    [House Hearing, 112 Congress]
    [From the U.S. Government Publishing Office]

                          CHANGING ENERGY MARKETS AND
                             U.S. NATIONAL SECURITY

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

                                    HEARING

                                   BEFORE THE

             SUBCOMMITTEE ON TERRORISM, NONPROLIFERATION, AND TRADE

                                     OF THE

                          COMMITTEE ON FOREIGN AFFAIRS
                            HOUSE OF REPRESENTATIVES

                          ONE HUNDRED TWELFTH CONGRESS

                                 FIRST SESSION

                                   __________

                               DECEMBER 16, 2011

                                   __________

                               Serial No. 112-89

                                   __________

            Printed for the use of the Committee on Foreign Affairs

     Available via the World Wide Web: http://www.foreignaffairs.house.gov/

                                     ______

                      U.S. GOVERNMENT PRINTING OFFICE
    72-104                    WASHINGTON : 2011
    -----------------------------------------------------------------------
    For sale by the Superintendent of Documents, U.S. Government Printing Office,
    http://bookstore.gpo.gov. For more information, contact the GPO Customer Contact Center, U.S. Government Printing Office. Phone 202�09512�091800, or 866�09512�091800 (toll-free). E-mail, gpo@custhelp.com.

                          COMMITTEE ON FOREIGN AFFAIRS

                     ILEANA ROS-LEHTINEN, Florida, Chairman
    CHRISTOPHER H. SMITH, New Jersey     HOWARD L. BERMAN, California
    DAN BURTON, Indiana                  GARY L. ACKERMAN, New York
    ELTON GALLEGLY, California           ENI F.H. FALEOMAVAEGA, American
    DANA ROHRABACHER, California             Samoa
    DONALD A. MANZULLO, Illinois         DONALD M. PAYNE, New Jersey
    EDWARD R. ROYCE, California          BRAD SHERMAN, California
    STEVE CHABOT, Ohio                   ELIOT L. ENGEL, New York
    RON PAUL, Texas                      GREGORY W. MEEKS, New York
    MIKE PENCE, Indiana                  RUSS CARNAHAN, Missouri
    JOE WILSON, South Carolina           ALBIO SIRES, New Jersey
    CONNIE MACK, Florida                 GERALD E. CONNOLLY, Virginia
    JEFF FORTENBERRY, Nebraska           THEODORE E. DEUTCH, Florida
    MICHAEL T. McCAUL, Texas             DENNIS CARDOZA, California
    TED POE, Texas                       BEN CHANDLER, Kentucky
    GUS M. BILIRAKIS, Florida            BRIAN HIGGINS, New York
    JEAN SCHMIDT, Ohio                   ALLYSON SCHWARTZ, Pennsylvania
    BILL JOHNSON, Ohio                   CHRISTOPHER S. MURPHY, Connecticut
    DAVID RIVERA, Florida                FREDERICA WILSON, Florida
    MIKE KELLY, Pennsylvania             KAREN BASS, California
    TIM GRIFFIN, Arkansas                WILLIAM KEATING, Massachusetts
    TOM MARINO, Pennsylvania             DAVID CICILLINE, Rhode Island
    JEFF DUNCAN, South Carolina
    ANN MARIE BUERKLE, New York
    RENEE ELLMERS, North Carolina
    ROBERT TURNER, New YorkAs
        of October 5, 2011 deg.
                       Yleem D.S. Poblete, Staff Director
                 Richard J. Kessler, Democratic Staff Director
                                     ------

             Subcommittee on Terrorism, Nonproliferation, and Trade

                     EDWARD R. ROYCE, California, Chairman
    TED POE, Texas                       BRAD SHERMAN, California
    JEFF DUNCAN, South Carolina          DAVID CICILLINE, Rhode Island
    BILL JOHNSON, Ohio                   GERALD E. CONNOLLY, Virginia
    TIM GRIFFIN, Arkansas                BRIAN HIGGINS, New York
    ANN MARIE BUERKLE, New York          ALLYSON SCHWARTZ, Pennsylvania
    RENEE ELLMERS, North Carolina

                                C O N T E N T S

                                  ----------
                                                                       Page

                                   WITNESSES

    Mr. Neelesh Nerurkar, specialist in energy policy, Congressional
      Research Service...............................................     9
    Mr. Robert McNally, president, The Rapidan Group.................    14
    Mr. Martin J. Durbin, executive vice president of government
      affairs, American Petroleum Institute..........................    24
    Gal Luft, Ph.D., executive director, Institute for the Analysis
      of Global Security.............................................    30

              LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING

    The Honorable Edward R. Royce, a Representative in Congress from
      the State of California, and chairman, Subcommittee on
      Terrorism, Nonproliferation, and Trade: Prepared statement.....     3
    Mr. Neelesh Nerurkar: Prepared statement.........................    11
    Mr. Robert McNally: Prepared statement...........................    16
    Mr. Martin J. Durbin: Prepared statement.........................    26
    Gal Luft, Ph.D.: Prepared statement..............................    32

                                    APPENDIX

    Hearing notice...................................................    52
    Hearing minutes..................................................    53
    The Honorable Gerald E. Connolly, a Representative in Congress
      from the Commonwealth of Virginia: Material submitted for the
      record.........................................................    55
    The Honorable Brad Sherman, a Representative in Congress from the
      State of California: Material submitted for the record.........    59

               CHANGING ENERGY MARKETS AND U.S. NATIONAL SECURITY

                                  ----------

                           FRIDAY, DECEMBER 16, 2011

                  House of Representatives,
                         Subcommittee on Terrorism,
                               Nonproliferation, and Trade,
                                  Committee on Foreign Affairs,
                                                        Washington, DC.
        The subcommittee met, pursuant to notice, at 10:12 a.m., in
    room 2200, Rayburn House Office Building, Hon. Edward R. Royce
    (chairman of the subcommittee) presiding.
        Mr. Royce. This hearing of the subcommittee will come to
    order. The title of this hearing is ``Changing Energy Markets
    and U.S. National Security.''
        Energy has become a national security issue in the United
    States. And one of the realities that we have to explore is the
    impact that energy has on so much of the trade issues,
    terrorism issues, even the nonproliferation issues. All of
    these are in the orb of the responsibilities of this
    subcommittee.
        This week the House passed sanctions aimed at Iran's energy
    sector. A nuclear armed Iran would hugely damage security in
    the Persian Gulf. It is just a reminder to us of the role
    played by energy, the reality that the United States is in a
    competitive situation, competing with China. Energy prices in
    China are 20 percent higher than energy prices here in the
    United States. Yet the question is, going forward, are we going
    to be able to access energy at a lower cost or are we going to
    foreclose those possibilities?
        We sit here today at this hearing at a time when you
    already have layoffs in the United States related to the
    Keystone pipeline. Last week, 60 Americans lost their jobs as a
    result of the President's decision not to give the green light
    and go ahead with the Keystone project. We sit here in the
    United States today, some of my colleagues were recently
    talking to the Canadian Ambassador and Prime Minister Harper,
    after the President made a decision not to go forward with the
    Keystone pipeline, and that reaction was to embrace a long-term
    strategy of looking to Asia for exports from Canada.
        We know Hu Jintao has approached and had a meeting with
    Prime Minister Harper about the idea of having the oil from
    Alberta shipped not here to the United States but instead
    transited to China to Chinese refineries. And what China seeks
    here is to reduce its cost of energy.
        We compete with China. It is going to impact jobs in the
    United States if energy costs go down in China as a result and
    if energy costs go up in the United States. So we have an
    opportunity. The United States has this opportunity, if you
    read the financial press, of being a net fuel exporter if we
    are able to access--North America can do this--if we can access
    the oil sands from Alberta. If we go forward with the Keystone
    pipeline. For the first time in 60 years our country would have
    the opportunity to be independent of the current circumstances
    where we depend upon the OPEC cartel, where we shift our
    dollars, our petro dollars into that market. And we should ask
    ourselves, at this point in time, are we better served
    recirculating those dollars, sending money to an ally, Canada,
    where 80 percent of what we spend in Canada, according to
    economists, is spent back here in the United States? Or are we
    better served by closing that option, allowing China and Canada
    to cement the deal that Hu Jintao is working on, which would
    allow those resources to go instead to China, and to continue
    to be dependent on sending our petro dollars into Saudi Arabia
    and into Venezuela and to other states that are either
    unreliable or hostile to the United States?
        We can continue with that trade imbalance with respect to
    the OPEC cartel or we can have our dollars stay at home, not
    being shipped to Saudi Arabia and Venezuela. From the
    standpoint of American jobs, we can create those jobs here or
    we can create those jobs in China. That is our decision. Right
    now the President is making a decision to lay off Americans,
    and 60 have already been laid off as a result of his decision,
    and instead have those jobs go to China.
        You can have American jobs if the U.S. Government and State
    governments will assist. There is a reason why unemployment is
    under 4 percent in North Dakota, and that is because of the
    booming energy sector there, that is because the administration
    has yet to find a way to shut that down. But not only does that
    benefit North Dakota, it is also benefiting Pennsylvania and
    other States.
        Greater U.S. manufacturing competitiveness is a major issue
    for us here in the United States. The explosion in natural gas
    production has given the United States an advantage here, but
    only if we can access that advantage. If we curtail that, if we
    shut off that possibility, then we are not going to be the
    beneficiaries. Good things are only going to happen if those in
    Washington who make these decisions in our State capitals let
    them happen.
        I am going to go back to the Keystone pipeline, a 1,700-
    mile extension that would transport 830,000 barrels of oil per
    day from Alberta to our refineries here rather than in China.
    By the Chamber's estimate--we know that the estimate of 20,000
    direct jobs--by the Chamber estimate it is 200,000 indirect
    jobs in the United States. Yet we face delay after delay and
    now this suggestion of delay until the next election.
        Well, the Chinese are not waiting and if the energy isn't
    piped to Texas refineries and refineries throughout the Midwest
    it is going to go instead to China.
        And I just would conclude with the concept or the argument
    that Prime Minister Harper made after the administration
    rejected his decision. He was very disappointed. And he laid
    out the argument that they would look long range to China and
    to Asia. And we can only hope President Obama drops his
    opposition.
        I turn now to the ranking member, Mr. Sherman, for his
    opening statement.
        [The prepared statement of Mr. Royce follows:]

