[Joint House and Senate Hearing, 111 Congress]
[From the U.S. Government Publishing Office]
S. Hrg. 111-171
OIL AND THE ECONOMY: THE IMPACT OF RISING GLOBAL DEMAND ON THE U.S.
RECOVERY
=======================================================================
HEARING
before the
JOINT ECONOMIC COMMITTEE
CONGRESS OF THE UNITED STATES
ONE HUNDRED ELEVENTH CONGRESS
FIRST SESSION
__________
MAY 20, 2009
__________
Printed for the use of the Joint Economic Committee
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JOINT ECONOMIC COMMITTEE
[Created pursuant to Sec. 5(a) of Public Law 304, 79th Congress]
HOUSE OF REPRESENTATIVES SENATE
Carolyn B. Maloney, New York, Chair Charles E. Schumer, New York, Vice
Maurice D. Hinchey, New York Chairman
Baron P. Hill, Indiana Edward M. Kennedy, Massachusetts
Loretta Sanchez, California Jeff Bingaman, New Mexico
Elijah E. Cummings, Maryland Amy Klobuchar, Minnesota
Vic Snyder, Arkansas Robert P. Casey, Jr., Pennsylvania
Kevin Brady, Texas Jim Webb, Virginia
Ron Paul, Texas Sam Brownback, Kansas, Ranking
Michael Burgess, M.D., Texas Minority
John Campbell, California Jim DeMint, South Carolina
James E. Risch, Idaho
Robert F. Bennett, Utah
Nan Gibson, Executive Director
Jeff Schlagenhauf, Minority Staff Director
Christopher Frenze, House Republican Staff Director
C O N T E N T S
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Opening Statements of Members
Hon. Carolyn B. Maloney, Chair, a U.S. Representative from New
York........................................................... 1
Hon. Kevin Brady, a U.S. Representative from Texas............... 2
Hon. Michael Burgess, MD, a U.S. Representative from Texas....... 15
Witnesses
Statement of James D. Hamilton, PhD, Professor, Department of
Economics, University of California, San Diego, California..... 5
Statement of Daniel Yergin, PhD, Co-Founder and Chairman of
Cambridge Energy Research Associates, Washington, DC........... 6
Submissions for the Record
Prepared statement of Representative Carolyn B. Maloney.......... 26
Prepared statement of Representative Kevin Brady................. 26
Prepared statement of James D. Hamilton.......................... 27
Report titled ``Causes and Consequences of the Oil Shock of
2007-08''.................................................. 30
Prepared statement of Daniel Yergin.............................. 101
Prepared statement of Representative Michael Burgess............. 114
OIL AND THE ECONOMY: THE IMPACT
OF RISING GLOBAL DEMAND ON THE
U.S. RECOVERY
----------
WEDNESDAY, MAY 20, 2009
Congress of the United States,
Joint Economic Committee,
Washington, DC.
The committee met at 10 a.m., in Room 210, Cannon House
Office Building, Hon. Carolyn B. Maloney (Chair), presiding.
Senators present: Brownback.
Representatives present: Maloney, Hinchey, Snyder, Brady,
and Burgess.
Staff present: Gail Cohen, Nan Gibson, Colleen Healy, Marc
Jarsulic, Andrew Wilson, Rachel Greszler, Lydia Mashburn, Jeff
Schlagenhauf, Jeff Wrase, Ted Boll, and Chris Frenze.
Chair Maloney. The committee will come to order, and the
Chair recognizes herself for 5 minutes for an opening
statement.
OPENING STATEMENT OF HON. CAROLYN B. MALONEY, CHAIR, A
REPRESENTATIVE FROM NEW YORK
Good morning, I would like to thank our distinguished
experts for agreeing to testify this morning on the impact of
last year's oil price shock on the U.S. economy and the
potential effect of higher oil prices on our economic recovery.
This hearing is timely because the traditional start of the
summer driving season gets underway this weekend. The most
recent estimate from the Energy Information Administration is
that regular gasoline prices will average $2.21 a gallon over
the summer's driving season and that diesel fuel prices will be
$2.23 a gallon, a far cry from the $4 or more a gallon for
gasoline or diesel that drivers faced last summer. What a
difference a year makes.
Although drivers will face much lower pump prices than they
did last summer, crude oil and gasoline prices have ticked up
recently. Indications of ``green shoots'' in the U.S. economy
and fiscal stimulus measures adopted in China have already
begun to nudge oil prices higher as expectations for greater
demand rise.
Right now it looks like the surplus capacity of crude oil
production is large enough to prevent an immediate repeat of
last year's price spike. But today we want to explore with our
witnesses the short-term policies that will help to avoid
derailing our recovery and long-term policies for sustainable,
economic growth.
While it would have been better for the last administration
to have started on a sensible energy policy earlier in the
decade, the current decline in global demand for oil has given
us some breathing room to change course.
Yesterday's announcement by President Obama ushering in
tougher national fuel efficiency standards is truly an historic
opportunity to reduce our dependence on oil. Higher standards
mean we will get further on every tank of gas.
The American Recovery and Reinvestment Act also included
policy changes that will help in the long run, such as
investment in intercity light rail and funding and loan
guarantees for research into advanced technology for vehicles
and other innovative technology. These investments will help
the United States develop a modernized transportation system
with efficient alternatives to automotive travel.
Last year's oil shock showed us that right now it takes a
very large increase in gasoline prices to reduce our
consumption of oil. Part of the reason is because many
consumers have no alternatives to their gasoline-powered cars.
In the long run, energy policies that increase alternatives
to using a gas-fueled car, whether they are different modes of
transportation or alternative fuels for cars, will help
minimize the impact to the economy of a rise in the price of
oil.
Energy efficiency, which allows us to use less energy for
the same activity, is an important part of the solution. Smart
grid technology will also allow us to use our electric
transmission grid more efficiently.
In testimony before this committee last year, Dr. Yergin
observed that the most recent oil shock underscores the need,
and I quote, ``to encourage timely investment across the energy
spectrum.'' I am optimistic that we are moving in that
direction and towards a long-term solution to reducing our
dependence on oil.
I look forward to the testimony today and am pleased to
recognize my colleague, Congressman Brady, for 5 minutes or as
much time as he may need.
[The prepared statement of Representative Maloney appears
in the Submissions for the Record on page 26.]
OPENING STATEMENT OF HON. KEVIN BRADY, A U.S. REPRESENTATIVE
FROM TEXAS
Representative Brady. Thank you, Chairwoman, for hosting
this hearing. I think it is an important topic, and I join with
you in welcoming the witnesses testifying before us on oil
prices and the economy, and the way forward.
Oil prices have plunged, as we know, during the recession
but have started to increase more recently due to greater
optimism about the economic outlook. And while some of this
recent optimism may be questionable, given the latest data on
retail sales and business investment, it is reasonable to
believe the economy will be in recovery by next year,
especially given the huge injections of money and credit by the
Federal Reserve.
The key challenge to energy policy now, given the long lead
time involved, is the need for investment in exploration and
production to meet oil demand over the longer term as opposed
to an oil price spike in the short term. Nonetheless, as the
international economy recovers, it is likely that oil prices
will increase.
In considering this issue, it is important to note that
state-controlled oil companies in OPEC and Russia and others
account for three-quarters of the world's oil reserves. These
state-controlled companies, not private firms, are behind
periodic attempts to manipulate the global oil market and exert
monopoly power to hold up prices. Whatever the lasting success
of these efforts, there is little doubt that state-controlled
oil companies are a major and growing force in the world oil
market.
There are also other state-to-state projects underway, such
as the effort to arrange financing for the Brazilian national
oil company with the Chinese government.
These efforts, whether they are undertaken with Iran or
Venezuela, are not only an attempt to guarantee energy supply
but also to guarantee energy work by suppliers and others with
these foreign governments, and those jobs replace U.S. jobs.
OPEC's cuts in oil production hold up prices, only one of
the many reasons we should want to encourage oil production in
North America. The U.S. and Canada together hold 15 percent of
the world's proven oil reserves, 200 billion barrels, and their
resource potential is much greater. The U.S. can and must do
much more to expand domestic production of oil as well as
natural gas.
Technologies, such as hydraulic fracturing, seismic imaging
enhanced by geopositioning satellite systems and steerable
drilling with gyroscopic guidance systems, together can
significantly expand economically recoverable oil and gas
reserves. Steerable drilling allows precision drilling along
variable trajectories without repositioning the drilling rig,
which is particularly beneficial offshore. And furthermore,
when horizontal drilling was combined with fracturing in the
early years of this decade, large volumes of natural gas became
recoverable from rock formations that previously had been
regarded as depleted or could not be tapped at all with
conventional methods.
Unfortunately, instead of encouraging U.S. oil and gas
production, the Federal Government has placed excessive limits
on exploration drilling, include effectively making offshore
drilling impossible in many areas.
The administration would further penalize oil and gas
production in the United States and would offshore U.S. energy
jobs by the imposition of a variety of new energy taxes.
The Treasury Department justifies these tax increases by
arguing that the lower taxation under current law ``encourages
overproduction of American oil and gas, and is detrimental to
the long-term energy security,'' at least partly because it
boosts ``more investment in the oil and gas industry than would
occur under a neutral system.''
