[Senate Hearing 112-35]
[From the U.S. Government Publishing Office]



                                                         S. Hrg. 112-35
 
                     ENERGY AND OIL MARKET OUTLOOK

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

                                HEARING

                               before the

                              COMMITTEE ON
                      ENERGY AND NATURAL RESOURCES
                          UNITED STATES SENATE

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                                   TO

 RECEIVE TESTIMONY ON THE ENERGY AND OIL MARKET OUTLOOK FOR THE 112TH 
                                CONGRESS

                               __________

                            FEBRUARY 3, 2011


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               COMMITTEE ON ENERGY AND NATURAL RESOURCES

                  JEFF BINGAMAN, New Mexico, Chairman

BYRON L. DORGAN, North Dakota        LISA MURKOWSKI, Alaska
RON WYDEN, Oregon                    RICHARD BURR, North Carolina
TIM JOHNSON, South Dakota            JOHN BARRASSO, Wyoming
MARY L. LANDRIEU, Louisiana          SAM BROWNBACK, Kansas
MARIA CANTWELL, Washington           JAMES E. RISCH, Idaho
ROBERT MENENDEZ, New Jersey          JOHN McCAIN, Arizona
BLANCHE L. LINCOLN, Arkansas         ROBERT F. BENNETT, Utah
BERNARD SANDERS, Vermont             JIM BUNNING, Kentucky
EVAN BAYH, Indiana                   JEFF SESSIONS, Alabama
DEBBIE STABENOW, Michigan            BOB CORKER, Tennessee
MARK UDALL, Colorado
JEANNE SHAHEEN, New Hampshire

                    Robert M. Simon, Staff Director
                      Sam E. Fowler, Chief Counsel
               McKie Campbell, Republican Staff Director
               Karen K. Billups, Republican Chief Counsel


                            C O N T E N T S

                              ----------                              

                               STATEMENTS

                                                                   Page

Bingaman, Hon. Jeff, U.S. Senator From New Mexico................     1
Burkhard, James, Managing Director, IHS Cambridge Energy Research 
  Associates, Cambridge, MA......................................    28
Diwan, Roger, Partner and Head of Financial Advisory, PFC Energy.    20
Jones, Richard H., Deputy Executive Director, International 
  Energy Agency, Paris, France...................................    14
Murkowski, Hon. Lisa, U.S. Senator From Alaska...................     2
Newell, Richard, Administrator, Energy Information 
  Administration, Department of Energy...........................     4

                                APPENDIX

Responses to additional questions................................    65


                     ENERGY AND OIL MARKET OUTLOOK

                              ----------                              


                       THURSDAY, FEBRUARY 3, 2011

                                       U.S. Senate,
                 Committee on Energy and Natural Resources,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 9:33 a.m., in 
room SH-216, Hart Senate Office Building, Hon. Jeff Bingaman, 
chairman, presiding.

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

    The Chairman. Why don't we go ahead and get started?
    Senator Murkowski is on her way here but was stuck in 
traffic and asked that we proceed without her.
    Let me first just mention, welcome to the committee. We 
have eight new members of this committee in this Congress, and 
one or two of them have come to the earlier hearings we had, 
but I hope several will come to this hearing. Let me just 
mention who they are and welcome them all--Senator Franken, who 
is here; Senator Coons; Senator Manchin; Senator Portman; 
Senator Lee, welcome to the committee; Senator Coats; Senator 
Paul; and Senator Hoeven. So we are glad to have them all on 
the committee and look forward to working with them.
    Let me go through a short statement here, and then we will 
begin our testimony.
    This is an oversight hearing on the energy and oil market 
outlook for this 112th Congress. As many of you know, we 
usually try to start each new Congress by having a sort of 
scene-setting hearing of this kind, which will look at the 
broad energy trends that we expect to influence our thoughts on 
energy policy, also more specifically on agenda items that come 
before the committee during this 2-year Congress.
    Today, we will start that discussion by hearing from Dr. 
Richard Newell, who is the Administrator of the Department of 
Energy's Energy Information Administration. He is going to give 
us highlights of EIA's latest short-and long-term energy market 
forecasts. We appreciate him being here. He just returned from 
a trip to the Middle East, I understand, and perhaps he can 
give us some insights from that trip.
    The committee is a heavy consumer of EIA information and 
products. So we always appreciate having EIA share its data and 
its analyses with us.
    We also will hear from Ambassador Jones, who is the Deputy 
Director of the International Energy Agency in Paris. We look 
forward to discussing IEA's forecast of total world energy 
supply and demand out through 2035. I would also note that IEA 
was founded as a forum for responding to oil supply 
disruptions, and it still has an important role to play in that 
capacity.
    Executive Director Tanaka, who was scheduled to be with us, 
found that the current situation in the Middle East required 
him to remain at their headquarters in Paris, but we are in 
good hands with Ambassador Jones, whose impressive resume 
includes service as the U.S. Ambassador in many of the 
countries in the Middle East. Given the current situation that 
we are seeing internationally, we are especially grateful to 
him for being here to give us the International Energy Agency 
perspective.
    We are also pleased to have two other very impressive 
witnesses with us, leading experts on energy, both of whom are 
familiar to the committee. They testified in 2008, as we 
attempted to understand that year's historic oil price spike. 
Mr. Diwan is partner and head of financial advisory with PFC 
Energy in Washington, and Mr. Jim Burkhard is the managing 
director of Cambridge Energy Research Associates in Cambridge, 
Massachusetts. So we very much appreciate them being here.
    Since the hearing was announced early last week, I think it 
is safe to say that members and witnesses alike have been 
following the developments in the Middle East with much 
interest. Fortunately, it appears unlikely that the political 
turmoil will result in major disruptions in oil production or 
transportation. At least at this time, that is my impression.
    However, I note that whenever geopolitical events of this 
type occur, it reminds us of our vulnerability to world oil 
supply disruptions, and it is a spur for us to consider energy 
policies that help to reduce that vulnerability.
    That is why I am particularly glad to see that EIA is 
forecasting a decline in U.S. consumption of imported oil 
between now and 2035. Until very recently, reversing the 
decade-old narrative of ever-increasing U.S. dependence on 
foreign oil seemed all but impossible. We now see that 2005 
might well have been the high-water mark in U.S. oil import 
dependence.
    Increased vehicle efficiency, a transition to increased 
reliance on biofuels, together with gains in U.S. oil 
production--all of those are creating real national and 
economic security benefits. I am optimistic that further 
technology advances, both in vehicles and in fuels, could make 
us even less reliant on imported oil than the current forecast 
predicts. I hope that we in the Congress will have the good 
sense to remain on this path toward increased energy 
independence.
    Now, with that, let me stop and defer to Senator Murkowski 
for any comments she would like to make before we hear from the 
witnesses.

        STATEMENT OF HON. LISA MURKOWSKI, U.S. SENATOR 
                          FROM ALASKA

    Senator Murkowski. Thank you and good morning, Mr. 
Chairman.
    I was eager to hold this hearing even before the unrest 
that we are seeing in Tunisia and Egypt and how this has grown 
into the international crisis that we are now witnessing. We 
say this a lot in this committee, but I think today's hearing 
is particularly timely.
    While we have seen no interruption in the supply of oil, 
the unrest in North Africa is affecting its price, and that 
should help us understand the costs and the consequences that 
are associated with our current energy policy.
    I think there is strong bipartisan agreement that our 
Nation is far too dependent on foreign oil, and I have always 
found it unfortunate that agreement seems to end there for so 
many members. I have never been one to deny the critical need 
for greater energy efficiency, for greater investments in 
alternatives, and for a responsible path forward for a cleaner 
energy future. This is and will continue to be a major 
undertaking, and the written testimony that we have today 
reflects that efficiency, biofuels, and other technologies will 
make an important contribution in the coming decades. I think 
that is a good thing, and we will continue to build on it here 
in this committee.
    But I am also quite interested in what we can achieve 
today, not just tomorrow. Despite the unfortunate state of our 
economy, oil prices are near $100 per barrel, and hardly anyone 
expects a correction back to $50 or even $80. Instead, oil is 
more likely to stay in its current range or trend upwards.
    With imports accounting for more than 50 percent of our 
supply, we are on the verge, once again, of seeing the huge 
costs that high prices hold for our economy. Worst of all, this 
is a problem that is at least partially of our own making. Over 
the years, our lands have been locked up and many of our most 
promising opportunities have been put out of reach.
    The U.S. sits on huge unexplored oil reserves in the 
offshore, in my State of Alaska, in the Rocky Mountain West. We 
have shale formations that aren't even accessible for research 
and development right now. At times, our energy policy goes 
beyond frustrating and becomes simply irresponsible. The 
American people expect their Government to keep energy 
affordable, but right now, it is failing on that front.
    We as citizens own the oil and the natural gas on Federal 
land. The Government is not a landlord, but a management outfit 
that we allow, through representatives in Congress, to contract 
for the development of these resources for our benefit. When 
the value of these resources is sustained at such high levels 
and we are overly dependent on foreign sources for our supply, 
there is not much tolerance for keeping them locked up. We 
essentially have money buried beneath our own soil, but instead 
choose to hemorrhage nearly $1 billion a day out of our 
economy.
    Now it is not that I expect our Nation to supply 100 
percent of its own oil. We won't. It is not that I expect 
increased domestic production to singlehandedly bring down the 
price of oil back down to our preferred price range. It won't 
do that. But I do expect honesty in this discussion about what 
increased domestic production can do to protect against supply 
disruptions, increase our security, restore our trade balance, 
generate Government revenues, and, most of all, create jobs.
    The events in North Africa should be a wake-up call to 
those of us who work on energy policy. Civil unrest is a fact 
of life in many of the nations that provide our imports. Iran 
now holds OPEC's presidency and is perfectly comfortable with 
$100 oil. An actual supply disruption, as opposed to the mere 
specter of one, would likely spike oil prices to levels that 
will stifle our economic recovery and result in genuine 
hardship for American working families.
    As this committee's joint background memo quoted from the 
Bipartisan Policy Center, they said, and I quote, ``A one-
dollar 1-day increase in a barrel of oil takes $12 million out 
of the U.S. economy. If tensions in the Mideast cause oil 
prices to rise by $5 for even just 3 months, over $5 billion 
will leave the U.S. economy. Obviously, this is not a strategy 
for creating jobs.'' That is the end of the quote.
    That is a tremendous amount of money. Really, we are 
talking about exponentially more when it comes to our deep 
dependence on foreign oil. So, today, I am renewing my call for 
a realistic and truly aggressive approach to the energy 
challenges we face. For the sake of our national security, for 
the sake of our economy, and for the sake of our world's 
environment, America should produce as much of the oil that it 
uses as possible.
    It is this balance, in concert with the resulting revenues 
and the ease of manufacturing, that will allow us to truly take 
control of our energy future. I am anxious to work with 
Senators on both sides of this dais to achieve a more 
appropriate balance in our energy policy, a balance that 
promotes all forms of energy.
    I thank the witnesses for the testimony that you have 
presented here this morning and look forward to the discussion 
that we will have.
    Thank you, Mr. Chairman.
    The Chairman. Thank you very much.
    Why don't we start with you, Dr. Newell? If you could take 
8 minutes or so and give us sort of the main points we need to 
understand? I would ask the same of each of the other 
witnesses, and we will include in the record your complete 
written statement in each case.
    But Dr. Newell, go right ahead.

STATEMENT OF RICHARD NEWELL, ADMINISTRATOR, ENERGY INFORMATION 
              ADMINISTRATION, DEPARTMENT OF ENERGY

    Mr. Newell. Thank you, Mr. Chairman and members of the 
committee. I appreciate the opportunity to appear before you 
today.
    The Energy Information Administration is the statistical 
and analytical agency within the U.S. Department of Energy. EIA 
does not promote or take positions on policy issues, and we 
have independence with respect to the information and the 
analysis that we provide. Therefore, our views should not be 
construed as representing those of the Department of Energy or 
other Federal agencies.
    Focusing first on the short-term outlook for oil, EIA 
expects a continued tightening of world oil markets over the 
next 2 years. World oil consumption grows by an average of 1.5 
million barrels per day in 2011 and in 2012 in our outlook, 
while supply growth from non-OPEC countries averages less than 
0.1 million barrels per day. Consequently, we expect the market 
to rely on increased OPEC members' production of crude oil and 
other liquids and some drawdown in inventories to meet world 
oil demand growth.
    With tighter world oil markets, EIA expects the price of 
West Texas Intermediate crude oil, a key U.S. pricing 
benchmark, to average about $93 per barrel in 2011, $14 per 
barrel higher than last year's average. We expect the price to 
rise to an average of $99 per barrel by the fourth quarter of 
2012. However, oil price forecasts are subject to a great deal 
of uncertainty. For example, the market value of futures and 
options contracts, which we track closely, is telling us that 
there is about a 1-in-3 chance that the price of oil could be 
above $110 per barrel at the end of this year.
    EIA expects the retail price of regular gasoline to average 
about $3.17 per gallon this year, about 40 cents per gallon 
higher than last year, and $3.29 per gallon in 2012. Prices 
will be higher than this during the peak summer driving season 
and in certain regions of the country, particularly the west 
coast. There is also a significant chance that gasoline prices 
could diverge substantially from these values, particularly due 
to uncertainty in oil prices.
    I will now turn to the longer-term energy projections from 
EIA's Annual Energy Outlook, which we update once each year. 
The reference case, which we released in December, represents 
an energy future through 2035--so, for the next 25 years--that 
assumes continuance of current market and technological trends, 
consumer behavior, and current laws and regulations. It does 
not include the effect of potential future policies that have 
not yet become law. The reference case represents a baseline 
that is a useful jumping-off point for assessing alternatives, 
and the full outlook, which we will release this spring, will 
include a large number of sensitivity cases that examine the 
impacts of different technological market assumptions and 
policy assumptions.
    Renewables are the fastest-growing energy source in our 
outlook, albeit from a relatively small base. Total use of 
renewable fuels grows 3 percent per year on average, compared 
to overall energy consumption, which grows only less than 1 
percent per year on an annual average basis. Growth in 
renewables results mainly from the implementation of renewable 
fuel standards, which is a Federal standard, and also State-
level mandates for renewable electricity generation.
    Turning to natural gas, the prospects for domestic natural 
gas production have dramatically improved over the last several 
years with the emergence of shale gas production. U.S. shale 
gas production has increased 15-fold over the last decade, and 
proved reserves of shale gas have tripled over the last few 
years. This has led EIA and other analysts to reassess the U.S. 
shale gas resource base, and in our new reference case just 
released, technically recoverable shale gas resources are more 
than double what we assumed in last year's outlook.
    As a result, U.S. natural gas production increases 25 
percent over the next 25 years, and our projections for natural 
gas imports and natural gas prices are, in turn, significantly 
lower than what we had previously assumed. Lower projected 
natural gas prices, in turn, underpin increased natural gas 
consumption, which rises 17 percent over the next 25 years, 
primarily for use in industry and electric power.
    Coal is another key source for electricity generation, and 
coal consumption grows gradually throughout the reference case 
projection, as existing plants are used more intensively and 
the few new coal plants already under construction are 
completed and enter into service.
    Nuclear generating capacity increases by about 10 
gigawatts, from 101 gigawatts in 2009 to about 111 gigawatts by 
2035. This includes about 6 gigawatts of new plant additions, 
with the balance coming from upgrades at existing plants.
    Turning back to oil, the reference case crude oil prices 
continue to rise in our long-term outlook as a growing global 
economy underpins oil demand growth that is more rapid than 
supply growth from non-OPEC producers. By 2035, the reference 
case crude oil price is $125 per barrel in real terms in our 
outlook.
    Recognizing the possibility of unpredictable changes in 
energy markets and policies, the full Annual Energy Outlook to 
be issued this spring will include a wide range of oil price 
scenarios that diverge significantly from this reference case 
assumption.
    Total U.S. consumption of oil and other liquid fuels grows 
from about 19 million barrels per day in 2009 to 22 million 
barrels per day in 2035 in the reference case. This modest 
growth in the reference case reflects increasing fuel prices 
and the implementation of finalized standards and statutory 
mandates that drive the fuel economy of light-duty vehicles to 
35 miles per gallon by 2020. However, pending standards 
proposed for heavy-duty vehicles and potential changes in 
light-duty standards beyond 2017 are not reflected in the 
reference case.
    Virtually all of the increase in liquids comes from 
biofuels use, driven by the Federal renewable fuel standard 
along with increases in natural gas liquids from natural gas 
production. We expect domestic oil production increases to come 
from onshore enhanced oil recovery projects and shale oil 
plays. Cumulative offshore oil production in this year's 
reference case is lower than in last year's outlook due to 
delays in near-term projects, changes in expected lease sales, 
and lower natural gas prices, which tend to be coupled with oil 
production.
    As a result of this increased domestic production and 
modest consumption growth, we expect U.S. dependence on 
imported liquid fuels to continue to decline. After reaching a 
high of 60 percent in 2005, the imported petroleum share of 
total liquid fuel use fell to 52 percent in 2009 and continues 
to decline in our projections to 42 percent by 2035.
    EIA's data analysis and projections are meant to assist 
policymakers in their deliberations and the private sector in 
making informed decisions. In addition to preparing baseline 
projections that I have reviewed this morning, EIA has also 
responded to requests from this committee and others for 
analysis of the energy and economic impacts of energy policy 
proposals. We look forward to providing you with whatever 
assistance you need in that regard.
    Mr. Chairman, members of the committee, this concludes my 
testimony, and I look forward to any questions you might have.
    Thank you.
    [The prepared statement of Mr. Newell follows:]

Prepared Statement of Richard Newell, Administrator, Energy Information 
                  Administration, Department of Energy

    Mr. Chairman and Members of the Committee:
    I appreciate the opportunity to appear before you today to discuss 
the energy and oil market outlook.
    The U.S. Energy Information Administration (EIA) is the statistical 
and analytical agency within the U.S. Department of Energy. EIA 
collects, analyzes, and disseminates independent and impartial energy 
information to promote sound policymaking, efficient markets, and 
public understanding regarding energy and its interaction with the 
economy and the environment. EIA is the Nation's premier source of 
energy information and, by law, its data, analyses, and forecasts are 
independent of approval by any other officer or employee of the United 
States Government. The views expressed in our reports, therefore, 
should not be construed as representing those of the Department of 
Energy or other federal agencies.
    The energy projections that I will discuss today are widely used by 
government agencies, the private sector, and academia as a starting 
point for their own energy analyses. EIA prepares both short-term 
energy outlooks, examining monthly trends over the next one to two 
years, and longterm outlooks, with annual projections over the next 20-
to-25 years. While I will be focusing primarily on the long-term 
outlooks in my remarks today, I would like to first summarize some key 
findings from our January Short Term Energy Outlook, which includes 
monthly forecasts through the end of 2012.

                     THE SHORT-TERM ENERGY OUTLOOK

    EIA's Short-Term Energy Outlook forecasts a continued tightening of 
world oil markets over the next 2 years. World oil consumption grows by 
an annual average of 1.5 million barrels per day through 2012 while the 
growth in supply from countries that are not members of the 
Organization of the Petroleum Exporting Countries (OPEC) averages less 
than 0.1 million barrels per day each year. Consequently, EIA expects 
the market will rely on both inventories and significant increases in 
the production of crude oil and non-crude liquids in OPEC member 
countries to meet world demand growth. While on-shore commercial oil 
inventories in the Organization for Economic Cooperation and 
Development (OECD) countries remained high last year, floating oil 
storage fell sharply in 2010, and projected OECD oil inventories 
decline over the forecast period. EIA expects that OPEC members' crude 
oil production will continue to rise over the next 2 years to 
accommodate increasing world oil consumption, especially with non-OPEC 
supplies expected to show limited growth. Projected OPEC crude oil 
production increases by 0.5 and 1.1 million barrels per day in 2011 and 
2012, respectively.
    Because of the projected tightening in world oil markets EIA 
expects the price of West Texas Intermediate (WTI) crude oil to average 
about $93 per barrel in 2011, $14 higher than the average price last 
year (Figure 1).* For 2012, EIA expects WTI prices to continue to rise, 
with a forecast average price of $99 per barrel in the fourth quarter 
2012. Energy price forecasts are, however, uncertain. Based on futures 
and options prices as of January 31, 2011, the probability that the 
monthly average price of WTI crude oil will exceed $110 per barrel in 
December 2011 is about 30 percent.
---------------------------------------------------------------------------
    * Figures 1-13 have been retained in committee files.
---------------------------------------------------------------------------
    EIA expects regular-grade motor gasoline retail prices to average 
$3.17 per gallon this year, 39 cents per gallon higher than last year 
and $3.29 per gallon in 2012, with prices forecast to average about 5 
cents per gallon higher in each year during the April through September 
peak driving season. There is regional variation in the forecast, with 
average expected prices on the West Coast about 25 cents per gallon 
above the national average during the April through September period. 
There is also significant uncertainty surrounding the forecast, with 
the current market prices of futures and options contracts for gasoline 
suggesting a 35 percent probability that the national average retail 
price for regular gasoline could exceed $3.50 per gallon during summer 
2011 and about a 10 percent probability that it could exceed $4.00 per 
gallon.
    Domestic natural gas production increased by an average 3.5 percent 
per year over the last 4 years, primarily because of the growth in 
production from unconventional shale gas resources. The growth in 
production has contributed to higher inventories, lower natural gas 
prices, and an increase in natural gas use in the electric power 
sector. The projected Henry Hub natural gas spot price averages $4.02 
per million Btu for 2011, $0.37 per million Btu lower than the 2010 
average (Figure 2). EIA expects the natural gas market to begin to 
tighten in 2012, with the Henry Hub spot price increasing to an average 
$4.50 per million Btu.
    EIA estimates fossil-fuel CO2 emissions increased by 3.8 
percent in 2010, after falling by 7.0 percent in 2009. Coal-and natural 
gas-related CO2 emissions rose as a result of increased 
usage of both fuels for electricity generation and higher consumption 
of natural gas in the industrial sector. Projected declines in coal and 
natural gas consumption in the electric power sector in 2011 more than 
offset increased consumption of petroleum in the transportation sector 
(i.e., motor gasoline, diesel fuel, and jet fuel). Consequently, 
forecast fossil-fuel CO2 emissions fall by 0.6 percent in 
2011. The forecast resumption of growth in electricity generation and 
improvement in economic growth in 2012 contribute to a 2.4-percent 
increase in fossil-fuel CO2 emissions. Projected fossil-fuel 
CO2 emissions in 2012 remain below the levels seen since 
1999 and 4.4 percent below 2005 emissions.

                       LONG-TERM ENERGY OUTLOOKS

    International Energy Outlook.--Before focusing on our U.S. Annual 
Energy Outlook, I want to briefly discuss some highlights of our 
International Energy Outlook 2010 (IEO2010), which was issued last May. 
The IEO2011 will be issued this spring. Although the Annual Energy 
Outlook focuses on our latest thoughts about domestic energy markets, 
it is useful to place this within a global context given the 
interconnectedness of U.S. energy markets and the broader global 
economy.
    The United States accounted for one-fifth of the world's energy 
consumption in 2007, but this share is likely to decline over the next 
two decades. Global energy consumption will grow about 50 percent over 
the next 25 years, with most of the growth occurring outside of 
developed countries, in places like China, India, and the Middle East. 
Energy demand in non-OECD countries is expected to grow over 80 percent 
from 2007 levels, and by 2035 China will account for almost 25 percent 
of total world energy consumption. Renewables are the fastest-growing 
source of world energy supply, but under current market and technology 
trends fossil fuels are still expected to meet more than three-fourths 
of total energy needs in 2035, assuming current policies are unchanged.
    Total global liquid fuels consumption projected for 2035 is 110.8 
million barrels per day, which is 29 percent or 24.7 million barrels 
per day higher than the 2007 level of 86.1 million barrels per day. 
Conventional oil supplies from OPEC member countries contribute 11.0 
million barrels per day to the total increase in world liquid fuels 
production from 2007 to 2035, and conventional supplies from non-OPEC 
countries add another 4.8 million barrels per day. World production of 
unconventional resources (including biofuels, oil sands, extra-heavy 
oil, coal-to-liquids, and gasto-liquids), which totaled 3.4 million 
barrels per day in 2007, increases fourfold to 13.5 million barrels per 
day in 2035.
    Natural gas consumption increases 44 percent globally over the 
projection period. Tight gas, shale gas, and coalbed methane supplies 
increase substantially in the IEO2010 Reference case--especially from 
the United States, but also from Canada and China.
    In the absence of additional national policies and/or binding 
international agreements that would limit or reduce greenhouse gas 
emissions, world coal consumption is projected to increase from 132 
quadrillion Btu in 2007 to 206 quadrillion Btu in 2035, at an average 
annual rate of 1.6 percent. China alone accounts for 78 percent of the 
total net increase in world coal use from 2007 to 2035.
    Annual Energy Outlook.--Turning to the Annual Energy Outlook 2011 
(AEO2011), the Reference case discussed today was released in December 
2010 and is intended to represent an energy future through 2035 based 
on given market, technological and demographic trends; current laws and 
regulations; and consumer behavior. EIA recognizes that projections of 
energy markets are highly uncertain and subject to geopolitical 
disruptions, technological breakthroughs, and other unforeseeable 
events. In addition, long-term trends in technology development, 
demographics, economic growth, and energy resources may evolve along a 
different path than represented in the projections. The complete 
AEO2011, which EIA will release this spring, will include a large 
number of alternative cases intended to examine these uncertainties.
    EIA has made numerous updates in developing its AEO2011 Reference 
case. Several notable changes from the AEO2010 include (1) a 
significant update of the technically recoverable U.S. shale gas 
resources, more than doubling the volume of shale gas resources assumed 
in AEO2010; (2) an increase of the limit for blending ethanol into 
gasoline for approved vehicles from 10 percent to 15 percent; (3) 
incorporation of California's Low Carbon Fuel Standard and other State 
environmental rules; and (4) updates in several key technology 
assumptions, including the cost of new power plants and the cost and 
sizes of electric and plug-in hybrid electric batteries.

                            ECONOMIC GROWTH

    Real gross domestic product (GDP) grows by an average of 2.7 
percent per year from 2009 to 2035 in the AEO2011 Reference case, the 
same as in the AEO2010 Reference case. The Nation's population, labor 
force, and productivity grow at annual rates of 0.9 percent, 0.7 
percent, and 2.0 percent, respectively, from 2009 to 2035.
    Beyond 2011, the economic assumptions underlying the AEO2011 
Reference case reflect trend projections that do not include short-term 
fluctuations. The near-term scenario for economic growth is consistent 
with that in EIA's October 2010 Short-Term Energy Outlook.
    It is important to note that one must exercise care in evaluating 
percentage growth relative to 2009 levels throughout the projection 
results since 2009 was the low point of the economic downturn and 
associated energy consumption.

                             ENERGY PRICES

    World oil prices declined sharply in the second half of 2008 from 
their peak in mid-July of that year. Real prices trended upward 
throughout 2009, and through November 2010 they remained generally in a 
range between $70 and $85 per barrel before climbing above $90 per 
barrel. Prices continue to rise gradually in the Reference case (Figure 
3), as the world economy recovers and global demand grows more rapidly 
than liquids supplies from producers outside the Organization of the 
Petroleum Exporting Countries (OPEC). In 2035, the average real price 
of crude oil in the Reference case is $125 per barrel in 2009 dollars.
    The AEO2011 Reference case assumes that limitations on access to 
energy resources in resourcerich countries restrain the growth of non-
OPEC conventional liquids production between 2009 and 2035, and that 
OPEC targets a relatively constant market share of total world liquids 
production (Figure 4). The degree to which non-OPEC and non-OECD 
countries restrict access to potentially productive resources 
contributes to world oil price uncertainty. Other factors causing 
uncertainty include OPEC investment decisions, which will affect future 
world oil prices and the economic viability of unconventional liquids. 
A wide range of price scenarios (from $50 per barrel to $200 dollars 
per barrel in 2035, in 2009 dollars) and discussion of the significant 
uncertainty surrounding future world oil prices will be included in the 
complete AEO2011 publication.
    Prices of motor gasoline and diesel in the AEO2011 Reference case 
increase from $2.35 and $2.44 per gallon (all prices are in real 2009 
dollars), respectively, in 2009 to $3.69 and $3.89 per gallon in 2035.
    The price of natural gas at the wellhead is consistently lower in 
the AEO2011 Reference case than it was in AEO2010 (Figure 5), because 
of a revised representation of natural gas pricing and a significant 
increase in estimated technically recoverable shale gas resources. The 
annual average natural gas wellhead price remains under $5 per thousand 
cubic feet through 2022, but rises thereafter to meet growth in natural 
gas demand and to offset declines in natural gas production from other 
sources. As the shale gas resource base is developed, production 
gradually shifts to resources that are somewhat less productive and 
more expensive to produce. Natural gas wellhead prices (in 2009 
dollars) reach $6.53 per thousand cubic feet in 2035, compared with 
$8.19 per thousand cubic feet in AEO2010.
    The average U.S. minemouth coal price declines somewhat after 2010, 
as the share of highercost coal from mines in Appalachia declines. The 
Appalachian share of total coal production, on an energy content basis, 
declines from 40 percent in 2009 to 33 percent in 2016 and 29 percent 
in 2035. The average, real delivered electricity price in the AEO2011 
Reference case falls from 9.8 cents per kilowatthour in 2009 to 8.9 
cents per kilowatthour in 2016, reflecting continued low natural gas 
prices. Electricity prices tend to reflect trends in natural gas 
prices, because natural gas represents a large share of total fuel 
costs, and in competitive areas natural gas-fired plants often are the 
marginal generators. In the AEO2011 Reference case, lower natural gas 
prices lead to lower electricity prices than in the AEO2010 Reference 
case. Electricity prices in 2035 (in 2009 dollars) are 9.2 cents per 
kilowatthour in the AEO2011 Reference case, compared with 10.3 cents 
per kilowatthour in the AEO2010 Reference case.

                           ENERGY CONSUMPTION

    Total primary energy consumption, which was 101.7 quadrillion Btu 
in 2007, grows by 21 percent in the AEO2011 Reference case, from 94.8 
quadrillion Btu in 2009 to 114.3 quadrillion Btu in 2035, to about the 
same level as in the AEO2010 projection in 2035 (Figure 6).
    The energy intensity of the U.S. economy, measured as primary 
energy use (in Btu) per dollar of GDP (in 2005 dollars), declines by 40 
percent from 2009 to 2035 in the AEO2011 Reference case as the result 
of a continued shift from energy-intensive manufacturing to services, 
rising energy prices, and the adoption of policies that promote energy 
efficiency. Since 1992, the energy intensity of the U.S. economy has 
declined on average by 2 percent per year, in large part because the 
economic output of the service sectors, which use relatively less 
energy per dollar of output, has grown at a pace almost 6 times that of 
the industrial sector (in constant dollar terms). As a result, the 
share of total shipments accounted for by the industrial sectors fell 
from 31 percent in 1992 to 24 percent in 2009. In the AEO2011 Reference 
case, the industrial share of total shipments continues to decline, but 
at a slower rate, to 21 percent in 2035.
    Population is a key determinant of energy consumption, influencing 
demand for travel, housing, consumer goods, and services. The U.S. 
population increases by 27 percent from 2009 to 2035 in the AEO2011 
Reference case, and energy consumption grows by 21 percent over the 
same period. Energy consumption per capita declines somewhat as a 
result, declining by an average of 0.2 percent per year from 2009 to 
2035 in the AEO2011 Reference case.
    The fossil fuel share of energy consumption falls from 84 percent 
of total U.S. energy demand in 2009 to 78 percent in 2035, reflecting 
rising fuel prices and the impacts of fuel economy standards and 
provisions in the American Recovery and Reinvestment Act of 2009 
(ARRA), the Energy Improvement and Extension Act of 2008 (EIEA2008), 
the Energy Independence and Security Act of 2007 (EISA2007), and State 
legislation.
    Total U.S. consumption of liquid fuels, including both fossil 
liquids and biofuels, grows from 18.8 million barrels per day in 2009 
to 22.0 million barrels per day in 2035 in the AEO2011 Reference case. 
The transportation sector dominates the demand for liquid fuels and its 
share (as measured by energy content) grows only slightly, from 72 
percent of total liquids consumption in 2009 to 74 percent in 2035. 
AEO2011 assumes the adoption of fuel economy standards for lightduty 
vehicles for model year 2011, as well as joint fuel economy and 
greenhouse gas emissions standards set forth by the EPA and NHTSA for 
model years 2012 through 2016. The fuel economy standards increase 
further through model year 2020 to meet the statutory requirements of 
EISA2007. The Reference case does not assume any further changes in 
fuel economy standards. Some ideas for further standards are discussed 
in the September 2010 EPA/NHTSA Notice of Upcoming Joint Rulemaking to 
Establish 2017 and Later Model Year Light-Duty Vehicle Greenhouse Gas 
Emissions and Corporate Average Fuel Economy (CAFE) Standards. Nor does 
it include the proposed fuel economy standards for heavy-duty vehicles 
provided in The Proposed Rule for Greenhouse Gas Emissions Standards 
and Fuel Efficiency Standards for Medium-and Heavy-Duty Engines and 
Vehicles, published by the EPA and the National Highway Traffic Safety 
Administration (NHTSA) in November 2010. Enactment of further binding 
standards would lower the projection for liquid fuels use.
    Biofuels account for most of the growth in liquid fuels 
consumption, increasing by 1.8 million barrels per day from 2009 to 
2035. The biofuel portion of 2035 liquid fuels consumption is 3.9 
quadrillion Btu in AEO2011, about the same as in AEO2010. Although the 
situation is uncertain, EIA's present view of the projected rates of 
technology development and market penetration of cellulosic biofuel 
technologies suggests that available quantities of cellulosic biofuels 
will be insufficient to meet the renewable fuels standard (RFS) targets 
for cellulosic biofuels legislated in EISA2007 before 2022, triggering 
both waivers and a modification of applicable volumes, as provided in 
Section 211(o) of the Clean Air Act as amended in EISA2007.
    In the AEO2011 Reference case, natural gas consumption rises from 
22.7 trillion cubic feet in 2009 to 26.5 trillion cubic feet in 2035. 
The total in 2035 is about 1.6 trillion cubic feet higher than in the 
AEO2010 Reference case due to lower natural gas prices.
    Total coal consumption, which was 22.7 quadrillion Btu in 2007, 
increases from 19.7 quadrillion Btu (1,000 million short tons) in 2009 
to 25.2 quadrillion Btu (1,302 million short tons) in 2035 in the 
AEO2011 Reference case. Coal consumption, mostly for electric power 
generation, grows gradually throughout the projection period, as 
existing plants are used more intensively, and a few new plants already 
under construction are completed and enter service. Coal consumption in 
the electric power sector in 2035 in the AEO2011 Reference case is 
about 1.3 quadrillion Btu (53 million short tons) lower than in the 
AEO2010 Reference case, however, as a result of higher levels of 
natural gas use for electric power generation due to relatively lower 
natural gas prices in the AEO2011 Reference case.
    Total consumption of marketed renewable fuels grows by 2.9 percent 
per year in the AEO2011 Reference case. Growth in the consumption of 
renewable fuels results mainly from the implementation of the Federal 
RFS for transportation fuels and State renewable portfolio standard 
(RPS) programs for electricity generation. Marketed renewable fuels 
include wood, municipal waste, biomass, and hydroelectricity in the 
end-use sectors; hydroelectricity, geothermal, municipal waste, 
biomass, solar, and wind for generation in the electric power sector; 
and ethanol for gasoline blending and biomass-based diesel in the 
transportation sector. Excluding hydroelectricity, renewable energy 
consumption in the electric power sector grows from 113.6 billion 
kilowatthours in 2009 to 261.6billion kilowatthours in 2035.

                     ENERGY PRODUCTION AND IMPORTS

    Net imports of energy meet a major, but declining, share of total 
U.S. energy demand in the AEO2011 Reference case. Energy imports 
decline due to increased domestic natural gas production, increased use 
of biofuels (much of which are produced domestically), and demand 
reductions resulting from the adoption of new efficiency standards and 
rising energy prices. The net import share of total U.S. energy 
consumption in 2035 is 18 percent, compared with 24 percent in 2009. 
The share was 29 percent in 2007, but it dropped considerably during 
the recession.

                         OIL AND OTHER LIQUIDS

    U.S. dependence on imported liquid fuels, measured as a share of 
total U.S. liquid fuel use, reached 60 percent in 2005 and 2006 before 
falling to 52 percent in 2009. The liquids import share continues to 
decline over the projection period, to 42 percent in 2035 (Figure 7).
    In the AEO2011 Reference case, U.S. domestic crude oil production 
increases from 5.4 million barrels per day in 2009 to 5.7 million 
barrels per day in 2035. Production increases are expected from onshore 
enhanced oil recovery (EOR) projects, shale oil plays, and deepwater 
drilling in the Gulf of Mexico. Cumulatively, oil production in the 
lower 48 States in the AEO2011 Reference case is approximately the same 
as in the AEO2010 Reference case, but the pattern differs in that more 
onshore and less offshore oil is produced in AEO2011.
    Onshore oil production is higher in AEO2011 as a result of an 
increase in EOR, as well as increased shale oil production, for which 
the resource estimate has been increased relative to AEO2010. In 
AEO2011, EOR accounts for 33 percent of cumulative onshore oil 
production. The bulk of the EOR production uses CO2. For 
CO2 EOR oil production, naturally produced CO2 or 
man-made CO2 captured from sources such as natural gas 
plants and power plants is injected into a reservoir to allow the oil 
to flow more easily to the well bore.
    Offshore oil production in AEO2011 is lower than in AEO2010 
throughout most of the projection period because of expected delays in 
near-term projects, in part as a result of drilling moratoria and 
associated regulatory changes, and in part due to the change in lease 
sales expected in the Pacific and Atlantic outer continental shelf 
(OCS), as well as increased uncertainty about future investment in 
offshore production.
    As with natural gas, the application of horizontal drilling 
together with hydrofracturing techniques have allowed significant 
increases in the development of shale oil resources (oil resident in 
shale rock). With AEO2011 incorporating five key shale oil plays (as 
opposed to two in AEO2010), oil production rises significantly in areas 
of the country where shale oil is being produced, including the Rocky 
Mountains (primarily from the Bakken shale), the Gulf Coast (primarily 
from the Eagle Ford and Austin Chalk plays), the Southwest (primarily 
from the Avalon play), and California (primarily from the Lower 
Monterey and Santos plays).