                                  ----------

        Mr. Sherman. Mr. Connolly.
        Mr. Royce. Mr. Connolly.
        Mr. Connolly. Thank you, Mr. Chairman. And I thank the
    ranking member for his graciousness. I want to thank you for
    the opportunity to address energy and national security issues
    as interrelated. In the promise of the debate about the
    Keystone XL pipeline rider in the House payroll tax bill, like
    you, Mr. Chairman, I am going to focus my comments primarily on
    that issue.
        The International Energy Agency recently issued its world
    energy outlook which contained one notable piece of good news:
    U.S. dependence on foreign and particularly Middle Eastern oil
    is projected to decline in contrast to China, India and Europe.
        According to the EIA, the primary reason for our dependence
    on foreign oil will decline at the adoption of aggressive
    vehicle efficiency standards, which will increase corporate
    average fuel economy standards to 54.5 miles by the year 2025.
    A projected increase in domestic oil production also will make
    a contribution to reduce foreign oil dependence, though
    according to the EIA that increase in production will have a
    much smaller impact than actual vehicle efficiency standards.
        Proponents of the Keystone XL pipeline have argued it will
    increase U.S. access to Canada oil. While this position has
    intuitive appeal, it deserves further examination. Five major
    oil pipelines already transport this oil derived from Canadian
    tar sands into the United States. These pipelines now terminate
    in Oklahoma, Illinois and Michigan, providing much of the
    United States with an ample supply of tar sands derived oil. In
    fact industry analysts note that these pipelines have produced
    an oversupply of oil in some parts of our country, creating low
    gas prices for some Americans at diminished oil company
    profits. The Keystone pipeline will provide an export outlet
    for Canadian oil, actually reducing supply in the Midwest by
    allowing oil companies to sell at higher priced markets
    elsewhere in the world.
        In the abstract I think members of this committee could
    address that boosting domestic oil production in an
    environmentally responsible manner would be beneficial insofar
    as it could reduce our dependence on OPEC oil. We discussed
    this subject in this committee. And as I stated at the time, I
    support such efforts to boost domestic production for domestic
    consumption.
        Therefore, when legislation to advance the Keystone
    pipeline came to the House floor I introduced, as I said I
    would, here a simple amendment requiring that oil to be used in
    America. That amendment would have ensured that Americans enjoy
    affordable gasoline and enjoy national security benefits as a
    result of the tar sands oil production. Obviously those
    benefits evaporate if oil companies simply export Canadian oil
    to the more expensive markets in China or Europe.
        I was surprised and disappointed, Mr. Chairman, that the
    House majority rejected that simple amendment, calling into
    question the motives underlying the push to approve the
    Keystone pipeline. Alberta Minister Ron Liepert said if there
    was something that kept me up at night it would be the fear
    that before too long we are going to be landlocked in bitumen.
        While Canadian oil companies might increase their profits
    from selling oil overseas, such exports come at the expense of
    American consumers and American national security. If we are in
    conceptual agreement that there is a relationship between
    domestic oil supply and national security, then perhaps we
    should acknowledge that hemorrhaging oil overseas would
    undercut those benefits.
        Proponents of the pipeline have argued it will create jobs.
    I ask unanimous consent to enter into the record a Washington
    Post Fact Check article noting that many job estimates offered
    by prominent elected officials have been wildly exaggerated.
        In reality the pipeline likely will produce at most some
    6,000 annual temporary construction related jobs and as few as
    50 permanent jobs. Compared to the half million public sector
    jobs that have been lost in the recent recession and nascent
    recovery, this is an anemic job boost at best.
        Irrespective of whether one is a climate change science
    denier or accepter, surely all of us could agree that
    additional oil transported by the Keystone pipeline should stay
    in the United States and absent legal guarantees likely will
    not. With that, I yield back.
        Thank you, Mr. Chairman.
        Mr. Royce. We will turn now to Mr. Johnson of Ohio.
        Mr. Johnson. Thank you, Mr. Chairman, and I would be happy
    to yield back 1 minute of my time to the chairman.
        Mr. Royce. I appreciate the gentleman yielding. The
    difficulty here is that China has already invested $10 billion
    in Canada's oil sands. Canada's Prime Minister, as a result of
    this decision by our President, has already said the necessity
    of making sure that we are able to access Asian markets for our
    energy products is underscored by this delay.
        The question is not if we bring these products to
    refineries here in the United States. The economics are such
    that--I am just going to quote from the Department of Energy.
    The Department of Energy says that gasoline prices in all
    markets served by these refineries, because we are talking
    about the Keystone pipeline project, would decrease. Gasoline
    prices would decrease in the Gulf Coast, gasoline prices would
    decrease in the East Coast, and gasoline prices would decrease
    here in the United States in Midwest. Not everybody agrees that
    having a falling price for gasoline is necessarily--you know,
    it depends upon your perspective on this. But I will tell you
    this, from a competitiveness standpoint, from a standpoint of
    creating jobs here as opposed as into China, this is a very
    important issue.
        I yield back to Mr. Johnson.
        Mr. Johnson. Well, thank you, Mr. Chairman. I also
    appreciate our witnesses being here today. You know, the lack
    of stability surrounding our energy markets today and the
    potential for even greater instability in the near future will
    not only continue to stunt the growth of our economy, it will
    jeopardize our national security. By importing oil from nations
    such as Saudi Arabia and Venezuela, the West is funding the
    spread of terrorism and foreign activism that stands in stark
    contrast to our foreign policy objectives.
        But as the world increasingly looks to the West for its
    energy needs we have an opportunity to alter this course and
    spur growth in our struggling economy. Thanks in part to
    breakthroughs in safety and technology, the United States is on
    track to become the top global oil and gas producer by 2020. In
    fact, the U.S. tops Russia, Saudia Arabia, and China in
    combined energy reserves, including oil, coal and natural gas.
        More than 9.2 million U.S. jobs are dependent on the oil
    and gas industry. And shale is a huge part of our energy
    potential, particularly in my district of eastern and
    southeastern Ohio. Exploration of Marcellus and Utica shales in
    this part of the state is a game changer, not only for energy
    development independence but for job creation. More than
    200,000 jobs are expected to come to Ohio in the next 4 years
    alone as a result of developing these deposits.
        There is a major growth in development happening now in
    America's energy sector, something that can turn our economy
    around and bring hundreds of thousands of jobs to Americans in
    need of a paycheck. However, high tax rates and excessive
    government regulation have the very real potential to destroy
    these robust ambitions. We have seen this most recently in the
    administration's refusal to approve the Keystone XL pipeline.
    This project is a no-brainer for job creation that would also
    significantly decrease our dependence on hostile foreign
    sources of oil. There is no logic to the administration's
    insistence on refusing a permit for this project.
        The United States doesn't have to be on the receiving end
    of OPEC's decisions. We have great potential and all the
    resources we require to secure our own energy needs. We can
    actually be the nation leading the global energy transition to
    the West. The question is will we have the leadership to take
    control of our future and make this a reality.
        Thank you, Mr. Chairman, and I yield back.
        Mr. Royce. Mr. Sherman.
        Mr. Sherman. Thank you for holding these important
    hearings. The effect of energy on our national security cannot
    be overstated. I know that most of the comments here have been
    about the Keystone pipeline. I think these hearings are far,
    far broader and the impact of energy on our national security
    is far more significant than this one pipeline.
        To address this pipeline, I think we have to take a look at
    the environmental concerns about how that pipeline should be
    built, the route it ought to take, and why it is bypassing the
    markets of the Midwest to go down to Texas, which is the one
    part of the United States that already has more oil than it can
    consume.
        I realize that there are some in the environmental movement
    who believe that if this pipeline is built then the carbon
    atoms on the petroleum under the ground of Canada will not be
    burned, mixed with oxygen atoms and sent into our atmosphere. I
    think the other opening statements have made it clear that at
    some point Canada will find a way to exploit this resource
    whether it is through the United States or through the port of
    Vancouver into the world markets.
        However, we shouldn't think that that is automatic or easy
    or that Keystone is going to go away next week. There are
    environmentalists in Canada. I have met them, and they are no
    more excited about the building of an east-west or pipeline
    through Canada than our American environmentalists for the
    Keystone pipeline.
        Energy really comes down to two separate issues or somewhat
    separate issues, and that is how do we generate the electricity
    and how do we move our vehicles. This is sometimes lumped
    together as one issue as if we have a national security crisis,
    how are we going to generate electricity. No, we have a world
    environmental crisis and global warming when we burn coal,
    which we do to create about half of our electricity. So one
    energy market is for electricity and the other is for moving
    vehicles, and it is moving vehicles that has been the national
    security crisis because the world hasn't found a better system
    yet than petroleum and the petroleum for reasons that have not
    been explained to me is in all the wrong places, at least that
    which was exploitable by the technology existing heretofore.
        Crude oil prices have almost quadrupled since the year
    2000. They now stand at $94. OPEC's is now being headed by a
    senior commander of the Revolutionary Guard Corps of Iran. I
    think this illustrates the fact that we do are have a national
    security problem when it comes to vehicle propulsion.
        I have been a strong supporter of international and
    domestic research. As to cooperation with other countries, we
    have as one model the U.S.-Israel Energy Cooperation Act, in
    which both countries put up the same amount of money for joint
    research projects and both countries have a strong incentive to
    wean the world from petroleum.
        In contrast, the Subcommittee on Asia and the Pacific had
    hearings in a $4 million program to give foreign aid to China
    to help it with its energy problems and to help it meet its
    carbon emission objectives. I think Chinese carbon is a Chinese
    problem, and last I checked they have enough dollars to pay for
    any American technology that they think necessary to deal with
    the issue.
        So I look forward to hearing from our witnesses chiefly as
    to how we are going to propel our vehicles without propelling
    to greater power the enemies of the United States, and finally
    I want to echo the gentleman from Virginia that a pipeline that
    bypasses America's Midwest markets and takes oil to ports in
    the United States for possible export may not be the best way
    to assure our national security.
        I yield back.
        Mr. Royce. I thank the gentleman. And we will go now to our
    panel. Mr. Neelesh Nerurkar is an energy specialist at the
    Congressional Research Service, where he helps members, and our
    staff understand the complexity of energy markets and energy
    security and international energy issues. And prior to being
    with CRS he analyzed global energy markets for a major energy
    company.
        Mr. Robert McNally is the founder and the president of
    Rapidan Group, an independent energy consulting firm. He has
    served several positions in the energy industry, and in the
    previous administration, Mr. McNally served as senior director
    for International Energy on the National Security Council.
        Mr. Martin Durbin is the executive vice president for
    government affairs at the American Petroleum Institute. He is
    responsible for their policy. They have 450 members, ranging
    from the largest oil and natural gas companies to small and
    independent companies. He worked on the Hill as a staff member
    in both the Senate and the House.
        Mr. Gal Luft is executive director of the Institute for
    Analysis of Global Security, a think tank focused on energy
    security, and he serves as an adviser to the United States
    Energy Security Council and is cofounder of the Set America
    Free Coalition.
        We welcome all of the witnesses to the subcommittee. You
    all have 5 minutes to complete your written testimony, which we
    have for the record. We will start with Mr. Nerurkar.