With all due respect, it is a policy designed to suppress
traditional U.S. oil and gas production, and it is absurd. The
Treasury notes that the lower taxation under current law is
also inconsistent with the administration's policy of reducing
carbon emissions, encouraging the use of renewable energy
sources through a cap-and-trade program.
In other words, at a time when we are nearly 60 percent
dependent on foreign oil and we need dramatic new investments
in energy throughout the world, our government is proposing
policy doing just the opposite. Thus it appears that the
counterproductive nature of the administration proposal is not
an unintended consequence, but the result of deliberate design.
Congress should block these tax increases precisely because
they would undermine oil and gas investment and production as
the Treasury itself concedes. These traditional sources of
energy are the bridge we need to the future of renewable
energy.
We are all in favor of seeking more renewable energy
sources, so long as they are economically viable. However, we
should not be seeking to suppress traditional energy production
that we know is economically viable.
According to the Energy Information Administration, the
truth is that oil, gas and coal provide most of the energy in
the U.S. economy and will continue to do so for many years. Tax
increases targeting our U.S. energy production, including cap-
and-trade tax, will weaken the economy, undermine U.S.
competitiveness and lower American living standards for decades
to come.
I yield back.
[The prepared statement of Representative Brady appears in
the Submissions for the Record on page 26.]
Chair Maloney. Thank you very much.
Chair Maloney. Now I would like to introduce our
distinguished witnesses. Dr. James Hamilton has been a
professor at the University of California, San Diego, since
1992. He served as Chair of the Economics Department from 1999
to 2002.
He is the author of ``Time Series Analysis,'' the leading
text on forecasting and statistical analysis of dynamic
economic relationships. He has done extensive research on
business cycles, monetary policy and oil shocks and has been a
research adviser and visiting scholar with the Federal Reserve
system for 20 years.
Dr. Hamilton received his PhD in economics from the
University of California at Berkeley.
Dr. Daniel Yergin is chairman of IHS Cambridge Energy
Research Associates.
Dr. Yergin received the Pulitzer Prize--congratulations--
for his work, ``The Prize: The Epic Quest for Oil, Money and
Power,'' which appears in a new updated edition in 2009.
He is a trustee of the Brookings Institution; a director of
the New American Foundation and of the U.S.-Russia Business
Council and on the advisory board of the Peterson Institute for
International Economics and of the MIT Energy Initiative.
Dr. Yergin received his B.A. from Yale University and his
PhD from Cambridge University, where he was a Marshall Scholar.
Thank you very, very much, and we are going to begin with
Dr. Hamilton and end with Dr. Yergin. Thank you for being here,
for your research, for your time, and for your testimony today.
Thank you.
Dr. Hamilton.
STATEMENT OF JAMES D. HAMILTON, PhD, PROFESSOR, DEPARTMENT OF
ECONOMICS, UNIVERSITY OF CALIFORNIA, SAN DIEGO, CALIFORNIA
Dr. Hamilton. Thank you very much, Chairman Maloney and
Vice Chair Senator Schumer, Ranking Member Representative
Brady, for holding this hearing.
In the OPEC oil embargo, the Iranian Revolution, the Iran-
Iraq war and the first Persian Gulf War, we saw big increases
in the price of oil, and each time it was followed by an
economic recession.
In 2007-2008, the price of oil increased by more than it
did in any of those historical oil shocks. And, in my opinion,
there is no question that the oil shock of 2007-2008 made a
material contribution to the current economic recession.
So why did it happen? Declines in production from mature
oil fields in the North Sea and Mexico, disruptions in Nigeria,
and production cuts from Saudi Arabia were all factors that
prevented world oil production from increasing at all between
2005 and 2007. And although production stagnated, world demand
for petroleum continued to boom.
World GDP was up more than 10 percent in 2006 and 2007, and
if there had not been a big increase in the price of oil, with
that kind of income growth, we would have anticipated very big
increases in petroleum consumption.
Even with the price increases, oil consumption from China
was up almost 1 million barrels a day, and yet no more oil was
being produced. That meant something had to change to persuade
the rest of us to reduce our consumption, despite the growing
incomes.
The historical experience has been that even very large oil
price increases cause relatively little immediate response on
the part of consumers. And, the experience between 2004 and
2006 was that, if anything, consumers were responding even less
than those small historical estimates to the price increases
that had come so far. I think the main reason a lot of us were
ignoring those initial price increases is because we could
afford to.
The energy expenditures as a share of total consumption
expenditures had been 8 percent in 1979 and had declined to 5
percent in 2004. But as the price of gasoline continued to go
up and reached $4 a gallon, that expenditure share was boosted
back up to 7 percent, a point at which nobody could have
ignored the price of energy, then we started to see some
dramatic changes.
Unfortunately, those quick changes in consumption spending
can be very disruptive for key sectors of the rest of the
economy. A prime example would be the U.S. auto sector. While
sales of fuel-efficient imports were going up, the sales of the
domestically manufactured models, particularly the SUVs, were
plunging, and the lost production and sales in the U.S. auto
sector made a significant negative contribution to GDP and
employment.
More generally, the decline in consumer sentiment and
overall consumer spending that we saw in 2007-2008 were very
similar to the pattern that we saw in those earlier historical
oil shocks.
Americans purchase about 140 billion gallons of gasoline
each year, and that means that when the price went from $2 to
$4 a gallon, that took away $280 billion at an annual rate from
spending power. The declines we saw in consumption are very
much in line with that.
Now, granted, there were other problems for the economy
besides just the oil shock, housing being at the foremost, but
housing was actually making a bigger reduction to GDP in the
year before the recession than it did in the first year of the
recession.
Something else happened to turn that slowdown from housing
into an outright decline in overall income and employment, and,
in my opinion, these factors I have pointed to, in terms of
effects of the oil shock, are a key aspect of that.
Now, furthermore, there is an interaction between what was
going on with oil markets and what was happening in housing.
Lost jobs, lost income, increased commuting cost to the exurbs
were all factors further depressing house prices, further
aggravating foreclosures. And eventually in the fall of 2008,
we reached a point where those financial events were
sufficiently severe that we entered a very serious new phase in
the recession that we are still struggling with.
Now would we have had those problems eventually even
without the recession, I don't know. But one thing I know for
sure is that those problems were made significantly worse by
having gone through a year of recession, and the fact that we
were in a recession, rather than slow growth, was very much
influenced by oil prices.
[The prepared statement of James D. Hamilton appears in the
Submissions for the Record on page 27.]
[The report titled ``Causes and Consequences of the Oil
Shock of 2007-08'' appears in the Submissions for the Record on
page 30.]
Chair Maloney. Thank you very much.
Dr. Yergin.
STATEMENT OF DANIEL YERGIN, PhD, CO-FOUNDER AND CHAIRMAN OF
CAMBRIDGE ENERGY RESEARCH ASSOCIATES, WASHINGTON, DC.
Dr. Yergin. Thank you. I want to thank you, Chair Maloney,
Ranking Member Brady and the committee for the opportunity to
join you this morning.
Amidst your very complex agenda, the committee is to be
commended for taking up this issue of energy during a period of
lower prices, when attention tends to shift. For these issues
of energy are integral to our Nation's economy, to our well-
being, our security and the safeguarding of our environment.
Chair Maloney, you said, what a difference a year makes,
and that is certainly the case here.
And, Congressman Brady, you emphasized the importance of
investment, and what I want to try and do in my testimony this
morning is talk about the importance of not having an either/or
approach to energy.
When I had the opportunity to testify before this committee
a year ago, oil was on that very sharp, upward trajectory. I
checked, it was 16 days after the hearing that oil hit $147.27
a barrel. And if you remember, at that time people were saying
oil was going to be $200 or $250 or $500 a barrel. Although it
seemed to us, when we looked at it, that we really were near a
break point, that the prices were going to come down.
It is noteworthy that it was on July 11th of 2008 that we
hit that high point. That was 2 months, more than 2 months,
before the collapse of Lehman Brothers when we went from moral
hazard to that frightening world of systemic risk when many
thought the financial system might actually collapse.
I think Professor Hamilton has made clear that it was not
only the failure of the credit system that led to the deepest
recession since the Great Depression, but that what happened
with commodity prices, particularly oil, was extremely
important. After all, the automobile industry was knocked flat
on its back, not by the collapse of Lehman Brothers but by what
happened at the gasoline pump.
So, in my testimony, I try and address three questions.
One, how did we go from the demand shock of the stronger
economy to the current recession shock?
The answer is that oil prices are, among other things, a
barometer of the world economy, so that the number one reason
is we went from what was called the best global economic growth
within a generation to the deepest recession since the Great
Depression. And we see it in many different indicators. Oil
demand today on a global basis is back to a pre-2005 level. In
April, U.S. oil demand was lower than it had been in any April
since 1996, 13 years ago.
But the question on the mind of the committee is, what
happens in the future? What are the prospects for another
shock?
And we are now in what we call the Long Aftershock; we are
seeing the effects of the price collapse and what happened to
demand. And when we look at that, we look at it in terms of
what is called spare capacity, which is a security cushion that
we rely upon.
And today, in the global oil market, we have about 6.5
million barrels a day of spare capacity. This is a very large
number. The last time we had this big a cushion was in 1988.
Compare that to 2005, when prices were headed up, when that
spare capacity was only 1 million barrels a day--very tight
market ready for a price shock. This cushion we have now, and
it is noteworthy, is equivalent to the total exports combined
of Iran, Venezuela and Nigeria. In other words, that takes some
of the geopolitical risk out of the oil market.