                              NATURAL GAS

    The emerging role of shale gas resources highlights the outlook for 
natural gas supply. Cumulative natural gas production in the lower 48 
States over the projection period in the AEO2011 Reference case is 25 
percent higher than in the AEO2010 Reference case as a result of 
greater supply availability from shale gas plays (Figure 8). The higher 
shale gas production and a higher rate of development results from the 
addition of shale gas resources in existing plays that can be produced 
at prices under $7 per thousand cubic feet.
    In the AEO2010 Reference case, technically recoverable unproved 
shale gas resources were estimated at 347 trillion cubic feet; in the 
AEO2011 Reference case they are estimated at 827 trillion cubic feet. 
The revised estimate results from the availability of additional 
information as more drilling activity takes place in both existing and 
new shale plays. U.S. shale gas production has increased 14-fold over 
the last decade, and reserves have tripled over the last few years 
(Figure 9).
    As a result of updated shale gas resources in existing plays (key 
additions were in the Marcellus, Haynesville, and Eagle Ford plays) and 
an assumption of increased well productivity for the newer plays, shale 
gas production in 2035 in the AEO2011 Reference case is almost double 
that in the AEO2010 Reference case.
    There is considerable uncertainty about the amounts of recoverable 
shale gas in both developed and undeveloped areas. Well characteristics 
and productivity vary widely not only across different plays but within 
individual plays. Initial production rates can vary by as much as a 
factor of 10 across a formation, and the productivity of adjacent gas 
wells can vary by as much as a factor of 2 or 3. Many shale formations, 
such as the Marcellus Shale, are so large that only a small portion of 
the entire formation has been intensively production-tested. 
Environmental considerations, particularly with respect to water, lend 
additional uncertainty. Although significant updates have been made to 
the estimates of undiscovered shale gas resources in newer areas, most 
of the resulting additions are not economically recoverable at AEO2011 
prices and have little, if any, impact on the projection.
    The Alaska natural gas pipeline, expected to be completed in 2023 
in the AEO2010 Reference case, is not constructed in the AEO2011 
Reference case. This change is a result of increased capital cost 
assumptions and lower natural gas wellhead prices, which hurt the 
economics of the project over the projection period. Total U.S. net 
imports of natural gas in the AEO2011 Reference case are lower than in 
the AEO2010 Reference case (Figure 10), due in part to stronger North 
American production, less world liquefaction capacity than previously 
assumed, and increased use of LNG in markets outside North America.

                                  COAL

    Although coal remains the leading fuel for U.S. electricity 
generation, its share of total electricity generation is consistently 
lower in the AEO2011 Reference case than in the AEO2010 Reference case 
through about 2023 (but similar thereafter). As a consequence, total 
coal production is slightly lower in the AEO2011 Reference case than in 
the AEO2010 Reference case.
    As U.S. coal use grows, domestic coal production increases at an 
average rate of 0.7 percent per year, from 21.6 quadrillion Btu (1,075 
million short tons) in 2009 to 25.8 quadrillion Btu (1,305 million 
short tons) in 2035. Production from mines west of the Mississippi 
River trends upward over the entire projection period. Following a 
substantial decline in output between 2009 and 2015, coal production 
east of the Mississippi River remains relatively constant from 2015 
through 2035. On a Btu basis, 60 percent of domestic coal production 
originates from States west of the Mississippi River in 2035, up from 
50 percent in 2009.
    Typically, trends in U.S. coal production are linked to its use for 
electricity generation, which currently accounts for 93 percent of 
total coal consumption. Coal consumption in the electric power sector 
in the AEO2011 Reference case (21.8 quadrillion Btu in 2035) is about 
1.3 quadrillion Btu less than in the AEO2010 Reference case (23.1 
quadrillion Btu in 2035). For the most part, the reduced outlook for 
coal consumption in the electricity sector is the result of lower 
natural gas prices that support increased generation from natural gas 
in the AEO2011 Reference case.

                         ELECTRICITY GENERATION

    Total electricity consumption, including both purchases from 
electric power producers and onsite generation, grows 30 percent, from 
3,745 billion kilowatthours in 2009 to 4,880 billion kilowatthours in 
2035 in the AEO2011 Reference case, increasing at an average annual 
rate of 1.0 percent (Figure 11). The growth in electricity consumption 
continues to slow due to structural change in the economy away from 
manufacturing and more stringent appliance efficiency standards. The 
growth rate in the AEO2011 Reference case is about the same as in the 
AEO2010 Reference case.
    Although the mix of investments in new power plants includes fewer 
coal-fired plants than other fuel technologies, a total of 21 gigawatts 
of coal-fired generating capacity is added from 2009 to 2035 in the 
AEO2011 Reference case. Coal remains the single largest energy source 
for electricity generation (Figure 12) because of continued reliance on 
existing coal-fired plants and the addition of some new plants in the 
absence of an explicit Federal policy to reduce greenhouse gas 
emissions. Concerns about greenhouse gas emissions continue to slow the 
expansion of coalfired capacity in the AEO2011 Reference case, even 
under current laws and policies. Lower projected fuel prices for new 
natural gas-fired plants also affect the relative economics of 
coalfired capacity, as does the continued rise in construction costs 
for new coal-fired power plants. Total coal-fired generating capacity 
grows to 330 gigawatts in 2035 in the AEO2011 Reference case.
    Compared with the AEO2010 Reference case, electricity generation 
from natural gas is higher in the AEO2011 Reference case, particularly 
over the next 10 years, during which natural gas prices remain low. New 
natural gas-fired plants are also much cheaper to build than new 
renewable or nuclear plants.
    Nuclear generating capacity in the AEO2011 Reference case increases 
from 101 gigawatts in 2009 to 111 gigawatts in 2035, with 6.3 gigawatts 
of new capacity (5 new plants) and the balance coming from rerated 
capacity. Electricity generation from nuclear power plants grows 10 
percent, from 799 billion kilowatthours in 2009 to 879 billion 
kilowatthours in 2035, accounting for about 17 percent of total 
generation in 2035 (compared with 20 percent in 2009). Higher 
construction costs for new nuclear plants in AEO2011, along with lower 
projected natural gas prices, make new nuclear capacity slightly less 
attractive than was projected in the AEO2010 Reference case.
    Increased renewable energy consumption in the electric power 
sector, excluding hydropower, accounts for 23 percent of the growth in 
electricity generation from 2009 to 2035. Generation from renewable 
resources grows in response to key Federal tax credits, but it is lower 
in the AEO2011 Reference case than in the AEO2010 Reference case 
because of lower natural gas prices and somewhat higher costs for new 
wind power plants. The drop in renewable generation relative to AEO2010 
is seen primarily in lower projections for wind and biomass generation. 
Growth in renewables is also supported by the many State requirements 
for renewable generation. The share of generation coming from renewable 
fuels (including conventional hydro) grows from 11 percent in 2009 to 
14 percent in 2035. In the AEO2011 Reference case, federal tax credits 
for renewable generation are assumed to expire as enacted. Extension of 
these tax credits could have a large impact on renewable generation.

                ENERGY-RELATED CARBON DIOXIDE EMISSIONS

    After falling by 3 percent in 2008 and nearly 7 percent in 2009, 
largely driven by the economic downturn, projected U.S. energy-related 
CO2 emissions in the AEO2011 Reference case do not return to 
2005 levels (5,980 million metric tons) until 2027, and then rise by an 
additional 5 percent from 2027 to 2035, reaching 6,315 million metric 
tons in 2035 (Figure 13). Energyrelated CO2 emissions grow 
by 0.2 percent per year from 2005 to 2035. Emissions per capita fall by 
an average of 0.8 percent per year from 2005 to 2035, as growth in 
demand for electricity and transportation fuels is moderated by higher 
energy prices, efficiency standards, State RPS requirements, and 
Federal CAFE standards.
    Energy-related CO2 emissions reflect the share of fossil 
fuels in energy as well as the mix of fossil fuels consumed, because of 
their different carbon contents. Given the relatively high carbon 
content of coal and its current use to generate more than one-half of 
the U.S. electricity supply, prospects for CO2 emissions 
depend in part on growth in electricity demand. After a decline from 
2007 to 2009, electricity sales resume growth in 2012 in the AEO2011 
Reference case, but the growth is tempered by a variety of regulatory 
and socioeconomic factors, including appliance and building efficiency 
standards, higher energy prices, shifts in housing growth, and the 
continued transition to a more service-oriented economy. With modest 
electricity demand growth and increased use of renewables for 
electricity generation influenced by RPS laws in many States, 
electricity-related CO2 emissions grow by 18 percent from 
2009 to 2035. Growth in CO2 emissions from transportation 
activity also slows in comparison with the recent prerecession 
experience, as Federal CAFE standards increase the efficiency of the 
vehicle fleet, employment recovers slowly, and higher fuel prices 
moderate growth in travel.
    Taken together, these factors tend to slow the growth in primary 
energy consumption and CO2 emissions. As a result, energy-
related CO2 emissions grow by 16 percent from 2009 to 2035--
lower than the 21-percent increase in total energy use. Over the same 
period, the economy becomes less carbon-intensive, as energy-related 
CO2 emissions per dollar of GDP decline by 42 percent.

                               CONCLUSION

    As I noted at the outset, while EIA does not take policy positions, 
its data, analyses, and projections are meant to assist policymakers in 
their energy deliberations. In addition to the work on baseline 
projections that I have reviewed this morning, EIA has often responded 
to requests from this Committee and others for analyses of the energy 
and economic impacts of energy policy proposals. We look forward to 
providing whatever further analytical support that you may require on 
energy-related topics.
    This concludes my testimony, Mr. Chairman and members of the 
Committee. I would be happy to answer any questions you may have.

    The Chairman. Thank you very much.
    Ambassador Jones, why don't you go right ahead?

   STATEMENT OF RICHARD H. JONES, DEPUTY EXECUTIVE DIRECTOR, 
           INTERNATIONAL ENERGY AGENCY, PARIS, FRANCE

    Mr. Jones. Thank you, Mr. Chairman.
    Just for those who came in late, my name is Dick Jones. I 
have been the Deputy Executive Director of the International 
Energy Agency since September 2008. Prior to joining the IEA, I 
served for 32 years as a U.S. diplomat, mostly in Middle East 
oil producers. I was also Ambassador to Kazakhstan.
    I am going to speak to you this morning about international 
energy trends today and over the next 25 years, focusing on 4 
key topics: first, recent international oil price increases and 
their impact; second, the IEA role in emergency response to oil 
supply disruptions; third, recent developments in gas and coal 
markets; and finally, long-term trends in world energy.
    The price of oil has risen more than 25 percent since last 
September. This week, ICE Brent has been priced above $100 per 
barrel for the first time since 2008. Some blame this rapid 
increase on speculation. But recent data for the final quarter 
of 2010 suggest that it was good old supply and demand, with 
fear over political unrest in the Middle East thrown in during 
the past few weeks.
    Will these high prices last? The IEA is skeptical. The 
situation today differs from 2008 in several key respects. OPEC 
has 3 times as much spare capacity now, has already shown a 
willingness to use it. OPEC production is up by 250,000 
barrels, or maybe more, since November. OECD's stocks are also 
higher. Government stocks alone equal 60 days. Refining 
capacity has improved worldwide.
    However, the Egyptian crisis remains the wild card. If 
international oil prices do stay at today's levels for the rest 
of 2011, it would bring us very close to an oil burden equal to 
5 percent of world GDP, a level that is associated with 3 
global recessions in the past 40 years. Today's tensions in the 
Middle East make it appropriate to review IEA's role in 
preparing for and coordinating international responses to oil 
supply disruptions.
    To belong to the IEA, each member country must maintain 
strategic oil stocks of at least 90 days of net imports. These 
can be government stocks or commercial stocks, but the 
government must have the legal authority to order their release 
in an emergency. Most countries have a mix of public and 
private stocks, including the United States.
    Stocks can either be in the form of crude oil or refined 
products. Again, many countries have both. However, the U.S. 
Strategic Petroleum Reserve only holds crude oil. Mr. Chairman, 
I recall that the IEA welcomed your bill in the previous 
Congress that would have changed that.
    In a crisis, the IEA quickly consults with affected member 
countries, analyzes the likely impact, and then recommends a 
course of action to the group, such as the release of specific 
amounts of oil into the international markets. If an action is 
approved, we then work with the members to ensure that they all 
do their part. This includes regular reporting and consultation 
until there is an assessment that the disruption is over.
    Outreach to important energy consumers outside of the IEA 
is also vital to managing a supply disruption, given the 
increasing weight that they play in world oil markets. In a 
crisis, we would also consult with important producers, 
including members of OPEC. Ten nonmembers took part in our 
latest emergency response training exercise, including China, 
India, and Russia.
    Although serious oil crises have been fortunately rare over 
the past 35 years, in my short tenure at the IEA, I have 
already seen occasions when a public reminder that IEA 
countries hold emergency stocks helped calm jittery markets.
    Besides oil, natural gas is also now garnering intense 
interest. American companies' success in producing gas from 
shale deposits is encouraging other countries to look for 
unconventional gas. Activity is growing in Australia, India, 
and China, but also in Poland and elsewhere.
    Now it is going to probably take several years to know 
individual results. However, it is already clear that by 
causing a glut in supply, shale gas is shifting patterns of 
trade, having a major impact on gas prices around the world.
    LNG slated to come to the United States is now going to 
Europe and Asia instead. In some markets, spot gas prices have 
been as low as a quarter to a third of oil on an energy basis. 
This is raising competition for pipeline gas, giving consumers 
in Europe a break. Gazprom is not very happy about that.
    More gas also means more natural gas liquids, which are 
becoming an important factor in oil production at the margin. 
This is one reason why we see the oil market as being 
relatively well supplied for 2011. Abundant gas should help 
keep oil prices down. Eventually, more gas could even help with 
coal prices. But right now, coal prices are climbing due to 
strong demand in China and India for power generation.
    For all these reasons, the IEA is very excited about gas, 
and we will release a special report on the golden age of gas 
here in Washington in June.
    2011 is also a time of uncertainty for long-term energy 
analysts. What course will the incipient economic revival take? 
How will Government responses shape markets? In the most recent 
edition of our annual World Energy Outlook, WEO for short, we 
looked at what would likely happen to world energy if current 
policies continue for the next 25 years. The results were 
disquieting.
    World energy demand would increase by about 50 percent. 
Fossil fuels would continue to dominate. Although oil use would 
only increase by a quarter, gas use would increase more than 
half and coal use by closer to 60 percent.
    Growth in all forms of energy is expected to be driven by 
economic expansion in emerging economies, notably China and 
India. But also the Middle East becomes an important 
consumption center. In fact, China, which only recently passed 
America as the world's largest energy consumer, is expected to 
double its consumption by 2035.
    Another feature of this WEO scenario is growing market 
power for OPEC countries. Their oil production is set to 
increase from 40 percent of world output today to one half over 
the next 25 years. Moreover, more of the world's oil production 
will come from difficult and remote places, which means it will 
cost more in real terms.
    In short, this scenario points to a less secure, more 
costly, and more environmentally harmful mix of energy than we 
have today. To avoid such an untenable energy future, WEO 2010 
also contained proposals for an alternative path based on three 
main elements: first, a strong push to improve energy 
efficiency; second, rapid steps to decarbonize electricity 
production using renewables, nuclear power, and carbon capture 
and storage; and finally, accelerating the development of 
advanced vehicle technologies.
    In our view, these steps would help improve lives all over 
the world by enhancing all countries' energy security, 
insulating economies from the price volatility inherent in 
fossil fuel energy markets, and reducing the pollution of our 
land, water, and air from the increased production, transport, 
and use of fossil fuels that would otherwise occur.
    I want to stress, however, that our scenario does not 
foresee a rapid decline in use of fossil fuels, let alone an 
end to it. Rather, we advocate shifting our energy supply to a 
more varied and, thus, a more secure, affordable, and cleaner 
mix of sources.
    Mr. Chairman, I would like to close with a brief personal 
comment. Having worked in the Middle East and the former Soviet 
Union and seeing the security, economic, and environmental 
impacts of the current world energy system firsthand, I am 
convinced that we can do better.
    Thank you very much for your attention.
    [The prepared statement of Mr. Jones follows:]

  Prepared Statement of Richard H. Jones, Deputy Executive Director, 
               International Energy Agency, Paris, France

    Mr. Chairman, Senator Murkowski, and Members of the Committee, I am 
grateful for the opportunity to come before you today to discuss the 
views of the International Energy Agency (IEA) on the outlook for, and 
major trends shaping, global energy and oil markets today and over the 
next 25 years. I hope that my testimony will help to inform the 
important work of this committee as it begins crafting policies in the 
new Congress.
    A retired American diplomat with experience on Middle Eastern and 
energy issues, I have served as Deputy Executive Director of the 
International Energy Agency since September, 2008. The IEA is an 
intergovernmental organization that acts as an advisor to 28 member 
countries, including the United States, in their effort to ensure 
reliable, affordable and clean energy for their citizens. Founded 
during the 1973-74 oil crisis, the central role of the IEA was and 
remains to co-ordinate response measures in times of oil supply 
emergencies. As energy markets have evolved, however, so has the IEA. 
Its mandate today also incorporates work on market reform, energy-
technology collaboration, climate-change policies and outreach to the 
rest of the world, especially major consumers and producers of energy 
including China, India, Russia and OPEC countries.
    I will use my time this morning to focus on several key areas. The 
first is an assessment of recent oil price movements, and their 
potential impact on the global economy in the near term. I will follow 
this with a brief description of the IEA's role in responding to 
disruptions in the supply of oil. I then wish to touch on market 
movements for other sources of energy, before speaking about the long 
term outlook for global energy.

         RECENT OIL PRICE MOVEMENTS AND THEIR POTENTIAL IMPACT

    Since last September, international oil prices have increased by 
more than 25%, and reached $100 a barrel for the first time in more 
than two years on Monday.
    It has been claimed by some that speculation on the price of oil 
was behind this rapid rise. However, data on supply and demand 
fundamentals for the fourth quarter of 2010 that has recently become 
available points more towards a market tightening due to stronger-than-
expected demand in key consumers and a concurrent drawdown of 
commercial oil stocks in OECD countries. Reasons for this growth in 
demand include unseasonal weather patterns and better than expected 
global economic growth. More recently, it appears that prices were 
boosted by concern in the market that the ongoing demonstrations in 
Egypt may eventually lead to a disruption of oil shipments through that 
country or spread to important producer countries in the region.
    Although some market observers have previously predicted that a 
combination of more and more demand, an impending scarcity of supply, 
and high revenue goals from producers will keep oil prices at around 
$100 for a sustained period of time in 2011, we do not see the current 
situation as a vindication of that point of view.
    Were prices to remain at this level for a sustained period of time, 
however, oil expenditures would soon rise as a proportion of GDP, 
creating an `oil burden' that could put a drag on the world economy. 
(This burden is calculated by analysing nominal--as opposed to 
inflation adjusted--oil expenditures, as a percentage of nominal GDP.) 
In fact, in the past, whenever the oil burden has been calculated at 5% 
or more, it is usually associated with an impending economic slowdown 
(see figure).*
---------------------------------------------------------------------------
    * Graphic has been retained in committee files.
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    The rise in prices over the last few months brings the oil burden 
too close to this 5% mark for comfort. Fortunately, there are elements 
of stability in the current market, which simply weren't there in 2008. 
For example, OPEC has much more spare capacity than it did in 2008 and 
OECD member countries have ample stocks of oil. There are already signs 
that some OPEC producers may be feeding extra supply to the market. 
Refining capacity is also in better shape than it was in 2008. While 
it's too soon to be confident, such factors could help cap prices in 
2011, by ensuring there is a sufficient supply of oil.

      IEA'S ROLE IN RESPONDING TO DISRUPTIONS IN THE SUPPLY OF OIL

    Here I would like to note that IEA member countries are well 
equipped to respond to a disruption in their oil supply. As a condition 
of membership in the Agency, each of the IEA's 28 member countries is 
required to hold strategic oil stocks equivalent to 90 days of its net 
imports. Since being established in the aftermath of the first oil 
crisis, a fundamental part of our work has focused and continues to 
focus on planning for and helping co-ordinate a collective IEA response 
to major disruptions in oil supply.
    Our work in this area now also includes many countries outside the 
IEA membership, such as China and India and other countries in Asia, 
which are also boosting their oil stocks or taking other measures to 
enhance their energy security, and have sought our advice. Last 
November we held our fifth major Emergency Response Exercise in Paris 
with the active participation of 10 non-Member countries.
    Emergency stocks, now growing in more and more countries, are a 
vital aspect of global energy security, as countries are able to add 
measured amounts of oil to the market in the event of large-scale 
disruptions to supply over an extended period. You will recall that 
this was last done back in 2005, when oil stocks were released after 
Hurricanes Katrina and Rita ripped through the Gulf of Mexico, damaging 
offshore oil rigs, pipelines and oil refineries.

              MARKET MOVEMENTS FOR OTHER SOURCES OF ENERGY

    Moving on from oil, the IEA also follows the international markets 
for other major fossil sources of energy, where recent developments are 
also worth noting.
    Recent success with US production of significant amounts of 
`unconventional' sources of gas, mainly from shale deposits, has 
sparked a flurry of interest throughout the world. Australia is leading 
the charge, but China, India and Indonesia are also seriously 
investigating their own `unconventional' gas sources. In Europe, work 
is proceeding in Poland and elsewhere.
    Based on current rates of consumption, it is estimated that 
recoverable conventional gas resources will last around 130 years, but 
this could be doubled with `unconventional' gas. These resources may 
also exist in countries which lack significant reserves of conventional 
gas; it is little wonder that the current scramble is now firmly 
underway.
    Soaring production of `unconventional' gas in the US has already 
led to a sharp drop in its need to import gas. This slump in US import 
demand is having a significant impact on global gas markets which have 
also been hit by the international economic crisis. Meanwhile, ample 
supplies, mostly from Qatar, of Liquefied Natural Gas have been 
arriving in the market. This has led to a `gas glut'--and a diversion 
of LNG cargoes to Europe. Spot prices of gas in Europe consequently 
have fallen, putting downward pressure on the price of gas supplied 
under long-term contracts from Russia.
    This is an example of why the IEA strongly urges countries to make 
their gas markets work as efficiently as possible, efficient markets 
help promote competition among suppliers. This is an important step for 
maintaining affordable prices.
    In contrast to natural gas, coal prices have been rising, largely 
because of growing demand from China and India. Even though both 
countries are massive coal producers themselves, and are almost self 
sufficient in coal, their economic growth is so rapid that they must 
increasingly look elsewhere for additional supplies.
    While their imports are small relative to their total coal use, the 
amount of coal they are looking to import is at such a level that it 
impacts heavily on the global coal trade, affecting traded coal prices 
sharply. Of course, in many parts of the world, because of transport 
costs and quality differences coal is not subject to global price 
pressures, and as such coal remains a competitively priced fuel, able 
to supply power at affordable prices.

                THE LONG-TERM OUTLOOK FOR GLOBAL ENERGY

    Last November, the IEA released the 2010 edition of its World 
Energy Outlook (WEO-2010). There are no 'facts' about the future, but 
the report does provide helpful insights into the evolution of our 
global energy system. Perhaps most importantly it highlights that the 
energy outlook over the next quarter century hinges critically on 
government policy action, and how that action affects technology, the 
price of energy services and end-user behavior.
    Today we will share some of the key results of our Current Polices 
Scenario, which is comparable to the EIA's Reference Scenario, in which 
we assume that government policies continue unchanged. World primary 
energy demand rises by 47% between today and 2035 in the Current 
Policies Scenario. Fossil fuels (oil, coal and natural gas) remain the 
dominant source of energy during that time, even as cleaner energy 
sources make gradual inroads. Oil demand increases by 24%, natural gas 
by 56% and, owing to relative abundance and low cost, coal demand 
increases by 59%. Electricity demand nearly doubles by 2035.
    Emerging economies are responsible for over 90% of the projected 
growth in primary energy demand. As a result, the OECD share of global 
energy demand, which declined from 61% when the IEA was set-up in 1973 
to around 42% today, falls to just 35% in 2035. The surge in non-OECD 
energy consumption is led by brisk growth in China, where demand 
doubles by 2035, dwarfing increases in any other country or region. 
Over the past year we have witnessed an historic re-ordering of energy 
heavyweights, with China surpassing the United States to become the 
world's top energy consumer. Remarkably, energy use in China was only 
half that of the United States just ten years ago. This underscores 
that developments on the global energy landscape remain highly 
sensitive to the various factors that drive energy demand in China, 
including prospects for economic growth, changes in economic structure 
and developments in energy and environmental policies.
    World oil demand experiences strong growth over the medium-and 
long-term. Based on preliminary data, we estimate that global oil 
demand in 2010 reached almost 88 million barrels per day (mb/d), the 
highest level on record. We project a rise to 107 mb/d in 2035, with 
all of the increase coming from non-OECD countries, led by China, India 
and the Middle East. In OECD countries, oil demand is expected to fall 
with improvements in vehicle efficiency; US demand, for example, is 
projected to drop by 1.7 mb/d, or 10%, between today and 2035.
    Oil supplies will come from an increasingly concentrated group of 
producers that hold the majority of remaining low-cost resources. 
OPEC's share of global oil supply is set to expand from 40% today to 
50% in 2035, as oil production in most non-OPEC countries has peaked 
(e.g. the United States, the North Sea), or will soon peak. These 
trends occur against the backdrop of an industry in flux. Opportunities 
for international oil companies, which have historically dominated oil 
sector development, are diminishing with the growing role of national 
oil companies and fewer reserves in accessible basins outside OPEC 
countries. Oil market challenges are further exacerbated by the 
prospect of accelerating decline rates for individual oilfields, 
particularly in non-OPEC countries; this includes Mexico--a major 
exporter of crude oil to the United States. To meet new demand growth 
and offset decline in currently producing fields, gross capacity more 
than six times the current capacity of Saudi Arabia will have to be 
installed by 2035. The world's total endowment of oil is large enough 
to support the projected growth in output, but it will require 
substantial levels of investment and development of more technically 
challenging and unconventional resources.
    The outlook for natural gas demand is particularly uncertain. The 
gas glut I mentioned earlier could have far-reaching consequences for 
the entire energy sector. It is expected to keep pressure on gas 
exporters to move away from oil-price indexation, particularity in 
Europe. Lower prices could lead to stronger demand for gas, backing out 
renewables and/or coal in power generation. To inform the policy debate 
on these issues, the IEA is currently preparing a new report on the 
``Golden Age of Gas'' which we plan to release here in Washington in 
early June. The projections in our Current Policies Scenario have 
profound implications for three elements vital to sound energy policy:

   First, energy security. Without policy changes, fossil-fuels 
        continue to dominate the energy mix at the expense of the 
        enhanced security that a more diverse set of energy sources 
        would provide. Furthermore, international shipments of energy 
        commodities will have to expand substantially to accommodate 
        the growing geographic mismatch between demand and production. 
        While energy supplies will become more flexible in some 
        respects (e.g. growing trade of liquefied natural gas vs 
        pipelines), expanding international trade unavoidably increases 
        dependence on physically vulnerable transit routes and 
        infrastructure, which poses greater risks in tight markets.
   Second, economic development. In the absence of policy 
        changes, few meaningful alternatives to oil are expected to be 
        available before 2035. As prices steadily rise, importing 
        countries without prospects for new development will continue 
        to face higher import bills that pose a mounting and 
        potentially unsustainable economic burden.
   Third, environmental protection. Without new initiatives to 
        slow the growth in fossil-fuel use, energy-related air 
        pollution will increase. Emissions of carbon-dioxide alone will 
        jump from 29 Gt in 2008 to 43 Gt in 2035, an increase of 45%. 
        According to analysis undertaken for the Intergovernmental 
        Panel on Climate Change, this emissions trajectory could lead 
        to a global average temperature increase exceeding six degrees 
        Celsius.

    These all add up to the conclusion that the global energy system, 
in which all countries are interdependent, faces a future that is 
increasingly untenable. To continue business-as-usual risks heightened 
insecurity, increasing economic volatility, and irreparable harm to the 
environment. We truly need a transformation in the world's energy 
system to a more secure, sustainable model, but of course this is much 
easier to say than it is to accomplish.
    The first step is to understand the extent of the necessary 
transformation. To help with this, the World Energy Outlook also 
presents a ``450 Scenario'' which is essentially a roadmap of what 
needs to be done to move to a truly sustainable energy future. To be 
frank, the scale of the challenge is immense. Carbon intensity would 
have to fall at 2.8% per year through 2020, and then by 5.3% per year 
until 2035. Keep in mind the 1973 oil price shock resulted in a 2.5% 
improvement in carbon intensity--in one year only--illustrating the 
daunting challenge of achieving those levels of improvement each and 
every year.
    The 450 Scenario confirms that promoting energy efficiency remains 
the quickest, most cost-effective approach to achieving our security, 
economic and environmental goals. This is the lowest hanging fruit we 
must pick first. A fundamental change will also be needed in the power 
and transport sectors. The global share of renewable-based electricity 
generation, for example, needs to rise to more than 45% by 2035--two-
and-a-half times higher than today. The share of nuclear power in total 
generation needs to increase by about 50% over current levels. By 2035, 
electricity generation from coal plants fitted with carbon capture and 
storage (CCS) equipment exceeds that from coal plants without the 
technology. In transport, biofuels and advanced vehicles will need to 
play a much larger role. By 2035, about 70% of global passenger-car 
sales will need to be advanced vehicles (hybrids, plug-in hybrids and 
electric cars). The benefits of this scenario are not only 
environmental; it would also significantly enhance our energy security 
by spurring greater diversity in the global energy mix, and reducing 
fuel import dependence. These results will in turn have important 
economic benefits for the vast majority of countries.
    Mr. Chairman, Senator Murkowski, and Members of the Committee this 
completes my testimony. I would be happy to answer any questions you 
may have.

    The Chairman. Thank you very much for your testimony.
    Mr. Diwan, go right ahead.

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

    Mr. Diwan. Mr. Chairman, Senator Murkowski, and members of 
the committee, I am grateful to have the opportunity to come 
before you today to discuss PFC Energy, my company's view on 
the oil markets.
    I hope that my comments today will help you to understand 
better the present situation in oil markets, and I am going to 
focus my remarks really on 4 points, in particular on the short 
to medium term, the next 2 years in terms of oil markets.
    First, when we look at the fundamentals, so the supply 
demand situation, and we look at the oil market right now, the 
way I would describe them is they are well supplied. Demand is 
rising almost exclusively in non-OECD markets in the next 2 
years, with the depths of the demand not very strong because we 
are really counting on two areas to grow very strongly, which 
is China and the Middle East and a little bit of the rest of 
Asia.
    OECD countries are not showing strong demand growth. So, 
and this unbalanced demand, if you want, makes global demand 
not particularly strong. I agree with Dr. Newell, it is around 
1.5 million barrels per day in the next 2 years.
    On the supply side, global liquid production--and I would 
like to include crude, gas liquids, and biofuels, all the 
liquids--have shown very strong growth in 2010. It is a record 
year. The question, is it a 1-year wonder, or is it telling us 
something more? I don't think that we will have such a strong 
growth in 2011 and 2012, but I think 2011 actually will show 
good numbers, probably close to 1 million barrels per day for a 
demand of 1.5 million barrels per day.
    The question is why do we believe that? The beginning of an 
answer seems to be showing that, actually, high oil prices are 
having an impact on supply for the first time in very long 
time. We have had high oil prices now for almost 8 years, and 
we start to see supply reacting both in crude, but also, 
obviously, in natural gas and creating a lot of liquids and 
biofuels to compete with crude oil. I will speak a little bit 
more about that.
    Finally, stocks, worldwide stocks actually are at 
respectable levels, above historical norms, and in certain 
areas clearly oversupplied. So if you look at oil markets 
today, you don't see visible tension in oil markets like we saw 
2 or 3 years ago.
    The second point is that not only oil markets are well 
supplied, but we have a very large cushion in terms of spare 
capacity, probably above 5 million barrels per day. In 
historical terms, this is a very high number and in percentage 
of demand, it is also a high number. We don't believe that that 
number will shrink dramatically in the next 2 years. Maybe a 
million barrels per day, maybe a little less, maybe a little 
more. So what we are describing as a well-supplied oil market 
is not changing dramatically in the next 2 years unless you 
have an exogenous factor, a crisis removing supply.
    Moreover, when we look at these numbers, we are not 
factoring Iraq and the potential increase in production and 
capacity in Iraq in these numbers. So outside an exogenous 
crisis, markets are well supplied.
    Obviously, we have a crisis right now, but we don't have 
any supply disruption. In a way, what we see in Egypt shows the 
good and the bad in the oil market. It reacts very quickly even 
if there is no supply. But at the end of the day, the reaction, 
I think, is short-lived and not very dramatic. Basically, 
prices moved by $5, and already we are starting to lose that as 
no disruption has occurred. At PFC, we do not believe that 
actually there is a strong chance of any disruptions.
    Finally, and probably the most difficult part is to 
understand prices and price formation. I have been looking at 
oil prices now for almost 20 years, and they remain a mystery 
for me. Because when you look at the present situation in the 
oil market in terms of supply, demand, stocks, spare capacity, 
et cetera, oil price is at $90. But you know, 10 years ago, 
with exactly the same numbers, oil prices would have been at 
$15. Five years ago, they would have been at $40. Two years 
ago, they would have been at $100.
    So the exact numbers do not predict an oil price level. 
They more predict a price path, if you want. So how do we 
account for having oil prices at let us say between $70 and $90 
this year with this type of fundamentals? I think we really 
need to look at broader issues to understand that, and the one 
I would like really to talk to you today, the one which I think 
is very important is really the margin--the price of marginal 
supplies.
    Basically, at what price or what price you need to bring 
new barrels of oil into production. So how high the price has 
to go to push for new investment in more marginal areas. 
Obviously, you are going to invest first in your most 
profitable potential fields, and the more marginal ones come as 
prices rise.
    The marginal fields in the world right now, being in Canada 
or Brazil or some fields in the United States, requires 
probably north of $70 to be break-even prices. So oil prices 
only have risen to bring more supply to market. OK? Is it $70, 
is it $80 and $90, I don't know, and I am not sure there is a 
clear number there. But that marginal price is important to 
bring new supply, and we are in the zone which is attracting 
new supply.
    The second important determinant of oil prices for me is 
really the internal needs of producing countries. It is what 
the Gulf countries in particular and the OPEC producer require 
internally to balance their budget at the end of the day. It is 
pretty much their only resources.
    When you look at the countries in general and you look at 
their balance of payment, they all have budgeted around $70, 
$80 oil. So, in a way, they believe that is the way the market 
is going to be there, and they are constraining supply to stay 
close to these prices.
    In my view, they are fairly reactive to the marginal price, 
rather than setting it. So, in a way, the OPEC tolerance for 
high prices increase as prices increase rather than as they 
push prices higher--as the market pushes prices higher, their 
tolerance increases.
    The third element, which is very important and I came here 
a couple of years ago to discuss, really is the 
financialization of oil. Oil has become an investable asset, 
like equity, fixed income, gold, dollar, or other commodities. 
The flow of money actually is quite important in determining 
how in the short term price move and determining that price 
path, and that is quite important.
    We have seen some important changes in the last few months, 
I think, and we can talk more about that in the Q&A. I feel 
there is less ability to increase prices very quickly through 
just money flows.
    I will stop here my comments and probably will come back to 
more during the Q&A, and thank you for giving me the 
opportunity to come and talk about that in front of you.
    [The prepared statement of Mr. Diwan follows:]

    Prepared Statement of Roger Diwan, Partner and Head, Financial 
                          Advisory, PFC Energy

                    OIL MARKET OUTLOOK FOR 2011-2012

    More than ever, the world is seeing a two-speed economy. Nearly all 
of the world economy is expanding again, but the divergence between 
recovery in the developed world and strong growth in the emerging 
markets is becoming more pronounced. In both Europe and the United 
States the medium-term outlook remains unexciting--the financial crisis 
that caused the recession is over, but its consequences will persist 
for years to come. In contrast, emerging markets are contending with 
the problems of excessively rapid growth--especially as it stokes 
inflation exacerbated by loose monetary policy. Despite concerns over 
inflation and the potential for monetary tightening in key emerging 
markets like China, the period through 2012 will likely see continued 
oil demand support that will far surpass any potential OECD demand 
increase.
    Although slowing from the 2.3 mmb/d global oil demand growth 
realized in 2010, PFC Energy forecasts demand to increase around 1.4 
mmb/d in both 2011 and 2012. Global consumption over this period will 
be driven entirely by the emerging market economies, as economic 
stabilization also leads to marginal net changes in advanced economies' 
oil demand. Gains in non-OPEC supplies (including OPEC NGLs) and 
further ramping up of new Iraqi production will be sufficient to meet 
the bulk of this incremental demand. Although there is some projected 
shortfall in new supplies' ability to completely satisfy demand 
requirements, the first half of the year will still be characterized by 
a relative over-supply in physical markets. But the tightening of the 
market by the second half of the year will prove supportive of higher 
prices, reflected in our upward revision in our price forecast for WTI 
to a 2011 average of $90.75/b and $96.25/b in 2012, with average 
quarterly prices reaching the $100/b mark toward the end of this two-
year period.
    The growing turmoil in the Middle East is providing a bullish 
factor for oil markets right now. The instability in Egypt has pushed 
prices up, but PFC Energy views the potential impact on oil supplies as 
virtually nil, and that includes the Suez Canal. Protests have spread 
across much of North Africa, as well as Yemen, but the major oil 
producing countries of the Gulf states have seen little in the way of 
unrest.. Since Tunisia's Bin Ali was pushed from office, several 
governments have taken measures to promptly address the food price 
issue and have re-instated food subsidies. Bolstered by strong balance 
sheets routinely leveraged to lower political unrest, and still 
enjoying the support of many of its citizens, the Gulf countries will 
likely have no difficulty keeping regimes, oil supply, and still ample 
spare capacity intact. And even if in more oil producing North African 
states the protesters achieved a Tunisian style victory, a lack of 
cohesiveness regarding the next step would be unlikely to dislodge the 
state apparatus, particularly that associated with oil production and 
marketing, or in the case of Egypt, disruption in Suez shipments.