    STATEMENT OF MR. NEELESH NERURKAR, SPECIALIST IN ENERGY POLICY,
                     CONGRESSIONAL RESEARCH SERVICE

        Mr. Nerurkar. Thank you, Chairman Royce, Ranking Member
    Sherman, and distinguished members of the committee. My name is
    Neelesh Nerurkar. I am an energy specialist at Congressional
    Research Service. CRS appreciates the opportunity to testify
    about how energy markets are changing. Note that CRS takes no
    position on the policy questions posed by these developments.
        I will discuss three main points from my written testimony:
    How markets are changing, how this affects oil concerns, and
    how this affects a broader set of issues.
        First, rapid, energy-intensive economic growth in
    developing countries has raised global energy demand in recent
    years. Economic growth is the main driver of energy demand.
    Energy production has been unable to keep up with this demand
    at previously prevailing prices. This contributed to rising
    energy prices, particularly for oil, and gave rise to energy
    security and economic concerns.
        Energy production is capital intensive. Projects have long
    lead times and can face policy and geopolitical constraints.
        Oil prices fell with the global economic downturn in 2008
    but has subsequently rebounded. Demand from developing
    countries has pushed global oil consumption to new highs in
    2010 and 2011.
        Higher prices in turn have motivated investment, technology
    development and policy incentives, which have contributed to
    increasing energy supplies particularly from new, complex or
    expensive resources around the world. A number of examples come
    from the United States and elsewhere in the Western Hemisphere;
    for instance, U.S. tight oil and shale gas production, U.S and
    Brazilian ethanol production, Brazil's offshore pre-salt
    resources and Canada's oil sands.
        Turning to the oil market, the world consumes 88 million
    barrels a day of oil and related liquid fuels. Forty percent of
    that is met with oil from OPEC, which includes major oil
    producers in the Middle East, Africa and South America. The
    world's largest non-OPEC oil producers are Russia and the
    United States.
        The United States is also the world's largest oil consumer
    and largest importer. Net imports meet 45 percent of U.S. oil
    consumption, but this is down from a peak of 60 percent in
    2005. Net imports have declined by 4 million barrels a day in 6
    years. Nearly half these declines can be attributed to lower
    consumption, a result of the economic downturn, and higher oil
    prices. The rest is due to higher domestic production of oil
    and other liquid fuels, particularly onshore crude oil and
    ethanol.
        The largest crude oil production increases have taken place
    in North Dakota and Texas. Tight oil production in North
    Dakota's Bakken formation has rapidly increased in recent
    years, enabled by technology advances in horizontal drilling
    and hydraulic fracturing.Ethanol production has been supported
    by Federal policy and higher gasoline prices. Among the largest
    declines in U.S. production have been in Alaska and California.
        Despite lower U.S. imports, U.S. imports from Canada have
    increased by 20 percent between 2005 and 2011 aided by growth
    in oil sands output. Accounting for about a quarter of U.S.
    imports, Canada is now our largest foreign source of oil.
    Meanwhile, though import volumes from OPEC have fallen, OPEC
    countries continue to account for half of U.S. net imports.
    Most of that, however, comes from OPEC members outside the
    Persian Gulf, such as Venezuela and Nigeria for example.
        There are a broader set of issues to consider here. I will
    briefly cover three. First, the impact of high energy prices,
    investment, technology development and policy incentives aren't
    limited to oil. They are also driving, for instance, rapid
    growth in renewable electricity generation. Also, drilling
    technology innovations have increased unconventional natural
    gas supplies and helped keep U.S. natural gas prices low. Shale
    gas has dramatically changed the U.S. natural gas outlook, so
    much so that some companies considering new liquefied natural
    gas exports. Other countries are looking to see if they can
    replicate the U.S. shale gas experience.
        Second, some energy sources involve environmental and
    fiscal tradeoffs. For example, the use of hydraulic fracturing
    to recover natural gas and oil has raised concerns about water
    resource risks, and some are concerned about the greenhouse gas
    emissions and ecosystem impacts from oil sands production and
    transport and refining. There are also fiscal tradeoffs where
    new energy resources require government support; for instance,
    the tax credit for ethanol.
        Finally, the oil market is globally integrated and oil
    market events anywhere can affect prices everywhere. For
    example, even though the United States imported little oil from
    Libya, the crisis there contributed to higher oil costs here
    whether that oil was imported by ship, by pipeline or produced
    at home. Foreign oil market disruptions could continue to
    affect U.S. oil prices even if the U.S. were to produce as much
    it consumed.
        In conclusion, rapid energy intensive economic growth from
    developing countries contributed to energy price increases,
    which in turn enabled new sources of energy supply growth.
    However, some of those sources have higher commercial,
    environmental and fiscal costs. Domestic oil supply growth is
    reducing our need for imports, but we remain connected to a
    global oil market where supply disruptions can continue to
    cause economic and energy security concerns.
        I thank you for the opportunity to appear before the
    committee, and I am happy to address your questions.
        [The prepared statement of Mr. Nerurkar follows:]