But what's going to happen in the future?
By the way, we are looking at inventories, too. They are
almost at their top levels.
But when we look at the future, it goes back to Congressman
Brady's remarks, out of the 15 million barrels a day of new
supply, roughly, that we would have expected to come on line on
a global basis between now and 2014, about half of that, 7.6
million barrels a day, is at risk of delay, postponement,
cancellation.
So as the economy recovers, we will see that spare capacity
shrink. And, therefore, we will start to become vulnerable to
future shocks, and I can assure you that, 3 to 5 years from
now, we will be looking at a very different oil market again,
and this committee will be looking, as it does, with much
concern about, what are the risks to our economy?
The third part of my testimony is looking at one important
element of energy security. We just this week have done a new
study called ``Canadian Oil Sands: Finding the Right Balance.''
We don't think about it this way very often in this
country, but Canada has the second largest oil reserves in the
world. Canada is the largest source of oil imports in the
United States, almost 20 percent. And the oil sands have seen
very substantial growth because of technological innovation.
There are two types of questions that hang over it, though.
One is the investment risk, a large risk. Many new projects are
being postponed because of cost. And secondly, there is a lot
of debate about the CO2 impacts and oil sands coming into the
United States. We looked at that very carefully. And if you
look at it from the production of oil sands right through our
automobile tail pipes, it is about 5 to 15 percent more CO2, a
manageable number, a number that needs to be brought down, but
it is within the range.
And so I think, when we think about our future energy
security, energy independence, all of those kinds of questions,
we really have to pay very close attention to Canada.
The point I would like to leave the committee with is the
reality of cycles. This recession will end. Maybe it is already
ending.
We have to think about the energy future. Major initiatives
have now been launched by the U.S. Government to help further
diversify and strengthen our energy system. We see it in smart
grids in transmission, electric batteries, renewables and
alternatives. There is also the opportunity to make real
advances in energy efficiency. That is wholly welcome.
And I am so struck that there is an embrace of energy
efficiency all across the energy spectrum in a way that we have
never seen before. We are going to see, I think, major impacts
that will come from sustained spending on energy research and
development.
We talk so often in energy about diversification, I think
we can say that the concept of diversification is, itself,
being diversified, and that is a major contribution to our
security.
But--and here is the, ``but'' lead time and scale are very
important. We use in this country the equivalent total energy
of 46 million barrels a day of oil.
So even if we start to electrify our automobile fleet, that
will take time. Even as we have more efficient automobiles, and
we have heard the announcement yesterday from the President
that will accelerate that, it will take time.
Meanwhile, we will see the growth in oil demand,
particularly coming from emerging markets. We are already
there. It is very striking that over the last 3 months, each of
the last 3 months, more new cars have been sold in China--in
China--than the United States, something that we would not have
really imagined 5 years ago.
So when economic growth resumes, so will growth in energy
demand. And that will put energy security back on the agenda,
and given the lead times, our policy decisions need to look
longer term to protect the American economy and the American
consumer.
And that gets me to my very final point. As part of that
longer-term view, we need to get beyond the either/or energy
debate. It is not one or the other.
We need to take a more ecumenical approach, ensuring that
there is a combination of conventional energy, renewable and
energy efficiency, alternatives--all developed with appropriate
environmental and climate change consideration.
Consider that today conventional energy, oil, natural gas
and coal supply over 80 percent of our total energy. There is
no single answer to the energy needs of our $14 trillion
economy. Oil itself is about 40 percent of our total energy.
That makes clear the importance of oil and the evolution of oil
to our economy and security in the years ahead and to the
global economy of which we are so much part.
That is precisely why the focus of this committee today is
so significant. Thank you.
[The prepared statement of Daniel Yergin appears in the
Submissions for the Record on page 101.]
Chair Maloney. Thank you so much.
Dr. Hamilton, in your opinion, can an increase in domestic
production have a significant long-term effect on the price
that the U.S. pays for oil? Can we drill our way out of this
problem?
Dr. Hamilton. Well, there is no question, if we had had
additional oil brought to the market last summer, it would have
been helpful. Those were unusual market conditions, as Dr.
Yergin was pointing out in terms of the very, very, low excess
capacity.
But I would further emphasize that it is a global market
for oil. And had there been no increase in the price of oil
from 2005 to 2008, I could easily see a need for another 5
million barrels a day on the world market.
And even the most optimistic assessments of what we might
be able to do with domestic production wouldn't make a dent in
that. And even if they did, in a few more years down the road,
with these levels of sales of cars from China, we would be back
in the same boat.
So I would very much endorse what Dan was saying about the
need for a combination of approaches. Yes, domestic production
would be helpful, but it is by no means a silver bullet that
solves the problems by itself.
Chair Maloney. Well, what should we do, or what steps
should we take? Both of you have touched on it in your
testimony. But if you could elaborate more on how to reduce the
impact of oil price increases in the long run, and during this
time when we seem to have a little bit of a breathing space,
what is the most efficient way that we can use our resources to
move us in the right direction for energy independence?
Dr. Yergin and Dr. Hamilton, if both of you would comment.
Dr. Yergin. When you look at it, we import about 56, 57
percent of our oil today. If you take that in terms of our
total energy, of course, it is a smaller share of that.
I so often think when people use the phrase energy
independence, they really mean energy security, so that our
economy and consumers are not vulnerable to future shocks. And
I think it is a diversified approach.
Obviously, we are seeing a step up in a focus on the longer
term, which particularly means energy research and development,
so that young scientists can really make long-term careers
there. And so that, I think, is part of the picture.
Certainly, what we are seeing on the renewables and
alternatives is very significant. But, if you say what has been
the biggest innovation in energy in the United States in the
last 2 years, you pause and you say, well, it is actually what
is happening in natural gas.
The revolution in unconventional gas is really a big deal.
It has been kind of piecemeal so it hasn't gotten a lot
attention. It is a domestic resource. That means that actually
we have the capacity to meet more of our needs for natural gas,
domestic natural gas. I think that is part of the picture.
And, clearly, if we import 56 percent of our oil, we
produce 44 percent, and so continuing to maintain domestic
production, there is no single number there, but it all adds
up.
Chair Maloney. A number of people suggested that
speculation contributed to the size of the oil price spike that
we suffered.
Can you estimate how much of the oil price increase was the
result of speculation, if any, and would you advocate policy
action to curb speculation, such as increased margins for
purchase of oil future contracts?
Dr. Hamilton and Dr. Yergin, could you comment on
speculation and its contribution?
Dr. Hamilton. I know a number of people have proposed
numbers for what was the contribution speculation; though in my
opinion, there isn't a sound bases for making that kind of
calculation.
I would emphasize that whatever you want to think about in
terms of financial markets, there is ultimately a physical
commodity that is involved here. There is a physical commodity
produced and consumed.
And if the quantity that is produced is bigger than the
quantity that is consumed, that ought to go into inventories.
What we saw happening to inventories in the early part of 2008
was that they were well below normal rather than above normal.
So I think it is hard to argue that the price at the beginning
of 2008 was one at which there was an excess supply.
Now, I think that it did come to be the case, that,
obviously, the movement of the price in the summer of 2008 was
overshooting. People were underestimating the degree of these
adjustments that people did start to make when that expenditure
share got higher.
I think there are some changes we could make to financial
markets to make sure we limit the exposure to risk of
institutions that shouldn't be taking risk, and making sure
that there are adequate margin requirements for trading on
organized exchanges. I am in favor of all of those measures.
But I think we shouldn't be blaming financial speculators
for giving us a message we didn't like. And the basic message
is, the world wanted more oil, and there wasn't more oil
available for it.
Chair Maloney. Thank you.
Mr. Brady.
Representative Brady. Thank you, Madam Chairman.
I think Dr. Yergin's point is a great one, which is it is
not an either/or proposition. I think we find ourselves in the
sound byte role too often, whether it is ``we can't drill our
way out of it'' or ``drill, baby, drill,'' probably two
extremes in this.
It really is an all-of-the-above solution, energy
efficiency, investments in renewable energy and then
traditional energy that can be that bridge until we get to that
renewable point.
A couple of thoughts, one, the ecumenical approach you
suggest, Dr. Yergin and Dr. Hamilton, I think, are excellent.
One of the myths is that demand for oil and gas is slowing, but
in fact it is growing. The International Energy Agency World
Energy Outlook estimates that the demand for traditional oil
will grow from 85 million barrels a day, as it is currently, to
106 million barrels a day by 2030. And much of this, of course,
will be in the developing countries.
So the thirst for oil, even with all of our progress from
renewables will continue to grow. There is also a myth that we
are running out of energy. The truth of the matter is that our
reserves are not shrinking; they are growing. We are seeing
this in areas like Brazil. But we also often hear people say
America consumes 25 percent of the world's energy; only has 3
percent of the proven reserves. This is misleading for a couple
of reasons. Your testimony shows that Canada and the U.S.
together have 15 percent of the reserves. And, secondly,
reserves are growing by the day. Technology has done that. In
the U.S. alone, our reserves have doubled since the 1970s.