               US ECONOMY SLOWLY GETTING BACK ON ITS FEET

    The United States has shrugged off fears of a double-dip 
recession--GDP growth has more or less returned to its pre-recession 
trend rate of 2.5%--but without recovering to its full potential 
output. Failure to do that means the economy is producing less than it 
could, and employing less labor as a result. Reengaging these idled 
resources is the most important policy challenge for the US government, 
but there may be little more that can be done while household and bank 
finances remain encumbered with debt. This suggests that high levels of 
unemployment are likely to persist for years.
    Even so, there now appears to be a reliable base of private sector 
support for sustainable growth at these modest employment and capacity 
utilization levels. For nearly two years government transfers staved 
off a decline in real disposable income, but over the past two quarters 
underlying real income growth has risen back to a 2-2.5% range. At the 
same time, the personal savings rate has stabilized in a range of 5-6% 
of disposable income, substantially higher than the preceding decade 
but still below the longer-term historical average of 8-10%. Taken 
together, these data point to a sustainable 2-2.5% growth rate in 
personal consumption--and given the 70% GDP share of personal 
consumption that underpins PFC Energy's expectation that overall growth 
will be in the same range.
    Other sources of growth are unlikely to add or subtract much to 
this underlying rate. Business investment has made a strong recovery 
from the depths of the recession, but appears to have stabilized at a 
modest 2-3% growth rate. Although capacity utilization rates had risen 
sharply from record lows, they have lately shown signs of stalling out 
at a level that still leaves significant slack in the economy and 
little incentive for large-scale new investment. Spending by the public 
sector will almost certainly decline this year, especially at the state 
and local level. As for trade, despite an encouraging rise in exports 
late last year it is still more likely that the deficit will widen than 
expand, making a net negative contribution to growth.
    Given these considerations, PFC Energy has revised upward its North 
American oil demand growth forecast for 2011 and 2012. After having 
grown by over 550 mb/d last year (essentially replacing 25% of the 
cumulative demand lost in 2008-09), we are confident that a sustained 
US recovery would add at least another 175 mb/d to North American 
demand levels this year (24.1 mmb/d versus 23.9 mmb/d in 2010). It is 
our perspective that structural changes to underlying US fuel 
consumption patterns have not been dramatically affected by higher oil 
prices in the lead-up to the Great Recession, and that unrealized 
demand for motor fuels remains. Income, more than price, seems to be 
the driving factor not only for US motorists, but for US consumers writ 
large.
    Indeed, middle distillate demand (i.e., the primary fuels used in 
commerce and air travel) was far more heavily impacted than gasoline, 
falling at an average rate of 7% per year in 2008-09 versus gasoline's 
-1.6%. It is notable that gasoline's postrecession recovery has also 
been less pronounced than that of middle distillates, underscoring the 
relative paucity of non-oil personal transportation alternatives in the 
United States as well as motorists' preference for gasoline. The 
contraction in 2008-09 highlighted the sensitivity of discretionary 
automotive use, not automotive use in general (or even a sweeping 
change in preference in favor of smaller cars). But whereas gasoline 
demand increased by 1% last year, diesel and jet fuel consumption 
surged by 3.5%--reflecting improved industrial activity and retail 
sales. Similar to the situation facing the general economy, middle 
distillates still have a long way to go in order to make up for the 
volumes of demand lost during the recession, and it is unlikely in our 
view that they will be able to do so by the end of 2012.
    In addition to the demand recovery gap from middle distillates, 
other parts of the barrel are also unlikely to return to pre-recession 
levels over the next two years. The product categories most likely to 
be affected are at the heavier end of the spectrum, fuel oil and 
``other oils'' (mainly asphalt). While the structural decline in the 
former has been common knowledge for years, weakness in asphalt is 
becoming more pronounced due to public sector budgetary constraints for 
transportation investment. This will likely become more pronounced this 
year as many US states struggle to fill widening budget deficits.
    For North America as a whole, stabilized economic conditions mean 
an improvement in cross-border trade and economic growth. Other 
localized factors do impact our forecast (for instance, the much more 
fundamentally sound nature of the Canadian economy compared to 
Mexico's), but for the region as a whole we see demand rising by 225 
mb/d in 2011 and 200 mb/d in 2012 (up 70 mb/d and 40 mb/d respectively 
since our December Global Oil Markets Report).

                 EUROPE: PERIPHERY WEIGHS DOWN THE CORE

    In contrast to the United States, Europe faces a serious threat to 
growth from the spreading Eurozone debt crisis--which has forced 
governments to accelerate fiscal adjustment even at the risk of 
undermining a still-fragile recovery. Portugal seems almost certain to 
join Greece and Ireland under an IMF emergency program with Spain 
likely to follow. Promises of austerity and a more buoyant European 
economy have done little to ease the pressure on the weakest 
governments. Until markets believe that their finances are on a 
sustainable path, they will be unable to raise funding without public 
assistance.
    The result is a clouded European outlook. Most European economies 
returned to growth in 2010, but the peripheral countries have either 
remained in recession or look poised to fall back into it. Adjustment 
policies in these countries aim to slash public spending and promote 
price deflation, but in weak economic conditions this is a guarantee of 
recession--and a further deterioration in public finances. The 
combination of state spending cuts and falling wages is already 
sparking political opposition, and this is certain to grow stronger. 
Problems in the periphery will hamper growth elsewhere, both through 
reduced trade and renewed financial sector difficulties. This suggests 
a weak growth forecast even if the Eurozone manages to muddle through 
2011, but a slide back into recession if the debt crisis spreads beyond 
Spain.
    A Europe splintered along structural economic fault lines is 
reflected in oil demand. Whereas the industrial powerhouse of Europe--
Germany--continues to truck along (pulling Poland and other smaller 
Central European countries along with it), other EU member states have 
simply stagnated and the socalled ``peripheral countries'' continue to 
contract.
    Accordingly, PFC Energy expects the contraction in total OECD 
European oil product demand to bottom out in the second quarter of 2011 
before rising to post yearly gains in 2012 (posting growth of -20 mb/d 
and +105 mb/d in 2011 and 2012, respectively). In contrast to North 
America, risks to this forecast are more to the downside, especially if 
the Euro zone financial crisis spreads to Italy and Spain.

                       ASIAN DEMAND LEADS THE WAY

    A long restocking cycle and easy, if not stimulative, monetary and 
fiscal policies underpinned a generally strong Asian economic 
performance and increased oil demand throughout 2010. But while China 
has embarked upon an ambitious attempt to re-orient its economy toward 
consumption-led growth, the majority of Southeast Asian economies have 
simply increased their economic export sector dependence. In 2011 this 
business-as-usual approach will result in lower growth for these 
countries. Aside from OECD goods import demand showing little upside 
for additional expansion and commodities inflation on the rise again, 
China's own economic transition (which encompasses reduction of both 
exports and imports) bodes ill for other Asian intermediate and capital 
goods.
    While Japan and South Korea will need to continue emphasizing high-
end niche markets, Southeast Asia must find avenues for effectively 
competing or partnering with China as well as stimulating domestic 
demand. But these are long-term processes and even if undertaken in 
2011 all signs point to moderating economic growth. Even China will see 
somewhat slower growth, despite its large domestic consumption 
potential and strong industrial support from import substitution. After 
the country's GDP expanded by just over 10% last year, slowing growth 
in industrial production, lending, government spending and net exports 
is likely to reduce growth this year to about 9%. One of the key 
factors for these decelerations is increasingly difficult year-on-year 
comparisons: a weaker first half 2011 for example will find it hard to 
show gains against a strong 2010 base.
    Aside from such accounting, inflationary pressures, particularly in 
rising food and housing prices, may also limit growth. Much of the 
year-to-year inflation, which has now reached 5%, has been a function 
of declining prices in the prior year period. But even as this base 
effect recedes, inflation is expected to exceed Beijing's new 2011 
inflation target of 4% and likely stabilize at slightly under 5%.
    The soon-to-be ratified Five-Year Plan (covering the period 2011-
2015) goes beyond the emphasis on domestic consumption to an emphasis 
on several strategic industries, with energy efficiency and alternative 
energy sources an overriding concern--including an aim to limit the 
increase of oil consumption. While much of the groundwork for 
implementing these measures will be done during 2011-2012, no 
significant impacts are expected to appear before later in the five 
year period. Growth in China's oil consumption is expected to slow in 
2011 to 490 mb/d (compared to 600 mb/d in 2010) and register 540 mb/d 
in 2012, but these trends reflect primarily the general economic 
conditions (and accounting effects), rather than any significant impact 
from initial stages of re-structuring along the guidelines laid out in 
the Five-Year Plan.
    As with the global economy more generally, the most pronounced 
economic and oil demand weakness in Asia lies within the advanced 
economies. But the largest factors affecting the outlook for demand in 
the OECD Pacific region are more strongly influenced by developments in 
China than domestic economic conditions. These countries managed to 
keep demand flat in 2010 due to strong Chinese demand for Japanese and 
Korean goods in wake of the global restocking cycle as well as due to 
capricious weather. With this support fading in 2011 and a large cut in 
naphtha demand looming (as their petrochemical exports to China are 
crowded out by Chinese domestic production), OECD Pacific oil demand 
will continue to structurally decline through 2012, registering total 
losses of 190 mb/d during the forecast period.
    Large domestic consumption capacity has also been a driving force 
for Indian oil demand, which is expected to expand by a moderate 95 mb/
d and 113 mb/d in 2011-2012. Substitution of liquid fuels in power 
generation and fertilizer feedstocks by natural gas, as well as likely 
monetary tightening will prevent greater demand growth. Total Asian oil 
demand growth to slow to slightly around 500 mb/d and 550 mb/d in 2011 
and 2012, markedly down from the 820 mb/d growth seen in 2010.

                   CHALLENGES FOR MIDDLE EAST ENERGY

    The Middle East is largely on a strong growth path that should 
weather even stronger than expected economic headwinds. The most 
salient risks to growth primarily reflect the problems of success. The 
primary challenges include managing increased power demand, containing 
inflationary pressures and ensuring sufficient job growth for locals, 
and are largely manageable in the short term. Power demand issues were 
marginally better this past summer, and a strong focus on investment in 
power generation should continue to improve this issue. Chronic 
unemployment in the region is an issue that has been present for years, 
but a prior baby boom will cause these issues to increase in the coming 
years as the number of new entrants to the labor force peak.
    Within the context of those challenges, 2011 demand growth in the 
Middle East is forecast to be 320 mb/d. This is slightly lower than 
last year's 382 mb/d pace, but is not reflective of a slowdown in the 
region. Instead it reflects primarily a deceleration of the increase in 
demand by Saudi Arabia after changing its policies in 2008 to emphasize 
fuel oil (and subsequently, crude) burning for power generation. While 
the effects of the policy change are largely complete, continued 
increased demand to meet electricity demands will be the primary driver 
in Saudi Arabia's 190 mb/d growth this year. It is anticipated that 
this summer crude demand for power generation will average 886 mb/d and 
could reach peaks as high as 1,150 mb/d in the high heat of the summer.
    This power demand will continue to grow strongly as construction 
projects are still in development throughout the region, with much of 
the construction activity centered in Saudi Arabia and Abu Dhabi--the 
new home for many of the construction cranes that were previously in 
Dubai. While most of Dubai's construction was underwritten by foreign 
debt, the construction boom now underway is largely financed or 
underwritten by foreign investors, and will allow continued growth in 
gasoil and other construction related fuels. The large financial 
reserves coupled with scant foreign debt for the major oil producers 
provides the region significant buffers from any further shocks to the 
global system. Consumer demand is also increasing as the recovery in 
car sales for the region is expected to continue, and with it gasoline 
demand, expected to rise 45 mb/d this year. Transportation demand is 
also expanding from the increased use of aircraft, a trend occurring 
globally during this recovery, but is even more of a factor for the 
Middle East as its flight capacity expands and it becomes an 
increasingly important hub for travel to Asia. This will help boost 
kerojet demand by an estimated 30 mb/d in 2011.

                         IRAN'S SUBSIDY REFORM

    Iran is a lone growth exception for the region, and it is expected 
to show another year of net demand decline in 2011. These declines are 
attributed to the strictures of an increasingly difficult multi-lateral 
sanctions program as well as the four-fold price increases introduced 
last December as part of a comprehensive subsidy restructuring. Demand 
in 2011 is forecast to decline 31 mb/d, with gasoline declining an 
estimated 30 mb/d as Iranians seek out alternative transportation. The 
alternatives include buses, which have already experienced increases in 
demand in the days after the price increases were announced. This 
factor that provides one of the few bright spots for Iranian demand, 
with diesel fuel expected to rise 15 mb/d on this increased public 
transportation use.
    Given the relatively staid reception these price increases have had 
on the population (albeit under heavy police and Basij presence to shut 
down protests before they started) it could be that they will be 
absorbed with relatively little change in the actual appetite for the 
fuels. However, the lack of any consumer outrage can also be attributed 
to the initial offsetting subsidy payment of $120 (representing three 
months of accrued subsidy payments--in the future these payments will 
continue to be $40 per month).
    The real effect of this change could be felt in the broader economy 
as the increased fuel prices translate into decreased consumer 
discretionary spending, as well as increased other costs across the 
board. President Mahmoud Ahmadinejad's plan seeks to avoid this 
particular problem with limited allowable price increases for 
businesses most affected by the fuel price increases, which in turn 
could shrink profit margins in other sectors and lead to lower business 
confidence. In the future, if the increased prices are believed to 
cause long-term economic problems, Tehran's response is likely to raise 
direct subsidy payments rather than roll back pump prices. This is in 
keeping with Ahmadinejad's plan to use the subsidy reform as a platform 
to strengthen his position within his political base, the rural poor, 
and a section of the population that saw limited benefits from the old 
subsidy program due to their low fuel consumption levels.

                LATIN AMERICA: AN ECONOMIC RENAISSANCE?

    Latin American oil demand in 2010 recovered with a near 300 mb/d 
increase, a pace expected to slow to 230 mb/d in 2011. The deceleration 
is affected by base effects and changes in the macroeconomic climate, 
but 2010 was also punctuated by a number of significant weather events 
that increased demand. While the impact of such weather events is 
expected to be diminished this year, current drought conditions in 
Argentina are likely to negatively affect agriculture output, and by 
extension diesel demand growth.
    Brazil continues to be the demand linchpin for the region, 
accounting for 163 mb/d of oil demand growth in 2010, a number that 
will slow to 120 mb/d in 2011. This oil demand growth was supported not 
just by an expanding economy and increased spending, but also a poor 
sugarcane harvest that pushed motorists to fuel up with gasoline C (a 
gasoline mix with a low, fixed level of ethanol) over hydrous ethanol 
(a straight ethanol product suitable for use in most Brazilians flex-
fuel vehicles). A near record planting season in the fourth quarter 
should increase supplies of the fuel by the second half of the year, 
reducing the demand growth from gasoline, barring poor weather.
    As the region has been exposed and profited from the recovery of 
commodity prices, demand support across the barrel has remained strong. 
Car sales have recovered from the low levels during the recession, 
fueled in part by tax incentives. But, at least in Brazil's case, the 
elimination of such incentives caused a downturn in sales for only a 
short period of time before recovering again. It is expected that even 
without such incentives Brazil car sales (now fourth largest in the 
world) will likely reach a new record in 2011.

                 SUPPLY GROWTH LARGELY SATISFIES DEMAND

    Although oil prices are moving to higher trading ranges on demand 
and general economic optimism, current liquids supply trends suggest 
that expected demand growth in 2011 and 2012 can easily be met from 
gains in non-OPEC production and OPEC gas liquids with only marginal 
demands on the still substantial OPEC spare capacity. Gains in non-OPEC 
liquids in 2010 are set to come in around 1.0 mmb/d although these 
increases will likely slow in 2011 and 2012. OPEC gas liquids will 
continue growing in both forecast years as domestic and export oriented 
gas projects reach full operation. And OPEC effective spare crude 
capacity is currently estimated at 5.7 mmb/d, providing the ability to 
cover any disappointments in non-OPEC performance--or unforeseen supply 
disruptions--throughout the forecast period.
    PFC Energy forecasts 2011 non-OPEC supplies (including not only 
crude, but also gas liquids and biofuels) will increase by around 540 
mb/d--a bit more bullish than prior estimates. The crude portion of 
this gain is 210 mb/d, somewhat lower than 2010's 640 mb/d increase. 
Most of this stems from the expectation that US crude output will 
decline rather than increase in 2011 as output drops in the Gulf of 
Mexico owing both to a lack of additional planned new projects as well 
as the drilling moratorium. Further adding to the slowdown will be 
smaller gains in Russia and China as new project start-ups are fewer in 
number exerting less of an upward pull.
    The year 2012 is forecasted to show only a 60 mb/d gain in total 
non-OPEC production. The key reason for the drop is a 230 mb/d decrease 
in crude supplies as ongoing depletion in most countries will offset 
gains in those few that are adding to production. Key oil plays showing 
increases over the next two years include Canada's oil sands, Brazil's 
deepwater, Colombia's Llanos basin, Ghana (the Jubilee field that 
started mid December) and Oman (Oxy's Mukhaizna project). But these 
gains combined cannot offset declines in the United States, North Sea 
and Mexico as well as numerous smaller producers in Latin America, MENA 
and the Far East.
    The other two elements of non-OPEC supply, gas liquids and 
biofuels, continue to show gains in both forecast years. Gas liquids 
(condensates and NGLs) should move up by around 175 mb/d in 2011 and 
125 mb/d in 2012. They are increasing simply from the many countries 
pursuing gas projects to meet domestic energy demand. But the largest 
increase in 2010 and expected for 2011 is the United States. Both from 
increases in natural gas output as shale gas development continues 
(seemingly regardless of the weak price environment) and the incentive 
to look for areas with liquids rich gas (given strong oil prices that 
push up liquids values well above natural gas values) the country 
should see about a 100 mb/d increase in 2010 followed by 40-50 mb/d in 
2011 and stabilizing in later years.
    Biofuels will add another 150-160 mb/d per year in the forecast 
years. As in the past, the two main sources of biofuels output growth 
will be the United States and Brazil. After seeing an increase in 
ethanol production estimated at 160 mb/d in 2010 (a good 70% of 2010's 
global increase in biofuels output), gains in the United States will 
moderate to the 40 mb/d range unless a blend rate above the current 10% 
is approved. Current restrictions approving a higher ethanol content 
for late model cars only makes it infeasible to implement at the retail 
level. Brazil should see steady annual growth of 40-50 mb/d as well. 
Other areas of the world are expected to add 40-50 mb/d per year, 
mainly biodiesel in Europe and Southeast Asia. However, with recent 
concerns over renewed food price inflation and intermittent support 
from governments, these assumed gains are far from locked in and could 
ultimately come in under our current estimate.
    OPEC non-quota-constrained gas liquids are making an impact on 
global balances, although somewhat haltingly due to construction delays 
and lengthy commissioning times. After adding an estimated 415 mb/d to 
supplies in 2010, OPEC gas liquids should see additional growth 
averaging about 420 mb/d in both 2011 and 2012. Qatar is the key 
contributor, stemming from expansion of its LNG industry that is 
nearing completion. As the trains reach full operational output in 2011 
gas liquids will continue to grow. Another important contributor will 
be start-up in 2011 of Shell's Pearl GTL project whose first phase will 
throw off another 70 mb/d of gas liquids. Saudi Arabia and the UAE are 
the other main contributors as both countries pursue oil and gas 
projects that will lead to increases in condensates and NGLs.
    At one time, Iran was expected to see equal if not larger gains in 
gas liquids output, but delays to the country's South Pars project 
schedule stemming from ongoing sanctions suggest minor gains over the 
next couple of years. This compares to the steady increases seen over 
the past decade, when the first of the now completed first eight phases 
of South Pars went into service. Kuwait is also being held back from 
further development of its sour and high pressure gas reserves until 
agreements are reached with foreign companies that can assist with the 
technical challenges of such development.

         OPEC: BOTH THE CALL AND ACTUAL OUTPUT TO REMAIN STEADY

    This expansion of global liquids outside of quota constrained OPEC 
crude reached 1.4 mmb/d in 2010 covering almost 60% of the robust 
demand growth (+2.3 mmb/d). Similarly, non-OPEC liquids plus OPEC NGLs 
should cover about 1.0 mmb/d of 2011's 1.4 mmb/d demand increment, or 
about 70% of expected demand growth. The call on OPEC should begin to 
rise more significantly in 2012, when projected gains in total non-OPEC 
liquids should net only 0.5 mmb/d, or roughly 35% of incremental 
demand. Based on this supply and demand path, 2012 could see the first 
major increase in the call on OPEC crude totaling almost 1.0 mmb/d. 
after a relatively minor 0.5 mmb/d increase in 2011.
    This does not however suggest a material tightening of supply 
conditions is in the offing. Capacity expansions in Saudi Arabia as 
well as maintained production restraint throughout the Gulf Arab and 
North African member states leave effective spare capacity at 5.7 mmb/
d. Both absolute and relative spare capacity are at levels not seen 
since the 1990s--an era of very weak prices. But a combination of 
operational flexibility and strategic considerations--both at the 
commercial strategic level of the operating national oil companies as 
well as in the political perspectives of the member states--means that 
such high levels of spare capacity will not play the same bearish role 
it has in the past.
    However it is not only quota members who are increasing capacity, 
but Iraq as well. PFC Energy's forecast sees Iraqi production rising 
380 mb/d by year end 2011 and a similar amount by year end 2012. And 
progress is being made. ENI announced in early December that it was now 
in the cost recovery and fee payment phase with the Zubair field, 
triggered when production hit 10% above the initial output rate of 183 
mb/d. And BP announced this week that the 10% threshold on the 1.077 
mmb/d Rumaila field has been met as well. Assuming that existing export 
infrastructure is improved, these projected additional incremental 
volumes coming in 2011 should be able to reach market. In addition to 
increases in Iraq southern volumes, we are still holding to our 
assumption that Kurdistan exports will re-start and average about 70 
mb/d for the year. For 2011, Iraq's annual average output should move 
up by about 400 mb/d, with a similar increment expected in 2012.

                  STOCKS AND BALANCES SHOW TIGHTENING

    Between non-OPEC and OPEC the world is well supplied with liquids. 
Even if 2011 or 2012 demand proves more robust than thought, supplies 
should readily be available to cover increased crude needs at OPEC's 
discretion depending on price and actual global stock changes. The 
unexpectedly sharp increase in 2010 oil demand--and third quarter draws 
from total commercial stocks--has lessened PFC Energy's concerns over 
impending stock builds in the first half of 2011. This is reflected in 
a substantial upward revision to our 1Q11 price outlook ($92/b for 
WTI). However, the early part of this year nevertheless still features 
not insignificant builds of nearly 1.0 mmb/d. A near-term continuation 
of oversupply conditions (albeit greatly reduced from our previous 
estimates) suggest prices may still weaken on a fundamentals basis over 
the second quarter ($86/b). From then onward our global supply/demand 
balance points to continual price increases through the end of the 
forecast period, eventually averaging $100/b in 4Q12.
    Despite the projected rise in prices, PFC Energy does not see OPEC 
substantially raising production in the next several months. Even with 
concerns of long term demand destruction and worries of another price 
spike potentially derailing the global economic recovery, the results 
of rising prices so far have not shown strong oil prices to be 
particularly pernicious. Furthermore, the global overhang of oil 
products has only just begun to recede, making risks to the downside 
from adverse change in the fundamentals less of a threat. Saudi Oil 
Minister Ali Naimi's characterization of $90/b as the new fair oil 
price was less a statement on the Kingdom's targeting of such a price 
level, but rather that current prices were achieved primarily as a 
result of a healthy return of demand. The pull of consumption on prices 
therefore also guards against threats that rising oil prices could de-
rail the economy. OPEC is likely comforted in this assessment by the 
judgment that rising nonenergy commodity prices produced little 
noticeable drag on economic performance in 2010. While general 
inflationary troubles could translate into economic and political 
problems over time, for the moment OPEC's concerns may turn to favoring 
further nominal price increases, even if only an attempt to preserve 
the purchasing power of the dollardenominated barrel. And perhaps most 
fundamentally of all, the cartel may be willing to resume its prior 
stance of taking pro-active steps to guard against downside price risks 
and address upside demand surprises reactively--a position that helped 
generate the historic boom in oil prices from 2004.

    [All tables and graphs have been retained in committee files.]

    The Chairman. Thank you very much for your testimony.
    Mr. Burkhard, go right ahead.

 STATEMENT OF JAMES BURKHARD, MANAGING DIRECTOR, IHS CAMBRIDGE 
           ENERGY RESEARCH ASSOCIATES, CAMBRIDGE, MA

    Mr. Burkhard. Thank you, Mr. Chairman, other members of the 
committee. We really appreciate the opportunity to share some 
thoughts with you about energy and oil in particular.
    Oil prices and gasoline prices are, as we all know, very 
visible. Millions of people see them every day when they fill 
up at the pump. It was just 2 \1/2\ years ago when we saw oil 
above $140, and then it was just 2 years ago when oil prices 
sunk close to $30 a barrel. These swings have had a great 
impact on Americans and the economy.
    Oil prices are on the rise again, and it is raising 
questions yet again about the impact on the economy and why are 
we seeing these kind of prices? The turmoil in Egypt raises the 
question about geopolitical stability of world oil supplies.
    Now what is happening in Egypt is part of a broader story, 
something we would refer to as a global redesign. A global 
redesign is what we describe as a period of change, deep change 
of the formal and informal mechanisms that shape and manage 
international relations.
    There is no blueprint for this global redesign, but it is 
clear that the pace, the distribution of economic growth is 
affecting the global balance of economic, political, and 
military power all at a time when the world faces extraordinary 
questions about macroeconomic management, security, and energy. 
Oil demand, supply, and price are key variables that will shape 
this redesign, and energy overall will play a significant 
element.
    The political upheaval in Egypt has provoked anxiety in oil 
markets. The oil market is always fearful when there is a 
threat to big oil exporters in North Africa and even bigger 
ones clustered in the Persian Gulf. Egypt is not a major 
exporter. It is, in fact, a slight importer. But about 2 to 4 
percent of global supplies does transit Egypt, and what happens 
in Egypt obviously has an impact beyond its borders in the 
Middle East.
    So oil prices are considerably higher. But looking back at 
what has happened over the last decade, it goes beyond just 
concerns about stability in the Middle East. There are many 
reasons that explain what has happened. But perhaps the most 
important, the core of what has happened is the stunning 
increase in income and GDP in China, India, and other emerging 
markets.
    We all know this, but looking at some of these statistics 
really just shows how stunning this is. In the last decade, GDP 
per capita in China is up 235 percent, 235 percent. In India, 
it is up 176 percent. That is from 2000 to 2010. Stunning.
    Rarely, if ever, have we seen living standards for so many 
rise so quickly. This is due, to some extent, to the breath-
taking spread and success of market-based decisionmaking in 
nearly every corner of the world.
    Now, some of the growth of the past decade was based on 
misplaced exuberance, and we still are grappling with that 
painful aftermath. But the broad trends of rising global 
prosperity are intact. Just look at how successful the 
economies of India and China have been since 2008.
    Over the last decade, demand in emerging markets has 
increased about 12.2 million barrels per day. That is roughly 
equivalent to the entire production capacity of Saudi Arabia. 
That is what has happened in emerging markets. Again, at the 
core of this, the higher incomes, aspirations for higher living 
standards. There are other factors as well that have played 
into this. Roger went into a few, and I will amplify some of 
those.
    One on the supply side, the law of long lead times. It can 
take anywhere from a couple of years to more than a decade to 
bring on a new oil field. You don't develop and bring on a new 
field overnight just because the price went up.
    Also, high industry costs. This was perhaps arguably the 
second most important trend in the oil markets over the past 
decade. From 2005 to 2008, according to the IHS CERA Upstream 
Capital Cost Index, which is sort of a consumer price index for 
the oil industry, in that short time period, 2005 to 2008, the 
cost of developing a field doubled on average around the world. 
So, in other words, a company had to pay double in 2008 in 
order to develop the same barrel of oil that compared to 2005 
prices.
    Other factors as well, oil has become the new gold. It is a 
financial asset in which investors take positions based on 
their expectations of the value of the dollar, inflation, and 
global oil demand and supply. The role of financial players has 
gotten a lot of interest over the years, especially in 2008, 
and they can accentuate a given price trend. But the primary 
reasons of price trends are rooted in the fundamentals of 
supply, demand, industry costs, and geopolitics.
    So what does this all mean for today and the future? One, 
it is a reminder that the oil market is a reflection of the 
world. That means prices go up and down in response to what is 
happening around the world. But perhaps more importantly, what 
does this mean for the future?
    In 2010, there is about 1 billion members of what you could 
call the global middle class. That is people who live in 
countries with per capita GDP of $10,000 or more. About a 
billion. By 2030, so in 20 years, that will have grown to about 
2.5 to 3.5 billion people in the global middle class. So a 
billion today, over the next 20 years, 2.5 to 3.5 billion 
people in countries with per capita income of $10,000 or more. 
That means more oil, more oil demand.
    There is a strong case for prices, for oil prices to be 
above levels we have seen for most of the past 20 to 30 years. 
This will reflect continued prosperity around the world. It 
will foster innovation and efficiency. Does it mean prices are 
inevitably going to continue to rise and rise? No. There are 
some factors that will offset that.
    One is the view that has been voiced already is peak demand 
in the OECD--Europe, North America, South Korea, Japan, 
Australia. We do believe that oil demand in the OECD peaked in 
2005, petroleum-based oil demand, and it will not exceed that 
level again. Fuel economy, biofuel mandates, demographics, the 
global health boom has turned into a global aging boom. That 
tends to lower oil consumption.
    All of this figures into the changing balance of power, 
this global redesign. There is no blueprint for how this is 
going to unfold, and there will be, of course, times of 
turmoil, which we are seeing today unfold in Egypt. To 
conclude, the energy prices, and especially oil, will continue 
to reflect the shifting fortunes of the global economy and 
geopolitics.
    Thank you.
    [The prepared statement of Mr. Burkhard follows:]

Prepared Statement of James Burkhard, Managing Director, IHS Cambridge 
                       Energy Research Associates

    It is an honor to speak on the energy and oil market outlook before 
the US Senate Committee on Energy and Natural Resources of the 112th 
Congress. It is very timely for the Committee to assess the current 
situation. I hope to provide a framework that will help to understand 
what we are seeing in world oil markets--and why. It was just two and a 
half years ago that oil surged to over $140 a barrel and just two years 
ago that it sank close to $30 a barrel. These swings had great impact 
on the economy and on the American people. Prices that were in the high 
$80s and low $90s have surged once again on the upheaval in Egypt. Once 
more there are questions about the impact of oil on the overall 
economy--and why we are seeing these kind of prices. The turmoil in 
Egypt has raised anew the concerns about the geopolitical stability of 
world oil supplies. Egypt is an important transit point for delivering 
Middle East oil to the global market via the Suez Canal and the Sumed 
pipeline. In recent years, combined oil flows from the canal and the 
pipeline have ranged from 1.7 million barrels per day (mbd) to 3.3 mbd. 
The high end of this range is equivalent to about 3.8 percent of world 
oil production.
    The pace and distribution of economic growth is affecting the 
global balance of economic, political, and military power--all at a 
time when the world faces extraordinary questions about macroeconomic 
management, security, energy, and the environment. The world is in the 
midst of what we refer to as a ``Global Redesign''--a period of change 
for the formal and informal mechanisms that shape and manage 
international relations.\1\ Oil demand, supply, and price are key 
variables that will shape this redesign--as will energy overall.
---------------------------------------------------------------------------
    \1\ See the Multiclient Study IHS CERA Energy Scenarios.
---------------------------------------------------------------------------
    Oil prices are in a range considerably higher than in the past. 
There are many reasons, but the most important reason of all is the 
change in the world economy and rise of major new, dynamic growth 
centers. Oil is our largest source of energy--about 37 percent of total 
US energy--and is essential to personal mobility, commerce, and trade. 
Its price reflects the global economy--the ups and downs, the 
surprises, and shifting expectations about geopolitics, technology, and 
economic growth.

                  US ROLE IN THE OIL AND GAS INDUSTRY

    The United States plays a major role in the oil and gas industry. 
We are the largest consumer of oil and gas in the world, but what is 
perhaps less recognized is the key role on the supply side. The United 
States is the world's largest producer of natural gas, the third 
largest for oil, and number two for coal. The United States is also a 
big producer of renewable energy. It is the largest biofuel producer in 
the world and has a growing portfolio of wind and solar power 
generation capacity. Oil and gas production plays an important role in 
the economy of producing areas of the United States. For example, in 
four states along the US Gulf of Mexico--Louisiana, Texas, Alabama, and 
Mississippi--the offshore oil and gas industry accounts for nearly 
400,000 jobs that generate $70 billion in economic value. This does not 
include the jobs created in Pennsylvania, Connecticut, Ohio, and a 
number of other states that provide equipment and services to the 
offshore industry.
    Domestic energy production is dynamic--its size is not simply a 
legacy of past investments. A recent ``game-changing'' development is 
the revolution in unconventional gas production in the United States. 
The unlocking of ``shale gas'' was led by the innovation and risk-
taking of American companies. Innovation in gas extraction has also 
resulted in higher oil production. In 2009 the US recorded the largest 
increase of oil and gas production in the world--a growth trend that 
continued in 2010.
    Another striking development of the past few years is the 
increasing integration of the US and Canadian energy markets. Canada 
leads development of the oil sands--an important component of global 
oil supply growth. The oil sands have made Canada the largest 
supplier--by far--of foreign oil to the United States, and this source 
has become part of the fabric of our continental energy security. Since 
2000 Canadian oil sands output has more than doubled--from 600,000 
barrels per day (bd) to 1.4 million barrels per day (mbd) in 2010. 
Total Canadian oil exports (crude oil and refined products) to the 
United States are 2.5 mbd, about double the number two supplier, 
Mexico. Canadian oil accounts for 21 percent of our total oil imports.

                        WHAT SHAPES OIL PRICES?

    The US energy industry is a substantial investor, supplier, and 
employer, but it is also part of a larger and increasingly global 
market. Oil is the most global of energy markets and exemplifies a 
dynamic, flexible, and competitive trading system. The price of oil--
and particularly of gasoline--is highly visible. We see it every time 
we fill up at the pump. But the factors that shape the price are often 
not as readily visible as the brightly lit signs listing the price of a 
gallon of gasoline.
    Electric power bottlenecks in China have, at times, contributed to 
greater use of oil in that country for backup power generation, 
boosting oil demand. This was one of the reasons that pushed oil demand 
up 9.7 percent in China last year. This created a volume gain of 
810,000 bd, which was one of the largest recorded gains in a single 
country in the past several decades. Rising global steel costs for the 
petroleum industry--up 122 percent since 2003--are an example of what 
may appear to be an obscure industrial trend, but one that has 
contributed to much higher costs to develop new oil fields. China's 
demand dynamics and the trend in steel costs are just two of many 
examples of how developments around the world influence what Americans 
pay at the pump, but which don't come to the attention of most 
consumers.
    Crude oil is fungible. This means, for example, that a barrel of 
oil produced in Africa can be refined anywhere in the world into 
gasoline, diesel, and jet fuel. Price signals help determine where to 
ship more or less oil. Nearly all the world's oil sales are directly 
linked or influenced by one of two ``benchmark'' crude oils: West Texas 
Intermediate (WTI) in Cushing, Oklahoma, or Brent in the United 
Kingdom. The price of a specific crude oil will vary from these 
benchmarks by as little as a few pennies or by as much as a number of 
dollars, depending on its quality and the cost of transporting it to a 
refinery. The futures markets for both WTI and Brent are well developed 
with large daily trading volumes.
    Flexibility and capability to allocate supply in response to price 
signals are the foundation of the oil market--and explain how it has 
withstood economic shocks, demand spikes, and supply outages. But with 
flexibility and responsiveness comes exposure to a broad array of 
forces of change around the world. These forces can both lower and 
increase the price of oil. A very recent example is the unrest in 
Egypt. While not a major producer itself, Egypt is a key oil transit 
point and an influential country in the world's most important oil 
producing region.