                                  ----------

        Mr. Royce. We thank you again. We go to Mr. McNally.

     STATEMENT OF MR. ROBERT MCNALLY, PRESIDENT, THE RAPIDAN GROUP

        Mr. McNally. Chairman Royce, Ranking Member Sherman,
    members of the committee, thank you for allowing me to testify.
    I would also like to make three points, drawing on my testimony
    submitted to the record.
        One, new energy supplies in our hemisphere will have real
    benefits if we allow them to be produced. Two, even if we
    produce more oil and gas here, we will still be connected to a
    global oil market and will have vital national security
    interests in and around the Persian Gulf.
        Three, the risk of oil price spikes must not and need not
    be an excuse to avoid interrupting Iran's oil exports. The loss
    of Iran's exports can be offset by tapping strategic reserves
    and increasing production in Saudi Arabia. A nuclear Iran would
    pose far greater and longer lasting risks of oil price spikes.
        To the first point, potential new and U.S.-Western
    Hemisphere oil and gas supplies could confer real benefits, but
    whether we realize them will depend on future regulatory and
    fiscal policies. Those benefits include lower import
    dependence, which would strengthen our economy's resilience to
    disruptions and reduce our need to borrow abroad. New supplies
    anywhere outside the Middle East reduce, all else equal, reduce
    our vulnerability to disruptions in that volatile part of the
    world. Down the road we may be able to use vast new shale gas
    deposits to displace oil imports, through fleet
    electrification, natural gas vehicles, to revitalize our
    domestic chemical sector, and via exports help reduce Russia's
    leverage over Western Europe.
        But second, even if we sharply reduce our oil import
    dependence our economy and national security will remain
    tightly linked to the global oil market, especially the trends
    and events in the Persian Gulf. Oil is a fungible commodity
    that is widely traded in a global market. As my colleague said,
    a disruption or price shock anywhere means a price shock
    everywhere.
        Lower oil import dependence improves our economic
    resilience, but will not insulate us from shocks. EIA projects
    our oil imports will fall to about 42 percent of demand by
    2035. Oil imports were 36 percent of demand in 1973 when we had
    the first oil price shock.
        The Persian Gulf now amounts to 16 percent of our crude oil
    imports and is expected to stay around that level through 2035.
    Even if we didn't import a drop from the Middle East, our vital
    national interest there would remain. The Middle East and the
    Persian Gulf is and will remain the world's most important
    energy region. As of 2009 it held 56 percent of global proven
    oil reserves, nearly all of those in the Persian Gulf. EIA
    projects Middle East share of global oil production will rise
    from 28-31 percent by 2035. With a higher market share and
    higher prices, Middle Eastern oil producers are going to earn
    trillions and trillions of dollars in revenues. We must remain
    engaged in that region partly to ensure that windfall is not
    spent to threaten us or our allies.
        Another interest is to make sure that China and India's
    soaring dependence on Middle East oil flow, mentioned earlier,
    does not lead to strategic competition or conflict. The
    International Energy Agency sees China's import dependence
    headed over 84 percent and India's over 92 percent by 2035.
        U.S. foreign policy can and should aim to share the costs,
    burdens and responsibilities of protecting the Gulf and sea
    lanes with other friendly and capable importers. Such
    cooperation exists to some extent already, such as with multi
    national anti-piracy patrols. But for the foreseeable future
    only the United States can play the role of guaranteeing the
    stability of the Persian Gulf.
        And this brings me to my last point. The Iranian regime's
    pursuit of nuclear weapons poses a grave, clear and present
    danger to our national security, including the risk of
    economically damaging oil price spikes. We, especially you,
    face a dilemma. Only interrupting Iran's crude oil exports is
    likely to change Tehran's behavior, but that step could cause
    oil price spikes that could hurt importers of Iranian crude and
    even our motorists. Iran exports about 2.2 million barrels a
    day; total spare capacity in the world is about 3 million
    barrels a day. As my colleague said, earlier this year we found
    out what happens when we lost 1.7 million barrels a day--
    gasoline prices went up to $4 a gallon.
        The alternative to biting oil sanctions, military options
    would also cause price spikes. And if biting oil sanctions or
    military options are not used, Iran will probably get nuclear
    weapons. This outcome poses the biggest and most enduring risk,
    not only to our national security, but also of oil price
    spikes. Some believe a nuclear armed Iran could be contained
    and deterred as the Soviet Union was during the Cold War. Even
    if containment worked, it is a costly and dangerous strategy.
    The early decades of the Cold War were violent and nearly
    catastrophic. I doubt oil prices will remain stable after
    Israel, Saudi Arabia and Iran test nuclear weapons and state
    their retaliatory doctrines, much less continue to fight proxy
    wars and conflicts arising from millennia of religious, ethnic
    and cultural hostility.
        Iran's pursuit of nuclear weapons is likely to raise oil
    prices one way or the other. Officials could manage this oil
    price risk by adopting what I call a quarantine-and-release
    strategy. We would halt most, if not all, of Iranian's oil
    exports while offsetting the supply loss with a drawdown in
    strategic stocks and higher Saudi production.
        Strategic stocks are large, secure and located in consuming
    regions. They are an important tool that can protect the
    economy while we raise the cost on the Iranian regime for its
    illegal and dangerous nuclear weapons quest. Short of a
    military action, quarantine-and-release may be the last option
    to avoid a nuclear Iran, which would pose the biggest risk to
    our national security as well as to oil prices.
        Thank you.
        [The prepared statement of Mr. McNally follows:]

                                  ----------

        Mr. Royce. Thank you. Mr. Durbin.