The problem is we have blocked away so much of our
opportunities to explore. You don't know till you get in there
what is there. That is also, I think, causing real supply
problems globally that could have provided, perhaps, that
leeway to keep prices from spiking, which is why the
administration's proposal that we are overproducing here in the
United States is just crazy. It is, to be kind, I think, naive
and maybe bordering on the ignorance of our world's global
supply.
So my question has to deal with what types of investments
should we be making now to ensure that there is adequate
supply?
It seems to me this administration is making a keen
investment in renewable energies.
Private companies, though, are outpacing the U.S.
Government's investment by about 5-1. Private business is
making key investments in energy efficiency. Our commercial
buildings are 30 percent more efficient than they were just a
few years ago.
So my question is, what types of investments, in addition
to renewable energy, what types of investments in traditional
energy should U.S. be making, and what types of policy changes
should we be making to be able to access the oil sands of
Canada, for example, which have been sort of given a cold
shoulder recently by this government.
What types of investments in policy should we be taking and
furthering today to ensure we don't have that price spike in
the future?
Dr. Yergin.
Dr. Yergin. There are a range of answers to that. I think
that one thing, if we go back to diversification as the
starting point, it is in our interest to see a lot of different
forms of energy being developed around the world and to be
encouraged.
When Winston Churchill made the historic decision to
convert the British Navy from coal to oil just before World War
I, his critics said, well, you are going to be dependent upon
oil from Iran, Persia. And his answer was, safety in oil lies
in variety, and variety alone.
So I think some of it is to encourage; some of it is to not
put obstacles in the way of things. We should give clear
signals to Canadian oil sands or to Brazil in terms of
developing its offshore, that we would like to see that happen.
I think those are kinds of the signals.
There is a big research agenda. We know that the questions
of clean coal have to be addressed on a global basis,
particularly when you look at China and India. It is also a
reasonable development of resources in the United States.
As I mentioned before, the development of unconventional
natural gas is really a big deal for our country, but you need
to develop those resources, and I think that includes the
question of offshore exploration in a reasoned, environmentally
careful manner as part of the agenda.
Representative Brady. Thank you very much.
Dr. Hamilton, do you want to weigh in?
Dr. Hamilton. To that, I would just add I think nuclear
technology is a known technology with some known problems, but
it has to be part of the solution. Investments are needed
there.
And I would also emphasize that to make use of some of
these alternative sources, such as wind, some significant
investment is required in the electrical transmission
infrastructure to get the power from where the wind is to where
the people are.
Representative Brady. I agree, Texas leads the Nation in
wind power. The trick is making it reliable, creating a
transmission grid, and having natural gas, for example, to be
that safety net.
I would note, too, we have a member of the Energy and
Commerce Committee here today, but I think the new cap-and-
trade bill devotes 58 pages to light bulbs and 2 sentences to
nuclear energy. It probably ought to be the other way around.
I yield back.
Chair Maloney. Thank you.
Mr. Hinchey.
Representative Hinchey. Thank you very much, Madam
Chairman.
Thank you both. I very much appreciate everything that you
have said and what you have written in your statements and your
involvement in those issues.
Dr. Yergin, I very much appreciate that wonderful book that
you wrote quite a while ago and is now out in a new version. I
am very interested in looking at the new version and seeing
what additional information you may be providing there. I am
sure there may be some that is very interesting.
The issue that we, are dealing with here is very complex,
very difficult and I think, in some ways, very dangerous. The
amount of oil on this planet is limited.
We may not know precisely how much it is, but we do have a
very good idea about how much it is.
There is very little of it that we are not aware of and
that we may be able to obtain. And some of that, that we may be
able to obtain, is very complicated.
For example, the oil in Canada. Canada has a huge amount of
oil, but obtaining that oil, getting it, is not as easy as it
is in drilling in the Middle East, where it is much more
accessible and much more easy to get out. It is much more
expensive to pull it out in Canada, and the consequences of
pulling it out can be complicated, can be dangerous, can have
some issues dealing with the environment that may be
consequential in some ways.
Same thing with natural gas here in the United States, a
lot of activities going on to produce natural gas here in the
United States, but in some ways in which it is being done as a
result of the change in those regulations, as a result of the
2005 energy policy bill that passed this Congress, which
stopped the examination of this kind of activity in order to
prevent the natural resources, particularly water. All of that
is very complicated, could be very, very dangerous.
So this situation that we are dealing with is something
that we need to spend an awful lot of time on and come up with
some very good responses.
The amount of oil that is being consumed on this planet
keeps growing, even though the amount of oil that we have on
this planet remains what it is, remains the same.
As you were pointing out, the increase in automobiles in
China, which has a population of about 1 billion people, is
growing up very, very dramatically. That is likely to also grow
in other places like India, where there is another 1 billion
population.
So the impact on the availability of oil is going to
continue to increase dramatically. And so, therefore, the price
will continue to go up. We are seeing that price go up now in
spite of the fact that the economy globally is still in a very
difficult set of circumstances; the price of a barrel of oil
has gone up. The price of a gallon of gasoline has gone up here
in the United States and elsewhere. So this is something that
is very, very complicated.
We are importing now, something in the neighborhood of like
70 percent of the oil that we use, that we use in this country,
about 70 percent is coming out from someplace else.
We produce about 6 percent of total oil, but in terms of
what is known, we hold about 2 percent of the known oil
reserves around the world. So we are impacting on our known oil
reserves in a very dramatic way, which is going to run it out
rather quickly, unless we are wise enough to get ahold of this
energy situation in a more intelligent and reasonable way.
Now, some of the things that you talked about were
alternative energy. You just mentioned wind energy, and I just
drove through Pennsylvania early this week, saw a lot of those
windmills up there, 12 of them in one particular place.
It reminds me of what I saw in places like Amsterdam, a lot
of windmills over there, and, as you said, Texas, and other
places.
But we need to focus on alternative energy, don't we? What
do you think? Do you think that we should be focusing our
attention on alternative energy? Should we be developing solar
energy? Solar energy is probably the most solid availability of
energy anywhere on this planet; that is the strongest source of
energy. And as a number of people have talked about it for a
long time, it gives us the opportunity to produce the energy we
need if we could just do it in an effective way.
So what can you tell us about the circumstances that we are
dealing with and what we should be doing to reduce our
dependence on fossil fuels and particularly our dependence on
oil and changing that to a dependence on something else, maybe
solar energy?
Dr. Yergin. That is a big question. You have put a lot of
different pieces together.
As we think about it, we need to divide the picture in two
parts; one is electricity, and then there is transportation.
And at this point, the transportation depends upon the internal
combustion engine, and I think that part of that picture is
indeed a more efficient automobile--the direction that we are
going in. That is welcome, and it is sort of the obvious thing
to do, and it is something that just kind of fell off the
agenda for many years.
Wind is already becoming a substantial business. Solar is
still quite small. They will grow as substantial businesses,
but they are still parts of our overall mix. And, again, I go
back to, we have a $14 trillion economy. So I say, yes, those
should be encouraged, stimulated.
They will become bigger, but we have to still look at where
does most of our energy come from, and how do we deal with
where we are going to be in the next 5 or 10 years?
Imports, you mentioned the 70 percent number, those are the
gross import numbers. It depends whether you look on imports in
terms of the gross number of barrels we import, because we
actually export some as we refine it and so forth, so it varies
that sometimes the numbers used are 70 percent. But if you look
at a net basis, it is 56 percent. That is still a very, very,
very large number. We import more oil than any other country
consumes. So we are very much integrated into that energy
market.
So the answer is that it is really all of the above when
you have a $14 trillion economy, and we can't afford to make
mistakes.
What we have seen, as Professor Hamilton said, is that we
are paying a heavy price now for what happened over the last
few years. And it was not only the credit system; it was also
inadequate supply.
Dr. Hamilton. I would like to underscore what
Representative Hinchey said about the oil sands. They are a
very energy-intensive resource. It takes a lot of energy to get
oil out. It is a very capital-intensive resource. It is a very
water-intensive resource, and it is very hard to scale up.
So we can look at the total reserves, but to get anything
other than a tiny fraction of that on an annual basis near term
is very challenging, even if we ignored the environmental
issues.
So those challenges are significant, and I am very much in
agreement with Dr. Yergin that we need all of the above. And it
is specifically a transportation question, and we should be
looking at the transportation infrastructure in addition as we
evaluate these questions.
Dr. Yergin. I have great respect for Professor Hamilton,
but let me slightly clarify it. At one point, 3 million barrels
a day, it starts to become a significant number. When we do the
numbers for where is the major growth in oil supply going to be
in the top 15 over the next 10 days years--what we call the
``O-15,'' Canada is like number 3 because of the oil sands, so
it is not inconsiderable.
There are a series of environmental, important
environmental questions that need to be addressed, but the
water issue, for instance, is mostly a winter question, not a
summer question, and I think there is a high priority on
addressing them.
The development of the oil sands, it is a very highly
regulated business in Canada. And, clearly, there is going to
be more and more focus on what do you do to continue to bring
down the CO2 compared to other sources?
So it is not to say that it is more important than some
others; just to say that it is actually pretty important, and
it happens to be next door to us, and it is one of the things
we have to look at when we think of, what is the equation for
our energy security, and where do our supplies come from.
Chair Maloney. Thank you very much.
Congressman Burgess for 5 minutes.
OPENING STATEMENT OF HON. MICHAEL BURGESS, A U.S.
REPRESENTATIVE FROM TEXAS
Representative Burgess. Thank you.