Dawn of a New Age
    The past decade was an exceptional time in the oil market. For a 
generation--up until 2003--oil prices generally hovered from $10 to $30 
per barrel. A $5 to $10 shift in the price of oil was an extraordinary 
development. But this all changed over the next several years as oil 
prices rose from an annual average of $26 in 2002 to an all-time annual 
average high of nearly $100 in 2008. The period of 2003 to 2008 was the 
``dawn of a new age'' in oil and energy markets. The driver was the 
unprecedented increase in income and gross domestic product in Asia, 
Latin America, the Middle East, and other emerging markets. Rarely, if 
ever, have living standards risen for so many across the globe in such 
a short time. Per capita economic output in China soared 235 percent 
between 2000 and 2010. India's per capita output rose 176 percent.
    Poverty reduction, rising income, and aspirations for higher living 
standards mean more oil demand--and this is what we have seen over the 
past decade. Oil demand increased 42 percent in emerging markets from 
2000 to 2010--a volume increase of 12.2 million barrels per day.\2\ 
This is roughly equivalent to the entire production capacity of Saudi 
Arabia. But in contrast to emerging markets, demand in developed 
markets--Europe, North America, and OECD members in Asia--was lower in 
2010 than in 2000.\3\ The contrasting demand patterns reduced the 
developed markets' share of world oil demand from 63 percent in 2000 to 
53 percent by 2010. But the volume growth in emerging markets more than 
offset the decline in developed markets. World oil demand in 2010 stood 
at 87.3 mbd--an all-time high. After two years of falling world oil 
demand, 2010 registered the second largest gain in more than three 
decades. Emerging markets were, again, the main driver of this growth.
---------------------------------------------------------------------------
    \2\ Emerging markets are generally defined as countries outside of 
North America, Europe and OECD members in Asia (Japan, South Korea, 
Australia and New Zealand.)
    \3\ The OECD is the Organization for Economic Cooperation and 
Development.
---------------------------------------------------------------------------
Oil Supply: Law of Long Lead Times
    Demand trends are a critical piece of the oil price story, but 
there are others as well. On the supply side the oil industry is ruled 
by the law of long lead times. The time it takes to explore for and 
discover oil, develop a field, and deliver the oil to market can range 
from several years to more than a decade, depending on the size and 
location of the resource base, the reservoir characteristics, and the 
business environment. Rising oil prices encourage more investment in 
oil production, but long lead times mean there is often a mismatch 
between a surge in demand and when investment in a new oil development 
leads to additional supply. New fields cannot be developed overnight.

Higher Industry Costs
    As oil prices rose and investment in new supplies increased for 
much of the past decade, so did demand for the people and equipment 
needed to find, develop, and produce oil. But the previous legacy of 
more than two decades of low oil prices and industry consolidation 
meant a ``missing generation'' in the energy chain--a generation of 
engineers, scientists, and others who skipped entering the petroleum 
industry. As a result, shortages of equipment and personnel 
dramatically raised the cost of developing an oil field. The IHS CERA 
Upstream Capital Costs Index--sort of a ``consumer price index'' for 
the global oil industry--illustrates the cost pressure. From 2005 to 
2008 our cost index doubled. In other words companies had to budget 
twice as much in 2008 as they did in 2005 to develop a barrel of oil. 
Adding to the cost pressure were increasingly heavy fiscal terms on oil 
investments in the form of higher taxes and greater state participation 
globally in oil projects. Costs did decline slightly in the aftermath 
of the Great Recession and subsequent fall in oil prices; but since the 
middle of 2010 costs have been on the rise again and currently stand 
close to the cost peak of 2008 (see Figure 1).*
---------------------------------------------------------------------------
    * Graphic has been retained in committee files.
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The Role of Global Financial Dynamics
    Oil has long figured into the workings of financial markets. Since 
the 1978 launch of the first heating oil contract on the New York 
Mercantile Exchange, it has been possible for investors to buy and sell 
oil contracts without being an active participant in the physical oil 
business. Such ``noncommercial'' market participants are essential to 
any futures market. In exchange for providing price certainty to a 
producer or consumer of oil, a trader has the opportunity to turn a 
profit--or a loss--from future price changes.
    Financial market investors--including those in oil futures--
represent a broad spectrum of investors with different time frames and 
motivations. They allocate capital based on current and expected global 
demand for oil and other commodities. Also, since oil is priced in US 
dollars, changes in the value of the dollar can and do influence the 
price of oil. Oil has become ``the new gold''--a financial asset in 
which investors stake positions based on their expectations of the 
value of the dollar, inflation, and global demand and supply of oil. 
The role of noncommercial investors can accentuate a given price trend. 
However, the primary reasons for price movements in recent years are 
rooted in the fundamentals of demand and supply, geopolitical risks, 
and industry costs.

              THE PRICE OF OIL: A REFLECTION OF THE WORLD

    The story of the price of oil over the past decade is a reflection 
of the changes in the world. At the core is the breathtaking spread and 
success of market-based decision making in nearly every corner of the 
world that has allowed hundreds of millions of people to benefit from 
expansion of trade and investment. In the future historians may look 
back at the early part of the 21st century as an extraordinary period 
of wealth creation in today's emerging markets. To be sure, the Great 
Recession revealed that some of the growth of the past decade was based 
on misplaced exuberance--and we are still grappling with the painful 
aftermath. But the broad trend of rising prosperity around the world is 
still intact--a trend borne out by the impressive performance of the 
Chinese and Indian economies since 2008.

The Outlook: A Boom in the Global Middle Class
    Financial market dynamics, industry cost trends, innovation, and 
the pace of investment will continue to influence the price of oil. But 
ultimately the level of oil demand is likely to exert the greatest 
impact.
    In the past two decades the population of countries with per capita 
income of less than $10,000 was booming. Now many of those countries 
are well on the way to entering the ranks of the global middle class. 
In IHS CERA's latest energy outlook, we project over that the next 20 
years an unprecedented number of people will enter the global middle 
class--countries with per capita incomes above $10,000. The global 
middle class will rise from less than a billion people in 2010 to 
between 2.7 and 3.5 billion in 2030. More people will be able to 
purchase a car, travel by plane, and consume electricity generated by 
coal, gas, nuclear, and renewable sources. When it comes to rising 
economic power, China and India garner much of the attention--and 
rightfully so given their massive populations. But this story will also 
unfold elsewhere in the world in parts of Africa, Latin America, and 
the Middle East.
    Does this mean that rapidly rising oil prices are inevitable for 
years to come? There is a strong case for historically high oil prices 
continuing for a number of years to come. But higher fuel economy 
standards, demographics, and oil substitutes will soften and perhaps 
even offset some of the upward pressure on oil prices. For example, IHS 
CERA believes that aggregate oil demand in developed markets peaked in 
2005 and will not exceed that level again. Higher fuel economy 
standards adopted in American, European, and Japanese markets will 
steadily soften demand as more efficient vehicles enter the fleet. Also 
biofuel mandates will continue to displace oil products--principally 
gasoline. Lastly, aging populations in many countries--including 
China--is another factor that will tend to slow the pace oil demand 
growth. Looking further ahead, electric vehicles hold promise and may 
become increasingly competitive with conventional cars powered by 
internal combustion engines.
    On balance world oil demand will continue to increase, but not 
necessarily at breakneck speed. Oil prices are likely to remain well 
above the levels seen during most of the past 30 years, but it will 
reflect a continued rise in global prosperity and also foster 
efficiency and innovation. There is no blueprint for the Global 
Redesign. There will, of course, be times of tumult. Energy prices, and 
especially for oil, will continue to reflect the shifting fortunes of 
the global economy and geopolitics.

    The Chairman. Thank you very much. Thank all of you for 
your excellent testimony.
    Let me start with a couple of questions, and Dr. Newell, 
can you just elaborate a little bit on your testimony about 
what is going to happen with the percentage of oil that we have 
to import over the next 25 years as you see it? I do think your 
testimony, it seems to be very different from what we have 
historically heard here in this committee, which is that 
imports have gone up and will continue going up.
    This is consistent with what Mr. Burkhard just said, that 
the level of imports peaked in 2005? Is that your position? 
Maybe you could elaborate on that?
    Mr. Newell. Yes. 2005 and 2006 were about the same, at 60 
percent of overall liquid fuels consumption. It has come down 
since then, and a good part of that has to do with the economic 
downturn. When you have a decline in domestic oil consumption 
needs, that tends to come first out of imports. So, that is one 
of the things that has led to that significant downward shift 
over the last several years.
    But we see that declining to 42 percent by the end of our 
projections. If you actually look at overall petroleum supply, 
which includes both imports as well as domestic production, 
that is about flat over our projection. But there is an 
increase in overall consumption of liquid fuels. That is being 
met by natural gas plant liquids, which are domestically 
produced. When you produce natural gas, you can get liquids out 
of that as well, which can displace conventional oil. Also 
biofuels, which increases in our projection.
    There have been a number of different factors that have led 
to this change. One is more moderate consumption growth, which 
I could attribute to two factors. One is the increase in fuel 
economy standards that we have seen over the last several 
years, both for light trucks first and then for light-duty 
vehicles. We also have higher fuel prices, which leads to a 
market incentive for folks to choose a more fuel efficient car 
next time they go out to buy one. Same thing for trucks.
    As I mentioned previously, on the supply side, we have an 
increase in natural gas liquids associated with our increased 
expectations for natural gas production, and we have the 
increase in biofuels due to the renewable fuel standards. So 
all of those factors together have led to a declining need for 
imports of oil.
    The Chairman. Ambassador Jones, let me ask you, I think you 
made the statement that the growth in gas production or gas 
supply is having a downward or exerts a downward pressure on 
the price of oil? I thought I heard you say that. Could you 
explain that a little more? Are you talking about the fact that 
production of gas does result in some gas liquids being 
produced and that is a factor, or are there other things going 
on there that we need to understand?
    Mr. Jones. That was the thrust of my remarks. A lot of the 
shale gas plays in the United States produce the unconventional 
gas, are fairly wet and are producing more natural gas liquids. 
So natural gas liquid production in the U.S. has increased, 
which is one of the reasons why U.S. oil production hasn't gone 
down as rapidly as maybe some people thought it would.
    That is true worldwide as well. Particularly in OPEC 
countries that are producing large amounts of natural gas, a 
lot of that gas is fairly wet, which means it has large amounts 
of NGLs mixed with it. The NGLs are separated out, and they are 
included in crude oil production or they are sold like crude 
oil.
    In fact, the increase in OPEC NGL production is interesting 
because NGLs are not subject to the OPEC production restraints. 
So a country like Qatar that produces a lot of gas, producing a 
lot of natural gas liquids, can sell those, and it doesn't 
appear as part of its quota. But yet it has a real impact on 
the oil market. That was what I was referring to when I said it 
can help keep prices down.
    The Chairman. OK. Let me just ask in general, you know, I 
think we are aware that this discovery of all this new natural 
gas in this country and now, more and more, in other places 
around the world has pretty dramatically changed the 
expectation for what the long-term price of gas might be. That, 
of course, impacts on decisionmaking with regard to new nuclear 
plants, with regard to renewable generation, with regard to a 
lot of things.
    Dr. Newell, could you give us some insights as to what you 
see happening there?
    Mr. Newell. Yes, that is correct. One of the implications 
of our reassessment of the shale gas resource base has been the 
significantly lower prices that we are projecting. So the 
average wellhead price of natural gas in our projection doesn't 
get above $5 per million Btu until after 2020, which is 
significantly lower than what we had in previous years.
    It gradually increases over that. But still, even toward 
the end of the period, it gets up to about $7. You may recall a 
short time ago it was at least a couple of dollars per million 
Btu higher than that.
    So the implications are that in the electric power sector, 
relative to other technologies, I mean, natural gas has had 
over the last decade or more several other advantages in terms 
of low capital costs, quick construction, and lower 
conventional pollutant emissions as well as lower 
CO2 emissions, which aren't currently subject to 
regulation, but do enter into decisionmaking.
    So, those other advantages that natural gas has, coupled 
with these now lower prices, do tend to tilt the balance even 
more toward natural gas. In terms of the capacity additions 
that we see in our projections, the majority of those new 
capacity additions are also for natural gas. The second-biggest 
source of new capacity additions would be renewables.
    Another factor that is useful to keep in mind is we 
reassessed our power plant costs this year, and several of 
those went up. Some came down. Natural gas was roughly the same 
as what we had been previously assuming. The overnight capital 
costs for nuclear and coal plants, which are much more capital-
intensive--large, more complex projects--went up significantly, 
20 to 30 percent. Renewables and wind went up a little bit, but 
not quite as much as coal and nuclear.
    So, there have been a number of things that have changed 
over the last several years that tend to point to natural gas 
in the electric power sector. So we are projecting more natural 
gas consumption in electric power, particularly over the next 
decade, than we were last year.
    The Chairman. Thank you very much.
    Senator Murkowski.
    Senator Murkowski. Thank you, Mr. Chairman.
    Mr. Newell, yesterday the Department of Energy released a 
finding stating that the construction of an oil pipeline out of 
Canada into the United States would reduce our dependence on 
Middle Eastern oil. Would you agree with the Department of 
Energy's findings there?
    Mr. Newell. I have briefly reviewed the study that you are 
referring to, which was conducted in the context of the 
Keystone XL pipeline. Whether or not that pipeline exists, one 
question is whether or not the oil would be produced. That is 
one question. That study seemed to suggest that it would be 
produced regardless of whether there was a pipeline, and it 
would likely be exported to the west, to Asia, as opposed to 
south to the United States.
    In terms of U.S. imports, that study concluded the oil 
would most likely come from Canada, rather than come from the 
Middle East, because we have had declines and are expecting 
further declines in heavy crudes from Mexico and from 
Venezuela, which have been historically sources of that crude 
oil. Because we have complex refineries that can use that heavy 
oil in the United States, we can refine this Canadian oil, and 
the most likely substitute would be Middle Eastern oil.
    Senator Murkowski. Then let me ask you in the reverse, our 
concern up north in Alaska is the continued viability of the 
Trans-Alaska pipeline, the TAPS. As you know, the throughput is 
declining to what we believe is dangerously low levels, and if 
we don't take some very serious steps in the very short term to 
add more oil into that line within the next few years, there is 
a real chance that it could be inoperable shortly after that.
    So the question to you, and anybody else that might choose 
to jump in, is, the economic impact, the national security, the 
trade-related consequences that would result if we take TAPS 
Offline, and our Nation is in a situation where we are no 
longer receiving that 10 percent of domestic crude supply that 
we have been receiving for approximately the past 30 years.
    If we lose a large-diameter pipeline like we have up north 
that brings crude into the lower 48, what is the economic 
impact of this?
    Mr. Newell. I will just make a brief comment, which is that 
in our projections, the oil flowing through TAPS does continue 
to decline, as it has over the last several years. Toward the 
end of our projection, it starts to get to a level where my 
understanding is the pipeline would stop operating. Two hundred 
thousand barrels per day is roughly my understanding, and it 
does get to that level toward the end of the projection.
    So at least through the year 2035, we don't anticipate that 
it would close. But after that, clearly, that looks like it is 
on the longer-term horizon.
    Senator Murkowski. Let me ask about capacity because 
several of you have discussed this, and Mr. Diwan, I think you 
stated that it is your understanding that there is a relatively 
large cushion, was the term that you used, of about 5 million 
barrels per day. I am told that it may be 5. It may be 6.
    The question is, and as we look to what is going on in 
Egypt and the uncertainty and the instability there, we look at 
what is available in terms of spare capacity and suggest, that 
can help insulate us from supply shocks, from the price shocks 
because we have got that spare capacity. How accurate do we 
really believe our numbers are when we are talking about this 
spare capacity? Do we really know? How verifiable is it?
    Mr. Diwan. We have a good idea. We don't have an exact 
number, and this is why I think we all hedged a little bit. It 
is probably closer to 6, but I like to say it is north of 5.
    A large part of it is in Saudi Arabia. This capacity is 
new. It has been added in the last 3 years. So for once I would 
say that we know actually that there is a large amount of spare 
capacity available in Saudi Arabia. They have a production 
capacity probably close to 12.5 million, and they are producing 
8.5 million.
    So most of the spare capacity in the world is in one 
country, but that is the nature of what spare capacity is. It 
is a Middle Eastern concept.
    Senator Murkowski. Doesn't that give us less assurance. 
When we are talking about the concerns that we are seeing in 
the Middle East right now, to know that you have most of your 
spare capacity located in one country, what kind of assurance 
does that give us?
    Mr. Diwan. The problem with the concept of spare capacity 
almost is an oxymoron. Only certain countries are willing to 
invest to create capacity and not produce it. These countries 
are probably 5, OK, and they are all in the Persian Gulf.
    This is their raison d'etre almost geopolitically is to be 
able to provide that spare capacity if something happens. I 
don't know a single oil company in the world--Exxon, Chevron, 
any international oil company--which is willing to have 
capacity which is not producing. So the concept of spare 
capacity is focused on the Middle East at the end of the day.
    So I have more assurance than I have 3 years ago that we 
know that Saudi Arabia did invest tremendously to increase 
capacity, and they have shown that they can produce more than 
what they are producing now. So, in a way, spare capacity as a 
number, I am more confident about it than I was 3 years ago 
because we have seen higher production numbers. We have seen a 
large amount of investment.
    So is it 5? Is it 4? Is it 6? I don't know. But it is a 
large number.
    Senator Murkowski. Thank you, Mr. Chairman.
    The Chairman. Senator Wyden.
    Senator Wyden. Thank you, Mr. Chairman. Thank you to the 
panel.
    I want to look at the issue of the role that the financial 
markets are playing with respect to oil prices. I was really 
struck--on Tuesday, the Wall Street Journal ran a column in 
what is called ``Heard on the Street'' that was entitled 
``Unrest Pits Oil Bulls Versus the Gold Bugs.'' In effect, they 
were talking about which area made more sense to put your bets 
on. Should you put your bets on oil or gold?
    Mr. Burkhard, you said something that I have not really 
heard witnesses talk about here in the Senate Energy in the 
past, and that is acknowledging the role that the financial 
markets are playing in oil prices with your statement where you 
say oil has become the new gold.
    So my question, beginning with you, Mr. Diwan, you say that 
the big oil producers are not going to be affected by what 
happened in Egypt and Tunisia. I assume we are talking about 
the Saudis. My question to you would be do you believe that the 
recent price increases, like the $5 a barrel increase in oil in 
a matter of days, do you think that is due to supply and 
demand?
    Mr. Diwan. No. Because we haven't seen a supply disruption. 
But markets do anticipate. Correct? I mean, this is what they 
do. They want to price risk.
    So the way I look a little bit at oil market, and I came 
here and in the House to talk about this financialization of 
oil in the last 3 years, money flows is like the steroids in 
the system. It comes, it rushes in. It has a very big impact. 
Sometimes it is lasting. Sometimes it is not.
    Clearly, when you have a situation like you had in Egypt, 
people do try to cover or speculate or invest. But the broader 
question that you ask is how important are these financial 
players in the oil market? They are very important. Oil has 
become more than a commodity. It has become an asset class, and 
the last 3 years have shown that.
    We have seen the money flow being the key determinant of 
short-term oil price changes. Does it determine the price is at 
$90 or $70? In the long term, it doesn't. The fundamentals 
will. But these price movements, which are very jerky, have--I 
mean, I look very closely at oil prices, and most of the time, 
the only correlation we can have has to do with dollar value, 
with gold, with exchange rates, with equity rather than short-
term moving the fundamentals. So the short-term moves are very 
much financialized.
    Senator Wyden. Over the years serving on this committee, I 
have walked away with the judgment that you usually don't see a 
single factor dictating oil prices.
    Mr. Diwan. Yes.
    Senator Wyden. I don't think you see just one. But clearly 
in past debates, I think short shrift has been given to this 
question of financial markets, and you just said this recent 
short-term increase was not due to supply and demand. That 
suggests to me that looking at the markets and the role of 
speculation is going to be increasingly important.
    I think you touch on that, and you touch on that as well 
with respect to your views, Mr. Burkhard. So that takes us back 
to you, Mr. Jones, because you don't think that the markets are 
really what this is about. You make it clear that you think 
this is about supply and demand, that the price increases in 
oil recently have been driven by the situation in Egypt. Let me 
get you, so you can put it in your words what you think of what 
Mr. Diwan and, to some extent, what Mr. Burkhard have said.
    Mr. Jones. The short answer is that I think I agree with a 
lot of what they said. I think that what my testimony was 
focused on was the actual run-up in prices since last 
September, and we saw a lot of tightness in the market. There 
was more demand.
    The big news of 2010 was a more rapid resurgence in OECD 
country demand than was expected, and particularly in the last 
quarter. So, that is what got the prices moving up.
    Now in the current situation where there is a crisis in the 
Middle East, as Mr. Diwan said, markets don't only look at what 
is happening today. They look at what they think might happen 
tomorrow, and that is where you get expectations in. So, I 
don't think there is necessarily a disagreement between us.
    Senator Wyden. If you look at your prepared testimony and 
you looked at Mr. Diwan's prepared testimony, there is a sharp 
difference. You play down the question of anything other than 
supply and demand. You are saying that markets are driving 
this, and the price of oil is driven essentially by the supply 
and demand question. Mr. Diwan is saying, look, we are not 
seeing any changes in supply and demand.
    That is why I got into the question of financial markets. 
This is complicated stuff. We understand it. I am just 
concerned your approach gives short shrift to the possibility 
of speculation and the financial markets. Mr. Diwan, I think, 
puts it in the appropriate context that there are a variety of 
factors, but we shouldn't dismiss the question of markets.
    When the Wall Street Journal is running articles talking 
about what you ought to put your bet on in the future, that 
ought to be a wake-up call that the Congress ought to start 
putting some attention on those issues.
    My time is up, Mr. Chairman, and I thank you.
    The Chairman. Senator Coats.
    Senator Coats. Thank you, Mr. Chairman.
    The Chairman. Welcome to the committee.
    Senator Coats. I appreciate that. Because this is my very 
first committee meeting, I don't begin to have the experience 
or the background of my predecessors who have already spoken. 
So I am not exactly sure who to address my questions to, but I 
will let you decide who wants to respond.
    Just two areas I would like to pursue. One is the energy 
security area. The gist of what was said here is that there 
seems to be a fairly high level of confidence relative to the 
flexibility of the supply lines and the capacity production and 
so forth. So an unrest or an interruption of supply, 
transmission of supply in one part of the world or from one 
source could easily be compensated for by increasing production 
or supplying through another area.
    My question is, not going to the specific, but to the 
general, do you, like the military--does anybody ``red team'' 
these things? Do you have books on the shelf that say, you 
know, if this pipeline is shut down in the Caspians, this is 
what we ought to do, or this is where we should go? Is there a 
body of study and analysis that we turn to when things like 
threats to the Suez Canal, threats to certain pipelines, 
political unrest somewhere in the world?
    What is the level of analysis that has been undertaken, and 
what is the level of confidence that we can adjust to these 
kind of things? There is always this uncertainty out there 
about it is not factored in with conventional wisdom as to 
supply and demand and availability and price and so forth. I am 
not sure who needs to answer that, but Ambassador?
    Mr. Newell. I will start, and then I will turn it over to 
Dick Jones. So, within the U.S. Government, the answer is yes. 
There is very good coordination within the Department of 
Energy, among different elements. The Energy Information 
Administration, which I head, works with the Office of Policy 
and International Affairs, which interfaces with the 
International Energy Agency.
    We also work with the Office of Electricity Delivery and 
Energy Reliability, which, in the event of things like 
hurricanes or pipelines going down, tracks those events very 
closely. In fact, right now, they are focused on the winter 
storm issue in the Midwest because that has electricity 
ramifications.
    In the current context of something like the situation in 
the Middle East, we are also in close contact with the National 
Security Council and other Government agencies, providing 
whatever analysis or background information that is necessary 
to help people understand the level of spare capacity on the 
supply side, which we have also talked about. Another issue 
that comes up when you are talking about, for example, Egypt, 
is different transit points. There is a pipeline called the 
Sumed pipeline which crosses there, as well as the Suez Canal. 
One thing to keep things in context, is that about 3 million 
barrels per day transits the canal and pipeline, but about 45 
million barrels per day of oil moves around the world through 
marine transit. So, as a fraction of that, it is quite small. 
There is about 10 percent spare capacity currently available in 
marine shipping for oil. So, these are the kind of issues that 
we track very closely. In the event of some kind of a 
disruption, then the U.S. has a Strategic Petroleum Reserve 
which could be called upon, as well as other reserves. That is 
the context in which we then start to coordinate with the 
International Energy Agency.
    So I will turn that over to Dick Jones.
    Mr. Jones. Thank you very much, Richard.
    Yes, just the IEA looks at the world, and we work with the 
world. We have 28 member countries. Obviously, the United 
States is one of the most important member countries that we 
have, but it is not the only one.
    So when we are looking at the world situation, particularly 
if we see a potential crisis brewing or potential disruption, 
we begin consulting with the countries that would be the most 
likely to be affected. That would include the United States, 
but it wouldn't be limited to the United States. We do much of 
the same work that Richard was describing, we do 
internationally. We then provide information to our member 
countries to keep them abreast of developments in the 
situation.
    Also I mentioned we have emergency response training 
exercises. Those training exercises are based on case studies, 
scenarios, and we don't make them up. We look at the real world 
and we say, for example, if there is a disruption here. Then we 
let teams come from our member countries and from the nonmember 
countries, and we have several teams working on the same 
problem.
    Then we see what they come up with, and we then debate 
whether or not this person's response or that team's response 
was the best one, or if there was one that was better and so 
on. That way, we all learn at the same time. We learn about the 
specifics of the issues, but we also learn about different 
points of view and how to work with one another, and that comes 
into quite a bit good use when we have a real crisis.
    Mr. Burkhard. One good example in the past that is 
instructive. In 2005, when we had Hurricanes Katrina and Rita, 
they took out a large amount of U.S. refining capacity. 
Gasoline prices went up in the United States, and that sent a 
market signal to the rest of the world to send gasoline to the 
United States.
    So the flexibility of the oil market was important there, 
but also IEA members at that time, particularly in Europe, were 
offering their strategic gasoline reserves to the market, which 
also helped to calm it. So I think that very real, fairly 
recent example of market signals combined with the insurance, 
so to speak, of what the IEA members provide was a good example 
of crisis management.
    Mr. Jones. If I could just add one thing? Our focus has 
been on oil because we were founded in the wake of the 1973-
1974 oil crisis. But in recent years, we are focusing more and 
more on other forms of energy as well. So, for example, we now 
also are doing work on natural gas security, particularly 
pipeline security, which is very important to our European 
members, and we are also looking at electricity grids and how 
they can be made more secure.
    So we are branching out beyond oil to natural gas and 
electricity. The response that Jim just mentioned was 
coordinated by the IEA.
    Senator Coats. Mr. Diwan, did you have any comment?
    Mr. Diwan. No. I want to build on what Jim said. The market 
responds quickly. I mean, price signals change. When you have 
disruption some places, prices go and you arbitrage. The only 
problem, it takes time to transport oil.
    So the system takes time to get back in shape, but we have 
seen it, crisis after crisis anywhere in the world, that you 
have enough spare refining, shipping crude. Right now, we have 
spare of everything that you can adapt. Just takes time because 
it is slow to adapt. You know, oil is bulky to transport and 
store and refine.
    Senator Coats. Thank you.
    Mr. Chairman, I want to get off to a good start with the 
Chairman. So I notice my time has expired and gone over time. 
So I won't ask my second question.
    The Chairman. You set a very good example for this 
committee. We appreciate it.
    [Laughter.]
    Senator Coats. Thank you.
    The Chairman. Senator Franken.
    Senator Franken. Thank you, Mr. Chairman.
    I would like to welcome my new members--not my new members, 
the new members to the committee, of which I am one. While 
Senator Hoeven was Governor of North Dakota, they discovered 
and developed tremendous oil resources there. In fact, some in 
North Dakota say he created them. I would like you to come over 
in Minnesota and do the same, if you could.
    But I want to turn to renewables because that is something 
we do really well in Minnesota. Dr. Newell, we need to be open 
to a diverse array of options as we think about energy policy. 
But as you say in your testimony, renewables seem to be where 
the largest growth is in the next 25 years. Is that right?
    Mr. Newell. Yes, that is correct. They have by far the 
fastest rate of growth.
    Senator Franken. As I said, in Minnesota, we are a national 
leader in renewables, especially wind and biofuels. We are 
transitioning to renewables fast, largely due to policies like 
the renewable energy standard, 25 percent renewables by 2025. I 
am proud to say that Minnesota utilities met their 2010 targets 
under the RES.
    In the EIA reference case scenario, we see a pretty bleak 
picture for renewables in 2035, only about 10 percent of our 
energy mix by 2035. Now I recognize that this scenario assumes 
no change in our national energy policies moving forward. Dr. 
Newell, what factors, in your view, both policy and other 
factors, could most help grow the U.S. renewables sector to a 
much higher percentage than those projections for 2035?
    Mr. Newell. The key issues that have affected the growth in 
renewables over the last several years and that I would 
anticipate would affect it over the next several years are 
several fold. One is on the purely economic side, the cost of 
renewable technologies. Were those to come down from where we 
are currently forecasting, either due to faster innovation than 
we are expecting or additional research and development effort, 
that could bring those costs down, in which case they would be 
more competitive with other technologies for power, such as 
natural gas, coal, nuclear, and so on.
    The other key policies that tend to support renewables are 
policies such as the production tax credit for wind, which does 
expire in our reference case, because that is what it does in 
current law. But you actually see a kink in the curve when it 
does expire. So that is clearly sending a signal that were it 
not to expire, that would have a significant impact, and we 
have run alternative policy cases that demonstrate that.
    The renewable fuel standard for transportation fuels also 
has a big impact. But that is in our reference case and grows 
very considerably because that are under current statute and 
ongoing regulations that is already in law. So those are some 
of them. There are a number of other tax credits on solar and 
so on, which also expire at some point in time. Were those to--
--
    Senator Franken. I am sorry to interrupt.
    Mr. Newell. Yes.
    Senator Franken. We have countries like China that are 
aggressively pursuing these, right, like solar and wind?
    Mr. Newell. Yes. That is definitely correct. There are a 
number of European countries doing that and also particularly 
China has been investing heavily really in all sources of 
electricity production. They have phenomenal growth, and so 
they are investing in solar, in wind. They are also investing a 
lot in coal and nuclear. So they are really kind of all-out on 
all fronts.
    Senator Franken. Let me go to Ambassador Jones. I notice 
that you talked about three areas you would like to go--a 
strong push in efficiency, to decarbonize electricity, and 
create advanced vehicles.
    So, let us talk about those. How do you decarbonize 
electricity?
    Mr. Jones. I mean, promotion of renewables is one way to do 
that because they obviously don't burn fuel. But you can also--
--
    Senator Franken. They don't burn carbon? They don't add 
carbon?
    Mr. Jones. They don't add carbon. But there are many other 
ways, and for example, you can have a coal-fired power plant 
running on biomass instead of on coal. You can have a coal-
fired power plant with biomass and carbon capture and storage, 
and then you are actually taking CO2 out of the air.
    Senator Franken. Right.
    Mr. Jones. So there are a lot of different technologies 
that are available. The question is what is economic and what 
is appropriate to the political and the physical 
characteristics of the country? For example, a lot of countries 
are pushing ahead with nuclear power, and other countries have 
decided not to do any nuclear power for political reasons 
because of concerns, obviously, on nuclear proliferation, spent 
fuel, and things like that.
    But there is a whole mix of approaches you can take, and we 
advocate a broad spectrum of technologies, depending on the 
endowment of the country. For example, some countries would be 
wasting their money if they invested in wind power because they 
just don't have the wind resources. Similar with solar power.
    So we think that where it makes sense, a country should 
invest in renewables. Where renewables are not an option, they 
should invest in carbon capture and storage if they want to get 
the full lifetime out of existing power plants or use biomass 
to fuel those power plants, or they should invest in nuclear. 
It depends on the country.
    Even in the same country, different regions will be 
different.
    Senator Franken. I know I am over my time. But I just want 
to say in summary that these projections to 2035, that is a 
fairly long way out.
    Mr. Jones. Twenty-five years.
    Senator Franken. We can definitely--you say it, and you 
added a personal note, which is that we can do better. I would 
like to add the same personal note and just say that those 
three efforts--a strong push for efficiency, decarbonizing 
electricity, and advanced vehicles, which I assume mean 
electric cars, maybe LNG cars, anything else I am----
    Mr. Jones. Hybrids--plug-in hybrids, all electrics. CNG is 
a possibility, especially for large transport, buses, and so 
on.
    Senator Franken. I thank you all for your testimony. Mr. 
Diwan, I just wanted to ask one last little thing? Did you, at 
one point, say ``oil prices are a mystery to me?'' Did I miss 
that in your testimony?
    Mr. Diwan. No. The more you know, the less you know after a 
while.
    Senator Franken. OK. That really made me feel good.
    [Laughter.]
    Senator Franken. Thank you, Mr. Chairman.
    The Chairman. Thank you.
    Senator Hoeven, welcome to the committee.
    Senator Hoeven. Thank you, Mr. Chairman.
    Good to be with you. I would like to thank both you and 
Ranking Member Murkowski for holding this hearing today and say 
that I very much look forward to working with you on the Energy 
Committee and, of course, with our fellow members. Not only the 
Senator from our neighbor State, Senator Franken, but Senator 
Manchin and I go back, I don't know, 6 years or more working as 
fellow Governors, and worked on energy issues and worked 
through the National Governors Association.
    So I very much look forward to working with you on these 
important issues, the energy challenges that face our country, 
and I see it as an incredible opportunity. Senator Franken was 
kind enough to refer to some of the progress we have made in 
energy in North Dakota, and we do produce a lot more oil and 
gas. We are over 100 million barrels a year now.
    Ten years ago, though, we were not producing much oil, and 
we were, in fact, declining in our oil production. Frankly, oil 
companies, if they hadn't left the Williston Basin, they were 
leaving.
    We worked very hard. Of course, a lot of the talk at that 
time was that companies weren't going to do exploration in the 
continental United States. They were still doing some great 
work up in Alaska, but really were going to other places around 
the globe for not only their exploration activities, but also 
production and refining as well.
    So we worked very hard to create the right kind of business 
climate that would stimulate not only oil development, but 
other types of energy development as well. The clean coal 
technologies, renewables, wind, biofuels, we are making a lot 
of progress. It is not just about producing more energy that we 
ship to great States like Minnesota and other places--
electrons, as well as oil and gas and biofuels--but it is very 
important for our economic growth and for job creation.
    So I see that same opportunity for our country. My question 
to you is what should we do? What should this Congress do to 
stimulate energy development in all sectors? What is the most 
effective things we can do to stimulate energy development in 
this country across sectors, without picking winners and 
losers? I mean oil and gas. I mean electricity from coal, 
hydro, other sources. Biofuels, wind, nuclear, you name it.
    But across all sectors, what are the things that we can do 
that will be most effective as a Congress to stimulate energy 
production in this country? I would particularly like you to 
focus on nonrevenue measures because we find ourselves with a 
bit of a budget challenge these days. So particularly the 
measures that don't cost money.
    So I am not talking about direct subsidy and so forth, but 
the kind of legal, tax, and regulatory measures we can put in 
place to stimulate energy development most effectively. I would 
like each of you to respond to that, if you would?
    Mr. Burkhard. I will start off. I will steal a phrase from 
a book of our chairman Dan Yergin. When Churchill 100 years ago 
switched the Royal Navy from coal to oil, he said security is 
in diversity and diversity alone. So in terms of pursuing 
different strategies, a singular approach probably isn't the 
most appropriate fit, but multidimensional policies that focus 
on supply and demand.
    Some of the trends and places you alluded to, Senator, if 
they continue, they will help both on the demand and the supply 
side. North Dakota is one of the key reasons why in 2009 the 
United States had the greatest increase in oil and gas 
production anywhere in the world. The United States did in 
2009. In 2010, that growth trend continued, and that is due to 
what is happening in North Dakota, but also Pennsylvania, other 
relatively new players on the oil and gas side.
    In terms of continental energy security, let us not forget 
about Canada. When we think of foreign oil, we think of 
something distant, far away, unknown. I don't think of Canada 
that way. Twenty-one percent of our oil now comes from Canada. 
It is by far the biggest oil supplier.
    So thinking about continental energy security, if the same 
trends in oil and gas continue, that will play an important 
role. On efficiency, the fuel economy standards that were 
renewed, strengthened in 2007 and then again in 2009, I 
believe, they are going to play a very large role in keeping 
U.S. oil demand below the 2005 peak.
    So I think consistency in the long-term approach and a 
multidimensional approach on demand and supply is something to 
consider.
    Senator Hoeven. What percent of our petroleum consumption 
is provided by the U.S. and Canada together? Do you know?
    Mr. Burkhard. Canada is about 2.5 million barrels per day. 
U.S. oil, it is roughly probably half. Maybe a little bit more, 
the U.S. and Canada combined total.
    Senator Hoeven. But of our total consumption, of our total 
consumption, what percentage do we cover between the U.S. and 
Canada? It is higher than people realize, right?
    Mr. Burkhard. It is probably half.
    Senator Hoeven. Fifty percent?
    Mr. Burkhard. Maybe a little bit more, 50 to 60 percent. If 
you include Mexico, it is even higher. If you look at North 
American energy security meaning Mexico, Canada, the U.S., you 
are looking at 70, 75 percent, something around there.
    Senator Hoeven. Seventy-five percent.
    The Chairman. Anybody else have a quick answer, and then--
--
    Mr. Diwan. No, I just wanted to point to a slight 
contradiction.
    Senator Hoeven. If you want, you can say the top 3 things 
so I don't violate my timeline. But----
    The Chairman. Yes, we have gone over the time.
    Senator Hoeven [continuing]. Name 1, 2, or 3 things that 
would really make a difference, in your opinion.
    Mr. Diwan. The cheapest barrel of oil is an efficient car, 
all right? I mean, this is how you reduce your demand, and it 
is probably cheaper than producing a new barrel of oil.
    But I just wanted to point a slight contradiction. I mean, 
if North Dakota has seen its production increase, and it is a 
great thing, it is because we have very high oil prices. So it 
is the economics which are answering. We always knew about the 
reserve in the Bakken, but they were never economical. When 
prices reach a certain trigger, technology was able to come and 
change that supply function. So having $3 gas and having high 
production in Dakota goes together.
    Senator Hoeven. No question, but the new technologies were 
vital and will continue to be vital in order to produce it 
economically----
    Mr. Diwan. Absolutely.
    Senator Hoeven [continuing]. Even down to a barrel price of 
maybe $50 a barrel.
    Mr. Diwan. Absolutely. So, efficiency, technology, and I 
would say a regulatory framework, which is look at the long 
term and allow the diversification across energy sources.
    The Chairman. We have two Senators here who haven't yet 
asked their first round, and then we will come back around, and 
we can get more response to that in the second round perhaps.
    Senator Udall.
    Senator Udall. Thank you, Mr. Chairman.
    Good morning, gentlemen. Thanks for being here today.
    Let me start by speaking to the profits of the oil 
companies. It has come to my attention that Exxon just 
announced that its profits for the last part of 2010 were over 
$9 billion. It is a 50 percent increase from earlier in the 
year. Exxon is not alone. Most, if not all the major oil and 
gas companies are going to report huge profits for 2010.
    Mr. Diwan and Mr. Burkhard, what will the major U.S. oil 
companies like Exxon do with these record-setting profits? For 
example, how much of those net profits would you estimate that 
the major U.S. oil companies are investing, or will invest, in 
domestically produced clean and renewable fuels, the price of 
which are not set by OPEC?
    Mr. Burkhard. I think some context for that, one, oil 
companies are price takers, not price makers. The revenues 
reflect the global oil markets. In terms of their spending, oil 
companies, the very large oil companies, their capital 
expenditures in a given year can range from roughly $15 billion 
to $25 billion.
    So it is a treadmill that they are on to constantly 
reinvest because they have fields that are at plateau 
production or declining. So it is a massive capital-intensive 
business where you have $15 billion, $20 billion, $25 billion 
of CAPEX are what we are seeing right now. A lot of these 
companies are part of this what we call ``the shale gale,'' the 
unconventional gas revolution in the United States, and gas is 
a lower carbon content fossil fuel. So that is playing a big 
role.
    Senator Udall. So you see them moving some of those profits 
into development of gas reserves?
    Mr. Burkhard. Yes.
    Senator Udall. Mr. Diwan.
    Mr. Diwan. I mean, they are oil and gas companies, first 
and foremost. So they invest in oil and gas.
    If you look at the broad trend in terms of capital flow, 
the United States has seen a lot of investment. The global 
industry is coming back to the United States, and that is a big 
development over the last 2, 3 years. Obviously, it has to do 
everything with the shale gas, but also the onshore oil 
potential in places like the Bakken.
    So the United States, because of technological change and 
the high oil prices, have been able to attract a lot of 
capital. A lot of these oil companies who have been looking 
abroad for years to be able to add to their reserves are coming 
back to the United States.
    They are not the most nimble companies. They are very 
large. So they tend to be second and third movers, rather than 
first movers. The small companies, the muscle, the economic 
muscle here have already created the resources. Now the oil 
companies are going to develop them.
    In terms of their investment in other technologies, it is 
really research and development. They are not biofuel 
companies. They are not solar companies. They will not become 
solar companies. So they are what they are.
    Most of their investment go back into massive projects 
where the treadmill that Jim is talking about is very 
important. The decline rates are very steep in the oil fields 
that they bring. They are probably 10, 15 percent, sometimes 
north of that. So, in a way, these companies are constantly 
seeing their base resources disappearing. So they need 
absolutely to invest, and that treadmill is only getting 
faster.
    Senator Udall. So you see them playing an important role in 
continuing to produce secondary, tertiary oil from such fields. 
But the advances in biofuels and clean energy will come from 
other sectors as well and from other entrepreneurs, other 
businesses, other business models?
    Mr. Diwan. I think so. I mean, that is the model. These 
companies are not the most nimble for these things.
    Senator Udall. The demand for oil is driven mostly by our 
transportation sector. I think, what, 70 percent of domestic 
oil demand.
    I am directing this at the panel. Do you have a sense of 
what percentage of our transportation sector would have to be 
fueled by electricity, natural gas, or some other alternative 
fuel in order for us to achieve energy independence in the 
transportation sector? In other words, at what point could our 
domestic supply of oil fulfill our domestic demand?
    Ambassador Jones, if you want to take that question for the 
record, too, I would be more than happy to work with you.
    Mr. Jones. I don't think it is something that we have 
actually sat down and tried to calculate. You could probably do 
a back-of-the-envelope calculation in terms of imports and how 
much share they are and figure it out. But Richard, you might 
have done something? I don't know.
    Mr. Newell. Yes. We have not analyzed that particular 
question. But under existing laws and market trends, while 
there is a decline in net petroleum imports, it is still quite 
sizable even 25 years from now. If one imagined what would be 
the kinds of actions that could change that, one would be 
declining consumption because declining consumption tends to 
come first out of imports.
    Then, substitution of the remaining consumption toward 
something that is not imported, which if it is electricity, 
electricity tends not to be imported. So any domestic source of 
electricity would do that. If it was domestically produced 
biofuels, that would do that.
    But one would have to analyze a particular proposal in 
order to--most anything you look at is potentially achievable. 
It depends on what kind of actions one is willing to take to 
achieve it.
    Senator Udall. Thanks to the panel.
    The Chairman. Senator Manchin.
    Senator Manchin. Mr. Chairman, thank you. Thank all of you 
for being here.
    I am sorry. Some of us had to go back and forth to 
committee meetings. So if I repeat something or might have 
missed something, I am very sorry for that.
    The State of West Virginia, as you know, is an energy 
producer, always has been for many, many years. We just have a 
hard time understanding without an energy policy in this 
country and what you just told us about, the dependency we are 
going to have on foreign oil, the security of the Nation being 
at risk because of our dependency on foreign oil, the 
uncertainty in the Middle East right now, and the growing 
uncertainties that could even make us more vulnerable, and our 
economy, how it is tied so tight, and you are telling me our 
dependency will grow and not become more independent.
    In our little State, we have an energy portfolio. We try to 
use everything we have. We have developed our shale gas, 
natural gas, as you know, in the Marcellus shale. We have a 
tremendous abundance of coal. We have biomass. We have a 
tremendous wind operation in West Virginia, which very few 
people know, and we have done everything we could with hydro.
    What I don't understand is that of all the energies you are 
talking about, there are subsidies, and I think that is what 
the Senator from Colorado was talking about. The subsidies of 
energy, whether it would be to oil, gas, wind, solar, biofuels, 
ethanol. The only energy source which is the greatest source 
that we have as far as we are dependent on right now is coal. 
It doesn't get a penny of subsidies.
    But it has been villainized by this administration and so 
many people, and it is the one we depend on the most that gives 
back more than what it takes. I can't figure it out.
    I mean, we are trying to use it in so many different forms, 
in supercritical heating and things of this sort. We are 
running into roadblocks with the EPA from every turn that we 
go. We are trying to use it in conjunction with our natural gas 
productions and trying to look at the changing and the fleet, 
especially our commercial fleet to compressed natural gas I 
think is a very doable.
    Do you all have a comment on why that one source of energy, 
which is the most depended upon in this Nation, has no types of 
subsidies, but the others demand so much subsidies? Does 
anybody want to answer that?
    Mr. Newell. I guess I would just say that Congress makes 
these policies, and so I don't have any particular----
    Senator Manchin. Do you all have a comment? Basically, do 
you think it is kind of off balance that 50 percent of our 
energy comes from the coal, which we have depended on for 
hundreds of years. No subsidies, not one penny of subsidies.
    But then oil--and I heard the profits of, what, $9 billion 
of profits--and the subsidies from that, subsidies from the 
tight sands of natural gas, subsidies on a gallon of ethanol, 
and everything else. Does it not make a little bit of----
    Mr. Newell. The one remark I will make is that we have been 
requested to do an analysis of energy subsidies by the House, 
and that is underway. We will be issuing that report sometime 
in the next few months.
    Senator Manchin. You compare that toward the coal that gets 
no subsidies. Will you compare it against what type of energy 
this country receives and depends upon without any investment 
except the market forces?
    Mr. Newell. Yes. It is a broad study that covers all manner 
of energy subsidies.
    Senator Manchin. The dependency that we have had on foreign 
oil and the uncertainly in the Middle East, I know you all have 
talked on that a little bit. I have noticed, Mr. Newell, you 
have talked about the price of a barrel of oil and the 
uncertainty, not really knowing where it is going. What do you 
anticipate as far as we, as a Nation, are able to take care of 
the dependency, independency as far as from our own domestic 
production? Is there any of you believe that we can become 
independent with the current policies?
    Mr. Burkhard. Senator, just on the coal question, I am not 
an expert in subsidies. But what is perhaps little noticed in 
some areas, the last decade, the strongest energy source in 
terms of demand growth has been coal around the world. That is 
due to what has been happening in China and India.
    China, India, and the U.S. are among the top resources----
    Senator Manchin. The rest of the world is using it more, 
and we are villainizing it more.
    Mr. Burkhard. It is a cornerstone of global energy supply 
in this country and certainly in China and other major players.
    Senator Manchin. Do any of you all believe that we can 
become energy independent?
    Mr. Diwan. Why do we need to become energy independent? We 
are not independent of pretty much anything. We believe all in 
free trade. We all have Italian ties, Chinese shirts, Chinese 
computer chips in our computers. We import everything, and we 
export everything. Oil shouldn't be that different, and energy 
in particular. So----
    Senator Manchin. You don't believe that we should try to 
become----
    Mr. Diwan. I don't think it is a key issue. It is a global 
commodity. It is globally priced. If we can import it, we can 
import it.
    Senator Manchin. Do you all believe that it ties to the 
security of the Nation?
    Mr. Diwan. It has a security aspect, but it is not the only 
one. There is an economic aspect.
    Senator Manchin. Sure.
    Mr. Diwan. What it costs to fuel this economy is a key 
issue.
    Mr. Burkhard. I would just add energy security and energy 
independence aren't--you know, there are differences between 
the two. If energy security is the objective, that may lead to 
different outcomes, different decisions than energy 
independence.
    Senator Manchin. Basically, those of us who lived through 
the 1974 oil embargo and saw what it had done and how it 
crippled the Nation, and at that time, I think we tried to take 
the position we would be energy independent by a very short 
period of time, by 2000. Of course, that came and gone.
    So you all are not tying the security of this Nation toward 
the independency that we could do with more domestic production 
of all of our resources?
    Mr. Burkhard. The increase in continental production, in 
Canada and the United States, it has been a source of economic 
growth in the places where it has taken place. So it is 
important in job creation, and it does play an important role 
at enhancing global energy security and, consequently, U.S. 
energy security. The growth in U.S. gas production and oil 
production is an important component of that overall security 
story.
    Senator Manchin. I will save that for a second round. Thank 
you, sir.
    The Chairman. Senator Coons, welcome to the committee.
    You are the only one here now who hasn't asked a first 
round of questions. Did you have questions you want to ask in 
this first round, and then we will do another 5-minute round?
    Senator Coons. Thank you, Chairman Bingaman and Senator 
Murkowski.
    I am grateful for the opportunity to join you. I apologize 
for my lateness. As is so often the case, there were other 
committees. Judiciary Committee just reported out an important 
patent bill that I think will help contribute to the role that 
I also view this committee as having a central place to play 
in, which is sustaining America's leading role in innovation 
and then making sure that we work together to develop the 
energy technologies of the future.
    I was interested in the testimony of several of the members 
of the panel. Dr. Newell, what changes do you expect to see 
going forward that are based on energy efficiency?
    I may have missed that since I was not here. But in what I 
read I didn't see a clear trajectory on what we could achieve 
in terms of savings due to energy efficiency standards. As that 
is something we expect to take up shortly, I would be 
interested in your views on how important that might be to 
America's energy future.
    Mr. Newell. Sure. Thanks for that question.
    When we look out over the next 25 years, there is a 
substantial decline in the growth of energy consumption we 
expect to have from the historic situation for a number of 
different reasons. If one looks at structural change in the 
economy, there is a significant change toward a more service-
oriented economy, which tends to moderate the rate of energy 
growth.
    We have done some analysis that suggested our consumption 
is going to be a third lower simply because of structural 
changes in the economy, which lowers the overall energy 
intensity of the economy. We have also done analysis that looks 
at changes in the energy efficiency of particular technologies, 
and that further lowers energy consumption about 13 percent 
from where it otherwise would be. That is already built into 
the reference case projection that I mentioned.
    Now those changes in efficiency come from a number of 
different places. One is efficiency standards that have already 
been promulgated or that manufacturers and the Department of 
Energy have agreed to. There have been some recent standards 
there which are built into our forecast.
    Market prices also play a role in reorienting consumers 
toward more energy-efficient appliances. You also have 
voluntary programs like the Energy Star labeling program, which 
provide information to people to help them understand what the 
energy consumption is from their appliances. These also tend to 
affect consumer behavior.
    In terms of disentangling the effect of these difference 
pieces, it becomes quite complex. I mentioned some of the 
things we have done. The other thing that enters in is fuel 
economy standards for automobiles, which I mentioned.
    We do include in the reference case the standards through 
the year 2016, which get the fuel economy of the light-duty 
vehicle fleet up to 35 miles per gallon. But in our reference 
case, fuel economy actually continues to grow beyond that up to 
38 miles per gallon by 2035, purely due to market incentives.
    So once these technologies are built into automobiles, the 
next time a manufacturer introduces a new model, those new 
technologies would tend to be included in those new models. 
Given higher projected oil prices, that would tend to provide 
an incentive for consumers.
    So there are a number of different policy and market 
incentives that are directing the economy to more energy 
efficiency. Although energy consumption still grows, it grows 
by a significantly lower rate than what we have seen 
historically.
    Senator Coons. Thank you. If I could, one other question to 
Ambassador Jones?
    You expect electric and plug-in hybrids to make up to 70 
percent of new car sales in 2035, if I am not mistaken, under 
one of the scenarios. Tell me what technology developments you 
think are critical to achieving that, what policies we should 
be pursuing to help ensure an American leadership role in that, 
and what are the different policy scenarios that you think 
would deliver the biggest advantages for us in terms of 
deploying that fairly significant percentage participation?
    Mr. Jones. I think the technology that needs the most work 
on is battery technology, storage. Increasing the energy 
density of batteries to allow the vehicles to have greater 
range. One of the key points that people always raise with 
electric vehicles is their lack of range, the fact that the 
speed with which they can be recharged, how often they need to 
be recharged.
    Now, in point of fact, studies have shown that, for 
example, BMW is developing electric vehicles, and they brought 
a fleet of electric BMWs and they let people drive them for a 
year, and they followed their use. They actually found that 
most people didn't really need to recharge their car more than 
2 or 3 times a week, and it was very easy. After a few weeks, 
they realized this, and they liked the vehicles.
    But there is a lot of acceptance, that public acceptance is 
the real problem. But that can be overcome with better battery 
technology, cheaper battery technology. But that is the key 
thing. Most of the rest of it has already been developed.
    Senator Coons. Thank you very much.
    Thank you, Mr. Chairman.
    The Chairman. Thank you very much.
    Why don't we do our second round here? Senator Murkowski, 
did you have questions?
    Senator Murkowski. Yes, thank you.
    Mr. Newell, I want to confirm that within your projections, 
you do not include any assessments as to Alaska natural gas 
being part of the mix within the projections through 2035. Is 
that correct?
    Mr. Newell. Yes. That is correct. That tends to depend 
heavily on the Alaska natural gas pipeline.
    Senator Murkowski. Yes.
    Mr. Newell [continuing]. Our assessment is that the capital 
costs have increased, and domestic lower-48 gas prices have 
come down. So, that pipeline through--at least through 2035--is 
not currently in the projection. That is correct.
    Senator Murkowski. I just wanted to confirm. Let me ask 
more generally then, in terms of your assessments as they might 
relate to the Arctic as a whole, not necessarily just to the 
U.S. Arctic and what may or may not develop offshore there, but 
as you know, we have the BP-Rosneft deal that is at play in the 
Arctic.
    Do you include these prospects in your assessment, either 
the BP-Rosneft deal or just anything in the Arctic? I think we 
recognize the potential for the reserves up there, but do you 
anticipate in your forecasts seeing anything coming out of the 
Arctic?
    Mr. Newell. I would have to go back and look at the 
specific results that we currently have. But areas that are 
open for lease sale would enter into our projections at some 
point. There have been changes over time in terms of what 
areas, at least around Alaska, have been open. I think that has 
even recently changed. So I would have to go back and see 
exactly. But, yes, we do assess those areas for sure.
    [The information referred to follows:]