    STATEMENT OF MR. MARTIN J. DURBIN, EXECUTIVE VICE PRESIDENT OF
            GOVERNMENT AFFAIRS, AMERICAN PETROLEUM INSTITUTE

        Mr. Durbin. Good morning, Mr. Chairman, Mr. Sherman, and
    members of the committee, and thank you for the invitation to
    testify this morning.
        As the title of the hearing implies, there is no question
    that global energy markets are changing. While API members
    continue to operate and invest around the world, there is
    growing recognition that a rebalancing of the energy markets is
    occurring and that due to enormous new potential reserves, both
    onshore and in the deep water, and due to geopolitical
    stability, the Western Hemisphere is quickly becoming a much
    bigger player on the global energy stage. For today's purposes,
    however, I will limit my comments to opportunities we have to
    enhance our energy and national security right here in North
    America.
        In some parts of the U.S., as has been noted already, oil
    and natural gas development is booming. While total U.S. crude
    oil production has remained constant since 2010, Gulf of
    Mexico, offshore and Alaskan production has dropped. This has
    been offset mainly by increased production onshore in North
    Dakota and Texas, almost exclusively on non-Federal land. This
    increase in domestic onshore production along with an overall
    drop in demand has allowed U.S. imports to decline during this
    period.
        The fact is we are in an enormously energy rich nation, and
    we should be taking better advantage of those domestic energy
    resources. To highlight this point, the international energy
    consulting firm, Wood Mackenzie, calculated the benefits of
    expanded domestic development earlier this year in a study
    conducted for API. It concluded that America's oil and natural
    gas industry can create 1.4 million new jobs by 2030. One
    million of those could be created in just the next 7 years.
        The same study showed that allowing greater production in
    the U.S. can generate an additional $800 billion to Federal and
    local treasuries by 2030. That won't erase our debt, but it is
    a nice down payment. It doesn't end there. In 2010, our
    industry directly contributed more than $470 billion to the
    U.S. economy in spending, capital investments, wages and
    dividends. That is more than half the size of the 2009 Federal
    stimulus bill. But this stimulus happens every year without an
    act of Congress and with no cost to the taxpayer.
        The Keystone XL pipeline is a perfect example of an energy
    project that will also enhance our national security. Now in
    its fourth year of review, Keystone XL will create thousands of
    good paying jobs for American families. And as the labor
    unions, whose members will directly benefit from this project
    testified last week, it is more than a pipeline. It is a
    lifeline, and it is time to put the safest, most highly trained
    and productive workforce to work on this project.
        It is also worth noting that the Keystone XL pipeline will
    not only be an outlet for the oil sands in Canada, but for the
    increased production that we are seeing in the Upper Plain
    States in North Dakota and Montana.
        But looking to Canada, it is about more than just one
    pipeline project. Eighty thousand Americans are currently
    employed because of Canadian oil sands. And according to the
    Canadian Energy Research Institute, we stand to create an
    additional 500,000 American jobs by 2035 and spur $775 billion
    in economic activity. Already there are at least 2,400
    companies in 49 States involved in developing oil sands either
    by providing the supplies and services in Canada or expanding
    our pipeline and refinery systems here in the U.S.
        Another fact, and I believe as the chairman noted, for
    every dollar the U.S. spends on Canadian products, including
    oil, Canada returns 90 cents through purchases of U.S. good and
    services. We simply don't see that level of return with other
    trading partners.
        But we also have to think more broadly about our energy
    future. DOE's Energy Information Administration forecasts that
    worldwide consumption of energy is expected to grow nearly 50
    percent by 2035 and the U.S. will require 20 percent more
    energy. They also project that renewables will meet only 13
    percent of that energy demand while oil and natural gas will
    continue to supply about 55 percent.
        But the choice is not between fossil fuels and renewable
    fuels. We are going to need all of it. In fact our industry and
    our member companies have invested more in zero and low carbon
    energy research than the Federal Government and nearly as much
    as all other industries combined. So growing renewables will
    continue to be important, but secure sources of oil and natural
    gas will be essential.
        Canada is already our number one supplier of imported oil
    and with projects like Keystone we have the ability to
    significantly increase our Canadian imports, which is already
    making up for declines in imports from Mexico and Venezuela.
    Cambridge Energy Research Associates projects that Canada could
    supply 5 million barrels of oil a day to the United States in
    2030, or one in four barrels Americans expect to consume. By
    expanding our access to domestic energy resources,
    strengthening our energy partnership with Canada, and
    increasing our domestic biofuels use, it is possible that we
    could produce all of America's liquid fuel needs by 2026.
        So in closing, oil and natural gas will continue to be
    critical to meeting our energy needs. We can choose to safely
    and responsibly produce more North American energy, creating
    hundreds of thousands of jobs and generating billions of new
    revenue for our Government, or we can stand on the sidelines
    and watch as other countries produce those resources that we
    will then have to purchase.
        Thank you, Mr. Chairman.
        [The prepared statement of Mr. Durbin follows:]

                                  ----------

        Mr. Royce. Thank you. Mr. Luft.

    STATEMENT OF GAL LUFT, PH.D., EXECUTIVE DIRECTOR, INSTITUTE FOR
                    THE ANALYSIS OF GLOBAL SECURITY

        Mr. Luft. Morning, Mr. Chairman, members of the committee.
    I am honored to represent here the United States Energy
    Security Council, which includes former Secretaries of Defense,
    State, Interior, Transportation, Homeland Security,
    Agriculture, Navy and Air Force, former Chairman of the Fed,
    Alan Greenspan, three former National Security Advisers,
    Directors of CIA, flag officers, and former retired executives
    from Lockheed Martin, Shell Oil and Kraft Foods. All of them
    are concerned about our growing dependence on petroleum and the
    impact on our national security and economic well-being.
        As was mentioned before, earlier this year the Department
    of Energy announced that U.S. imports of petroleum declined
    from 12.5 million barrels a day in 2005 to 8.6 million barrels
    of oil this year. U.S. import dependency dropped from 60
    percent to 46 percent. Now this 31 percent reduction in our
    level of imports in just 7 years is a remarkable achievement.
    Some of this is due to the recession, but most is due to, as
    mentioned, fuel efficiency and even more importantly
    significant ramp-up in domestic production enabled by
    technology.
        So far so good, but here is the rub, when America's oil
    imports dropped our foreign oil expenditures climbed by almost
    50 percent, from $247 billion in 2005 to $367 billion this
    year. The share of oil imports in the overall trade deficit
    grew from 32 percent in 2005 to 51 percent this year. Worst of
    all, the price of gallon of gasoline increased by 65 percent.
    So despite the lower demand, U.S. drivers spent this year on
    gasoline more than in any other year before.
        So, yes, we have become more self-sufficient and more
    efficient, but at the same we became poorer and deeper in debt.
    We are becoming more so-called energy independent, but less
    prosperous.
        What is wrong with this picture? Clearly something is wrong
    with our method. Being self sufficient in oil does not shield
    an economy from oil shocks. When the price of oil spikes, it
    spikes for everyone. Only 9 percent of our oil use comes from
    the Persian Gulf, yet the economy is always very vulnerable
    when things happen there. As long as oil remains the only
    source of energy to participate in the transportation fuel
    market, those who control the lion's share of production and
    reserves will rule the day. I am particularly referring to
    OPEC, which despite the control of 79 percent of global
    conventional oil reserves produces today almost the same number
    of barrels they did 30 years ago, even though the world economy
    more than doubled since.
        The Arab Spring created a situation in which the GCC
    government have gone into major liabilities to the tune of
    about $150 billion keeping the people happy so they don't end
    up like Mubarak and the other leaders.
        Who is paying for this? We pay for this. And I find it to
    be sad that while we have this conversation in the United
    States about reducing entitlement programs to hard working
    Americans, we are funding entitlement programs in Saudi Arabia,
    Kuwait, and the United Arab Emirates.
        What is wrong with our method is that we fail to address
    the root of our energy vulnerability, and that is oil's virtual
    monopoly over transportation fuels. This monopoly is enabled by
    the fact that for the most part our automobiles are blocked to
    fuels not made from oil. Since 2005 roughly 100 million new
    petroleum only vehicles roll over U.S. roads, each with an
    average lifecycle of 15 years. But allowing this to happen we
    effectively locked ourself to petroleum for the next 2 decades
    with all the implications.
        Congress can break this virtual monopoly with a stroke of a
    pen by enacting the Open Fuel Standard Act introduced earlier
    this year. This 2-page bill would ensure that cars sold in the
    United States are open to fuel competition so that drivers can
    compare prices per mile and on-the-fly choices between gasoline
    or diesel and a whole variety of non-petroleum fuels.
        As I indicated in my written testimony, the Open Fuel
    Standard would also open the door to methanol, which is an
    alcohol fuel that provides the most economic way to introduce
    our abundant natural gas resources as an alternative to
    petroleum in the transportation sector.
        Mr. Chairman, this time 200 years ago Napoleon was
    preparing his army to march into Russia. At the time salt was
    the most important strategic commodity by virtue of its
    monopoly over food preservation. Salt deposits conferred
    national power and wars were even fought over the salt. Salt
    was the Achilles heel of Napoleon's war machine. Its status as
    a strategic commodity ended with the invention of alternative
    ways to preserve food, like canning and refrigeration.
    Napoleon's disastrous Russia campaign was the last time in
    history that salt played a role in world politics.
        Today we consume and import more salt than ever. Yet I
    doubt that anybody in this room is concerned about our salt
    dependence or where our salt is coming from. Petroleum today
    occupies the same strategic ground that salt did. With a simple
    legislative fix, at a zero cost to taxpayers, the U.S. Congress
    can deliver to oil the same fate that humanity delivered to
    salt. So let's get it done.
        Thank you, Mr. Chairman.
        [The prepared statement of Mr. Luft follows:]

