[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/

                                 ______



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                      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:]

    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
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    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:]

    
    
    
    
    
    
    
    
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    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:]

    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
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    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

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     Material Submitted for the Hearing RecordNotice deg.




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










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



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