    The Energy Information Administration's global liquids production 
projections, as published in the Annual Energy Outlook 2011, reflect 
oil production in offshore Alaska but not in Arctic regions other than 
Alaska, and therefore do not include any production potential as a 
result of the BP-Rosneft deal. Although oil is already being produced 
offshore in the Alaska Arctic, additional oil production from 
undiscovered offshore fields is not projected to commence until after 
2030. In the Annual Energy Outlook 2011 reference case, oil production 
from new Alaska offshore fields in the Arctic reaches 200,000 barrels 
per day in 2035.
    Regardless of the EIA projections, Shell Oil is making a concerted 
effort to drill exploration wells in both the Beaufort and Chukchi 
Seas. If Shell found sufficiently large oil reservoirs at either 
location that would justify their commercial development, then new 
offshore oil fields in the Alaska Arctic could be in production by 
2020.

    Senator Murkowski. Let me ask, a question for the whole 
panel. We talk a lot about the reserves worldwide and what the 
U.S. consumes. The commentary is that the U.S. consumes a 
quarter of the world's oil, but we only have 3 percent of the 
world's reserves. I have some issues with how this is stated.
    First of all, the 3 percent figure, as I understand it, 
only speaks to proven reserves, which is to say that they have 
already been drilled there. It doesn't reflect any of the 
unexplored areas, whether we are talking Arctic offshore or 
whether we are talking Atlantic, Pacific coast, Eastern Gulf, 
much of the deep water.
    So I guess the question to you all would be, first, how 
important is it to actually know what our oil reserves amount 
to? Secondly, if we here in the United States were to prove up 
our reserves, not use them for production, but just provide for 
that assessment, and we were to do so within the next 5- to 10-
year horizon here, what does this do to the percentage of 
global reserves that we know in terms of our percentage of 
consumption here in the United States? How does that even out? 
Again, I am curious to know how important is it to know exactly 
what we have in terms of reserves?
    Mr. Burkhard, why don't we begin on your end?
    Mr. Burkhard. Reserves are an important figure, but there 
is no global, uniform standard that countries around the world 
adhere to. So it is a figure that is used a lot, but it has an 
uncertain definition globally.
    One quick example, the Canadian oil sands. If you include 
the Canadian oil sands, Canada has the second-largest oil 
reserves in the world after Saudi Arabia. If you don't include 
the oil sands, which some don't, it falls down quite a bit.
    Perhaps a more relevant example of the resource bases is 
production as opposed to reserves because the reserves depend 
on future investment and activity and fiscal terms, a whole 
host of factors. The U.S. is the third-largest oil producer in 
the world, and it is the largest gas producer.
    Senator Murkowski. But what you are saying is we don't have 
a uniform definition as to how we are defining reserves, and 
that doesn't allow us to do an apples-to-apples comparison. Is 
that correct?
    Mr. Burkhard. U.S. companies do adhere to a common 
standard, but----
    Senator Murkowski. Right. But outside of the United States?
    Mr. Burkhard. Right.
    Senator Murkowski. Mr. Diwan.
    Mr. Diwan. Yes. I mean, in some places, it is a political 
number.
    Senator Murkowski. Yes.
    Mr. Diwan. In other places, it is an economic number. At 
different prices, you have more or less reserves. At $100 oil, 
you have more reserve than at $10 oil because you can exploit 
these resources and move them to reserves.
    So I think, overall, it is not a key criteria. When you 
look at oil companies, their reserves always seems very 
limited. I mean, the United States has basically 10 years of 
reserve ahead of us for the last 50 years. So it is not a 
completely meaningful number. There is definitional issues, and 
it is also how we prove and how you book reserve, which is 
another factor which is complicating.
    Senator Murkowski. Is there an effort within the EIA that 
takes what you have globally and tries to come up with a 
commonality and looking to not necessarily redefine, but to 
just make sure that you are doing a same comparison when it 
comes to understanding what the global reserves are?
    Mr. Newell. For the United States, it is, I think, 
relatively well defined in the global sense. But we have been 
asked on other occasions by other Members of Congress to try 
and dissect and put on an apples-to-apples basis, as much as is 
possible, and we can share that with you.
    It is a challenge. We rely on sources, as others do. The 
U.S. Geological Survey is very important in this area, the Oil 
and Gas Journal also. But as was stated, you have to treat 
different estimates from different places with different 
degrees of surety.
    To get to your question, I think in terms of how it would 
impact, for example, the work that EIA does, the thing that 
matters most over a 20-, 30-year time horizon is even beyond 
reserves. Because as was mentioned, reserves only prove up 
maybe a decade or so of production. Beyond that, it is the 
technically recoverable resource base that becomes even more 
important. But reserves are important in the near term because 
they speak to areas that companies have demonstrated and taken 
the effort to say that they can produce economically under 
current prices and technological conditions. So it is relevant 
for near-term projections.
    I think from the grand scheme of things, if one was to more 
carefully assess the U.S., it could change. In terms of the 
global balance, though, I think it is unlikely to change in 
terms of sheer magnitude just because so much of both reserves, 
and then also beyond that, recoverable resources, are outside 
of North America. I think that basic high-level U.S. context 
would not change significantly based on that.
    If I may just say one thing to respond to a couple of 
questions posed earlier? Is that----
    The Chairman. Yes, go right ahead.
    Mr. Newell. One minute. Senator Hoeven had asked what 
percent of our petroleum consumption comes from Canada and the 
United States. The U.S. is the source of about 48 percent of 
our liquid fuels consumption, and Canada would add about 
another 12 percent. So you would get up to 60 percent if you 
added those 2 together.
    The other thing for the record I just want to state is that 
my tie is hand-tailored in the United States of America.
    [Laughter.]
    The Chairman. You are a rare individual, but we are glad to 
know that.
    Senator Murkowski. Thank you.
    The Chairman. Senator Portman, you have not had a chance to 
ask any questions. All of us have had at least one round of 
questions. So why don't you go ahead with your questions? 
Welcome to the committee.
    Senator Portman. Thank you, Mr. Chairman. I appreciate your 
welcoming me, and it is good to be here with a few of my 
colleagues.
    I apologize that, as a new member, I am still trying to 
figure out how to be at 3 different hearings at the same time. 
In this case, I didn't get the chance to hear all of the 
interesting testimony. I did read some of it.
    I hope this question is not one that has already been 
addressed, but my focus would be on the economy and the impact 
of your prediction of increased demand and, therefore, 
increased cost of oil. I looked at some of your data indicating 
that we are going to be approaching $100 a barrel in the next 
couple of years if your projections are correct.
    I know we are not looking at the economic analysis here as 
much as pricing and supply, but have you looked at the impact 
on U.S. economic growth during that period, assuming that your 
projections are correct on the increased cost of oil?
    Although we are producing a lot domestically, as you just 
said in response to Governor Hoeven's question, obviously, as 
Egypt and other countries experience issues that affect the 
cost of oil, what will the impact of that be, and has that been 
calculated into your projections on the cost of oil over the 
next couple of years?
    I open it up to any and all of our witnesses today.
    Mr. Newell. Sure. I can respond. Both our short-term and 
our longer-term outlook really take assumptions of both U.S. 
domestic and global economic growth as an input into that 
analysis, but it does take account of oil prices within that. 
One question is if there were to be changes in oil prices, what 
could be the potential ramifications for the U.S. economy?
    This is a complex question, but let me give some thought to 
it. Other things equal, every $10 per barrel increase in the 
price of oil tends to add about $40 billion per year to our oil 
import bill. Since imports are subtracted from gross domestic 
product, this tends to weigh on gross domestic product. So 
every $10 per barrel increase in the price of oil may lower GDP 
by 0.2 percent or so. That is one way to look at it.
    Now a key issue, though, is what is causing the price 
increase? If it is demand-side economic growth that is causing 
the price increase, along with that economic growth--which may 
be coming from abroad--our exports may be increasing because 
China or other countries may demand more materials, more 
equipment from us.
    So, demand-side increases in prices can be consistent with 
continued global economic growth. The place that tends to be 
more of a concern is if it is a supply side shock to oil that 
causes prices to increase, which pretty unambiguously tends to 
be a more significant headwind for the economy.
    The one other point that I will mention is it also depends 
upon the state of the economy into which this oil price change 
is entering. If you are in a situation of a weakened economy or 
if you are in a situation where things like monetary response 
would not be sufficient, then you could be in a more 
problematic situation.
    Our sense of the current situation is that a lot of the 
price increase right now is demand driven, and so that is 
consistent with continued economic growth. We don't see that, 
at least at this point, providing a significant headwind for 
the U.S. economy.
    Senator Portman. I noted in your testimony you also, 
though, said that the demand side dynamic here is driven 
primarily by emerging economies. You cited China and India and 
Brazil. So, our experience certainly in the last couple of 
years is, is those countries have increased their economic 
growth and have continued to grow. It hasn't reflected on a 
change in our balance of trade in terms of the export-import 
issue you talked about or our economic growth certainly in 
2009, going into 2010.
    But I appreciate your answer, and I hope that these very 
important energy inputs are being taken into account as we look 
at what the economic forecasts are going forward. Any other 
responses from the panel?
    Mr. Burkhard. Very briefly, it is an excellent question, 
tough to answer because there is no magic price that elicits a 
response on the part of consumers or governments. Certainly, 
there are psychological points. When oil hits $100, when the 
price of gasoline hits $3, or if it were to go up to $4, you 
will see the higher it goes, the stronger the reaction will be.
    But that is in the United States, but oil is priced 
differently, different areas around the world. Some consumers 
are shielded from high prices, others exposed to it. So the 
reaction globally is very uneven.
    Senator Portman. Any other responses?
    Mr. Jones. Yes, just picking up on the global response, I 
mean, a lot of countries are less well positioned than the 
United States to handle high prices, and they are price takers. 
It will have an impact on their economies.
    I mean, I had a chart in my testimony where I talked about 
the oil burden. Basically, at $100 oil, you are getting up to 
about 5 percent of world GDP going for oil imports. In the past 
when that has happened, it has been a harbinger of a recession.
    Whether or not it would occur this time, nobody knows. But 
if that price were sustained for all of 2011, we would have 
concerns of the economic impact.
    Mr. Diwan. There is one last element which is important, 
which is the value of the dollar. Because a lot of countries 
pay for oil in dollar, and if dollar is rising or the declining 
also have an impact into that equation.
    Senator Portman. Thank you, Mr. Chairman.
    The Chairman. Thank you.
    Senator Wyden.
    Senator Wyden. Thank you, Mr. Chairman.
    Mr. Burkhard, I want to continue this line of questioning 
that I began with the whole question of financial markets and 
what is going on in the Middle East and this time turn to the 
question of oil that is now in storage. If you take a look at 
the EIA figures, the Energy Information Agency figures on 
inventory, what they show is there are people out there who 
have been holding a lot of barrels of oil in storage 
significantly above the normal inventory levels, sometimes tens 
of millions of barrels.
    Now, through the summer, as the prices climb, the petroleum 
in storage also climb. When the oil was sold off at the end of 
the year, prices dipped. Now we have this whole array of 
immense challenges, obviously, in the Middle East. Mr. Diwan 
said that that is unlikely to actually impact oil supply, but 
oil in storage is rising again at levels well above normal 
inventory levels.
    So my question to you is break down for us what all this 
buying and holding and storage is all about. Because it 
suggests to me, picking up on the theme that you touched on 
earlier, oil in storage is also part of the oil as new gold, 
which is going to be driving investors staking out positions in 
the years ahead that brings a new element of speculation into 
this debate that we are going to have to concentrate on.
    So break down for me what you think this set of changes in 
storage is all about.
    Mr. Burkhard. Part of the oil storage story over the past 
year is investors, companies are responding to market signals 
because the oil market in the U.S. has been generally in a 
state of contango. Now, what the heck is ``contango''?
    Contango is where the price to buy a barrel today is let us 
say it is $90. In the futures market, it means that 6 months 
from now, a year from now, that price could be $95 or $100. So 
that means if I buy a barrel of oil today at $90, I lock in the 
price to sell it at $95, 6 months down the road, I can lock in 
a return.
    So, investors have been responding to that contango 
environment in the oil price. What it is generally signaling is 
the market's expectation that supplies, oil supplies will be 
more valuable in the future. So buy today will pay you more 
later because the market thinks it will be more valuable.
    One of the drivers of that--not the only one, but an 
important one--was last year, in 2010, we saw the second-
largest increase in oil demand globally in more than 30 years. 
So this sense that the oil market will become tighter over time 
is one of the factors that explains the behavior in this 
contango-type environment.
    Senator Wyden. We are going to have to get into contango 
because I will tell colleagues--Senator Murkowski, I don't 
think you were here when I laid out this point that the Wall 
Street Journal talked about. At the beginning of the week, they 
ran their ``Heard on the Street'' column that had a title 
``Unrest Pits Oil Bulls Versus the Gold Bugs,'' basically 
making the discussion for the future essentially where people 
are going to make their bets.
    Obviously, these issues with respect to how oil and gas 
prices get set are complicated, difficult kinds of questions. 
But to me, these questions that are finally making the pages of 
the Wall Street Journal are ones that have gotten short shrift, 
and that is why I think Mr. Burkhard, Mr. Diwan have given us a 
lot of valuable information.
    Mr. Jones, I appreciate your moving toward Mr. Diwan's 
position because when I read your prepared statement, I saw a 
sharp difference between what you were saying and what Mr. 
Diwan was saying that, to me, undervalues how important this 
financial market issue is going to be as we try to get into 
these questions.
    Mr. Chairman, I thank you for this additional round because 
I think oil in storage represents yet another iteration of what 
Mr. Burkhard calls the new gold because this is going to be 
part of what drives the debate about financial assets and where 
they are headed in the future and one I certainly am going to 
spend a lot of time on.
    So I thank you.
    The Chairman. Thank you.
    Senator Hoeven, did you have additional questions?
    Senator Hoeven. Thank you, Mr. Chairman.
    This follows a little bit on my earlier question. You 
talked about looking at supply in this country in a continental 
way with Canada and Mexico, talked about efficiency, talked 
about technology. Of course, Mr. Diwan said, well, you know, 
price drives that. That is important and true in many respects. 
It is interesting, though, once that technology is out there 
and deployed, of course, it tends to bring down the price at 
which you can produce oil or gas or most any other energy at a 
lower threshold, which is very important for our production 
going forward.
    So, with that in mind, I want to ask and maybe start with 
Mr. Diwan because, I mean, obviously, it is price driven. But 
we need to find ways to deploy technology that helps us produce 
more energy in environmentally sound ways and work to bring 
that cost down. So how do we do that? Maybe talk in terms of 
countries around the world that are doing some things that we 
should be looking at doing, and I am really talking from the 
production side.
    Most of your projections you talk about the demand side, 
which I understand. China's incredible growing demand, India, 
so on and so forth. But from the production supply side, talk a 
little bit about that. Who is doing things to produce more? Who 
is using technology in new and innovative ways that is going to 
really have an impact going forward and, again, something that 
we can look at?
    Mr. Diwan. The good new here is really the bright, shiny 
example of how economics work and incentive works and price 
works is the United States. What we have seen in the United 
States over the last 5 years is phenomenal.
    Gas prices increased, and this increase in gas prices have 
triggered a technology called breakthrough. We knew about the 
shale gas. We had an idea a little bit how to go about it. But 
what happened in the United States in terms of breaking the 
code, if you want, and being able to produce that gas and now 
extending that technology to oil is just phenomenal.
    Most oil companies, the large oil companies, the large 
national oil companies drill very few wells every year, and 
they tend to do a lot of experimentation in labs, et cetera. In 
the United States, it is very different. You have a very large 
entrepreneurial sector, both of oil companies and service 
companies. They don't go into labs and think about 3 years how 
we are going to drill that well. They go and they drill it.
    The wells are fairly small. The investments are fairly 
small. Capital is available. Risk capital is available. They 
basically try and try and try and try.
    What we have seen in the gas world is we brought all these 
ingredients together--capital, technology, experimentation, 
resources--and we broke the code of the shales. That has 
tremendous application globally, and that what we have seen 
since is because of that, the natural gas supply increased, gas 
prices went down. So you have that surplus of capital, 
technology, people, material, wells, et cetera, and it shifted 
to oil. This is how we have seen now this tremendous 
development in onshore oil in the United States, which was a 
dead sector 10 years ago, and it was perceived as a dead sector 
with very little future.
    A year and a half ago, we were talking about what is 
happening in the Bakken. Now we are talking about what is 
happening in the Eagle Ford, what is happening in Colorado. So 
it expanded very quickly. At these prices, you can experiment. 
You can try.
    After all, I think over 80 percent of oil wells drilled in 
the world every year are drilled in the United States. So this 
is where you experiment and where this experimentation goes. So 
the question right now is how much the experimentation made in 
the United States can branch out and go and have impact on 
other resources that we know exist, but we couldn't get out 
because prices were too high. We didn't have the technology, et 
cetera. How much we can replicate the example of the United 
States in terms of technology and success.
    That is really the big question, both for gas and for oil.
    Senator Hoeven. I think it is interesting the way you 
describe it and, right, breaking the code in terms of producing 
these different types of energy because it also, over time, 
brings the price down. So other thoughts on what we can do to 
continue that kind of entrepreneurial development here?
    Obviously, price is one. But the regulatory environment? 
What else? I mean, are there other things companies are 
specifically looking for or that you are seeing having a real 
impact on production around the world?
    Mr. Newell. I will just expand a little bit on what was 
said. We are currently at EIA going beyond the domestic 
assessment of shale gas and broadening that internationally to 
assess the potential for shale gas development globally.
    We are working on that. That, depending upon what we find 
there, would tend to enter into our international energy 
outlook, which we also produce each year. Some of the main 
prospects there that we already see certainly include Canada. 
It clearly has shale gas basins, which, in effect, extend 
upward from ours across the border.
    Also, China and some parts of Eastern Europe seem to be 
promising places. But my sense is this has been very much 
driven by market response to high prices that existed at one 
point, which then encouraged the application of certain 
technology, and then there was innovation in that technology.
    The Chairman. Any other final comment on this?
    Mr. Jones. I was going to ask the Senator, you only focused 
on oil and gas. Are you talking about technologies in general? 
Because there are a lot of examples of innovative policies, for 
example, that are being deployed in Europe and elsewhere on 
renewable energy.
    Senator Hoeven. I really was interested in other energy 
sectors as well, including renewables. But I do see that I am 
past my time. So out of deference, Mr. Chairman, I will 
relinquish back.
    The Chairman. Did you want to make a short response----
    Mr. Jones. Yes. Just shortly, I mean, there are a lot of 
things like feed-in tariffs, for example, or portfolio 
standards that are used in various places. But the key thing 
seems to us to be clear, consistent policies that are as 
technology neutral as possible, but that also take into account 
the development stage of the technology.
    A lot of technologies need a hand up, so to speak, to get 
across what is called the ``valley of death'' between the R&D 
of the development of the technology and the full 
commercialization of it because you have got get economies of 
scale. So, those are areas where some countries have 
demonstrated how to get across that valley by supporting 
companies at a key stage of the development of their 
technologies.
    Senator Hoeven. Mr. Chairman? So, if you had some of those 
examples, I would love to get them from you. Any that you think 
have been particularly effective in stimulating production.
    Thank you, Mr. Chairman.
    The Chairman. All right.
    Senator Franken.
    Senator Franken. Thank you, Mr. Chairman.
    Senator Manchin asked why there weren't subsidies for coal, 
and none of you seemed to want to answer that. I don't know if 
it was a rhetorical question, but it seems that coal is doing 
pretty well without subsidies. It is very plentiful. It is very 
cheap, relatively, and relatively, compared to other fuels, 
kind of dirty and, therefore, we don't subsidize it.
    But speaking of subsidies, President Obama has called for 
kind of a suite of cuts in subsidies and tax preferences for 
oil companies. What effect, Dr. Newell, do you think that such 
a cut would have on domestic oil production or gasoline prices?
    Mr. Newell. We haven't specifically evaluated the 
Administration proposals for changes in those tax incentives.
    Senator Franken. OK. Fair enough.
    In a 2009 statement to the Senate Finance Committee--and I 
have this is right here--Alan Krueger, Assistant Secretary for 
Economic Policy and chief economist at the Treasury Department, 
said, and I quote, ``Because we expect little or no effect on 
the world supply of oil, removing these subsidies would have an 
insignificant effect on world oil prices.''
    He goes on to say that the decrease in domestic production 
due to these cuts would be less than 0.5 percent. Even in the 
long run--this might sound rhetorical, but anyone wants to pick 
up on it--doesn't this sound like an industry that doesn't need 
tax benefits and subsidies to survive? Anybody?
    Mr. Burkhard. One thing to keep in mind as you discuss the 
future of the fiscal terms that govern oil and gas companies--
and again, I am not an expert on subsidies. So, but one aspect 
to keep in mind is American oil and gas companies are competing 
in a very competitive global marketplace. How they are taxed 
here or at home can affect how they can compete against 
companies from Asia, Europe, or other places.
    So I don't have a specific answer, but I think having that 
global----
    Senator Franken. The largest 5 oil companies in the last 
decade have made over $1 trillion in profits. 2010 profits were 
double that of 2009. Now we have seen ads from these companies 
talking about how much they are doing to invest in alternative 
energy production. You see it all the time. They are feel-good 
ads, I think.
    I remember I felt great about BP because it had the little 
green thing. It was beyond petroleum. I think everyone in 
America thought like, ``BP, that is the future. Boy, that is 
great.'' I loved those ads. Then we learn that BP had like the 
worst safety record of any of these oil companies.
    So these ads, I am wondering how much really are these 
companies doing, investing in alternative energy? I mean, Mr. 
Diwan, you said that oil and gas companies are in the business 
of oil and gas. Isn't this really what they are doing 
negligible?
    Mr. Diwan. They are oil and gas companies. I repeat that. 
There is a scale issue. These are huge companies. I mean, Exxon 
is the largest company in the world. Chevron is $200 billion 
capitalization. The renewables business is very small.
    So even if they are doing a lot, it would not be material 
for the companies.
    Senator Franken. But it would be material for the world of 
renewables?
    Mr. Diwan. Correct. But they are companies. I mean, they 
have a mission, and that is what they are doing.
    The scale issue is that you wouldn't expect these large 
companies to be the key innovator, investor, et cetera. I mean 
just from an economic perspective. So we can't ask them to be 
what they are not. They might pretend to be something that they 
are not, but that is a different issue.
    Senator Franken. OK. So you can't ask them to be what they 
pretend?
    Mr. Diwan. Yes.
    Senator Franken. OK. I will write that one down.
    But going back, Mr. Burkhard, to my question, you were 
saying that they have to compete on a world basis. They are 
doing unbelievably well, right?
    Mr. Burkhard. They----
    Senator Franken. That is a relative term, ``unbelievably.'' 
But they are doing very well. I mean, if Exxon makes $9 billion 
this quarter, that is--do they really need these subsidies? Do 
they really need these tax preferences?
    Mr. Burkhard. I mentioned earlier that oil companies are 
price takers and not price makers. There, the level of their 
revenue, which is large, the level of their capital 
expenditures is large. When prices are high, that we see what 
the results are. So they are a reflection of what has been 
happening in the global oil market.
    Last year, we saw Chinese oil demand grow 10 percent, 10 
percent in 1 year from China.
    Senator Franken. So I think your answer to my question is, 
no, they don't really need these subsidies. So that is what it 
sounds like. That is my interpretation. You don't have to nod 
or agree. But for the record, he wasn't nodding.
    [Laughter.]
    Senator Franken. Thank you, Mr. Chairman.
    The Chairman. Senator Coons.
    Senator Coons. Thank you, Mr. Chairman.
    I would like to follow up on the colloquy with both Senator 
Hoeven and Senator Franken. Ambassador Jones, you were talking 
about, I believe, the valley of death and other nice ways to 
describe the challenges of early stage commercialization and 
scale-up of innovations.
    To the exchange you just had with Senator Franken, Mr. 
Burkhard, there is a real question in my mind about the 
appropriate role of the Federal Government in either 
subsidizing ongoing oil and gas exploration and development or 
alternative energy technologies. The projections that are made 
in the World Energy Outlook for the makeup of the total sort of 
global energy picture in 2035 is a bracing reminder that this 
is largely a petroleum-based economy and will remain so for 
much of the next few decades.
    You mentioned in the conversation with Senator Hoeven, he 
asked for some insights about how we could be more effective, 
what other countries are doing. I would welcome input from any 
member of the four who are in front of us, the panel, how we 
are most likely to be successful in securing capital investment 
and job growth in the United States as renewable energy 
technologies scale up.
    Given the numbers you gave, it seems to me as if wind and 
hydropower have the largest potential, and solar comes next. 
Admittedly, they are small in scale in the global economy. But 
there is a great deal of interest in them in most of our home 
States.
    So, the question is if we have to choose between continuing 
essentially to expend Federal dollars in subsidizing oil and 
gas development, drilling, distribution or in providing 
subsidies that will encourage and accelerate the development of 
renewables, how can we have the best bang for the buck in terms 
of employment and deployment, the creation of jobs in the 
United States and the deployment of technologies that have 
positive long-term opportunities for us?
    I also just wanted to clarify something. I assume, from 
some of these projections about the renewables sector, that 
most of the growth will come outside the United States, that 
the actual use of renewable source energies will be mostly in 
China and less in the United States. But I may have misread 
that in the materials I looked at before coming today.
    So I would appreciate your wading through the complicated 
question. I would be happy to focus it if any of you want to 
take a particular piece of it.
    Mr. Newell. I will just quickly respond to the last part of 
your question in terms of the magnitude of renewable energy 
deployed into the United States relative to the rest of the 
world. You are correct, but the U.S. is a small fraction of the 
entire world.
    So, one would expect that----
    Senator Coons. We tend to forget that.
    Mr. Newell. Yes. So the other key factor there is that the 
U.S. need for energy is growing much more slowly than it is in 
other parts of the world. So, key factors are how big we are 
currently, and the growth is predominantly elsewhere in terms 
of energy consumption. So, that really does reorient both 
energy consumption as well as different types of energy supply. 
Growth is in other parts of the world.
    Our assessment looking out over the next 25 years is that 
energy consumption by the OECD countries, of which the United 
States is one, is growing modestly-roughly flat whereas overall 
energy consumption globally will have perhaps 50 percent growth 
over the next 25 years. So, very significant global growth, 
most of it outside of OECD.
    Senator Coons. I assume also some of it in countries that 
don't have an existing power distribution system or grid so 
that renewables may grow more rapidly in remote parts of the 
world where there is no existing infrastructure so that you are 
literally leapfrogging the existing largely petroleum-based 
infrastructure in the United States.
    Ambassador.
    Mr. Newell. That has certainly been one of the interests in 
solar energy technology and other distributed energy 
generation, yes.
    Mr. Jones. I just would like to add to Richard's comment 
that there is probably a lot of headroom still left for 
expansion in energy consumption overseas, especially in China. 
Because even with all the growth that they have seen, I think 
China's per capita energy consumption is like a third of the 
OECD average. So they can keep growing for a long, long time.
    That is, I think, what is going to drive the development of 
energy consumption. The energy industry, technology, everything 
is going to be driven because you have got a huge mass of 
people there that have--basically, their growth has become 
self-sustaining. They are no longer dependent on imports, and 
their disposable income has risen dramatically, as we heard, 
and they have got a lot more development to undertake, and they 
are going to do it. It is going to change the world.
    They are not alone. India is the same. Maybe not quite as 
far up the development scale as China, but they are also going 
through this. So that is why in the International Energy 
Agency, we are very concerned about the growth in the 
technologies they use. If they use coal, we really are going to 
have a tremendous increase in carbon dioxide in the atmosphere, 
for example.
    It is not just carbon dioxide, it is other pollutants 
associated with coal. Those pollutants can cross the Pacific 
Ocean. So we are very concerned about how China and India 
satisfy their insatiable appetite for energy over the next 2 to 
3 decades. It matters a lot for our welfare here.
    Even though we are not consuming increasing amounts of 
energy, if they are, it is going to affect our environment. It 
is going to affect our prices and our economy.
    The Chairman. Any other comment anyone wanted to make in 
answer to this?
    Let me then see, Senator Murkowski, did you have additional 
questions?
    Senator Murkowski. No, Mr. Chairman.
    The Chairman. Senator Coons, did you have additional 
questions?
    Senator Coons. No, Mr. Chairman.
    The Chairman. Thank you all very much. I think it has been 
a useful hearing, and we appreciate your expertise and your 
time today.
    Thank you. That concludes our hearing.
    [Whereupon, at 11:55 a.m., the hearing was adjourned.]