                                  ----------

        Mr. Royce. Thank you very much, Dr. Luft.
        Let me open with a few questions for our panel. In the near
    future, China is going to make up a third of the world's oil
    demand growth, and that need has driven their foreign policy
    around the world. We have seen that whether it is in Sudan or
    in Burma or in Central Asia. We have seen some of the
    consequences because it is all about resources for Beijing. And
    I would add where China goes corruption often follows in terms
    of their attempts to have access to this.
        Now they are in our hemisphere. Now China is here. They
    have established a working group on energy, and Chinese
    companies have invested $10 billion in Canada's oil sands. Now
    this is my perspective on this, but it seems to me that the
    Obama administration has laid out a welcome mat for China with
    respect to the Keystone pipeline project and the decision not
    to go forward. I base that partly on the reaction in Canada, or
    if any of the members of the press would like to talk to the
    Canadian Embassy about this, this really pained the Canadian
    Government.
        Just days after the Obama administration announced the
    Keystone delay, Canadian Prime Minister, Stephen Harper, met
    with China's Hu Jintao. Harper was painfully blunt. What he
    said was, ``This does underscore the necessity of Canada making
    sure that we are able to access Asia markets for our energy
    products.'' That was his quote. And those remarks spurred
    headlines around the world. Reuters said, ``Asia a priority for
    Canada after U.S. delays Keystone.'' And the Wall Street
    Journal: ``Canada shops oil after pipeline halt.'' And it is a
    halt.
        I had a press conference not long ago with the
    representative of the pipeline company, the company that is
    making that pipeline. He said last week they laid off 60 of
    their employees and there are more layoffs coming as a
    consequence of this decision. And indeed there are now Canadian
    proposals to dramatically increase the capacity for oil from
    Alberta to reach the Canadian West Coast in order to be shipped
    to China.
        These plans are being set with a view toward diversifying
    away from an unreliable partner, the United States. And instead
    they are looking at China. And this is all being planned with a
    long-term focus on the Chinese market in mind.
        Now, Mr. Durbin, Canada is not waiting around. I wonder if
    you share my concerns and I would ask how accessible is
    Canada's Alberta oil market to the Chinese market?
        Mr. Durbin. Mr. Chairman, thanks for the question. I am not
    sure I can give you a clear answer on accessibility of China to
    the Canadian market other than to say, as you pointed out, they
    made significant investments in the oil sands. I don't think
    that is any surprise. It has been pointed out that Canada has
    an enormous resource that they are sitting on top of. They are
    going to find a way to get this to market.
        I think our focus, and certainly at API we shared
    disappointment with the decision to delay the pipeline, but we
    are today utilizing oil sands and Canadian energy resources to
    a great extent, and I think it is in our national interest, our
    energy interest, our security interest to enhance that even
    more. And so there is no question that Canada is going to find
    outlets for the oil sands crude. And we believe there are just
    too many benefits from a job creation, economic growth, energy
    security, and national security to bypass that opportunity.
        Mr. Royce. Well, let me follow up with a quote from the
    U.S. Department of Energy, a study that they commissioned, and
    this was their conclusion. ``If pipeline projects to the
    [British Columbia] coast are built, they are likely to be
    utilized. This is because of the relatively short marine
    distances to major Northeast Asia markets and future economic
    growth there.'' And because of ``increasing ownership interest
    by Chinese companies, especially in oil sands production. Such
    increased capacity would alter global crude trade patterns.
    [Canadian crudes] would be `lost' from the USA, going instead
    to Asia. There they would displace the world's balancing crude
    oils, Middle Eastern and African predominantly OPEC grades,
    which would in turn move to the USA. The net effect would be
    substantially higher U.S. dependency on crude oils from those
    sources versus scenarios where capacity to move [Canadian]
    crudes to Asia was limited.''
        So we have a choice, and I would ask you, do you share this
    analysis that Canadian oil in these words could be ``lost'' to
    China?
        Mr. Durbin. The DOE report is a concern. Again, our broader
    concern has got to be can we better control our energy future.
    And the resources we have available to us from Canada is one of
    the critical paths we have to take going forward to again
    retain that control.
        Mr. Royce. Well, you said in your testimony we have a
    simple choice before us. I think it is a pretty straightforward
    one.
        I will go to Mr. Sherman now. Thank you.
        Mr. Sherman. Thank you. Mr. Durbin, would Keystone be
    willing to build the pipeline if American law prohibited the
    export of the petroleum that was brought to us through that
    pipeline?
        Mr. Durbin. Mr. Chairman, I obviously can't speak for
    TransCanada. I know they testified to some of this last week as
    well, they only move the product. They are----
        Mr. Sherman. Would the American Petroleum Institute support
    a statute that provided the pipeline could be built, perhaps
    with some additional environmental safeguards, but prohibited
    the export of the oil carried by that pipeline?
        Mr. Durbin. No, sir, I don't think API would support that.
        Mr. Sherman. So basically you are not here to give us
    energy security, you are here to try to let some oil companies
    make some money by building a pipeline.
        Mr. Durbin. No, sir, I don't think that is right.
        Mr. Sherman. Well, you don't create energy security by
    having Canadian oil exported to Europe as opposed to exported
    to Japan through the United States.
        Mr. Durbin. But I disagree with your premise.
        Mr. Sherman. Well, the fact is if the proponents of the
    pipeline and the industry itself insists on the right to
    export, if the plan is to build a pipeline bypassing our
    interior markets in the Middle West and bringing it to a port
    well equipped for export, it sure looks like export.
        Mr. Durbin. If you look at the refineries in the Gulf Coast
    that have invested billions of dollars to be able to process
    crude oil here in the United States----
        Mr. Sherman. I am sure that it won't be refined and
    exported.
        Mr. Durbin. The United States continues to be the largest
    market for gasoline and diesel. So all of the incentive is to
    have the jobs here, the investment here, but again it is a
    global market.
        Mr. Sherman. I would like to have the gasoline here.
        Mr. Durbin. I believe you will.
        Mr. Sherman. That doesn't seem to be the plan. If the
    pipeline was to U.S. markets in the Middle West we wouldn't
    have this issue. We wouldn't be talking about aquifers in
    Nebraska and there wouldn't be the risk of export.
        Mr. Durbin. Mr. Chairman, it was defined already----
        Mr. Sherman. Reclaiming my time, I want to turn to--first,
    I need to put a few things in the record. Without objection, I
    would like to put in the record material provided by the Sierra
    Club, the Wilderness Society, a statement by Dr. Albersworth of
    the Wilderness Society and a report from Oil Change
    International concerning the pipeline.
        Back when I was chairman I would say without objection, so
    ordered.
        Mr. Royce. Without objection.
        Mr. Sherman. I would also like to put on the pipeline an
    excellent article by Dr. Luft, who is here, in Foreign Policy
    Magazine dealing with how the anti-Russia vestige of our State
    Department has caused it to embrace pipelines designed to get
    natural gas to Europe and that natural gas may eventually come
    from Iran. It is a fascinating article about how Iran's
    economic situation will be perhaps dramatically improved over
    the next decade or so as they are able to export this natural
    gas to Europe as a direct result of U.S. policy. And if I have
    time I would like to ask you some questions about that, but I
    want to shift to something else and that is the open fuel
    standards.
        When open fuel standards means ethanol, I am not all that
    excited. Turning corn into fuel is one of the reasons we have
    such high food prices around the world, and it hasn't really
    been an alternative. But we have huge natural gas deposits in