We are doing this hearing, the Joint Economic Committee,
and I am also in a hearing two buildings over on the cap-and-
trade bill that is working its way through our Energy and
Commerce Committee, so it is very instructive to have this
hearing this morning.
I think, Dr. Yergin, we spent some time a year ago in our
Oversight Investigations Subcommittee in Energy and Commerce
about the speculation of the futures market and the very high
prices that we were facing.
Oddly enough, now we are putting ourselves in a position,
the recession fixed the problem of the high prices in the oil
market, and we may be reinstituting those high prices with our
cap-and-trade legislation that we are working on in Energy and
Commerce.
The issue of diversification, and Representative Brady
mentioned that there was really only scant mention of nuclear
in the cap-and-trade bill that we are doing right now, the
energy tax bill that we are doing right now.
Nuclear does have a place, in my opinion, in whatever we
do, as far as the Nation's future energy armamentarium. It also
seems like, during the run-up to this hearing that we are
having in Energy and Commerce, we heard testimony from the
standpoint of oil sands in Canada, the colocation of nuclear
facilities close to the oil sands could, the excess energy
produced with production of nuclear energy could in fact be
used to satisfy some of these higher energy demands that are
required for getting the tar sands.
Is that a correct observation?
Dr. Yergin. Representative Hinchey mentioned my book The
Prize, and one of the lessons that I take away from it is about
constant innovation in energy. The reason the oil sands are
more significant now than they were 10 years ago is because of
major innovation, and I think we see that in renewables,
alternatives, all across the way.
And one of the issues on the agenda is, could there be
small nuclear power plants used to provide the heat for the in
situ recovery of oil sands, and I think that is a very
reasonable research question.
I think generally what you say about nuclear power, and
Professor Hamilton has mentioned it already, it is 20 percent
of our electricity today. It is not like should we have
nuclear? It is a significant part of our electricity supply.
The question there, too, is, what kind of technological
advances will make it a third or fourth or fifth generation
part of the mix? We certainly see it happening in other parts
of the world, and it is a carbon-free form of electricity.
Representative Burgess. Correct, and if I have time, we
will come back to that.
Let me just ask a question about the, Dr. Yergin, you
mentioned the issue of electricity, the issue of
transportation.
Now, in my part of north Texas, we actually happen to be
blessed with one of those alternative shale formations 8,000
feet under the ground, the Barnett shale. And out of that type
of shale, we are now producing a significant amount of natural
gas. Our good friend back in Texas, T. Boone Pickens, always
talks about putting our heavy transportation fleet on natural
gas fuel as opposed to the diesel fuel.
Is that a realistic outlook to be able to replace our
transportation fuel with a compressed natural gas that we have
here that is made entirely in America?
Dr. Yergin. Between 1895 and 1905, we had a horse race in
this country between the horseless carriage, what was going to
power it? Was it going to be alcohol fuels? Was it going to be
gasoline? Was it going to be electricity? And the internal
combustion engine and gasoline and diesel won. Today that race
is wide open again, and we are looking at all these difference
choices.
I think the reality is that we will probably need the
natural gas for electric generation. I think that is--and
particularly as we develop more wind, as has been pointed out,
we need natural gas generation to back up that wind production.
We know that our automobile industry is in a deeply wounded
state. And, yesterday the President announced the acceleration
of the fuel efficiency standards. I think there are only so
many things that the automobile industry can be asked to do at
the same time.
And it seems to me, what we are saying is, become more
efficient; that over here are hybrids; here, let's see what can
be done with electric batteries. And that is a pretty big
agenda for an industry that is very short on resources.
Representative Burgess. And, yet, if 20 percent nuclear is
significant, no question about it, there is a big nuclear
facility not far from my district down in Comanche Peak, Texas,
but I rather suspect the size of that could be significantly
increased, and the barriers to doing that have always been the
regulatory aspects and the environmental impacts, so that it
seems as if we could streamline some of that process and allow
colocation of next-generation nuclear facilities on the sites
where we are already generating nuclear power, so there is not
the siting issue.
More of our base load for electricity could be generated by
nuclear, thus freeing it up for transportation. I agree that
wind is not a stable enough source. Certainly in Texas where
there are high energy demands on a hot day, the wind isn't
blowing, and you need natural gas right now for those plants to
supply the energy required for air conditioning.
But if you were able to take care of more of the base load
with nuclear; 20 percent is significant, but what if we could
bring it to 30, 35 or 40 percent? That would certainly free up
more of the natural gas to be used for our transportation
sector.
Dr. Yergin. Right. I think the challenge for nuclear right
now is our, as our electricity demand grows, will nuclear stay
at 20 percent? Will it drift down? We have seen these nuclear
power plants that used to operate at 55 or 60 percent capacity
now at 85, 90 percent.
There are a number of, as you know, applications for new
nuclear power plants, and it does seem that the process has
been streamlined. There is still risk, but a number of people
want to do it.
But I think what you say is most likely that those plants
will be colocated next to existing nuclear power plants. And,
again, it is part of the mix.
Of course, what has also happened over the years is we have
lost a lot of our capacity to have a nuclear industry, and that
business now has become globalized, too.
Representative Burgess. Thank you.
[The prepared statement of Representative Burgess appears
in the Submissions for the Record on page 114.]
Chair Maloney. Mr. Snyder.
Representative Snyder. Thank you, Madam Chairman, for
having another good hearing.
Dr. Yergin, I appreciate what you said a while ago. I think
too many of us--probably more on this side of the table--in our
zeal back home, our populace sphere, talk about energy
independence and produce all our energy right here. The reality
is our country has always been a trading Nation; it will always
be a trading Nation.
What we should be looking for is predictability of supply
and price. And we are always going to be selling energy, we are
always going to be buying energy, and we shouldn't be alarmed
by that, but we should be alarmed by threats to predictability
of supply and price. And I hope that we will be, as the years
go by, a major seller of technology for developing. I mean, it
will be a huge plus for us in our job situation.
The interrelationship between all these things going on in
the American economy right now, I think it is a fair statement,
isn't it, that because of what is going on in the credit
markets right now, some of our investments in venture capital
and things like wind production has been held back. Is that a
fair statement?
Dr. Yergin. Yes. There was a lot of buoyancy in the
renewables and alternatives a year ago. The collapse in the
credit markets has really hit these projects very hard, and you
see it both in the development projects; you also see it in
terms of the venture capital. The discovery is that everything
is harder, and it takes longer.
Representative Snyder. There are still very good projects
sitting out there. Arkansas has a lot of dynamic things going
on in energy. One of them is we have developing blade
manufacturers that have moved in, and some other things. And
there are some projects on the table that are good business
opportunities, but whether it is a gas station or a restaurant,
you can't get the money to get it going.
Dr. Yergin. Yes. Part of the green stimulus program has
been aimed at trying to put a floor under the renewables and
alternatives so that while policy wants to move in that
direction, the economic realities doesn't move in the other
direction. But I think for a lot of entrepreneurs, the last 8
months in this sector, as in many others, has been very, very
difficult.
Representative Snyder. Right. Mr. Brady mentioned Texas and
natural gas. Arkansas has been a major new producer of natural
gas for this country, and I think, as you mentioned, not a lot
of people know about it. I think my district has probably been
the center of new production of natural gas for the country for
the last several years. And it is still going on, despite the
downturn in price; we still have companies that are drilling
today and producing new wells.
You all talked about--one of you phrased it ``the flight to
commodities'' in terms of price, and whether it is speculation
or not speculation. Would you talk about the issue of how this
might impact on our producers? If we have folks who are
producing new natural gas wells out there, they need to have a
predictable price to make it worthwhile for them. And so they
get contracts, they get some hedge contracts so they have some
predictability of price.
There is some apprehension that in our zeal and necessity
of regulating the speculative market that we will do it in such
a way that may hurt what we all see as the traditional healthy
use of commodity hedge contracts to have that predictability of
price. Would you all comment on that issue with regard to
natural gas?
Dr. Hamilton. Well, I would like to point out that the
futures markets play a role not just for hedging, but also for
information provision. And I think it is vital for the economic
future that we get an accurate reading on what are these
challenges in terms of global demand, and what are the
available supplies. And that is a very important function that
futures markets have to provide.
If you define hedging as taking a position on a futures
contract to reduce your risk, you could argue that a pension
fund that is in commodities is hedging because the commodities
may go up at the time your other assets go down, and they
diversify your portfolio.
Representative Snyder. It just seems like there is a
dramatic difference between a producer that cuts a contract
with somebody down the line that this is what our price will be
2 years from now. That is so dramatically different from
somebody speculating in the commodities market.
Dr. Hamilton. Well, on the other hand, if you define
speculation as taking a position because of what you think is
going to happen to the price, it is hard to think that even
somebody who has physical delivery involved is not also taking
into consideration what they think is going to happen to the
price.
So I am a little uncomfortable with this very sharp
distinction between hedging on the one hand and speculation on
the other. I think it is vital that these markets function
correctly and send an accurate signal. And I am all in favor of
any institutional changes that help to promote that. But again,
we do need to face the future, and if the future means tighter
energy, we need to know about that now, and we need to respond
to it now, rather than blame the futures markets for pricing
that, I think.