                                APPENDIX

                   Responses to Additional Questions

                              ----------                              

                              Department of Energy,
                         Energy Information Administration,
                                     Washington, DC, July 25, 2011.
Hon. Jeff Bingaman,
Chairman, Committee on Energy and Natural Resources, U.S. Senate, 
        Washington, DC.
    Dear Mr. Chairman: On July 22, 2011, you were provided answers to 
47 questions submitted by Senator Sanders, Murkowski, and Cantwell 
following the February 3, 2011, testimony by Richard Newell before the 
United States Senate Committee on Energy and Natural Resources.
    The Department of Energy provided answers to questions outside of 
the U.S. Energy Information Administration's purview. Specifically, 
Senator Murkowski's question number three (Liquid Fuel Imports) 
directed to Dr. Richard Newell and questions one (US Energy Companies 
Versus National Oil Companies), three (Major Oil Discoveries), four 
(Crisis-Drive Energy Policy), five (Clean Energy Standard), seven 
(Foreign Oil Dependence), 12 (Impact of Federal Policies), and 13 
(Modular Nuclear Reactors) directed at all panelists. Senator 
Cantwell's question 4a (Effect of New Production Technologies on 
Prices), 8 (Implications of Business as Usual) and 11 (How to Increase 
Energy Diversity) asked of all witnesses.
            Sincerely,
                                     Howard K. Gruenspecht,
                                              Acting Administrator.

              Responses to Questions From Senator Sanders

                         CLEAN ENERGY STANDARD

    Question 1. The President has proposed a ``clean energy standard'' 
that would require 80 percent of our electricity to come from ``clean'' 
sources by 2035. Based on the Energy Information Administration's 
resources and data, if such a policy was established and it permitted 
natural gas, nuclear, and coal with carbon capture and sequestration to 
qualify either in whole or in part for credits toward the 80 percent 
goal, what impact, if any, would this standard have on renewable energy 
production from wind, solar, geothermal, and biomass?
    What are your projections for solar in particular under such a 
standard; would we be likely to see any significant solar energy 
deployment under this standard? What percentage of ``clean energy'' in 
2035 do you foresee, under the new standard, as coming from solar, both 
photovoltaic and concentrated solar.
    If such a policy included a tier system, whereby at least one tier 
of the 80 percent requirement (perhaps 25 percent) was stipulated for 
renewable energy production, would that serve to increase projected 
renewable energy deployment under this standard?
    Answer. The clean energy goal proposed by the President has not yet 
taken the form of a specific legislative proposal. Without the specific 
structure of a proposed policy, EIA cannot provide reliable estimates 
of its potential impacts.
    In the past, however, EIA has analyzed several legislative 
proposals for renewable portfolio standards, renewable energy 
standards, clean energy standards, and similarly-structured policies to 
require minimum shares for specific generating resources. Through these 
analyses, EIA has found that numerous policy details can significantly 
influence the impact of the policy on key indicators such as the 
generation mix, cost to consumers, cost to industry, and even 
achievement of the targeted generation share. These key parameters 
include the existence and level of any limits on the price of 
renewable/clean energy credits; exemptions for certain classes of 
utilities or exclusion of certain generation from requirements of the 
program; the ability to ``bank'' early compliance credits; and the 
existence of ``credit multipliers,'' ``set-aside'' targets, and tiered 
compliance systems that incentivize specific technologies within the 
suite of eligible technologies. However, since the broad outline of the 
President's proposed goal is different from the proposals previously 
analyzed by EIA, one should be cautious in relying on earlier analyses 
for guidance on the new goal. When this goal is more completely 
specified as a policy proposal, EIA will be in a better position to 
evaluate its potential impacts.

                           OIL AND EFFICIENCY

    Question 2. As you know, the current greenhouse gas and fuel 
economy standards will take us to roughly 35.5 miles per gallon for 
cars and light trucks by 2016, and the Administration has announced 
plans to develop new standards through 2025. What would the impact be 
on oil consumption and greenhouse gas emissions in the United States if 
the Administration announced a new standard of 60 miles per gallon by 
2025, as has been encouraged by a bi-partisan group of Governors and a 
number of retired senior military officers, and which is still somewhat 
less ambitious than the announced standards for fuel economy in Europe? 
How many barrels of oil would we save compared to business as usual?
    Answer. EIA has not performed a specific analysis of increasing 
light-duty vehicle fuel economy to 60 miles per gallon by 2025. Our 
forthcoming Annual Energy Outlook 2011 (AE02011), to be released this 
spring, will include alternative scenarios of increased light-duty 
vehicle fuel efficiency.

                                 SOLAR

    Question 3a. Does EIA have a projection for when residential and 
commercial solar photovoltaic energy will reach grid parity in cost for 
a significant segment of electric customers in the United States (such 
as 20 percent or 50 percent of electric customers)?
    Answer. EIA does not have a projection for when the price of 
residential and commercial solar photovoltaic energy will be at or 
below the retail price of electricity from the grid for a significant 
number of electric customers. The cost of electricity from the grid 
varies significantly across the Nation. Also, grid electricity and 
electricity produced by on-site photovoltaic systems are not identical 
products, since the former is generally available to follow load 
requirements while the latter follows the availability of the 
intermittent solar resource.
    In EIA's Annual Energy Outlook 2011 Reference case, near-term 
average growth in residential and commercial solar photovoltaic 
generation is 26 percent per year from 2010 through 2016 while the 30-
percent Federal investment tax credit is available. From 2017 through 
2035, after the Federal tax credit for residential systems expires as 
currently scheduled and the business investment tax credit returns to 
its permanent 10-percent level, average annual growth in residential 
and commercial solar generation slows to 1 percent per year, even as 
technology costs are projected to decline. The rate of adoption after 
2016 indicates that purchasing electricity from the grid is projected 
to remain the economic choice for most residential and commercial 
customers in the United States through 2035.
    Question 3b. How would it impact EIA's projections for solar energy 
deployment, as compared to business as usual, if solar energy reached 
parity with the price of electricity from the grid in 50 percent of the 
United States by 2013?
    Answer. EIA has not analyzed a scenario with the price of solar 
energy at or below the price of electricity from the grid in 50 percent 
of the United States by 2013 and cannot provide estimates of the 
potential impacts of this specific scenario. EIA's Annual Energy 
Outlook 2011 (AE02011) Reference case provides an illustrative example 
of the impacts that solar costs can have on projected deployment. In 
the Reference case, electricity prices to residential and commercial 
consumers are expected to remain stable through 2035 in real terms. 
Near-term average growth in residential and commercial solar 
photovoltaic generation is 26 percent per year from 2010 through 2016 
while the 30 percent Federal investment tax credit is available, as is 
currently scheduled. From 2017 through 2035, after the Federal tax 
credit for residential systems expires and the business investment tax 
credit returns to its permanent 10-percent level, average annual growth 
in residential and commercial solar generation slows to 1 percent per 
year, even as technology costs are projected to decline. The full 
release of the AE02011 will contain a number of additional cases that 
assume lower technology costs or extended incentive policies for solar 
energy. These cases can be used to better understand the potential 
deployment of these technologies under more favorable conditions than 
may be found in the Reference case.

                               GREEN JOBS

    Question 4. Do you have data on solar photovoltaic energy and wind 
energy utilized in this country that includes breakdowns for country of 
manufacture of solar panels and wind turbines by year, and job creation 
related to solar and wind manufacturing, installation, and maintenance 
in the United States? If you do not have this type of data, can you 
inform the committee whether you could supply such data and whether you 
plan to, similar to your efforts in documenting manufacturing of 
geothermal heat pumps?
    Answer. EIA collects some data on the import of solar PV generating 
equipment to the United States if it passes through a U.S. 
manufacturer. In 2009, U.S. PV manufacturing companies reported 
shipments of 987 MW of solar photovoltaic equipment, including cells 
and modules, and 587 MW of imported solar photovoltaic equipment. 
During that year, U.S. solar PV manufacturers also reported solar 
photovoltaic exports of 462 MW. While EIA does not collect import or 
manufacturing data for the wind industry, a report released by Lawrence 
Berkeley National Laboratory in August of 2010 indicates that in 2009 
the U.S. imported 39 percent of wind turbine equipment on an equipment-
cost basis.
    Although EIA collects import and export data on shipments of 
photovoltaic equipment from U.S. manufacturers, and while this data can 
be useful in illuminating gross trends in equipment sourcing for this 
market, this data can only provide limited insight into the actual 
point-of-origin composition of the installed photovoltaic capacity 
market. In the current market, component manufacturing activities may 
occur in different locations for the same finished, installed module. 
Even core components like the photovoltaic cells can pass through 
several locations, perhaps with initial cell casting in the United 
States, shipment to a foreign facility for assembly into a finished 
module, and re-shipment to the United States for integration with other 
components into a final installed system. EIA does not track the 
movements of specific shipments, and thus cannot disaggregate the 
specific path-of-travel of any given module. Neither does EIA track 
photovoltaic modules to the final point-of-installation, and thus 
cannot provide installed module locations or other statistics on 
installed capacity for most photovoltaic modules. Finally, EIA does not 
track shipments that do not have a domestic manufacturing component, 
and may miss modules that are entirely manufactured overseas and 
shipped to U.S. installers without passing through a U.S. manufacturer 
along with way.
    Although the researchers at Lawrence Berkeley National Laboratory 
have access to different data sources for their estimate of wind 
equipment imports, they also report problems with accounting for cross-
national, multi-stage manufacture of this complex product.
    EIA survey respondents report over 14,000 jobs in 2009 in 
photovoltaic manufacturing. EIA does not have sufficient data on wind 
or solar distribution and installation industries to estimate industry 
employment. Employment estimates for specific industries are usually 
provided by the U.S. Bureau of Labor Statistics, which collects primary 
labor survey data and is better equipped than EIA to provide industry-
specific estimates of U.S. employment trends for other manufacturing, 
distribution, and installation activities.

             Responses to Questions From Senator Murkowski

                            CELLULOSIC FUELS

    Question 1. It appears that your agency has forecast continued--and 
significant--shortfalls in cellulosic biofuels production. Can you 
explain where cellulosic technology is today, why it has been so slow 
to take off, and how far below our targets we may be in 2022? What will 
it mean for the Renewable Fuel Standard if we continue to fall so 
acutely short of its annual production mandates?
    Answer. A review of the industry reveals several significant 
factors that have contributed to the delay in available advanced 
biofuels production. Studies show that capital costs have risen 
significantly above the original expectations for these technologies. 
In addition, biomass feedstock costs have also been substantially 
higher than originally expected and process yields have not achieved 
goals. At least 6 planned facilities have delayed startup by 6 months 
or longer, while only 3 plants have reached the startup phase--with 
many more awaiting financing. Many in the industry face important 
financial, legal, and technological issues that have yet to be 
resolved.
    A direct consequence of the slow market penetration of the 
technology is the requirement that EPA make available for sale 
cellulosic biofuel credits at costs significantly below the current 
production cost for the cellulosic biofuels. If this were to continue, 
EPA would need to evaluate whether to utilize the discretion authorized 
by Paragraph (7) of section 211(o) of the Clean Air Act to also reduce 
the advanced and total schedules which would ultimately delay the 
timetable for attainment of the total volume target for renewable motor 
fuels under the Renewable Fuel Standard.

                            EPA REGULATIONS

    Question 2. Understanding that proposed legislation and regulations 
are not incorporated into the agency's forecasts. [sic] Now that the 
EPA's climate regulations have begun to go into effect, will those be 
included in your agency's work? Is it possible for EIA to model those 
regulations? Can you tell us anything about what you expect their costs 
to be, on energy prices or for our economy as a whole?
    Answer. While EPA is developing regulations pertaining to 
greenhouse gas (GHG) emissions from power plants and other large 
sources, together with the states, it has not released specific 
standards for different plant types. Without such standards, EIA cannot 
effectively model any impacts of EPA's proposed regulations. EIA is 
monitoring EPA's progress in developing the rules, and when more 
information on the specific standards is available, we will adjust our 
analysis accordingly.
    EIA does try to capture current market behavior with respect to 
concerns about GHG emissions and their potential regulation in its 
modeling. In order to account for the uncertainty surrounding 
investment decisions in GHG-intensive technology, and to reflect 
current market behavior, EIA assumes a 3 percent increase in the cost 
of capital for new coal-fired power plants and other GHG intensive 
technologies, which is one of the reasons that relatively few new coal-
fired power plants beyond those already under construction are added in 
the AE02011 Reference case projections. In addition, 10 states in the 
Northeast are required to meet the requirements set by the Regional 
Greenhouse Gas Initiative (RGGI) and this is represented in the EIA 
analyses.

                          LIQUID FUELS IMPORTS

    Question 3. Your agency has forecasted that liquid fuels imports 
will decrease by just a fractional amount over the next 25 years, from 
9.7 million barrels a day last year to 9.4 million barrels a day in 
2035. Assuming that accounts for higher fuel economy standards and the 
emergence of advanced vehicles and biofuels. Can you describe any other 
actions we might take, such as increasing domestic oil production, that 
would cut our foreign oil dependence?
    Answer. The EIA projections you refer to represent a ``business as 
usual'' forecast that includes existing policies but not new 
initiatives. In March, the President laid out a bold goal of cutting 
goal imports by one-third by the year 2025, relative to 2008. To 
achieve that goal, the Administration is committed to expanding the 
safe and responsible production of domestic oil and natural gas; 
improving the efficiency of our vehicles; and promoting innovation in 
new technologies like advanced biofuels and electric vehicles.

        US ENERGY COMPANIES VERSUS NATIONAL OIL COMPANIES (NOCS)

    Question 1. Can you describe how U.S. oil and gas producers operate 
with any disadvantages relative to National Oil Companies such as the 
OPEC owner companies?
    Answer. National oil companies (NOCs) now control over three-
quarters of the world's oil reserves. The OPEC NOCs have the obvious 
advantage that the bulk of conventional oil resources are located in 
their home countries and they usually have exclusive access to these 
oil reserves. About 40 percent of the world's current production comes 
from OPEC and this oil is relatively inexpensive to produce. How OPEC 
manages its supply has an important impact on world markets. OPEC is 
capable of expanding their low-cost production and OPEC has 
historically played a role in adjusting supplies of oil in response to 
growing demand.

                              OIL MARKETS

    Question 2. If only about 3 percent of the world's oil travels 
through the Suez Canal and the SUMED pipeline, yet we are seeing some 
influence on the global commodity price resulting from the instability 
around the Suez, does this indicate seemingly small disruptions, real 
or potential, can have comparatively large impacts on global markets?
    Answer. The market impact of such a supply disruption can go beyond 
volumetric loss. Although Egypt is not a large exporting country, it is 
important to the oil markets for several reasons: as a transit 
corridor, because of its very high profile in a broader region--the 
Middle East and North Africa--that is of critical importance to energy 
markets, and because of the risk of unrest rippling through the rest of 
the region. Earlier this year, as unrest mounted in Egypt, the market 
grew concerned that oil traffic though the Suez Canal and the Sumed 
(Suez-Mediterranean) pipeline might be halted. The market also became 
increasingly concerned about the risk that unrest and potential 
disruptions could spread--as eventually happened in Libya. Also, even 
though the disruption occurred against a context of relatively 
comfortable spare oil production capacity, and total Organization for 
Economic Cooperation and Development (OECD) oil inventory levels are 
generally comfortable by historical standards, the latter were not 
evenly distributed throughout the world and were markedly tighter in 
Europe, the primary market for Libyan crude, than in North America, The 
European Brent crude oil market had been tightening before the start of 
unrest.
    At the same time, there is not enough surplus capacity to offset an 
unlikely scenario where the oil supplies would be halted in the 
countries in the Middle East and North Africa where political protests 
have taken place. These countries produce a combined 30.4 million 
barrels per day of petroleum liquids, or 35 percent of the world's 
total supply. In addition, these countries have virtually all of the 
world's spare production capacity. Because of the large amount of 
global oil supplies produced in these areas, markets have been 
concerned that political protests in the Middle East and North Africa 
could potentially have large effects on world oil markets.

                         MAJOR OIL DISCOVERIES

    Question 3. What was the impact on global investment and markets 
when the Tupi field was discovered off Brazil in 2006, and how does the 
addition of a multibillion barrel discovery impact the host nation and 
the industry?
    Answer. The first discoveries in the pre-salt area offshore Brazil 
were located in the Tupi field in the Santos Basin in late 2006. 
Petrobras (Brazil's state-owned oil company) confirmed that the Tupi 
field alone holds 5-8 billion barrels of light grade crude oil and is 
at a depth of three miles below the surface of the ocean. With an 
estimated potential of 50-80 billion barrels of oil equivalent in the 
pre-salt area (due to its geologic location under a cap of salt), 
Brazil's oil production potential represents one of the most 
significant finds in the industry over the last three decades. 
President Dilma Rousseff is deeply involved in setting Brazil's 
policies on oil production.

Impact on global investment and markets
    Brazil is producing approximately 100,000 barrels per day this year 
in the pre-salt area. Production could reach 1 million barrels per day 
by the middle of this decade. Brazil's oil production has risen 
steadily in recent years, and the country has recently become a net oil 
exporter. The new pre-salt discoveries are world class and some 
analysts believe Brazil has the potential to become a significant 
exporting country. However, considerable challenges must still be 
overcome in order to bring these reserves to market. The difficulty of 
accessing reserves, considering the large depths and pressures involved 
with the pre-salt oil production, represent significant technical 
hurdles that must be overcome. Further, the scale of the proposed 
expansion in production will also stretch Petrobras' exploration and 
production resources and Brazil's infrastructure, as well as its 
financial capacity to meet investment demands.
    Many countries, either through direct negotiation with the 
Brazilian government or through their respective National Oil Companies 
(NOC) or conglomerates, are aggressively seeking access to these new 
resources.

                      CRISIS-DRIVEN ENERGY POLICY

    Question 4a. The Outer Continental Shelf Lands Act was implemented 
after the Arab oil embargo and subsequent price controls and economic 
shocks of the 1970's, as was the authorization of the Trans-Alaska 
Pipeline System. Are these patterns of crisis and response an 
unavoidable trend in U.S. energy policy?
    Answer. The United States has naturally paid increased attention to 
energy policy after particular events such as the oil embargo of 1973 
and other periods of sharply increased energy prices. Nonetheless, 
important energy initiatives have been enacted in more normal times due 
to continuing concerns on the part of the Congress, the Administration, 
the States, U.S. industry, and the public. Examples of important policy 
initiatives that have been enacted without any shocks to the energy 
supply system include the Energy Policy Act of 2005 and the American 
Recovery and Reinvestment Act of 2009 (ARRA). ARRA included more than 
$80 billion for increasing generation from renewable energy sources; 
expanding manufacturing capacity for clean energy technology; advancing 
vehicle and fuel technologies; and building a bigger, better, smarter 
electric grid, all while creating new, sustainable jobs. Other examples 
are described in the following answer.
    Question 4b. Is the U.S., in your group's view, more proactive or 
reactive in its energy policy?
    Answer. While an answer necessarily has a subjective element, there 
are reasons to believe that the United States has become more proactive 
in its energy policy compared to past years. For example, there have 
been other reasons besides high energy prices to develop advanced 
energy technologies. Concerns over climate change have motivated clean 
energy policies even when energy prices have been low. Often, 
environmental and energy security concerns line up to redouble our 
energy policy efforts. We achieve both objectives, for instance, when 
we improve energy efficiency. New requirements for higher motor-vehicle 
efficiency and low-emission biofuels fuels are moving the 
transportation sector away from oil dependence while also reducing 
greenhouse gas emissions.

                         CLEAN ENERGY STANDARD

    Question 5. Should we learn a lesson from the Renewable Fuel 
Standard, which has fallen short of expectations, when considering an 
aggressive electricity mandate like the one the President is calling 
for? How likely is it that we will create unforeseen problems if we put 
a CES in place? To name just one example, will transmission problems--
and our inability to add significant amounts of renewable energy to the 
grid--become the new ``blend wall''?
    Answer. The President's Clean Energy Standard is designed to 
achieve the deployment of clean energy technologies as cost-effectively 
as possible. Rather than picking winners and losers among technologies, 
the CES would include a very broad range of energy sources, including 
renewable (like wind, solar, hydro, and geothermal) as well as nuclear, 
efficient natural gas, and clear coal. To address your specific 
question on the issue of transmission needs under a CES, the amount of 
new transmission that would be needed relative to the transmission 
needed under `` business as usual'' is difficult to predict, given that 
the CES does not choose among clean technologies. To the extent that 
expanding renewable energy generation creates needs for new 
transmission infrastructure, the Administration is working hard to 
address those needs. For example, the President's FY 2012 budget 
proposal includes two new Energy Innovation Hubs, one devoted to Smart 
Grid Technologies and Systems and another to Energy Storage, 
technologies that can ease the integration of variable renewables into 
the electric grid. This is in addition to the research and development 
work in these areas already funded by the Department of Energy in its 
Office of Science, Office of Electricity Delivery and Energy 
Reliability, and Office of Energy Efficiency and Renewable Energy. 
Moreover, the Administration recently announced the creation of a 
Renewable Energy Rapid Response team to address barriers to the 
permitting and siting of renewable projects, including transmission 
lines.

                          ALTERNATIVES TO OIL

    Question 6. How substantial of an impact do you believe advanced 
biofuels, electric vehicles, and other technologies will have on 
petroleum consumption by 2020? By 2030?
    Answer. The Annual Energy Outlook 2011 Reference case projects that 
advanced biofuels will displace 300,000 barrels per day of crude 
consumption by 2020 (3 percent of projected refinery crude inputs) and 
830,000 barrels per day by 2030 (6 percent of projected refinery crude 
inputs). Although sales of plug-in electric vehicles, which includes 
battery electric vehicles and plug-in hybrid electric vehicles, 
increase over the projection period and reach 2 percent of new light 
vehicle sales by 2030, they account for less than 1.5 percent of all 
light-duty vehicles in use by that time and have only a modest impact 
on light-duty vehicle petroleum demand. Hybrid vehicles, diesel 
vehicles, and other advanced conventional vehicle technologies (e.g., 
turbo charging and light weight materials) are projected to make more 
significant contributions to fuel economy improvement in the Reference 
case projection. The cumulative effect of increased use of biofuels, 
advanced biofuels, and fuel economy improvements results in a slight 
decline in light-duty vehicle petroleum demand from current levels over 
the Reference-case projection period, despite the significant increase 
in the number of vehicles and vehicle miles of travel.

                         FOREIGN OIL DEPENDENCE

    Question 7. If Congress had allowed the Coastal Plain of ANWR and 
other parts of Alaska to be opened to production, in 1995 for example, 
we would be producing domestic oil at a considerably higher rate. What 
would that mean for our nation's energy security? Would we be more 
protected, or less protected, from civil unrest in Egypt, Jordan, and 
other parts of the Middle East? In the event of a supply disruption 
abroad, would we be better equipped, or less prepared, to deal with 
import shortages?
    Answer. The amount of oil produced would depend on a number of 
economic, geologic and technical factors, with production not occurring 
until about ten years after the beginning of exploration. The most 
recent USGS evaluation of potential oil reserves from the area occurred 
in 1998. USGS estimated a 95 percent probability that at least 5.7 
billion barrels of technically recoverable undiscovered oil are in the 
ANWR coastal plain and a 5 percent probability of at least 16 billion 
barrels. The mean estimate was 10.3 billion barrels.
    Based on these estimates, EIA has conducted several analyses of the 
potential annual production from this area. In its most recent analysis 
in 2008, EIA concluded that the opening of the ANWR 1002 Area to oil 
and natural gas development was projected to increase domestic crude 
oil production starting in 2018 (assuming exploration started in 2008). 
In the mean resource case, production peaks at 780,000 barrels per day 
(bpd) in 2027 and declines to 710,000 bpd by 2030.
    According to the EIA's 2008 analysis, additional oil production 
resulting from the opening of ANWR would be a small portion of total 
world oil production. Based on the most recent estimates of U.S. 
production and imports from the EIA Annual Energy Outlook 2011, ANWR 
production of approximately 750,000 bpd could potentially displace 
between 8 and 9 percent of U.S. oil imports annually or about 1 percent 
of world production. The impact on world oil prices--and therefore U.S. 
crude oil and gasoline prices--would be correspondingly small; in the 
mean resource case, EIA estimated a reduction in low sulfur, light 
crude oil prices of $0.75/barrel (translating into less than 2 cents 
per gallon of gasoline). As a result the opening of ANWR would have 
little effect on U.S. energy security in terms of our vulnerability to 
high world oil prices.
    Because oil is priced in a global market, however, the opening of 
ANWR would have little effect on the consequences of political unrest 
or a supply disruption in the Middle East. The main impact of these 
events would likely be higher oil prices worldwide, which would 
adversely impact the economies of all oil-consuming nations, including 
the United States. That is why the President is committed to reducing 
our nation's overall consumption of oil, for example through increased 
vehicle efficiency, at the same time that it is taking steps to promote 
safe and responsible oil and gas development and alternative fuels.

                          PROJECTED OIL PRICES

    Question 8. In a hypothetical scenario of September 2012, with 
unemployment down to 8%, the economy growing at greater than 3% each 
quarter, and world markets on the upswing, where would you forecast the 
price of oil?
    Answer. In EIA's March's Short-Term Energy Outlook, U.S. gross 
domestic product (GDP) growth for 2011 and 2012 was 3.2 percent and 2.8 
percent, respectively, with the unemployment rate averaging 9.0 and 8.5 
for 2011 and 2012, respectively. EIA projects U.S. liquid fuel 
consumption to increase by an average 130,000 barrels per day in 2011 
and a further 190,000 barrels per day in 2012, while world consumption 
grows by roughly 1.6 million barrels per day in each year. The price of 
West Texas Intermediate crude oil is projected to be $102 in 2011 and 
$105 in 2012.
    With the somewhat higher domestic economic growth and lower 
unemployment rate posited by your question, a modest further increase 
in U.S. liquid fuels consumption would be expected but the effect on 
oil prices would be small given that the consumption increment is a 
very small fraction of projected world oil demand.

                          OFFSHORE MORATORIUM

    Question 9. How does the amount of oil that could be taken offline 
by unrest in the Middle East compare to the amount of production that 
will be lost because of the absence of new exploratory permits in the 
Gulf of Mexico, and the absence of resumed exploratory operations?
    Answer. The impacts on Gulf of Mexico (GOM) production associated 
with the stoppage, now ended, of deepwater development and exploration 
drilling in the aftermath of the April 2010 Macondo well blowout 
involve significantly lower volumes than the losses of production from 
the Middle East and North Africa that are the current focus of oil 
market attention. For example, roughly 1.5 million barrels per day of 
crude oil supply has been shut down since March 2011 due to the 
conflict in Libya. EIA's July 2011 Short-term Energy Outlook (STEO) 
assumes that only half of this production will be restored by the end 
of 2012. Because of the large amount of global oil supplies produced in 
the Middle East and North Africa (about 30.4 million barrels per day), 
markets continue to be concerned that political protests in these, 
regions could potentially lead to further disruptions that could have 
large effects on world oil markets.
    In contrast, oil production in the Federal GOM is forecast to be 
close to its 2009 level in 2010 once final information from the Bureau 
of Ocean Energy Management is incorporated in EIA's data. While EIA's 
expects Federal GOM production to decline in both 2011 and 2012, the 
change from the 2009 level, at 0.07 million barrels per day in 2011 and 
0.17 million barrels per day in 2012, is much smaller than the Libyan 
outage, and not all of this change can be directly attributed to the 
stoppage, now ended, in deepwater drilling following the Macondo well 
blowout.

                           ECONOMIC RECOVERY

    Question 10. Adam Sieminski, the Chief Energy Economist for 
Deutsche Bank, recently wrote that ``We estimate that a 10 dollar rise 
in the oil price subtracts approximately 0.5 percentage points off U.S. 
growth.'' Do any of you agree with Mr. Sieminski's assessment? Would 
this calculation change if the US supplied 60% of its own oil as 
opposed to importing 60% of its oil?
    Answer. Some caution should be used when attempting to estimate the 
response of the U.S. economy to an oil price change. The magnitude of 
macroeconomic impacts depends on the magnitude of the price shock, its 
persistence, and the relative importance of oil to the economy. A major 
challenge to estimating the magnitude of oil price shocks on the 
economy is that some historically large oil price increases have been 
accompanied by other macroeconomic factors and policies that have also 
impacted aggregate demand. That said, EIA's analysis suggests a lower 
impact of oil price increases on the U.S. economy, implying a rough 
rule of thumb that each $10 per-barrel increase in the price of oil 
lasting for one year would reduce gross domestic product by about 0.2 
percent in that year, as well as in the following year.
    The magnitude of the impacts on the U.S. economy depends upon how 
long the oil price increase lasts, whether the change in the oil price 
is gradual, the oil price level when the price change occurs, and the 
availability of substitutes to oil. Economic impacts vary depending on 
whether the oil price change results from supply constraints or from 
increased demand due to robust economic and income growth. The impact 
on the economy also depends on pre-existing economic conditions 
including the rate of inflation, interest rates, and monetary policy.
    These results would change if the U.S. were not a net oil importer. 
Since the United States imports a large percentage of its oil, the 
terms of trade (the volume of exports needed to purchase a given volume 
of imports) deteriorate when the price of oil increases because U.S. 
consumers pay more for the same amount of oil and are therefore less 
able to purchase other goods.

                            PRICE INCREASES

    Question 11. The head of the Bipartisan Policy Center noted earlier 
this week that ``A one-dollar, one-day increase in a barrel of oil 
takes $12 million out of the U.S. economy. If tensions in the Mideast 
cause oil prices to rise by $5 for even just three months, over 5 
billion dollars will leave the U.S. economy.'' Do any of you disagree 
with that assessment?
    Answer. In 2010, U.S. net crude oil imports averaged around 9.2 
million barrels per day and net petroleum product imports averaged 0,4 
million barrels per day, for a total of 9.6 million barrels per day. 
Assuming the average level of imports did not change in response to the 
price increase or other factors, a one-dollar increase in the price of 
oil would cost about $9.6 million dollars per day in increased import 
costs. Again, holding constant the volume of imports, a $5-per-day 
increase would amount to an increase of about $48 million per day and 
result in a cumulative $4.4 billion in increased import costs over a 
three-month period.