    North America. What would be the--first of all, how much more
    would an open fuels standards car cost to manufacture? And
    second, what is the technology to fuel such a vehicle with
    natural gas?
        Mr. Luft. The open fuel standards is not a fuels bill. It
    does not support or endorse any fuel. It is a bill that is
    designed to deal with the fact that cars today are blocked to
    competition, okay?
        Mr. Sherman. It is an automobile standards bill.
        Mr. Luft. Exactly.
        Mr. Sherman. So how much more would the auto companies
    charge us for the cars?
        Mr. Luft. It depends on the technology. If they choose to
    do electric vehicles, it will be $10,000. If they do choose to
    do flex fuel vehicles, it will be something in the order of
    $100 or less. So for $100 or less your car will be able to run
    on gasoline, but also a variety of alcohols. Now ethanol is
    only one of them, but what we do see the potential it is for
    methanol. Methanol, as MIT just concluded in its report, is the
    most economic use of natural gas is if you convert it into
    liquid fuel called methanol. The spot price of methanol today
    is about $1.13 a gallon. If you convert it to gasoline on
    energy equivalence, it would be significantly cheaper than
    gasoline at the pump. So if there is a fuel that can compete
    against gasoline and it is made from domestic natural gas, why
    not allow it to compete, why block it from the market.
        Now, interestingly, it is the oil and gas industry that I
    think could benefit a lot from this bill because natural gas
    prices are very low today. And the reason they are very low is
    that there is no demand. We are producing more and more, but
    there is no way that we can absorb it because our utilities
    just don't absorb it fast enough.
        Mr. Sherman. And so if basically this could very much help
    domestic oil and gas industry producers, it would be
    competition for the international oil industry. Mr. Durbin,
    where are you on open fuel standards?
        Mr. Durbin. I haven't had a chance to even look at it. It
    is the first I have heard of the idea. It sounds interesting.
        Mr. Sherman. I commend you for proposing the idea, but is
    the idea of requiring this E85--I forget what the logo was of
    General Motors--there are a lot of flexible fuel standards
    automobiles on our roads. And I look forward to getting Mr.
    Durbin's organization to comment on them. And I yield back all
    the time I don't have.
        Mr. Royce. Mr. Johnson, please.
        Mr. Johnson. Thank you, Mr. Chairman. Let's see. Mr.
    McNally, this week the House passed two bills to strengthen
    sanctions on Iran, House Resolution 2105 and 1905. In addition,
    the House passed the defense authorization bill, H.R. 1540,
    which included a provision to sanction entities that do
    business with the Central Bank of Iran.
        What has been the effect of sanctions imposed thus far in
    Iran's oil industry and what else can we do to prevent a
    nuclear weapons armed Iran without disrupting oil markets?
        Mr. McNally. Thank you for the question. The Obama
    administration should be commended for strengthening sanctions
    against Iran, including on the oil industry, and urging other
    countries to do so. As a result, Iran has had to work harder to
    sell its oil. It has had to circumvent banks and find go-
    betweens and give easier credit, and we have made life a little
    more difficult for Iran to sell its oil. However, it is still
    doing so. It still exports about 2.2 million barrels a day.
        In my view, the legislation that has been worked on here is
    still too weak. It gives the President two easy outs to avoid
    sanctions that would crimp Iran's oil exports significantly. It
    gives a national security out and it also gives an out where if
    the President says there is not sufficient supply to offset the
    loss of Iran there would be a waiver.
        My message to you is with tight spare production capacity
    in the world, at most 3 million barrels a day. That is the EIA
    estimate. It is probably very high, many folks in the private
    sector are much lower. But at 3 million barrels a day and
    expected to stay fairly low in the coming years, the market
    will always be too tight to risk crimping Iran's oil exports.
        In my view, that is why we must neuter that argument and
    look to welcoming the President's decision to use the strategic
    stocks to offset the supply loss from Iran. So in my view, in
    short, I think sanctions so far have been too weak. We have
    been playing patty-cake and we need to start playing hardball.
        Mr. Johnson. Thank you for that. The United States has long
    banned Iranian oil imports, and there have been calls for the
    EU to do the same. What would be the impact, in your opinion,
    of a European Union ban on Iranian oil products--or imports, I
    am sorry?
        Mr. McNally. In my view, that would, because Europe only
    accounts for over 450,000 barrels a day of Iran's total 2.2
    million barrels a day of exports, I think that if Europe were
    to ban the imports you would see a rearranging of flows. It
    would be a great day for Russia because those Greek refiners
    who have been taking in Iranian crude would look to Russian
    exports to replace those barrels. So there would be a
    rearranging of flows. And it would probably lead to some higher
    costs for European consumers, although again, the Europeans
    could lower their strategic stocks to have a stock draw to
    offset that.
        The Iranians would have to sell their oil cheaper into
    Asia. The Chinese are hard bargainers, and when the Iranians
    showed up with these stranded barrels that they had been
    selling to the Greeks but now no longer could, Iran would have
    to probably accept a discount. So Iran would lose some of the
    revenue that it currently earns on its exports because it would
    sell it into a smaller market that was aware that those barrels
    were sort of blocked from Europe. So it would crimp Iran, it
    would make life a little more difficult, it would cut into
    revenues somewhat.
        Mr. Johnson. What was the effect of our ban on global
    markets?
        Mr. McNally. Our ban of Iranian imports?
        Mr. Johnson. Yes.
        Mr. McNally. No effect that I am aware of.
        Mr. Johnson. No effect?
        Mr. McNally. Yes.
        Mr. Johnson. Okay. With that, I think I will yield back the
    remainder of my time to the chairman.
        Mr. Royce. Thank you. I just would follow up on that
    question to Mr. Durbin. Again, we had the study from the
    Department of Energy that said gasoline prices in all markets
    served by the Gulf Coast and the East Coast refineries would
    decrease, including the Midwest. I am perplexed on the question
    of the Midwest. I assume that part of the answer is that the
    excess refining capacity must be in the Gulf.
        Mr. Durbin. Correct.
        Mr. Royce. And the Midwest must be running at full
    throttle. So if you dictated that all the Alberta oil capacity
    go to the Midwest refineries they wouldn't be able to handle
    the excess; is that the issue here?
        Mr. Durbin. Well, and again, the Midwest refineries are
    currently processing oil sands crude oil. So yes, this does
    provide greater flexibility and greater diversity of supply in
    the Gulf Coast refineries to serve our domestic market.
        Mr. Royce. So the problem is that you have got limited
    refinery capacity around the United States. I know that is the
    problem in California. And we won't--the government will not
    allow new refineries to be built easily, past experience. So
    the question is getting it to the refineries with excess
    capacity here in the United States to serve the domestic
    market.
        Mr. Durbin. Correct.
        Mr. Royce. I see. Well, let me go to Mr. Connolly.
        Mr. Connolly. Thank you, Mr. Chairman.
        Mr. Durbin, I found myself mostly in agreement with your
    opening statement. And I think, to be intellectually honest, I
    think you are right. If the goal is to lessen our reliance on
    foreign oil, especially from areas of the world that are
    problematic for lots of different reasons, frankly everything
    has got to be on the table. That doesn't mean we have to
    approve everything, but it does mean, intellectually to be
    honest, everything has got to be examined forthrightly on its
    merits. And so I applaud you for that principle because I think
    that ought to guide what we do. And frankly with respect to me
    anyhow on the Keystone pipeline, it is not an ideological issue
    for me.
        But in the spirit of being intellectually honest a couple
    of points. Does TransCanada now have a terminus in Vancouver?
        Mr. Durbin. In Vancouver?
        Mr. Connolly. Yes. Is there not a pipeline that ends in
    Vancouver?
        Mr. Durbin. I don't know whether TransCanada has a line.