Dr. Yergin. Can I add reinforcement to what Professor
Hamilton is saying? I certainly remember last year testifying
before this committee, and, of course, last summer speculation
was a very hot subject. But if you take two real-world
examples, one is you are an airline, and you see key people
keep saying the world is running out of oil, oil is going to be
200 or 250, and you go out and you hedge your position. Are you
hedging or are you speculating?
Another example, a specific pension fund, an $80 billion
pension fund, concerned about instability in the Middle East,
wanting to protect its retirees, takes a position in oil as a
way to protect itself against conflict in the Middle East. Is
that a hedger or a speculator?
On the other hand, you have people who are just kind of
playing the game and looking at technical analysis back and
forth. When you look at the market today and you say the oil
market is really not reflecting the fundamentals of supply and
demand, there are a lot of green shoots in the oil price right
now. There is a pent-up demand for demand, and people are
saying China looks pretty good now, and it is all going to come
back again. And by the way, the other thing that happens here
is that--and we saw that in the run-up last time the weakness
of the dollar tends to lead to that flight to commodities as an
offset, And we see that, too.
We all struggle to identify that sharp dividing line
between hedging and speculating, and it is awfully hard to find
it. But certainly, what you are talking about, a producer who
is making a commitment to invest for the next several years
with the risk and trying to take some of that market risk out
of it, that is a very important tool to be able to do that in a
sound and legitimate way, to be able to go ahead and finance
the development that they want to do. And you are seeing it
exactly in your district.
Representative Snyder. The tool is so important; it is the
difference between whether they produce or not. And I think we
have to be careful we don't stifle that somewhere. And it will
be this side of the table; if a mistake is made, it will be
this side of the table.
Dr. Yergin. Yes. Because you are going into that business,
you have the risk of do you have the resource? Do you have the
market? Then you have the price. What you are really trying to
do when you are in that business is manage the whole series of
different risks at the same time.
Chair Maloney. Professors Yergin and Hamilton, oil prices
started rising over 5 years ago, and real crude oil prices
doubled from 2003 to 2006, and then doubled again in mid-2007
and 2008, and oil companies experienced record profits. Did
these profits translate into increased domestic exploration and
development?
Dr. Yergin. We certainly saw budgets with E&P, which is the
upstream which you are talking about, went up very
dramatically. At the same time, what was also going up--less
attention was being paid to it, and I have a chart about it in
my testimony--is that the cost went up. There was a shortage of
engineers, drilling rigs, drill ships, everything else. So when
you were investing in 2008, if you were starting a new project,
you would literally have to budget twice what you had budgeted
in 2004 to be able to do that same project. So all of those
factors were working together.
Chair Maloney. Dr. Hamilton.
Dr. Hamilton. There were big increases in investment. I was
surprised we didn't see a little bit more. But I would also
emphasize the difference between the private oil companies and
the national oil companies. The private oil companies were
reinvesting 25 percent of their gross revenues, and the oil-
producing countries were reinvesting 6 percent of their net
export revenues. So there is a real difference there. That is
part of why we are not developing resources in the places in
the world that would be helpful.
Chair Maloney. What does this suggest about domestic oil
supply in the future?
Dr. Hamilton. Well, American production has been in a long-
term decline since 1970. And we can talk, as we were earlier,
about getting to some of these other sources. But to think we
are going to significantly increase production for a
significant period of time just within this country, I think,
is very ambitious. Yes, we need that investment where there are
promising alternatives, but I want to come back to this theme
that we need all of these solutions. It is a huge problem, and
it is too big a challenge for any one of these ideas, however
good that one idea might be, to get anywhere near solving the
problem by itself.
Dr. Yergin. I guess I would add to it is that investment
will be made somewhere. If it is made in the United States, it
creates jobs in the United States and activity here rather than
revenues going into the treasury of other countries.
Professor Hamilton is quite right, we are not going to,
from everything we know, increase our oil production. The
question is do we stabilize it and keep it at a reasonable
level?
What we also see is the impact of technology. In the late
1970s, the so-called ``deep water frontier,'' if you were going
out and drilling, was 600 feet of water. Today people are
drilling in 6,000, 7,000, 8,000 feet of water. All across the
energy spectrum--renewables, alternative, conventional--you see
this march of technology. That is really a source of actually
confidence when you look at the totality of our $14 trillion
economy.
Chair Maloney. Thank you.
Mr. Brady.
Representative Brady. Thank you, Madam Chairman. This
hearing is very instructive.
We always have conspiracy theories in Congress abound
whenever oil prices go up that they are being manipulated by
fuel oil companies; and, of course, every investigation shows
that that is not the case. Once people realize that national
oil companies owned by other governments hold 80 percent of the
reserves--nearly 80 percent of the reserves in the world and
produce equivalently to that, they understand that there is a
new geopolitics of oil, where national oil companies owned by
their governments are now cutting political deals with other
governments that guarantee access, guarantee jobs, and shrink
the role of private international energy companies in trying to
develop oil reserves. In fact, I think there are 60 national
oil companies, half of which have reserves outside their own
countries, so they are moving very aggressively.
Here in the U.S., we seem to be doing just the opposite,
discouraging investment in the U.S. and discouraging production
in those key investments. An example, in 2004, Congress passed
a change in the Tax Code. Worried about jobs being offshored,
they changed the Tax Code so that companies that manufactured
here in the U.S., produced in the U.S., invested in the U.S.
had a lower tax rate than companies that do the same activities
offshore, in an incentive to produce here.
But this Congress, in the last 2 years, has repeatedly
chosen one sector, American energy, to single out and say, we
are not going to treat you like that, we are going to--raise
your taxes and treat you, when you manufacture, invest and
produce jobs in the United States, as if you are doing it
overseas; in other words, creating incentives to produce less
here in America, and offshore those jobs and investments
overseas. This at a time, again, where technology is allowing
us to access more and more of our own resources in an
environmentally friendly way, and also identify more reserves
so that we can, again, continue to hit that balance of more
renewables, more efficiency, more traditional oil.
So I guess my question to both you of is as we look forward
on pricing, the new geopolitics of oil where countries cut
deals with other countries, and the role of private companies
become smaller, what is that impact potentially on future
prices here in the United States?
Dr. Hamilton. Well, I think it is unfavorable, as I was
saying, insofar as many of these governments are not running
the industry as efficiently as they could. And when you go
through the list of these countries--Venezuela, Nigeria, Iran,
Russia--there are plenty of worries about the political
stability in any of these. And, for me, it is one question of
is the oil there? It is a second question of are we going to
get it and get it in time?
Representative Brady. In the past, private companies have
had the competitive advantage on financing and technology and
expertise, but that seems to be disappearing as well; there is
a gap.
Dr. Yergin.
Dr. Yergin. Yes. I think up through last summer, many of
the private companies were saying, well, what is going to be
their role in the international scene in the future because of
the role of the national oil companies. With prices down, you
see that the balance changing. Indeed, I should say that one of
the major themes in the new part of The Prize is this change in
balance between national oil companies and private oil
companies. It had looked like we were moving into this era of
just national oil companies really dominating things. Price is
down, suddenly the picture looks different; their countries
need investment again, they don't have the revenues, and there
is more openness.
Private companies bring project management. These projects
now are $5- or $10 billion projects. They can execute them.
Capital becomes important again. So I think we can say that
there is kind of a new balance emerging again in this part of
the cycle.
But I think the point--and the point for this hearing is
that we really do move in cycles. In 3 to 5 years from now, the
kind of concerns that we had last year will be back on the
agenda again. And the question is having as solid a foundation
that reflects the entire energy spectrum to deal with it.
Representative Brady. I actually think there is more common
ground on this issue than some of the sound bites allow us to
pursue. But thank you both for being here. You are very
informative.
Representative Hinchey. I want to express my appreciation
for you, too. Thank you both very much for being here, and
thank you for what you have said in response to the questions.
This is a very complicated and very critically important
issue that has to be dealt with very effectively. And I can see
how people here in the United States as well as a lot of other
people around the world are trying to control this issue.
I think that, as you were saying, as our production began
to decline back around 1970, that was one of the initiators of
the Middle East to organize themselves together and to begin to
control oil prices and drive up the price for their benefit.
And God knows, they have been enormously successful. The huge
amount of money that flows into those countries--Saudi Arabia,
particularly, but others as well--has been incredible since
then, and it is just continuing.
In some ways, that reminds me of a little story that dates
back to the early part of the 20th century, which you included
in the prize, the Teapot Dome scandal, where you had an
interest in one particular company at that time controlling as
much as they could of the known oil reserves on publicly owned
land around the country. We have seen something similar to that
over the course of the last year here, where we had people on
one side of the aisle in this Congress saying that the best way
to control oil prices would be to open up oil drilling offshore
and extend the leases to companies. That would drive down the
price. Well, we argued about that, and we saw that that was not
really the case at all.
We are dealing with a very fascinating issue here, very
fascinating and very critical. It has got to be dealt with
effectively, not just for now, which is very complicated, but
even more so as time goes on. This is going to get more and
more complex, more and more difficult to deal with. And this is
something that this Congress has got to take into
consideration, because one of the responsibilities we have is
not just for today, but for future generations.
So I am just wondering what you think we should be doing
most effectively--not just now, but maybe now--but also, what
we should be doing, thinking about what would be most effective
three or four decades from now.
Dr. Hamilton. Well, three or four decades is farther than I
can think. I think it is a big enough challenge to get through
the next 10 years.