                       IMPACT OF FEDERAL POLICIES

    Question 12. What role does the federal government's stimulus 
policies, and the Federal Reserve's second round of quantitative 
easing, have played in boosting commodity prices? Have these policies 
boosted the price of oil, and, if so, by how much?
    Answer. The price of oil and other commodities is determined by 
many factors related to current economic and market conditions, as well 
as expectations about future conditions. Some major factors affecting 
current oil prices are expectations about the global economic recovery, 
the growth rate of Asian demand, and whether OPEC producers will be 
willing or able to meet demand growth without increased supply from 
non-OPEC producers.
    The American Recovery and Reinvestment Act of 2009 (ARRA), the 
cornerstone of the federal government's stimuluS policies, includes 
measures that provide both upward and downward pressure on oil prices. 
Two overall aims of ARRA are to create new jobs and save existing ones, 
as well as to spur economic activity and invest in long-term growth. 
Historically, increased economic activity has been linked to oil 
demand. Promoting economic growth provides upward pressure to current 
prices through expectations of higher future oil demand.
    Measures funded by ARRA provide downward pressure on oil prices by 
reducing U.S. consumption of oil. The Department of Energy (DOE) is 
investing in energy-efficient and advanced vehicle technologies 
(hybrids, electric vehicles, plug-in electric hybrids, hydraulic 
hybrids, and compressed natural gas vehicles) that will reduce 
petroleum consumption by displacing conventional gasoline-and diesel-
powered vehicles. DOE is also investing ARRA funds to support increased 
production and use of biofuels to directly displace petroleum 
products.\1\
---------------------------------------------------------------------------
    \1\ Department of Energy--Recovery and Reinvestment webpage, at 
http://www.energy.gov/recovery/vehicles.htm, accessed Feb 16, 2011.
---------------------------------------------------------------------------
    According to the Federal Reserve's Statement Regarding Purchases of 
Treasury Securities, the second round of quantitative easing aims to 
``promote a stronger pace of economic recovery and to help ensure that 
inflation, over time, is at levels consistent with its mandate.''\2\ As 
noted earlier, expectations of improved economic recovery provide 
upward price pressure on oil prices as economic activity is commonly 
linked directly to oil consumption.
---------------------------------------------------------------------------
    \2\ Federal Reserve of New York, Operating Policy: Statement 
Regarding Purchases of Treasury Securities, at http://
www.newyorkfed.org/markets/opolicy/operating_policy_101103.html, 
accessed Feb 16, 2011.
---------------------------------------------------------------------------
                        MODULAR NUCLEAR REACTORS

    Question 13. What role do you believe small modular nuclear 
reactors will have in meeting the global demand for electricity? What 
countries are moving forward with this technology and what countries 
are interesting in acquiring these reactors?
    Answer. Small Modular Reactors (SMRs) could play a significant role 
in meeting the global demand for electricity. Many countries desire to 
pursue or expand nuclear energy programs and would see value in 
pursuing SMRs because of their potential benefits, such as lower 
capital costs, greater flexibility in siting due to lesser cooling 
requirements, ability to support smaller electrical grids, capability 
to replace fossil plants that have existing electrical infrastructure, 
and the lower risks of construction delays. Argentina, Japan, Korea, 
Russia, and the United States are moving forward in the development of 
SMR technology. Based on statements by representatives at international 
forums such as IAEA interactions, the following countries also have 
indicated interest in SMRS: Bangladesh, China, Estonia, Ghana, 
Indonesia, Jordan, Kazakhstan, Kenya, Malaysia, Mongolia, Morocco, 
Namibia, Nigeria, Russia, Senegal, Singapore, Sri Lanka, Switzerland, 
and Venezuela.

                            OIL SPILL REPORT

    Question 14. Have you reviewed the recommendations made by the 
Presidents' Oil Spill Commission? Have your conducted any analysis on 
the impact those recommendations, if fully implemented, would have on 
domestic oil production, our import levels, and the global price of 
oil?
    Answer. EIA's Annual Energy Outlook 2011 Reference case includes 
only current laws and regulations and thus our projections do not 
include recommendations of the President's Oil Spill Commission.

                                 CHINA

    Question 15. Can you shed light on what China's energy picture 
really looks like, not just for renewable energy, but also its future 
demand for oil, natural gas, and coal?
    Answer. In the long-term, EIA projects all forms of energy will 
grow substantially to meet China's future demand. Between 2007 and 
2035, China's renewable energy consumption alone more than quadruples 
according to the International Energy Outlook 2010 (1E02010), EIA's 
latest assessment of world energy markets. China remains among the 
world's fastest growing regional markets for wind power expansion, with 
its total net wind-powered generation projected to increase from 6 
billion kilowatthours in 2007 to 374 billion kilowatthours in 2035. 
Nonetheless, hydroelectricity remains China's largest source of 
renewable energy and, even in 2035, wind generation is only 30 percent 
the size of hydroelectric generation.
    Although China's is poised for a substantial rise in renewable 
energy use, fossil fuels will likely be used to meet much of the 
country's future long-term energy needs. Oil, natural gas, and coal 
still account for 86 percent of China's projected total energy use in 
2035 in the 1E02010 Reference case, a decrease from its 2007 share of 
93 percent. With its large domestic reserves, coal remains China's 
largest energy source throughout the projection, fueling both electric 
power and industrial sector requirements. Though the Chinese government 
intends to consolidate the coal sector by focusing on larger, more 
efficient mines, coal use grows at an annual average rate of 2.9 
percent and roughly doubles by 2035 in the 1E02010 Reference case 
projection. Significant changes to existing law or technological 
breakthrough could, however, change this Reference case outlook.
    Liquid fuels demand also increases rapidly, primarily to fuel 
China's growing transportation sector needs, rising in total 
consumption by 2.9 percent per year in the forecast period of the 
1E02010. Natural gas, though a small contributor to China's fuel mix in 
absolute terms, is expected to be the fastest-growing fossil fuel 
during the forecast period, increasing 5 percent per year and doubling 
its share of the overall energy mix.
    In the short term, China's oil consumption is projected to continue 
to grow during 2011 and 2012, with oil demand reaching almost 10.4 
million barrels per day (bbl/d) in 2012. The anticipated growth of 1.2 
million bbl/d between 2010 and 2012 represents about 38 percent of 
projected world oil demand growth during the 2-year period according to 
the March 2011 EIA Short-Term Energy Outlook.

  EFFECT OF DOMESTIC DRILLING ON GAS PRICES AND FOREIGN OIL DEPENDENCE

    Question 1a. In response to the recent political unrest in the 
Middle East, and rising oil prices, we have heard familiar calls to 
expand domestic drilling in the United States--including offshore and 
in the pristine Arctic National Wildlife Refuge (ANWR)--typically with 
the claim that such actions will lower gasoline prices or reduce our 
dangerous over-reliance on foreign oil.
    An Energy Information Administration (EIA) study from May 2008 
projected the effects on oil prices of drilling in the Arctic National 
Wildlife Refuge. According to EIA's projections, in the most optimistic 
case, drilling in ANWR would reduce crude oil prices by approximately 
$1.44 per barrel. I understand this would translate to approximately 3 
to 4 cents per gallon of gasoline at the pump about 20 years from now.
    It seems that EIA has found that drilling offshore would have a 
similarly negligible effect on prices. EIA issued an analysis in 2009 
that examined the impact of maintaining the historical moratorium on 
drilling off the Atlantic, Pacific, and Eastern Gulf of Mexico. 
According to that analysis: ``With limited access to the lower 48 
OCS...there [would be] a small increase in world oil prices... The 
average price of imported low-sulfur crude... is $1.34 per barrel 
higher, and the average U.S. price of gasoline is 3 cents per gallon 
higher.''
    Mr. Newell, does EIA still stand by the findings in these recent 
reports?
    Answer. EIA would not expect the overall findings in the 
aforementioned analyses of opening ANWR or maintaining the historical 
moratoria on drilling off the Atlantic and Pacific coasts and in the 
Eastern Gulf of Mexico (GOM) to change significantly if the analyses 
were to be updated. The results in both of these analyses reflect the 
significant amount of time that would be required for these sources to 
add to global oil supplies and the likelihood of offsetting demand and 
supply responses over an extended period.
    Question 1b. Even if every acre of the United States were open to 
oil drilling both on and offshore would that lower gasoline prices 
today? Or in 2 years, 5 years, 10 years, or 20 years?
    Answer. Although near-term production from areas that have already 
been leased can be highly sensitive to the pace of drilling activity, 
opening access to drilling on every acre of the United States not 
currently open to leasing would not necessarily have an impact on 
production and prices in the short-term. Before any drilling in such 
areas can begin, at a minimum, leases must be purchased, environment 
impact studies performed, and drilling permits submitted and approved. 
In the undeveloped areas of the offshore, the lead time between leasing 
and production is 5-10 years, depending on water depth and proximity to 
existing infrastructure. In the aggregate, by 2030 greater access to 
Federal lands and waters could increase crude oil production by about 1 
million barrels per day (excluding oil shale) with ANWR accounting for 
most of the increase at about 700,000 to 800,000 barrels per day. The 
remaining volume is from the Gulf of Mexico. Regarding oil shale, the 
primary constraint to production is the rate of technological progress, 
particularly with respect to developing a commercially-viable in-situ 
production process. In the Annual Energy Outlook 2011 Reference case, 
large-scale oil shale production is projected to begin in 2029 and 
reach 135,000 barrels per day in 2035, however, small-scale mining and 
retorting of oil shale on private lands could occur earlier.
    Because oil prices are largely determined by the international 
market, the substantial lead time for new Federal leasing to result in 
new production allows for demand and supply responses over an extended 
period that can significantly offset the impacts of production from 
newly-leased areas. As a result, the longer-term impact of increased 
domestic oil production on gasoline prices is expected to be modest; a 
few cents per gallon in 2035.
    Question 1c. EIA predicts that oil imports in 2035 will be about 
the same level as they are today. Is there any way that domestic 
drilling could significantly impact that level of dependency?
    Answer. U.S. dependence on imported liquid fuels, which reached 60 
percent in 2005 and 2006 before falling to 52 percent in 2009, is 
expected to continue to decline to 42 percent by 2035 as a result of 
increases in biofuels, natural gas liquids, domestic production from 
onshore enhanced oil recovery projects (primarily carbon dioxide 
flooding), shale oil plays, deepwater drilling in the Gulf of Mexico, 
and consumption increases that are moderated by fuel economy standards. 
More rapid technological improvements and wider application of existing 
technologies to emerging oil plays, as well as increased access to 
domestic oil resources in Alaska and the Outer Continental Shelf, could 
further reduce dependence on imported liquid fuels.
    Question 1d. Would a permanent moratorium on drilling offshore the 
West Coast of the United States have any impact on future oil prices or 
the prices consumers pay at the gasoline pump?
    Answer. A permanent moratorium on drilling offshore the West Coast 
of the United States is not expected to have a significant impact on 
gasoline prices. In addition to the more general points made in the 
response to question lb, the Bureau of Ocean Energy Management, 
Regulation and Enforcement has indicated that there is low resource 
potential in that offshore region.

              Responses to Questions From Senator Cantwell

         IS OPEC ABLE TO OFFSET ANY INCREASED DOMESTIC DRILLING

    Question 2. A number of experts have argued that any price impact 
of increased domestic production can be easily offset by OPEC. 
According to another EIA factsheet:

          One of the major factors on the supply side is OPEC, which 
        can sometimes exert significant influence on prices by setting 
        an upper production limit on its members, which produce about 
        40% of the world's crude oil. OPEC countries have essentially 
        all of the world's spare oil production capacity, and possess 
        about two-thirds of the world's estimated crude oil reserves.

    Is it true that OPEC, by modestly curtailing its output, has the 
power to offset any downward pressure that a marginal increase in US 
oil production might otherwise produce?
    Answer. EIA agrees that OPEC could modestly curtail crude oil 
production to offset increased U.S. oil production. This would 
eliminate the downward price pressure of increased U.S. oil production. 
However, it could also reduce OPEC revenue because of lower production 
by its members, which may affect some OPEC member countries' 
willingness to reduce production. It should also be recognized that, as 
was the case during 2007 and early 2008, OPEC spare capacity could fall 
to lower levels, reducing the ability of OPEC member countries to 
influence world oil prices by controlling production. Under such 
circumstances, OPEC countries may not want to curtail their production 
in response to higher U.S. production.
    In the past, OPEC has demonstrated the ability and willingness to 
reduce production to limit price declines. In the fall of 2008, in 
response to rapidly falling world oil prices, OPEC reduced its target 
oil production from 29.7 million barrels per day (bbl/d) to 24.8 
million bbl/d, or a targeted drop of 4,8 million bbl/d over a period of 
3 months. Actual output from OPEC, including from Iraq, fell from 31.4 
million bbl/d in October 2008 to 28.9 million bbl/d in February 2009, a 
reduction of 2.5 million bbl/d in less than 4 months. OPEC nations' 
government control of oil production levels, combined with their 
relatively low cost to develop and maintain production capacity, 
provides them with the ability to enact such significant supply 
reductions.
    In contrast, during periods of significant non-OPEC supply 
expansion and ample OPEC spare capacity--such as during much of the 
1990s--OPEC's pricing power has been much lower.

                  EFFECT OF SPECULATION ON OIL PRICES

    Question 3a. Several of the [sic] testified that the oil price 
movements can be explained by supply and demand fundamentals and these 
explain the upward pressure we've seen in recent months. We often hear 
about the lack of a ``conclusive'' smoking gun that links oil price 
spikes to speculation in the derivatives markets.
    However, as you may know, the recently-passed Dodd-Frank Act 
requires the Commodities Future Trading commission (CFTC) to establish 
rules to eliminate excessive position limits. Unfortunately, 180-day 
deadline for those rules has passed and the regulatory process of 
establishing position limits is still in the early stages, and the 
limits are planned to be phased in over time.
    Can the witnesses please comment on the likelihood of seeing a huge 
oil price spike this summer of the magnitude that we saw in the summer 
of 2008?
    Answer. In July 2008, the WTI futures price rose to an all-time 
high, in both real and nominal terms. A review of information from both 
the financial and physical markets suggests the futures market is 
pricing in only a low chance of the July futures contract exceeding the 
$145 price level seen in July 2008. As of March 25, the futures market 
for North Sea Brent crude oil is pricing in a 7 percent probability 
that the July contract will exceed price levels seen in 2008 and a 2 
percent chance for the similar WTI contract. Several key fundamental 
factors of the oil market also are drastically different from 2008 and 
may help explain this result. First, using EIA estimates, OPEC spare 
production capacity is projected to be 2.7 million barrels per day 
higher in the first half of 2011 than in the first half of 2008. 
Second, crude oil inventories in the United States are near historic 
highs. Lastly, world economic growth, which is an indicator of oil 
demand growth, is expected to average 3.6 percent in the first half of 
2011. This is below the 4-6 percent growth that the world economy saw 
from 2005 through first quarter of 2008. Thus, there is considerably 
more ``slack'' in crude oil production and inventory levels compared to 
2008 and lower projected demand. These factors support the market's 
opinion of a low probability of seeing a sharp rise in oil prices this 
summer; however, geopolitical events, weather, or other unforeseen 
events could increase the chance of prices rising rapidly.
    Question 3b. Do any of the witnesses believe that putting some 
limits on excessive speculation reduces the changes of rapid rise in 
oil prices similar to the summer of 2008?
    Answer. Position limits on energy futures, which are in the process 
of being developed by the Commodity Futures Trading Commission pursuant 
to last year's Dodd-Frank financial reform legislation, are intended to 
prevent one entity from obtaining an undue influence on a market. EIA 
has not evaluated the specific consequences of position limits on oil 
price movements. Nonetheless, the effect of position limits on future 
price movements will depend in part on the degree to which prices--in 
the absence of such limits--would be driven by the actions of 
individual market entities or rather by broader market trends and 
behavior.
    Question 3c. Recent years have provided us with plenty of fresh 
evidence that markets are susceptible to irrational behavior, both 
exuberance and fear. We have seen this not only in energy markets, but 
in financial markets in general, whether for securities, home 
mortgages, or other commodities. Can you please comment on how, and 
whether, your organizations attempt to incorporate market forces into 
your energy pricing models?
    Answer. EIA examines supply, demand, economic growth, futures 
markets, and other market forces, as well as other analysts' forecasts, 
in its energy pricing analyses. EIA also quantifies the uncertainty, or 
risk, in the market by using ``implied volatilities'' derived from the 
NYMEX options markets to construct confidence intervals around the 
NYMEX crude oil futures prices. The confidence intervals are 
essentially a way of assessing the market's uncertainty around the 
current price paths, and thus, take into account all factors, including 
``non-fundamental'' factors. Information from futures trading is also 
used to calculate probabilities of prices exceeding certain levels. 
These probabilities are included in a supplement to EIA's Short-Term 
Energy Outlook.

            EFFECT OF NEW PRODUCTION TECHNOLOGIES ON PRICES

    Question 4a. There seems to be some disagreement on whether 
investment in developing new production technologies ends up reducing 
the price of fossil fuels. We have heard a great deal about how oil and 
gas production is a capital intensive business that requires 
significant investment in new technologies to access new resources, 
whether those are unconventional resources, such as oil sands or shale, 
or hard to access resources, such as ultra-deepwater drilling.
    Does investment in developing such hard-to-access resources result 
in lower fossil fuel prices? Or does it simply enable the production of 
harder to access and more expensive resources, thereby ensuring that 
oil and natural gas will only continue to flow as long as global prices 
remain high? Are you concerned that the U.S. is locking itself into 
dependence on a resource that is destined to get more and more 
expensive over time?
    Answer. Private and national oil companies are using advanced 
technologies to bring unconventional oil and natural gas resources to 
market.\3\ There is no question that with these new technologies oil 
and natural gas prices are lower than they otherwise would be. No 
technology, of course, will be employed if it has a cost of production 
greater than expected market price. In the United States the expanded 
use of horizontal drilling and hydraulic fracturing technologies in 
tight sands and shale deposits have had very large impacts on U.S. 
natural gas supplies and they are beginning to have a noticeable impact 
on U.S. oil supplies.\4\ As there is not a world-wide natural gas 
market, beyond LNG, there can be considerable disparity of natural gas 
prices across different regions of the world.
---------------------------------------------------------------------------
    \3\ The Bakken Formation of the Williston Basin is a success story 
of horizontal drilling, fracturing, and completion technologies. EIA, 
Technology-Based Oil and Natural Gas Plays: Shale Shock! Could There Be 
Billions in the Bakken?
    \4\ EIA estimates U.S. natural gas production from shale was 3,110 
billion cubic feet (bcf) in 2009 out of a total U.S. marketed natural 
gas production of 21,604 bcf. Oil production from the Bakken formation 
by the end of 2010 reached 458,000 barrels per day, outstripping the 
capacity to ship the oil from the region. (Bentek Energy) By 
comparison, in November 2010, total U.S. crude oil production was 5.595 
million barrels per day. (EIA)
---------------------------------------------------------------------------
    Price is the market equilibrium of supply and demand. Improvement 
in production technology increases the technically recoverable 
resource. Reserves are determined by what portion of the technically 
recoverable resource is economical to produce. Producers use future 
price projections to evaluate what production technologies and resource 
plays are likely to result in the greatest return on investment.
    Technological advances have lowered the cost of resource access and 
production for shale gas, shale oil and oil sands. EIA projects a 
doubling of natural gas production from shale gas formations and 20 
percent higher natural gas production.\5\ These represent substantial 
improvements compared with the production and price forecasts in the 
EIA Annual Energy Outlook 2010 (AE02010) Reference case.\6\ The 
improvement in the U.S. natural gas outlook is much greater when 
compared to the widely held expectation of earlier years that the 
United States would have to rely on LNG imports.\7\
---------------------------------------------------------------------------
    \5\ AE02011 Early Release, 2035, lower-48 states.
    \6\ EIA, AE02011 Early Release.
    \7\ The Annual Energy Outlook 2004 projected that, by 2025, 7.2 
TCF, or 22%, of domestic consumption, would be met by natural gas 
imports.
---------------------------------------------------------------------------
    For oil produced from shale formations, company announcements and 
industry reports have noted that technology developments have reduced 
drilling time to an average of 24 days to drill a well in 2010, down 
from 56 days in 2006.\8\ The technology developments have made 
accessible new areas that were previously marginal drilling and 
exploration opportunities and made wells profitable at prices as low as 
$50 a barrel, down from $80 three years ago according to market 
analysts.\9\ For oil sands, technological developments are helping to 
hold down rapid increases in labor and capital costs which have pushed 
break-even prices to $60-$80 per barrel according to industry 
sources.\10\ These cost reductions are typical after advanced 
technologies are first deployed. Through a process often referred to as 
``technology learning,'' new technologies usually achieve a steady 
reduction in cost with expanded commercial deployment. As other 
unconventional technologies are deployed to develop harder-to-reach oil 
and gas resources, we can expect that this process of technology 
learning will continue with each new innovation.
---------------------------------------------------------------------------
    \8\ Wall Street Journal, February 26, 2010, Oil Industry Booms--in 
North Dakota
    \9\ Ibid.
    \10\ Business Week, June 2, 2010, Production Costs Climb for 
Canadian Oil Sands, Companies Say
---------------------------------------------------------------------------
    It is less important whether the cost of unconventional oil and gas 
development is ever competitive with the easy-to-reach oil and gas 
resources of the past. The real test is whether they remain competitive 
in the oil and gas markets of the future. The investments being made by 
private and national oil companies indicate a high degree of confidence 
that they will, although there is always the possibility that oil or 
natural gas prices could fall sufficiently to make these investments 
unprofitable, at least temporally. These risks are not fundamentally 
different than those that have to be considered by any investor.
    Question 4b. Do you believe there is now a new normal for fossil 
fuel prices? Just a decade ago OPEC had a $22 to $28 a barrel target 
range. In 2004 Ali Naimi, the Saudi oil minister, called $30 to $34 a 
barrel a ``fair and reasonable price'' for oil. Why is the world now so 
willing to accept considerably higher levels of fossil fuel prices?
    Answer. Recent statements from OPEC members have identified ``fair 
and reasonable'' price levels significantly higher than the price range 
they discussed a few years ago. Saudi Minister Al Naimi stated in 
January 2011 that a $70-$80 oil price range was fair for the world 
market. Some OPEC members appear to be targeting price levels even 
higher than indicated by his statement. In January of this year, Iran, 
Libya and Venezuela (all members of OPEC) identified $100 a barrel as a 
fair market price.
    Rapidly rising oil consumption in non-OECD (Organization for 
Economic Cooperation and Development) countries is one important reason 
for higher oil price levels. Oil consumption in non-OECD countries 
soared 40 percent from 2000 to 2010, an absolute increase of 
approximately 12 million barrels per day (bbl/d). Developing countries 
often see a smaller demand response to higher prices due in part to the 
widespread existence of oil product subsidies. OECD countries, on the 
other hand, had decreasing oil consumption during the last decade, 
which fell from 48 bbl/d in 2000 to less than 46 bbl/d in 2010. On the 
supply side, oil producers are exploring and developing reserves in 
more costly areas, including deep water and oil sands. The combination 
of rising demand and more costly supply has been the major factor in 
price levels beyond those seen a decade ago.

                       ROLE OF ENERGY EFFICIENCY

    Question 5a. Can you please talk about the role of energy 
efficiency standards--for lighting or vehicles or otherwise--in your 
reference case? What assumptions are made as to how future efficiency 
standards enacted via legislation or a rulemaking process will impact 
future fossil fuel consumption levels?
    Answer. The Annual Energy Outlook 2011 Reference case includes, for 
light-duty vehicles, the attribute-based Corporate Average Fuel Economy 
(CAFE) standards for model year (MY) 2011 and CAFE and greenhouse gas 
emissions standards for MY 2012-2016 as promulgated by final 
rulemakings. The MY 2011 minimum fuel economy requirement increases 
from 25.6 mpg in MY 2010 to 27.3 mpg in MY 2011 and to 34.1 mpg in MY 
2016. CAFE standards are assumed to further increase in the Reference 
case to a combined 35 mpg for MY 2020 as mandated by the Energy 
Independence and Security Act of 2007. In the Reference case, CAFE 
standards are held constant in subsequent model years, but the minimum 
requirement is exceeded over the projection period due to the continued 
adoption of advanced technologies, with new vehicle fuel economy 
reaching 37.8 mpg by 2035.
    The Annual Energy Outlook 2011 Reference case also includes energy 
efficiency standards for residential and commercial equipment that have 
been promulgated by the U.S. Department of Energy, legislated by 
Congress, or agreed upon by manufacturers and other interested parties. 
Many major end-use devices in buildings are covered by efficiency 
standards. When a new or revised standard goes into effect, equipment 
that does not meet the efficiency standard is assumed by EIA to be no 
longer available. Impacts on future fuel consumption increase over time 
as worn-out equipment is replaced and equipment is purchased for new 
buildings. In the industrial sector, minimum efficiency standards for 
motors also reduce fuel consumption. In the Reference case, increased 
energy efficiency lowers energy consumption about 13 percent from where 
it otherwise would be in 2035. The full AEO, to be released this 
spring, will include a range of sensitivity cases that alter the 
assumptions about energy efficiency improvements and consider the 
impact of extensions of energy efficiency policies.
    Question 5b. There have been recent legislative proposals to 
overturn the U.S. lighting efficiency standard enacted in the Energy 
Independence and Security Act of 2007. I have seen analysis showing 
that this single policy will result in the United States foregoing the 
need for 30 additional large power plants and consumers will 
collectively save more than $10 billion on electricity bills each year. 
Do you agree with that analysis and how would repeal of this lighting 
standard affect your long-term modeling results?
    Answer. By 2020, residential lighting technologies in the Annual 
Energy Outlook 2011 (AE02011) Reference case are three times more 
efficient than those marketed today due to lighting standards in the 
Energy Independence and Security Act of 2007. EIA has not analyzed the 
lighting standards in isolation. However, average annual lighting use 
per household falls 622 kilowatt-hours (kWh) between 2011 and 2025 in 
our projections, from 1,757 kilowatt hours (kWh) to 1,135 kWh. 
Projected lighting energy use for all 135 million U.S. households in 
2025 is 153 billion kWh in our Reference case projection. If per-
household lighting energy use in 2025 remained the same as in 2011, 
projected aggregate electricity use for residential lighting would be 
about 84 billion kWh higher in 2025. While translating this into the 
number of power plants potentially avoided is complicated, if one were 
to assume that on average each gigawatt of capacity generates about 6 
billion kWh, the 84 billion kWh reduction in lighting use would 
eliminate the need for about 14 gigwatts of new capacity or about 28 
500-megawatt generating units. Regarding electricity bill savings, this 
amounts to about $9 billion per year in lower electricity bills when 
priced at the AE02011 residential electricity prices of 10.5 to 11 
cents per kWh, although this does not include the additional up-front 
cost for more expensive lighting.

                         U.S. OIL DEMAND CURVE

    Question 6a. I found one of the most interesting trends across your 
collective forecasts is the flat, or even declining, demand for oil in 
developed countries, including the United States, over the next 25 
years.
    Mr. Burkhard's testimony notes that CERA believes aggregate oil 
demand in developed markets peaked in 2005 and will not exceed that 
level again.
    The IEA predicts U.S. oil demand will drop by 10% by 2035.
    The EIA reference case predicts that total liquid fuel consumption 
in the U.S. will increase 17%, to 22.0 million barrels per day, but all 
of that increase will come from biofuels. Oil demand appears 
essentially flat or falling.
    If Congress and the Bush and Obama Administrations had failed to 
enact these policies, how likely is it that forecasted U.S. oil demand 
would be falling over the next 25 years?
    Answer. If vehicle fuel economy standards had not been increased 
during the past decade and policies that support and/or require 
biofuels production and consumption had not been enacted, then U.S. 
total liquids consumption would be higher than the 22 million barrels 
per day in 2035 projected in EIA's Annual Energy Outlook 2011 Reference 
case. Without these policies, U.S. biofuels production and consumption 
would be lower and thus oil consumption would be increasing instead of 
being essentially flat.
    Question 6b. If Congress and the Administration had failed to enact 
these policies, what would you anticipate would be the effect on global 
oil prices in 2035, compared with your reference case?
    Answer. If these fuel economy and biofuels policies had not been 
enacted--which effectively reduce demand for oil--then global oil 
prices would be higher in 2035 compared with the $125 per barrel (2009 
dollars) in the Reference case.

                    MEETING RENEWABLE FUELS TARGETS

    Question 7a. I am discouraged by EIA's prediction that the market 
will be unable to meet the targets set forth in the RFS-2, which is the 
revised Renewable Fuels Standard that Congress passed 2007.
    That standard mandates production of thirty six-billion gallons of 
biofuels a year by the year 2022, sixteen billion gallons of which must 
be of ``cellulosic'' origin.
    Your agency's analysis states that: ``EIA's present view of the 
projected rates of technology development and market penetration of 
cellulosic biofuel technologies suggests that available quantities of 
cellulosic biofuels will be insufficient to meet the renewable fuels 
standards targets for cellulosic biofuels before 2022.''
    In EIA's analysis, what are the primary barriers to achieving the 
RFS targets? Are they on the supply side--simply producing enough fuel? 
Or are there also barriers on the demand side--creating an adequate 
distribution infrastructure and enough flexible fuel vehicles on the 
road?
    Answer. The expected shortfall in meeting the cellulosic biofuels 
targets primarily reflects high production costs and technological 
challenges that are exacerbated by current market and regulatory 
conditions. Some observations that support this statement include:

   Technological progress on process yields and scaling up 
        designs has been observed to be slower than initially 
        anticipated. At least 6 planned facilities have delayed startup 
        by 6 months or longer, while only 3 plants have reached the 
        startup phase--with many more awaiting financing.
   Many in the industry have been observed to face important 
        financial, legal, and technological issues that have yet to be 
        resolved. Recent bankruptcy, plant closure, and repeatedly 
        missed production goals are examples of serious setbacks for 
        companies identified by the EPA as potential cellulosic 
        suppliers in 2011.
   The recent financial downturn has also been cited by 
        technology developers as a reason for the reduction in private 
        investment in the technology. Studies show that capital costs 
        have risen significantly above the original expectations for 
        these technologies. In addition, biomass feedstock costs have 
        also been substantially higher than originally expected and 
        process yields have not achieved goals.

    The slow market penetration of the technology has led to the EPA 
granting waivers for large shares of the cellulosic biofuels mandates 
for 2010 and 2011. This in turn has made EPA cellulosic biofuels 
credits available to obligated parties at a cost significantly less 
than the current production cost for the technology.
    On the demand side, EIA's projections do not assume a near-term 
infrastructure constraint in marketing the ethanol that is produced. 
The majority of U.S. corn ethanol production and smaller volumes of 
imported ethanol and cellulosic ethanol are assumed to be absorbed in 
E10 and recently-approved E15 gasoline blends. In addition:

   After the E15 blend pool is saturated by 2020, new volumes 
        of ethanol are assumed to be sold as E85--with the partial 
        resolution of some infrastructure barriers--and Flex-Fuel 
        Vehicles are assumed to be more widespread.
   E85 is assumed to be sold at a discount factoring in its 
        lower energy density compared to motor gasoline, with E85 
        selling for $2.87 per gallon vs. $3.64 per gallon for gasoline 
        in 2030. E85 volumes thus increase from 0.1 billion gallons in 
        2020 to over 9 billion gallons at the end of the forecast 
        (2035).

    A number of next-generation biomass-to-liquid technologies, 
including clean diesel fuel produced from cellulosic biomass, are 
assumed to be ``drop-in'' fuels that can be distributed and consumed 
using existing infrastructure and vehicle fleets and do not face 
significant infrastructure hurdles. These fuels contribute to the 
overall level of cellulosic biofuels in EIA's projections.
    Question 7b. Does EIA's analysis include cellulosic biofuels other 
than ethanol? For example, does it include the possibility that the 
RFS-2 mandate might be met with other cellulosic fuels such as 
methanol?
    Answer. The majority of cellulosic biofuel consumption growth is 
projected to come from cellulosic ethanol. However, the Annual Energy 
Outlook 2011 Reference case also projects the penetration of Biomass-
to-Liquids (BTL) technologies that use cellulosic biomass to produce 
other motor fuels. These next-generation technologies yield fuels that 
can be distributed and consumed using existing infrastructure and 
vehicle fleets.
    While methanol is not an approved RFS-2 pathway for direct use in 
transportation fuels under current rulemakings, EPA has indicated that 
it would allow cellulosic Renewable Identification Numbers (RINs) to be 
generated for qualified cellulosic methanol feedstock used in biodiesel 
production based on its ethanol-equivalent energy value (approximately 
0.75 RINs per unit of methanol or 0.1 RIN per gallon of biodiesel). 
Since volumes are expected to be very small and are currently only 
being produced in testing phases, the AE02011 does not explicitly model 
a cellulosic methanol RFS credit.
    Question 7c. Do you believe there will be enough flexible fuel 
vehicles available in America in 2022 to be able to consume biofuels 
production mandates in the RFS-2?
    Answer. The Annual Energy Outlook 2011 Reference case projects that 
41 million flex-fueled vehicles will be on the road in 2022, 
representing about 16 percent of the total light-duty vehicle stock. 
These flex-fueled vehicles could consume 27.5 billion gallons of E85 in 
2022, if fueled entirely by that fuel. The actual ethanol content of 
E85 fuel varies by region and season and typically averages well under 
85 percent, with petroleum gasoline making up the difference. Using the 
assumption that 75 percent of E-85 is actually ethanol, if all flexible 
fuel vehicles were fueled with E85 nearly 21 billion gallons of 
biofuels could be consumed. Biofuels are also blended into motor 
gasoline and diesel fuel, with ethanol blending into motor gasoline 
being by far the most significant. Ethanol can be blended into motor 
gasoline to up to 10 percent of volume and up to 15 percent of volume 
for light-duty vehicles from model year 2001 and later. The Annual 
Energy Outlook 2011 Reference case projects that over 17 billion 
gallons of ethanol will be blended into motor gasoline in 2022. If 
sufficient production was available, ethanol blended into motor 
gasoline and E85 consumed in flex-fueled vehicles could in principle 
reach approximately 38 billion gallons by 2022, surpassing the total 
36-billion-gallon RFS-2 mandate.

                   IMPLICATIONS OF BUSINESS AS USUAL

    Question 8. One thing I found lacking from most of the analyses was 
any kind of discussion of their broader implications. For example, what 
kind of world will we live in 2035 if the forecasts contained in the 
reference cases prove accurate, a world that consumes 107 million 
barrels of oil per day.
    . . . I completely agree. Energy policy raises complex questions of 
equity and justice. I believe that too often people who point to the 
unsustainable nature of our energy system are labeled as ``anti-
growth''. For all our sakes, I hope we can begin to move beyond such 
characterizations, and start talking about policy that can foster both 
growth and sustainability.
    Would you please comment on the implications of continuing our 
business as usual trajectory (i.e. the trajectory outlined in the EIA 
reference case)?
    Answer. The Energy Information Administration (EIA) includes 
information regarding the economic and energy implications of the 
Annual Energy Outlook Reference case. The broad implications are 
summarized below.
    The U.S. real gross domestic product grows by an average of 2.7 
percent per year from 2009 to 2035 in the Annual Energy Outlook 2011. 
The Nation's population, labor force, and productivity grow at annual 
rates of 0.9 percent, 0.7 percent, and 2.0 percent, respectively, from 
2009 to 2035. Assuming no changes in policy related to greenhouse 
gases, carbon dioxide emissions grow slowly, but do not again reach 
2005 levels until 2027.
    Although energy-intensive industries are expected to recover 
rapidly from the recent recession, long-term growth is slowed by 
increased competition from overseas manufacturers and a shift in U.S. 
manufacturing toward higher-value consumer goods which are less energy-
intensive to manufacture. Net imports of energy meet a major, but 
declining, share of total U.S. energy demand. The projected growth in 
energy imports is moderated by increased use of biofuels (much of which 
are produced domestically), demand reductions resulting from the 
adoption of new efficiency standards, and rising energy prices. Rising 
fuel prices also spur domestic energy production across all fuels, 
particularly natural gas from plentiful shale gas resources, and temper 
the growth of energy imports.
    It is important to note that the EIA Reference case is based on 
current laws and regulations and thus does not assume new policies, 
such as increased fuel economy standards, changes in access policy for 
domestic resource development, a Clean Energy Standard, or any new 
climate change policies. This practice is necessary to provide a clear 
reference point and to avoid speculative policy assumptions, and it 
serves as a starting point for analysis of potential changes in energy 
policies, rules, or regulations through the uses of alternative 
modeling cases. The EIA Reference case therefore is meant to provide an 
outlook where the assumptions and implications are clearly understood, 
but not necessarily as the world might unfold.

             INVESTMENT LEVELS NEEDED IN NEXT HALF CENTURY

    Question 9. Has EIA done a comparable analysis [of the amount of 
worldwide investment that might be required over the next half-century 
to prevent energy shortages and greenhouse gas emissions from 
undermining global economic growth] that could be used for comparison 
[with the TEA figure of $45 trillion]?
    Answer. EIA has not developed an estimate of the future investment 
required in the world energy supply infrastructure nor has it 
considered how such an estimate might be affected by policies to limit 
greenhouse gas emissions. There are few publically-available sources of 
international statistics that would allow EIA to confidently make such 
estimates. In general, worldwide statistics on the costs associated 
with installing energy infrastructure are costly and difficult to 
obtain. Thus, without making heroic assumptions about current and 
future global costs associated with an array of potential energy 
infrastructure projects, EIA would be unable to derive such estimates 
either in the present or in the long-term future. However, EIA's U.S. 
Annual Energy Outlook Reference case projections and additional 
analysis cases provide extensive information regarding U.S. energy 
infrastructure requirements.