        Mr. Connolly. Well, are not tar sands product in fact
    transshipped to the port of Vancouver?
        Mr. Durbin. I don't know. I don't know.
        Mr. Connolly. Mr. Nerurkar. I have a map here that says
    there is.
        Mr. Nerurkar. There is one pipeline that runs to the
    Canadian West Coast from the Alberta oil sands right now. I
    believe it has around 300,000 barrels a day of capacity.
        Mr. Royce. I know that California gets some capacity.
        Mr. Durbin. Okay. And there are proposals for expansion.
        Mr. Connolly. Exactly. And is the purpose of that Vancouver
    terminus at least in part for the purpose of export and is not
    a domestic threat?
        Mr. Durbin. Correct.
        Mr. Connolly. And some of that export goes to Asia, is that
    not correct?
        Mr. Durbin. I don't know that. I don't know the flow.
        Mr. Nerurkar. There is some going to China and other
    places.
        Mr. Connolly. Yes. So the idea is that because of the delay
    Canada is now looking at the Chinese market, that is not true.
    As a matter of fact, they have been in the China market, and
    the reason to look at the China market has nothing to do with
    the delay; it has to do with the fact that China is the fastest
    growing market in the world and has enormous potential. And if
    you are an oil exporter, if you are in that business, that is
    certainly a market you are going to look at, isn't it?
        Mr. Durbin. Yes. And I believe I have said that as well.
        Mr. Connolly. Of course. Thank you. Well, you didn't assert
    that, the chairman did in his poster.
        Mr. Royce. If the gentleman would yield.
        Mr. Connolly. Yes.
        Mr. Royce. It was not me asserting it, it was the Prime
    Minister of Canada asserting it and it was the employees at the
    Canadian Embassy who asserted. But I would be happy--let's put
    back up the quote of the----
        Mr. Connolly. Reclaiming my time, Mr. Chairman.
        Mr. Royce. You can have your time back. I am just going to
    put the quote up from the Prime Minister of Canada.
        Mr. Connolly. Reclaiming my time, Mr. Chairman. The
    Canadian Government knows how to communicate with the United
    States Government, and frankly that is not through a hearing of
    this subcommittee. So if they want to formally communicate to
    the United States Government their concerns about the pipeline
    or the Chinese market they know how to do that.
        But I thank the chairman and was happy to yield.
        The proposed terminus at Port Arthur, Texas, this is what I
    am stuck on, Mr. Durbin, in the spirit of being intellectually
    honest. TransCanada has a different business model where it has
    actually limited contracts to long-term contracts, including
    with two major exporters. And the retrofitting or building of
    new refineries clearly seems to be for export, not for the
    domestic market. Why would we build new refineries in Port
    Arthur, Texas if the purpose was solely for domestic
    consumption? Why not do it in the Midwest, where we already
    have pipelines and product is already coming into the United
    States such that we have a glut in that area. And Keystone
    itself has pointed out that if we don't do something to
    alleviate that glut, prices will fall. If we do do something to
    alleviate that glut like the pipeline, they actually say in
    their application papers prices, unlike what the chairman
    indicated, will actually rise per barrel of heavy crude.
        Why would we have a terminus at Port Arthur, Texas if the
    purpose weren't clearly for export? Maybe not exclusively, but
    just like the Vancouver terminus it is for export.
        Mr. Durbin. Because the refining capacity in the Port
    Arthur area and the contracts they are putting in place with
    refineries throughout that area and continuing to do so, that
    is where the capacity is. The idea is we should be siting new
    refineries.
        Mr. Connolly. But Mr. Durbin, in the spirit of your
    testimony, which I commend, of intellectual honesty, don't we
    have to concede that the purpose of putting the terminus at
    Port Arthur is inter alia for export?
        Mr. Durbin. I just want to say it is not the purpose.
        Mr. Connolly. I said among other purposes, inter alia, it
    is for export.
        Mr. Durbin. And I acknowledge that we are dealing with a
    global market.
        Mr. Connolly. Yes, you did.
        Mr. Durbin. And right now we are exporting.
        Mr. Connolly. But Mr. Durbin----
        Mr. Durbin. We are exporting some refined products now.
        Mr. Connolly. Mr. Durbin, you will also concede, will you
    not, that the arguments used in favor of the pipeline have
    exclusively been about enhancing the domestic supply here in
    the United States? No one has talked in favor of the pipeline
    in the Congress about global market and we have to do our share
    by building a pipeline and expanding refinery capacity to
    enhance exports to other countries.
        Mr. Royce. The time has expired. Mr. Duncan.
        Mr. Connolly. I thank the chair.
        Mr. Duncan. Thank you, Mr. Chairman, and thanks for having
    this hearing. I think it is very timely. And I will go back to
    what we heard earlier in the year from one of the defense
    leaders of the country when he said that there can be no
    national security without energy security. I believe that
    energy is a segue to job creation, and that is what this
    Congress needs to be talking about, and that is what we hear
    the other side trying to talk about a lot is jobs, creation of
    jobs. The Keystone XL pipeline is a job creator. It creates
    refining jobs and it creates construction jobs. And I am not
    too young to remember an impact that the Alaska pipeline had on
    employment in this country as we developed the Alaska pipeline
    to meet our energy needs. It is a prime example of what we can
    do with XL, Keystone XL pipeline and produce jobs.
        All Canadian oil, whether it is used in this country or
    shipped around the world, is exported oil from Canada. It is
    exported to the United States from our largest trading partner,
    someone we should be trading with every opportunity we get. We
    should be utilizing hemispheric resources. The American public
    is frustrated when they are paying over $3 a gallon at the pump
    knowing that we have got the resources in this country and in
    the Western Hemisphere with friendly countries like Canada that
    can supply the resources that we need. They are frustrated when
    they see this government standing in the way.
        Mr. Royce. One minute remains in the vote.
        Mr. Duncan. Just I want to give Mr. Durbin an opportunity
    to respond to Mr. Sherman if you didn't with the balance of my
    time.
        Mr. Durbin. Thank you, Mr. Duncan. And again, we said from
    the beginning we are exporting product now. So certainly the
    addition of Canadian crude into our market, into our
    refineries, is simply providing more supply diversity, and
    allowing us to produce the fuels that we need here, and when it
    makes sense we are certainly going to be able to export
    products as well. We import and export. But more importantly,
    the Canadian crude coming into the Gulf Coast refineries is
    replacing crude oil that we had been bringing in from Venezuela
    and Mexico. Venezuela is sending more of its product overseas
    to Asia and elsewhere and Mexico's production is simply on the
    decline. And we need to replace that, and this not only
    replaces it, we will end up being able to get even more. And it
    does improve our overall energy and national security.
        Mr. Royce. As we adjourn, let me just close with the
    comment again of the Prime Minister of Canada. This was several
    days after the Obama administration announced the Keystone
    delay. The Prime Minister, Stephen Harper, had had a face-to-
    face meeting with China's Hu Jintao and afterwards to the press
    these were his words: The decision by the United States, ``This
    does underscore the necessity of Canada making sure that we are
    able to access Asia markets for our energy products.'' I think
    that is pretty straightforward.
        We stand adjourned. Thank you.
        [Whereupon, at 11:20 a.m., the subcommittee was adjourned.]

                                A P P E N D I X

                                  ----------

         Material Submitted for the Hearing RecordNotice deg.

                   \\ts\

    \
                          \

    Material submitted for the record by the Honorable Gerald E. Connolly,
         a Representative in Congress from the Commonwealth of Virginia

             \a
                         \

      Material submitted for the record by the Honorable Brad Sherman, a
            Representative in Congress from the State of California

                                   __________

                                   __________