But one point that I wanted to make that I think our
discussions brought out is how interrelated all these questions
are. We were talking about natural gas; well, do we use it for
electricity? Do we use it as an energy source for the oil
sands? Do we use it as a supplement for wind power? Or we can
drive our vehicles with it directly. Even though we are looking
at the moment at a crunch in terms of transportation, we need a
transportation technology, that analysis brings up how
interrelated these are. And if you make progress on one front--
for example, I have been mentioning nuclear power as a known
option that we can pursue further, it gives you a little more
breathing room on some of the other. But again, we need to be
moving with all of these options at the same time.
Dr. Yergin. As you say, this is very complicated. There is
no single mastermind grand plan, I think, that will answer it
because there are a lot of things we don't know. No one thought
2 years ago or 3 years ago we would have this revolution of
natural gas. No one thought a few years ago that we would see
wind grow as much as it has grown recently. So I think that in
the nearer term, it is a focus on security, so that 3 to 5
years from now this committee is not meeting asking, how did we
get into this situation again, how did the great economic
recovery that started in 2009 or 2010 end up flat on its back.
Longer term, three or four decades from now, I really do
think if we have a sustained level of investment in research
and technology, not with that uncertainty that you don't know
whether the dollars are there or not, that we may see some very
happy surprises, very beneficent.
You talked about solar. You know, the logic of solar and
photovoltaics is so compelling, it is so powerful. The question
is to get scale, to get the cost down. I am on the advisory
board at the MIT Energy Initiative, and when you are on that
campus, and you see all of these people working these
questions, you say, that is where the future is three or four
decades from now, and that is where we really need to make our
investment. And you look at the last three or four decades, and
that investment has gone up and down. So I think that kind of
consistency will help us answer the question with greater
clarity.
Chair Maloney. Thank you so much. This has been a very
informative hearing on a crucial subject. You are both leading
experts. We will circulate your testimony to other Members of
Congress.
The meeting stands adjourned.
[Whereupon, at 11:19 a.m., the joint committee was
adjourned.]
SUBMISSIONS FOR THE RECORD
Prepared Statement of Representative Carolyn B. Maloney, Chair
Good morning. I would like to thank our distinguished experts for
agreeing to testify this morning on the impact of last year's oil price
shock on the U.S. economy and the potential effect of higher oil prices
on our nascent economic recovery.
This hearing is timely because the traditional start of the summer
driving season gets underway this weekend. The most recent estimate
from the Energy Information Administration is that regular gasoline
prices will average $2.21 a gallon over this summer's driving season
and that diesel fuel prices will be $2.23 a gallon--a far cry from the
$4 or more a gallon for gasoline or diesel that drivers faced last
summer.
What a difference a year makes.
Although drivers will face much lower pump prices than they did
last summer, crude oil and gasoline prices have ticked up recently.
Indications of ``green shoots'' in the U.S. economy and fiscal stimulus
measures adopted in China have already begun to nudge oil prices higher
as expectations for greater demand rise.
Right now, it looks like the surplus capacity of crude oil
production is large enough to prevent an immediate repeat of last
year's price spike.
But today we want to explore with our witnesses the short-term
policies that will help to avoid derailing our recovery and long-term
policies for sustainable economic growth.
While it would have been better for the last administration to have
started on a sensible energy policy earlier in the decade, the current
decline in global demand for oil has given us some breathing room to
change course.
Yesterday's announcement by President Obama ushering in tougher
national fuel efficiency standards is truly an historic opportunity to
reduce our dependence on oil.
Higher standards mean we'll all get further on every tank of
gasoline.
The American Recovery and Reinvestment Act also included policy
changes that will help in the long run, such as investment in intercity
light rail and funding and loan guarantees for research into advanced
technology for vehicles and other innovative technology.
These investments will help the United States develop a modernized
transportation system with efficient alternatives to automotive travel.
Last year's oil shock showed us that right now it takes a very
large increase in gasoline prices to reduce our consumption of oil.
Part of the reason is because many consumers have no alternatives to
their gasoline powered cars. In the long run, energy policies that
increase alternatives to using a gas-fueled car--whether they are
different modes of transportation or alternative fuels for cars--will
help minimize the impact to the economy of a rise in the price of oil.
Energy efficiency, which allows us to use less energy for the same
activity, is an important part of the solution. Smart grid technology
will also allow us to use our electric transmission grid more
efficiently.
In testimony before this committee last year, Dr. Yergin observed
that the most recent oil shock underscores the need ``to encourage
timely investment across the energy spectrum.'' I am optimistic that we
are moving in that direction and towards a long term solution to
reducing our dependence on oil.
I look forward to the testimony of our witnesses.
__________
Prepared Statement of Kevin Brady, Senior House Republican
I am pleased to join in welcoming the witnesses testifying before
us today on oil prices and the economy.
Oil prices have plunged during the recession but have started to
increase more recently due to greater optimism about the economic
outlook. While some of this recent optimism may be questionable given
the latest data on retail sales and business investment, it is
reasonable to think that the economy will be in recovery by next year,
especially given the huge injections of money and credit by the Federal
Reserve.
The key challenge to energy policy now, given the long lead time
involved, is the need for investment in exploration and production to
meet oil demand over the longer term, as opposed to an oil price spike
in the short term. Nonetheless, as the international economy recovers,
it is likely that oil prices will increase.
In considering this issue, it is important to note that state-
controlled oil companies in OPEC and Russia account for three quarters
of world oil reserves. These state-controlled companies, not private
firms, are behind periodic attempts to manipulate the global oil market
and exert monopoly power to hold up prices. Whatever the lasting
success of these efforts, there is little doubt that state-controlled
oil companies are a major force in the world oil market. There are also
other state-to-state projects underway such as the attempts to arrange
financing for the Brazilian national oil company by the Chinese
government.
OPEC's cuts in oil production to hold up prices are only one of
many reasons we should want to encourage oil production in North
America. The U.S. and Canada together hold 15 percent of the world's
proven oil reserves, 200 billion barrels, and their resource potential
is much greater. The U.S. can and must do much more to expand domestic
production of oil as well as natural gas.
Technologies such as hydraulic fracturing, seismic imaging enhanced
by geopositioning satellite systems, and steerable drilling with
gyroscopic guidance systems together can significantly expand
economically recoverable oil and gas reserves. Steerable drilling
allows precision drilling along variable trajectories without
repositioning the drilling rig, which is particularly beneficial
offshore. Furthermore, when horizontal drilling was combined with
fracturing in the early years of this decade, large volumes of natural
gas became recoverable from rock formations that previously had been
regarded as depleted or could not be tapped with conventional methods.
Instead of encouraging U.S. oil and gas production, the federal
government has placed excessive limits on exploration and drilling,
including effectively making off-shore drilling impossible in many
areas. The Administration would further penalize oil and gas production
by the imposition of a variety of new energy taxes.
The Treasury justifies these tax increases by arguing that the
lower taxation under current law, ``encourages overproduction of oil
and gas, and is detrimental to long term energy security,'' at least
partly because it boosts ``more investment in the oil and gas industry
than would occur under a neutral system.'' With all due respect, a
policy designed to suppress U.S. oil and gas production is absurd. The
Treasury notes that the lower taxation under current law is, ``also
inconsistent with the Administration's policy of reducing carbon
emissions and encouraging the use of renewable energy sources through a
cap and trade program.''
Thus it appears that the counterproductive nature of the
Administration proposal is not an unintended consequence, but a result
of deliberate design. Congress should block these tax increases
precisely because they would undermine oil and gas investment and
production, as the Treasury itself concedes. These traditional sources
of energy are the bridge we need to the future of renewable energy.
We are all in favor of seeking renewable energy sources, so long as
they are economically viable. However, we should not be seeking to
suppress traditional energy production that we know is economically
viable. According to the Energy Information Administration (EIA), the
truth is that oil, gas, and coal provide most of the energy in the U.S.
economy, and will continue to do so for many years. Tax increases
targeting U.S. energy production, including the cap and trade tax,
would weaken our economy, undermine U.S. competitiveness, and lower
American living standards for decades to come.
__________
Prepared Statement of James D. Hamilton
Big increases in the price of oil that were associated with events
such as the 1973-74 embargo by the Organization of Arab Petroleum
Exporting Countries, the Iranian Revolution in 1978, the Iran-Iraq War
in 1980, and the First Persian Gulf War in 1990 were each followed by
global economic recessions.
The price of oil doubled between June 2007 and June 2008, a bigger
price increase than in any of those four earlier episodes. In my mind,
there is no question that this latest surge in oil prices was an
important factor that contributed to the economic recession that began
in the U.S. in 2007:Q4.
Unlike those earlier episodes, in which there had been a single
dramatic development behind the oil price spike, the price rise over
2007-08 resulted from a number of separate factors. World oil
production decreased slightly between 2005 and 2007. Declining
production from mature oil fields in the North Sea and Mexico played a
role, as did political instability in Nigeria. Saudi Arabian
production, which many analysts had expected would have increased to
meet rising demand, fell by 850,000 barrels/day between 2005 and 2007.
These declines were enough to offset production gains in places such as
Angola and central Asia, with the result that total global oil
production dropped slightly over this two-year period.
