[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

                              ----------                              

                     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.
  

                                  
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