Although production stagnated, the demand for petroleum continued
to boom. World petroleum consumption had increased by 5 million barrels
per day during 2004 and 2005, driven largely by a 9.4% increase in
global GDP over the two years. Over the next two years--2006 and 2007--
world GDP grew an additional 10.1%, which in the absence of an increase
in the price of oil would have produced further big increases in the
quantity of oil consumed. Even with the price increases, Chinese oil
consumption increased by 870,000 barrels per day between 2005 and 2007.
With no more oil being produced, that meant that residents of the U.S.,
Europe, and Japan had to reduce our consumption a comparable amount.
The price of oil needed to rise by whatever it took to persuade us to
do so.
How much the price needed to rise in order to balance global demand
with supply depends on how quickly consumers change their habits in
response to a change in the price of oil. The historical experience has
been that even very large oil price increases cause relatively little
immediate change in the quantity of oil consumed. The response of
consumers to energy price increases over 2004-2006 was if anything even
smaller than those historical estimates. One reason for that smaller
response may be that energy expenditures as a fraction of total
spending by U.S. consumers had fallen from 8% in 1979 to 5% in 2004.
The reason that we were purchasing about the same quantity of gasoline
despite the increase in the price was that many of us could afford to
do just that.
By June of 2008, the price of gasoline had reached $4/gallon,
driving the energy budget share back up to 7%. While some people had
been ignoring $3 gasoline, $4 definitely got their attention. The
resulting abrupt changes in spending patterns can be quite disruptive
for certain key economic sectors and seem to be part of the mechanism
by which the earlier oil price shocks had contributed to previous
economic recessions. The kinds of economic responses we saw between
2007:Q4 and 2008:Q3 were in fact quite similar to those observed to
have followed previous dramatic oil price increases.
One notable example was the plunge in auto sales. The number of
light trucks sold (which includes the once-dominant SUV category) fell
by 23% between 2007:Q2 and 2008:Q2. One indication that this sales
decline was caused by oil prices and not other economic developments is
the observation that sales of imported cars were up by 9% over this
same period. Since the domestic manufacturers were more heavily reliant
on sales of the less fuel-efficient vehicles, these changes represented
a significant hit to the domestic auto sector. Declining production of
motor vehicles and parts alone subtracted half a percent from total
U.S. real GDP between 2007:Q3 and 2008:Q3. In the absence of those
declines, real GDP would have clearly grown over this period and it is
unlikely that we would have characterized 2007:Q4-2008:Q3 as a true
economic recession. One hundred and twenty-five thousand jobs were lost
in U.S. auto manufacturing between July 2007 and August 2008. If not
for those losses, year-over-year total job gains for the U.S. economy
would have been positive through the first year of what we now
characterize as an economic recession.
More broadly, another pattern we observed in earlier oil price
shocks was a deterioration in consumer sentiment and slowdown in
overall consumer spending. Americans buy about 140 billion gallons of
gasoline each year, meaning that a dollar per gallon increase in the
price takes away $140 billion from their annual purchasing power. The
declines in consumer sentiment and slowdown in consumer spending that
we observed between 2007:Q4 and 2008:Q3 are very much in line with what
we saw happen in response to historical energy price shocks of similar
magnitude.
In 2003, I published a description of the response of U.S. real GDP
to a change in oil prices that implies that the biggest economic
effects of an oil price increase are not seen until 3 or 4 quarters
after the oil prices go up, as the downturn multiplies and propagates
across sectors. When you feed in the values of GDP through 2007:Q3 and
oil prices through 2008:Q2, that model would have predicted the value
of 2008:Q3 real GDP--one year in advance--with an error of less than
0.2%.
I was quite surprised by that last result, because of course there
were other serious problems for the U.S. economy over this period
besides the price of oil. Foremost among these would be the depression
in new home construction. But residential fixed investment had
subtracted 0.94% from GDP between 2006:Q4 and 2007:Q3, despite which
the economy overall continued to grow and we were not at that point in
an economic recession. On the other hand, residential fixed investment
subtracted only 0.89% from GDP over 2007:Q4 to 2008:Q3, during which
period the U.S. economy did enter recession. Something else, in
addition to the pre-existing problems in the housing sector,
contributed to tipping the scales from an economic slowdown into a
self-feeding dynamic of falling output and employment. I see little
basis for doubting that a key aspect of that new drag on the economy
resulted from the effects of the oil price shock.
There is also an interactive effect between the oil price shock and
the problems in housing. Lost jobs and income were an important factor
contributing to declines in home sales and prices, and we saw the
biggest initial declines in house prices and increase in delinquencies
in areas farthest from the urban core, suggesting an interaction
between housing demand and commuting costs. Once house price declines
and concomitant delinquencies reached a sufficient level, the solvency
of key financial institutions came to be doubted. The resulting
financial problems turned the mild recession we had been experiencing
up until 2007:Q3 into a much more severe downturn in 2008:Q4 and
2009:Q1. Whether those financial problems were sufficiently
insurmountable that we would have eventually arrived at the same crisis
point even without the extra burden of the recession of 2007:Q4-2008:Q3
is a matter of conjecture. But that oil prices made an important
contribution both to the initial downturn as well to the magnitude of
the problems we're currently facing seems to me to be indisputable.
Could anything have been done to prevent this? The decision by the
Federal Reserve to drop interest rates so quickly in the first few
months of 2008 likely contributed to some of the commodity price
speculation. In the spring of 2008 I had further recommended some
temporary sales of oil out of the Strategic Petroleum Reserve as
another measure that might have proven beneficial. There is also a
tradeoff between our goals of environmental protection and reducing
U.S. energy use, and certainly there are policy options we could have
explored for reducing our demand for low-sulfur oil in particular. I
would recommend that the U.S. have an emergency plan in place for
various regulatory adjustments that could be made on very short notice
to help reduce petroleum demand in response to any future crisis in
global oil supplies. For example, in my opinion the decision to
accelerate the shift to winter fuel requirements was helpful in
containing the economic damage from Hurricane Katrina in the fall of
2005.
But although there are some concrete steps that might have helped,
it would be a mistake to focus exclusively on short-term gimmicks. The
fundamental problem that I have highlighted above--booming world
petroleum demand in the face of stagnant world oil production--is very
much a long-run challenge. The reality is that no policy could have
prevented a substantial increase in the price of oil between 2005 and
the first part of 2008. The main lesson that I hope we draw from this
experience is that this long-run challenge is something with very real
and present short-run consequences.
Will the recent uptick in oil prices undermine prospects for
recovery from the recession? Retail gasoline prices have risen about 50
cents a gallon from their low in December. That takes away about $70
billion from consumers' annual spending power, which is hardly helpful
for the broader challenge of restoring household balance sheets to a
level where spending could be expected to pick back up. But let me
emphasize that although I believe that the initial spike in oil prices
was an important element of the process that produced our current
difficulties, we are currently at a point at which the multipliers and
spillovers associated with the recession dynamic itself have become far
more important factors than the price of oil. The problems faced by
U.S. automakers at the moment--and those problems are very, very
daunting--are not caused by the price of gasoline. What is needed to
restore U.S. vehicle sales now is not lower gas prices but instead more
income, jobs, and confidence on the part of consumers.
Notwithstanding, the recent rise in oil prices again underscores
the present reality of the long-run challenges. Even if we see
significant short-run gains in global oil production capabilities, if
demand from China and elsewhere returns to its previous rate of growth,
it will not be too long before the same calculus that produced the oil
price spike of 2007-08 will be back to haunt us again.
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Prepared Statement of Representative Michael Burgess
Thank you Madam Chair for holding this hearing. I commend the JEC
for taking this opportunity to engage in such a timely subject.
Three weeks ago we heard from Chairman Bernanke who stated that the
U.S. economy has contracted sharply since last autumn. Real gross
domestic product has dropped at more than six percent in the fourth
quarter of 2008--as well as the first quarter of this year--resulting
in the loss of some 5 million jobs over the 15 months.
Furthermore, the available indicators show overall business
investment remains weak. The Federal Reserve found restrained capital
spending plans, net declines in new orders and further weakening in the
demand for commercial and industrial loans.
A number of factors have contributed to this situation; however,
rising commodities prices are clearly capable of prolonging this
current recession, foremost on that list being oil.
Clearly the United States needs oil to sustain our economic growth,
but our supply here in the U.S. is limited and so we have turned our
attention to developing countries such as Venezuela, Nigeria and
Russia. But so have the hungry oil consumers around the globe, each
eager to amass the formidable scope of even our currently troubled
economy. For instance, China and India together account for 100 million
new consumers of oil EACH year.
And while no one can tell us with perfect clarity the correlation
between low prices of oil and the ability for our businesses to earn
increased profits, any nominal economists can explain colloquially the
basic laws of supply and demand. The U.S.' desire for oil has not been
whetted by high oil prices. We still drive our cars to work, to home
and to play. Match this with the competing consumption demands for
those seeking to mimic the America lifestyle and what we end up with is
a scarce commodity . . . thus driving up costs.
Furthermore, we know that we are heading towards a time in the year
when oil prices, and subsequently transportation fuel prices, are
seasonally higher, which can only add to our economic troubles.
Madam Chair, make no mistake, I am interested in hearing from the
experts in our panel today regarding specific metrics of analysis to
determine whether our economy's recovery is dependent upon the rest of
the globes consumption of oil, but what we need are solutions for THIS
country's oil needs rather than a mere minimization of costs.