                  IMPACT OF GREENHOUSE GAS REGULATIONS

    Question 10. Now that the Environmental Protection Agency has begun 
to implement regulations to limit greenhouse gas emissions from 
stationary sources, how has that impacted EIA's modeling results? What 
assumptions has EIA incorporated into its modeling runs to account for 
these EPA regulations in terms of greenhouse gas emissions reductions 
relative to 2005 levels? If EIA has yet to incorporate these new 
regulations, does the agency plan to in the future?
    Answer. While EPA is developing regulations pertaining to 
greenhouse gas (GHG) emissions from stationary sources, it has not 
released specific standards for the various types of power plants and 
energy-using industrial facilities. Without such standards, EIA cannot 
effectively model the impacts of EPA's proposed regulations. EIA is 
monitoring EPA's progress in developing the rules, and when more 
information on the specific standards is available, we will adjust our 
analysis accordingly.
    EIA does try to capture current market behavior in its modeling 
with respect to concerns about GHG emissions and their potential 
regulation. In order to account for the market's uncertainty 
surrounding investment decisions in GHG-intensive technologies, EIA 
assumes a 3 percent premium in the cost of capital for new coal-fired 
power plants and other GHG-intensive technologies, which is one factor 
that leads to few new coal plants beyond those already under 
construction being added to the AE02011 Reference case projection. In 
addition, 10 states in the Northeast are participating in the Regional 
Greenhouse Gas Initiative (RGGT) cap and trade program and this is 
represented in the EIA analyses. Most states participating in the 
program have already met their state level caps.

                    HOW TO INCREASE ENERGY DIVERSITY

    Question 11a. A common theme across all the witness testimony is 
that global energy demand is increasing and fossil fuel prices are 
likely to continue to increase. So it seems like if the U.S. continues 
to ignore this problem, the economic and security impacts will be 
significant. The witnesses also all seem to agree that diversifying 
America's sources of energy is a key way to mitigate these harmful 
impacts.
    What are the most economically efficient policies to increase U.S. 
energy diversity without the need for government to pick technology or 
special interest winners or losers?
    Answer. The most effective policies are those which clearly define 
the attributes or requirements that the Nation wants to achieve to 
address energy security, economic growth, and climate change. A 
technology-neutral approach, such as the Clean Energy Standard (CES) 
proposed by President Obama in the State of the Union, which seeks to 
double the share of electricity from clean energy sources by 2035 to 80 
percent, is an example of such a policy. Under a CES, as proposed by 
President Obama, any technology that uses energy in a clean, efficient 
way will have the opportunity to advance.
    The President has also outlined a portfolio of actions which, taken 
together, could cut U.S. oil imports by a third by 2025. These include 
programs that would increase the fuel economy of our cars and trucks, 
put one million electric vehicles on the road by 2015, and increase the 
use of nonpetroleum fuels.
    Question 11b. Do you agree with many energy experts who argue that 
a predictable price on carbon designed in a way that minimizes price 
volatility is the most economically efficiency and technology neutral 
way to realize greater energy efficiency and diversity?
    Answer. A predictable, long-term price on carbon that minimizes 
volatility is one way that the actual costs of fuels usage can be 
reflected in their prices and one way to transform the energy system 
toward cleaner and more secure energy sources. However, other policies 
can assist in this transition in a cost-effective and technology 
neutral way. For example, the President's proposed Clean Electricity 
Standard would create a broad, technology-neutral incentive to 
transform the power sector, and many other policy options exist to 
increase the efficiency of energy consumption in end-use sectors.
    Question 11c. Are there links between policies to reduce greenhouse 
gas emissions and increasing energy diversity? If such policies are 
successful in significantly reducing world demand for fossil fuels, 
what impact on future prices is that likely to have?
    Answer. Policies that reduce greenhouse gas emissions will 
generally lead to greater deployment of cleaner and more secure energy 
technologies. If the transportation sector, for instance, gradually 
transitions away from petroleum through electrification, it will be 
important to encourage cleaner sources of electricity to maximize the 
environmental benefits of this transition, and the diversity of the 
energy supply increase as a result. Such transformation could be 
achieved through policies like the President's proposed Clean Energy 
Standard, coupled with policies to promote electric vehicles. If global 
fuel consumption declines, this would put downward pressure on global 
prices for such fuels, but the actual outcome will also depend on 
trends in global supply.
                                 ______
                                 
     Responses of Richard H. Jones to Questions From Senator Corker

    Question 1. Your organization has looked extensively at fossil fuel 
consumption subsidies. Does the U.S. pay any consumption subsidies and 
if so, how much, and how is that related to the price consumers pay for 
petroleum?
    Answer. Using the price gap methodology, which compares 
international market prices for fossil-fuels with end-use prices paid 
by consumers, the IEA does not measure any fossil-fuel consumption 
subsidies paid by the United States. The United States does, however, 
administer a targeted program to assist low-income households with 
immediate home energy needs through the Low Income Home Energy 
Assistance Program (LIHEAP). This is not captured by our measurement 
approach since it does not affect the pricing of energy products, but 
it does support fossil-fuel and other energy consumption.
    Question 2. If we were to look at all the costs paid by the U.S. 
Government to manage supply lanes and ensure the safe transport of 
crude, what would the true price of petroleum be? Are these costs 
reflected in any way in the price that consumers pay, and what would 
happen to the price per gallon of petroleum if these support measures 
were to be eliminated?
    Answer. Crude oil prices comprise many elements, ranging from short 
term market fundamentals, oil refining bottlenecks, perceptions of 
future supply/demand, macro and micro-financial influences and 
geopolitical risks. To the extent that the protection of supply lanes 
lowers the perception of risk in producing or transit areas it would 
also lower the international crude oil price. One can only guess at the 
extent to which this component of international prices might change if 
sea lanes were not kept clear, but ceteris paribus, were less resources 
dedicated to ensuring the secure movement of oil supplies, then crude 
prices might well rise.

   Responses of Richard H. Jones to Questions From Senator Murkowski

                               SUEZ CANAL

    Question 1. You said in a recent interview with the Financial Times 
that you've heard reports of ``difficulties in providing security for 
some of the crews passing through the Suez Canal. And of course, if 
there is a blockage of the Suez Canal, that would be cause for 
concern.'' Can you tell us what, exactly, you've heard about security 
concerns in that region? Do they remain?
    Answer. The Suez Canal is a choke point for transport of many 
commodities, including crude oil and petroleum products. The blockades 
in 1956-1957 and 1968-1975, when some 10% of global oil trade passed 
the Suez Canal, caused oil prices to spike and triggered economic 
downturn. Therefore oil market participants are still closely watching 
the Suez Canal and react nervously to any news of interruptions. Times 
have changed however. The introduction of Very Large Crude oil Carriers 
(VLCCs) in the early seventies resulted in more crude oil transport 
around Cape of Good Hope of Africa, so nowadays less than 1% of the 
crude oil production is transported through the Suez Canal, in almost 
balanced quantities going north and south. So the cause of concern is 
not so much a loss of crude oil supply (in fact no oil would be lost, 
but transportation time and costs would go up), but the Suez Canal is 
in the heart of the Middle East, the dominant oil producing region, and 
any increased tension in the Middle East results in nervousness on the 
oil market. For example, the specific press reports referenced in the 
FT interview turned out not to be significant.

                               SUBSIDIES

    Question 2. Your organization has been quite active in opposing 
fossil fuel consumption subsidies. Do you believe the U.S. government 
offers any fossil fuel subsidies? What are they and what would be some 
of the consequences if these were removed? Would you describe LIHEAP--
financial assistance for heating oil purchases--as the sort of 
consumption subsidy which IEA supports ending? Between consumption 
subsidies and production incentives, which result more directly in 
increased consumption of fossil fuels?
    Answer. The US government offers some fossil-fuel subsidies; most 
are on the production side. Although not captured by our methodology 
for measuring fossil-fuel consumption subsidies, where we compare 
international market prices for fossil fuels with end-use prices paid 
by consumers, the targeted Low Income Home Energy Assistance Program 
(LIHEAP) supports fossil-fuel and other energy consumption. We do not 
recommend phasing out subsidies that are well-targeted and assist the 
poor with the most basic of energy needs.
    The IEA has not attempted to quantify US subsidies to fossil-fuel 
production, but these do exist within our broad definition of energy 
subsidies which is ``any government action that lowers the cost of 
energy production, raises the price received by energy producers or 
lowers the price paid by energy consumers''. Instruments used to confer 
support to fossil-fuels production are often tax incentives, including 
for the US: limiting taxable income based on percentage depletion of 
oil and gas reserves, allowing the expensing of intangible drilling 
costs, and domestic manufacturing deductions. The IEA has not tried to 
measure the effect on energy production of phasing out these subsidies, 
although they would increase costs for producers to some extent.

        US ENERGY COMPANIES VERSUS NATIONAL OIL COMPANIES (NOCS)

    Question 3. Can you describe how U.S. oil and gas producers operate 
with any disadvantages relative to National Oil Companies such as the 
OPEC owner companies?
    Answer. IOCs (including US companies), which have traditionally 
dominated the global oil and gas industry, are increasingly being 
squeezed by the growing power of the national companies and by 
dwindling reserves and production in accessible mature basins outside 
OPEC countries. The main advantage held today by NOCs over IOCs is 
access to reserves. We may see stronger partnerships between the 
national and international oil companies in the future to ensure 
adequate oil and gas supplies in the long term. The mutual benefits 
that could accrue are compelling: the national companies control most 
of the world's remaining reserves, but in some cases lack the 
technology, capital and/or skilled personnel to develop them 
efficiently; the international companies are opportunity-constrained, 
but have the finance and management skills, and technology to help 
national companies develop their reserves.

                              OIL MARKETS

    Question 4. If only about 3 percent of the world's oil travels 
through the Suez canal and the SUMED pipeline, yet we are seeing some 
influence on the global commodity price resulting from instability 
around the Suez, does this indicate that seemingly small disruptions, 
real or potential, can have comparatively large impacts on global 
markets?
    Answer. It is true that because both the supply and demand for oil 
are slow to respond in the short term to changes in international 
prices, so relatively minor dislocations of supply or demand can have 
an exaggerated impact on price. But events in Egypt this last month 
have had an impact that went far beyond concerns over Egyptian 
infrastructure and transit routes. Concerns about contagion of 
political instability for the rest of the MENA region, where much of 
the world's oil and gas resources are concentrated, likely played at 
least as much of a role in influencing prices.

                         MAJOR OIL DISCOVERIES

    Question 5. What was the impact on global investment and markets 
when the Tupi field was discovered off of Brazil in 2006, and how does 
the addition of a multi-billion barrel discovery impact the host nation 
and the industry?
    Answer. The Tupi discovery has consolidated Brazil's position as 
one of the three main contributors to non-OPEC supply growth over the 
next decade. Major oilfield announcements tend to affect the share 
price or valuation of individual companies concerned, rather than 
commodity prices per se. Brazil faces challenges in constructing 
infrastructure according to the ambitious schedule it has set itself, 
and in managing windfall oil revenues once production starts in a major 
way.

                      CRISIS-DRIVEN ENERGY POLICY

    Question 6. The Outer Continental Shelf Lands Act was implemented 
after the Arab oil embargo and subsequent price controls and economic 
shocks of the 1970's, as was the authorization of the Trans-Alaska 
Pipeline System. Are these patterns of crisis and response as an 
unavoidable trend in U.S. energy policy?

          a. Is the U.S., in your group's view, more proactive or 
        reactive in its energy policy?

    Answer. After the Arab oil embargo and the creation of the 
International Energy Agency (IEA), all Member countries of the IEA 
committed themselves to a number of actions to reduce their oil 
(import) dependency. The actions taken differed, according to the 
circumstances of the country. Those countries that could increase 
domestic production did so, like the US, but notably also countries in 
Western Europe, who started successfully exploring the North Sea.
    Also all IEA countries implemented energy savings and energy 
efficiency programs.
    The efforts of the Member countries have been reviewed over the 
last 35 years during a series of Energy Reviews and Emergency Response 
Reviews (each conducted in a 5 year cycle). Generally speaking, the 
crisis response measures of the United States are well developed and 
the Strategic Petroleum Reserve of the United States is a valuable 
asset for the country and for the group of IEA Member countries as a 
whole.

                         CLEAN ENERGY STANDARD

    Question 7. Should we learn a lesson from the Renewable Fuel 
Standard, which has fallen short of expectations, when considering an 
aggressive electricity mandate like the one the President is calling 
for? How likely is it that we will create unforeseen problems if we put 
a CES in place? To name just one example, will transmission problems--
and our inability to add significant amounts of renewable energy to the 
grid--become the new ``blend wall''?
    Answer. Ambitious targets for low-carbon electricity, especially at 
the federal level, as announced by President Obama , are important 
signals of the USA's willingness and determination to move the country 
onto a sustainable energy trajectory. The 450 Scenario of the IEA's 
World Energy Outlook 2010 details a medium-term carbon-constrained 
energy pathway, which projects that 89% of the United States' power 
output could be zero or low-carbon by 2035 given concerted policy 
support. [NB: the WEO's definition of ``zero or low'' carbon energy is 
much stricter than the definition given by President Obama: the WEO 
only includes fossil fuel generation with CCS, while President Obama's 
CES proposal includes `clean coal' in general and `efficient natural 
gas'.]
    Carefully defining the Clean Energy Standard (CES) and its eligible 
technologies, possible technology set-asides and interim targets are 
crucial first steps to boosting investor confidence. Given that a 
majority of US states already have renewable portfolio standards in 
place, the effective implementation of a federal clean energy standard 
will require careful coordination and a predictable and transparent 
transition that avoids disadvantaging existing clean energy 
investments.
    Targets must be supported by an effective system of financial and 
non-financial incentives to ensure appropriate conditions for 
exploiting the large potential for clean energy technologies. These 
clean energy technologies, including renewables, such as wind and 
solar, are generally not yet as mature and cost-competitive as 
conventional carbon-intensive generating technologies, but their costs 
are declining rapidly thanks to increasing economies of scale and 
technology learning gained through significant market deployments with 
targeted policy support.
    Doubling the contribution of clean energy technologies to the USA's 
generation mix by 2035 is evidently a tremendous challenge requiring a 
systems approach to ensure sustainable market growth while controlling 
overall cost, both in terms of policy support and technical 
infrastructure. Upgrading and expanding existing grids to keep pace 
with capital stock turnover in the power sector is a fundamental 
challenge regardless of the specific type of generation technologies 
entering the mix. As part of this challenge, in parallel to the 
introduction of a Clean Energy Standard, the system integration of 
variable renewable energy technologies, such as wind and solar PV, 
needs to be assessed carefully. However, the IEA's research suggests 
that the capacities of grids, based only on current resources and 
improving operational measures, are usually broad enough in most cases, 
e.g. in the Western US grid, which we have analysed in detail.

                          ALTERNATIVES TO OIL

    Question 8. How substantial of an impact do you believe advanced 
biofuels, electric vehicles, and other technologies will have on 
petroleum consumption by 2020? By 2030?
    Answer. IEA analysis shows that there is tremendous potential to 
cut transport oil demand in the 2030 time frame. However, this will 
depend heavily on the policies deployed over this period, as well as on 
the success of improving and lowering the costs of key technologies 
that are still in the development phase, such as for advanced biofuels 
and batteries. In our baseline projections (which assume that no new 
policies are introduced by governments), biofuels and EVs do not take 
sufficient market share to save very much oil by 2030.
    However, in a world committed to low-carbon and lower-oil 
dependence futures, we believe there could be a substantial shift away 
from oil by 2030, with some of this shift in evidence by 2020. For 
example, in our WEO 2010 and ETP 2010 reports (which are consistent), 
our low CO2 scenarios show a reduction in global transport oil use, 
compared to our baseline projection, of 150 million tonnes (about 7%) 
in 2020 and 600 million tonnes (about 30%) in 2030. Through 2030, 
substantially more than half of these reductions are attributable to 
improved energy efficiency across a range of vehicles and modes (cars, 
trucks, aircraft etc), including strong improvements to internal 
combustion engines (such as hybridization). About 10% of the oil 
savings in 2030 are attributable to biofuels, and another 10% from 
electric vehicles. Other alternative fuels, such as natural gas, also 
play a role. However after 2030 the contributions from EVs and biofuels 
rise rapidly. With the right policy framework we believe that these 
technologies can become fully competitive, and in fact dominant, by 
2050.
    Realising a 30% cut in transport oil use relative to the baseline 
projection by 2030 would have enormous benefits for energy security, 
less air pollution in cities and the climate. It could also help 
restrain oil prices. For these reasons, the IEA is committed to helping 
countries move onto such a pathway.

                         FOREIGN OIL DEPENDENCE

    Question 9. If Congress had allowed the Coastal Plain of ANWR and 
other parts of Alaska to be opened to production, in 1995 for example, 
we would be producing domestic oil at a considerably higher rate. What 
would that mean for our nation's energy security? Would we be more 
protected, or less protected, from civil unrest in Egypt, Jordan, and 
other parts of the Middle East? In the event of a supply disruption 
abroad, would we be better equipped, or less prepared, to deal with 
import shortages?
    Answer. Generally speaking, if a country has more domestic oil 
production, it is less exposed to physical disruptions from abroad. At 
the same time, oil is traded on global markets, so a severe disruption 
can cause prices to rise in all countries, because the oil will flow to 
the highest bidder. So a country with more domestic production has less 
to fear that its oil supply will be disrupted when a major incident 
happens abroad, but prices may still rise, even in those countries that 
do not need to import any oil.

                          PROJECTED OIL PRICES

    Question 10. In a hypothetical scenario of September 2012, with 
unemployment is down to 8.0%, the economy growing at greater than 3.0% 
each quarter, and world markets on the upswing, where would you 
forecast the price of oil?
    Answer. The IEA does not forecast the price of oil. See below.

                          OFFSHORE MORATORIUM

    Question 11. How does the amount of oil that could be taken offline 
by unrest in the Middle East compare to the amount of production that 
will be lost because of the absence of new exploratory permits in the 
Gulf of Mexico, and the absence of resumed exploratory operations?
    Answer. In our short and medium term market analysis, we do not 
forecast oil prices. Rather our models are driven by the shape of the 
oil futures curve at the time that projections are made. However, the 
scenario you paint of strong global economic growth would likely be 
accompanied by strong oil demand growth and, because of the lead times 
necessary to develop new oil production capacity, by a narrowing margin 
of OPEC spare capacity. Our own medium term market outlook under a high 
economic growth scenario envisages OPEC spare capacity shrinking from 
around 6% of global demand in 2010 to less than 5% of global demand on 
average in 2012. Spare capacity would still be higher than the very low 
levels evident during 2004-2008, but nonetheless the very fact of a 
shrinking level of market flexibility suggests more volatile markets.
    Our latest view is that 2015 US GoM oil production could turn out 
around 300 kb/d lower than we previously forecast because of delays in 
new field developments and to drilling required to sustain production 
at older fields. Those volumes could be higher if drilling remains at 
markedly lower levels for longer or new drilling is banned altogether 
in prospective resource-bearing areas. However, they would still 
probably pale in comparison to the amount of production that could be 
taken off line if political unrest were to disrupt production for a 
significant period in even one Middle Eastern exporting country.

                           ECONOMIC RECOVERY

    Question 12. Adam Sieminski, the Chief Energy Economist for 
Deutsche Bank, recently wrote that ``We estimate that a [10 dollar] 
rise in the oil price subtracts approximately 0.5 percentage points off 
U.S. growth.'' Do any of you agree with Mr. Sieminski's assessment?

          a. Would this calculation change if the US supplied 60% of 
        its own oil as opposed to importing 60% of its oil?

    Answer. Our static analysis of oil price impacts on the US economy 
indicates that $100 per barrel oil (on average) in 2011 translates to 
an import bill of $385 billion at expected import levels (10.5 million 
barrels per day in our projections). This would be equivalent to 
roughly 2.6% of US GDP, approaching similar levels to those experienced 
in 2008, and risk undermining economic recovery. At $110 per barrel in 
2011, our estimate for the yearly US import bill would rise to $425 
billion (simplified using the same import and GDP levels in the 
calculation), or 2.8% of US GDP. The calculation provides only a rough 
estimate, but supports the notion that a $10 swing in oil prices can 
have a major effect on the economy. The import bill we calculate, and 
thus its relation to GDP, depends on volume of net imports rather than 
the percentage of imports or domestic production. Assuming that 
domestic production accounted for 60% of US oil consumption at levels 
we project for 2011, US net imports would amount to about 7.1 mb/d. 
With $100 per barrel of oil, the import bill would then total $260 
billion for the year, or 1.7% of US GDP.

                       IMPACT OF FEDERAL POLICIES

    Question 13. What role does the federal government's stimulus 
policies, and the Federal Reserve's second round of quantitative 
easing, have played in boosting commodity prices? Have these policies 
boosted the price of oil, and, if so, by how much?
    Answer. Federal stimulus and QE2 could theoretically boost 
commodity prices through physical or financial transmission mechanisms 
(note, these are two very different policies; the former is fiscal 
while the latter is monetary). Both may have demand side impact on 
commodities, but it is simply not possible to attribute specific price 
effects.
    Insofar as stimulus and QE have buoyed economic activity in the US 
and abroad, physical demand for commodities would tend to rise and 
prices would increase, all other factors being equal. Both US economic 
growth and oil demand came in higher than expected in 2H10, one factor 
behind tightening global fundamentals and rising oil prices. However, 
it is difficult to isolate the effect of these policies on the economic 
rebound and on oil prices, particularly given the cyclical recovery in 
US oil demand that had already been underway since early-2010 and 
overarching role of global supply/demand fundamentals in tightening the 
physical market.
    On the financial side, QE2 could potentially boost commodity prices 
through the exportation of currency inflation to dollar-pegged 
economies or through increased financial flows into commodities and 
emerging markets. Price pass-through resulting from the former 
mechanism could ultimately manifest itself through physical 
fundamentals, with currency inflation in emerging markets acting to 
stimulate oil demand. Increased capital flows into emerging markets 
could also stimulate higher levels of economic activity, thus raising 
oil demand and prices. However, it is unclear the degree to which QE2 
itself has inflated developing economies. The domestic monetary policy 
of such countries probably plays a larger role and, indeed, several 
large economies (e.g. China and Brazil) have already begun tightening 
interest rates in order to cool economic expansion. Finally, while 
increased financial flows into commodities may amplify oil price 
movements in the short-term, there is little empirical evidence 
quantifying the effect of such flows. The linkage of oil futures 
markets to underlying physical markets also suggests that any such 
price dislocation brought about through purely financial reasons may be 
short-lived in any case.

                            OIL SPILL REPORT

    Question 14. Have you reviewed the recommendations made by the 
President's Oil Spill Commission? Have you conducted any analysis on 
the impact those recommendations, if fully implemented, would have on 
domestic oil production, our import levels, and the global price of 
oil?
    Answer. No, we have not connected an analysis of the possible 
impact of these recommendations, beyond that mentioned above (see 
question on Offshore Moratorium).

                        MODULAR NUCLEAR REACTORS

    Question 15. What role do you believe small modular nuclear 
reactors will have in meeting the global demand for electricity? What 
countries are moving forward with this technology and what countries 
are interesting in acquiring these reactors?
    Answer. Small modular reactors are discussed in the joint IEA/NEA 
(Nuclear Energy Agency) 2010 publication Technology Roadmap/Nuclear 
Energy. Countries involved in developing the technology include: 
Argentina, China, Japan, Korea, Russia, South Africa and the United 
States. Companies involved include: Areva, Babcock & Wilcox, General 
Atomics, NuScale and Westinghouse. Two small units are known to be 
under construction in Russia, reportedly for deployment via barge to a 
remote coastal settlement on the Kamchatka peninsula. Elsewhere, some 
other designs are well advanced, with initial licensing activities 
underway. Demonstration plants could potentially be in operation before 
2020, if funding becomes available. However, no firm commitments have 
been made to date.

                                 CHINA

    Question 16. Can you shed light on what China's energy picture 
really looks like, not just for renewable energy, but also its future 
demand for oil, natural gas, and coal?
    Answer. Over the past year or so we have just seen an historic re-
ordering of energy heavyweights, with China surpassing the United 
States to become the world's top energy consumer. Already a major actor 
in global energy markets, it has become abundantly clear that the 
developments in China will be key to shaping the world's energy future. 
Chinese energy use was only half that of the United States in 2000. The 
increase in China's energy consumption between 2000 and 2008 was more 
than four times greater than in the previous decade. Prospects for 
further growth remain strong, given that China's per-capita consumption 
level remains low, at only one-third of the OECD average, and that it 
is the most populous nation on the planet, with more than 1.3 billion 
people. Consequently, developments on the global energy landscape 
remain highly sensitive to the various factors that drive energy demand 
in China, including prospects for economic growth, changes in economic 
structure, developments in energy and environmental policies, and the 
rate of urbanisation.
    The momentum of economic development looks set to generate strong 
growth in energy demand in China throughout the Outlook period. In the 
New Policies Scenario, China's primary energy demand reaches two-thirds 
of the level of consumption of the entire OECD. In absolute terms, 
industry accounts for the single biggest element in the growth in final 
energy demand. China's electricity demand is projected to almost triple 
in 2008-2035, requiring capacity additions equivalent to 1.5 times the 
current installed capacity of the United States. During much of the 
period of its economic expansion, China was able to meet all of its 
energy needs from domestic production, but now a growing share is being 
met by imports. China has extensive coal resources, but in recent years 
has become a net importer. It has struggled to expand its mining and 
rail-transport infrastructure quickly enough to move coal from its vast 
inland reserves to the prosperous coastal areas where demand has been 
growing most rapidly. In the New Policies Scenario, China's net imports 
of coal increase to 2015, but the country once again becomes a net 
exporter towards the end of the Outlook period. Its oil imports jump 
from 4.3 mb/d in 2009 to 12.8 mb/d in 2035, the share of imports in 
demand rising from 53% to 84%. Natural gas imports also increase 
substantially to reach a share of 53% of demand in 2035, requiring a 
major expansion of pipeline and liquefied natural gas (LNG) 
regasification infrastructure.
    China's growing need to import fossil fuels to meet its rising 
domestic demand will have an increasingly large impact on international 
markets. Similarly, if pursued vigorously, China's efforts to expand 
the use of clean energy could have far-reaching implications throughout 
the rest of the world. First, its drive to deploy clean energy will 
lower the cost of those technologies everywhere, made possible by the 
economies of scale achievable in such a vast market and the 
acceleration of learning rates bound to occur. Second, there will be 
strong effects on global trade. China will most certainly attain status 
as the leading exporter of clean energy technologies and we may see, 
like Japan's auto manufacturers have done, an internationalisation of 
Chinese clean energy firms and manufacturing of clean energy equipment 
in destination markets. Third, China will gain a firmer economic stake 
in global action to reduce greenhouse-gas emissions.

    Note: The graph ``China's share of the projected net global 
increase for selected indicators'' has been retained in committee 
files.

    Responses of Richard H. Jones to Questions From Senator Cantwell

  EFFECT OF DOMESTIC DRILLING ON GAS PRICES AND FOREIGN OIL DEPENDENCE

    Question 1. In response to the recent political unrest in the 
Middle East, and rising oil prices, we have heard familiar calls to 
expand domestic drilling in the United States--including offshore and 
in the pristine Arctic National Wildlife Refuge (ANWR)--typically with 
the claim that such actions will lower gasoline prices or reduce our 
dangerous over-reliance on foreign oil.
    An Energy Information Administration (EIA) study from May 2008\1\ 
projected the effects on oil prices of drilling in the Arctic National 
Wildlife Refuge. According to EIA's projections, in the most optimistic 
case, drilling in ANWR would reduce crude oil prices by approximately 
$1.44 per barrel. I understand this would translate to approximately 3 
to 4 cents per gallon of gasoline at the pump about 20 years from now.
---------------------------------------------------------------------------
    \1\ http://www.eia.doe.gov/oiaf/servicerpt/anwr/results.html
---------------------------------------------------------------------------
    It seems that EIA has found that drilling offshore would have a 
similarly negligible effect on prices. EIA issued an analysis in 2009 
that examined the impact of maintaining the historical moratorium on 
drilling off the Atlantic, Pacific, and Eastern Gulf of Mexico. 
According to that analysis: ``With limited access to the lower 48 OCS. 
. .there [would be] a small increase in world oil prices.The average 
price of imported low-sulfur crude. . .is $1.34 per barrel higher, and 
the average U.S. price of gasoline is 3 cents per gallon higher.''
    Would you please comment on your views on the ability of expanded 
domestic drilling to affect world oil prices?
    Answer. As noted already, crude oil prices are influenced by 
today's market conditions, but also by perceptions of how easy it will 
be to meet expected demand growth in the future. A widespread 
perception among industry players today is that it is difficult to 
expand the supply base rapidly, largely because of barriers to 
investment. For the most part, these concerns centre on key areas of 
low-cost resources being completely off limits to international 
investment (such as Russia and the Middle East). But improved access to 
known hydrocarbon resources within major consuming countries could also 
go some way to easing concerns about future supplies, thus potentially 
acting as a restraining factor on future oil price rises.

        IS OPEC ABLE TO OFFSET ANY INCREASED DOMESTIC DRILLING?

    Question 2a. IEA forecasts that most the growth in oil production 
will occur in OPEC Countries like Saudi Arabia, Iraq, Venezuela, UAE, 
Kuwait, Iran, Qatar, Nigeria, Libya, and Algeria--not exactly America's 
best friends or even regimes that support the basic rights of their 
citizens. I understand that IEA projects that by 2035, world dependence 
on OPEC oil will rise from 41 percent to 52 percent. That's a level not 
seen since the oil shocks of the early 1970s.
    What can oil importing nations do to mitigate the national and 
economic security threat posed by such a high degree of dependence on 
OPEC?
    Answer. To enhance their energy security, countries need to take 
near-term actions in five key areas: (i) promote energy efficiency; 
(ii) ensure adequate energy diversity by minimising dependency on any 
single fuel, single supplier or single transportation route/mechanism; 
(iii) improve oil market data transparency; (iv) maintain an adequate 
safety net for use in the case of a supply shortage; and (v) 
participate in global cooperation on emergency preparedness as an oil 
supply disruption anywhere in the world would result in severe knock-on 
effects throughout the entire market. In the longer term, the 
progressive decarbonisation of electricity generation and the 
introduction of alternative transportation technologies would also help 
by reducing the growth in demand for fossil fuels.
    Question 2b. It seems that the policies in the bipartisan 2007 
Energy Bill that have increased vehicle fuel economy and the use of 
biofuels are the only things that have helped reduce the forecast for 
U.S. oil imports in decades. What lessons can be learned from that?
    Answer. Both fuel economy and the use of biofuels have the 
potential to significantly lower oil use in the US and elsewhere. 
Strong provisions in the 2007 Energy Bill have helped to leverage this 
potential. There are still other areas of strong potential to cut oil 
use, such as promoting electric and plug-in hybrid vehicles. The recent 
Obama administration initiatives appear to put the US on a strong 
course in this regard as well, with a target of 1 million plug-in 
vehicles on the road by 2015.

                  EFFECT OF SPECULATION ON OIL PRICES

    Question 3a. Several of the testified that oil price movements can 
be explained by supply and demand fundamentals, and these explain the 
upward pressure we've seen in recent months. We often hear about the 
lack of a ``conclusive'' smoking gun that links oil price spikes to 
speculation in the derivatives markets.
    However, as you may know, the recently-passed Dodd-Frank Act 
requires the Commodities Future Trading Commission (CFTC) to establish 
rules to eliminate excessive position limits. Unfortunately, the 180-
day deadline for those rules has passed and the regulatory process of 
establishing position limits is still in the early stages, and the 
limits are planned to be phased in over time.
    Can the witnesses please comment on the likelihood of seeing a huge 
oil price spike this summer of the magnitude that we saw in the summer 
of 2008?
    Do any of the witnesses believe that putting some limits on 
excessive speculation reduces the chances of rapid rise in oil prices 
similar to the summer of 2008?
    Question 3b. Recent years have provided us with plenty of fresh 
evidence that markets are susceptible to irrational behavior, both 
exuberance and fear. We have seen this not only in energy markets, but 
in financial markets in general, whether for securities, home 
mortgages, or other commodities.
    Can you please comment on how, and whether, your organizations 
attempt to incorporate market forces into your energy pricing models?
    Answer. We think that the rise in prices seen since September 2010 
has in large part been rooted in a tightening of global market 
fundamentals, with oil demand having run ahead of supply to the tune of 
over 1 mb/d in 2Q and 3Q 2010. But a tightening market is not the same 
as a tight market. The first half of 2011 sees a market that still 
looks well supplied, with a cushion of flexibility provided by spare 
OPEC crude capacity and OECD refining capacity, plus levels of OECD oil 
inventories that still look comfortable. So the period through summer 
2011 does not have the same precursors of surging prices that were 
evident in early 2008. Of course, in recent weeks uncertainties 
regarding future supply due to the ongoing turmoil in the region have 
also had a major impact on prices. How long this might persist depends 
on the course of political events which are impossible to forecast.
    We are generally in favour of greater regulatory oversight of 
commodity futures and derivatives markets and of moves to enhance the 
visibility of trades both on and off exchanges. Measures aimed at 
reducing systemic risks are to be supported. But at the same time, 
regulators are aware that well functioning markets need liquidity, ease 
of price discovery and ample opportunities for physical market players 
to hedge price risks for the future. The concept of `excessive' 
speculation is difficult to define, and we would argue in favour of 
caution as regards position limits, so as to avoid sharply curbing 
market liquidity. Arguably, the sharpest spell of short term commodity 
price volatility occurred in autumn 2008 when liquidity flooded out of 
the market. So there is a risk of unintended consequences from over-
zealous regulation, although many regulators seem well aware of this 
issue.

            EFFECT OF NEW PRODUCTION TECHNOLOGIES ON PRICES

    Question 4. There seems to be some disagreement on whether 
investment in developing new production technologies ends up reducing 
the price of fossil fuels. We have heard a great deal about how oil and 
gas production is a capital intensive business that requires 
significant investment in new technologies to access new resources, 
whether those are unconventional resources, such as oil sands or shale, 
or hard to access resources, such as ultra-deepwater drilling.
    Does investment in developing such hard-to-access resources result 
in lower fossil fuel prices? Or does it simply enable the production of 
harder to access and more expensive resources, thereby ensuring that 
oil and natural gas will only continue to flow as long as global prices 
remain high? Are you concerned that the U.S. is locking itself into 
dependence on a resource that is destined to get more and more 
expensive over time?
    Do you believe there is now a new normal for fossil fuel prices? 
Just a decade ago OPEC had a $22 to $28 a barrel target range. In 2004, 
Ali Naimi, the Saudi oil minister called $30 to $34 a barrel a ``fair 
and reasonable price'' for oil. Why is the world now so willing to 
accept considerable higher level of fossil fuel prices?
    Answer. It is less a case that investment in these new resources 
might perpetuate higher prices, more a case that failing to invest in 
new sources of supply would likely lead to still higher prices. 
International oil companies face barriers to investment. Much of the 
world's low cost oil is situated in countries which deliberately 
restrict access or limit extraction rates. So international companies 
have had to `move up the cost curve'. Structurally, and in the long 
term, the marginal barrel of non-OPEC supply is likely to become higher 
cost. This will ultimately lead to policies which lessen dependence on 
oil in the longer term. But we cannot wean our economies off oil and 
other hydrocarbons overnight. So investment in new sources of oil and 
gas, even if they are higher cost, needs to be encouraged.
    There are great dangers in heralding any concrete new `range' for 
oil prices. Technology, changing economic circumstances and geopolitics 
often conspire to alter perceptions of what might constitute any new 
price `norm'. Opportunity constraints, rising costs, stretching project 
lead times and producer revenue aspirations all pushed price 
perceptions higher in the last decade. And indeed in the longer term, 
the exploitation of more costly oil resources, and moves toward an 
effective price for carbon dioxide emissions could indeed lead to a 
sustained period of higher prices. But as the economic recession of 
2008 showed, periods of sharply lower prices are also possible. In the 
short term, the global economic recovery would benefit from prices 
lower than currently, as the global oil burden is approaching levels 
which in the past have acted to curb economic activity.

                       ROLE OF ENERGY EFFICIENCY

    Question 5. Can you please talk about the role of energy efficiency 
standards--for lighting or vehicles or otherwise--in your reference 
cases? What assumptions are made as to how future efficiency standards 
enacted via legislation or a rulemaking process will impact future 
fossil fuel consumption levels?
    There have been recent legislative proposals to overturn the U.S. 
lighting efficiency standard enacted in the Energy Independence and 
Security Act of 2007. I have seen analysis showing that this single 
policy will result in the United States foregoing the need for 30 
additional large power plants and consumers will collectively save more 
than $10 billion on electricity bills each year. Do you agree with that 
analysis and how would repeal of this lighting standard affect your 
long-term modeling results?
    Answer. The IEA models estimate that the EISA regulations will 
result in a sharp rise in demand for CFLi from 2012 to 2015 peaking at 
just fewer than 900 million lamps. This is followed by a sharp down-
turn in demand of about 560 million lamps in 2018. Thereafter, the 
second tier regulations take effect but only require a modest increase 
in sales because a large proportion of the screw-base lamp stock is 
already converted to higher efficiency lamps and the intermediate xenon 
halogen options that are now being replaced have a longer lifetime and 
slower replacement cycle than the GLS they replaced. Sales continue to 
rise more modestly but show ongoing fluctuations as the replacement 
lamp market responds to the 2015 peak and trough. In addition solid 
state lighting begins to make accelerated inroads into the lighting 
market in the 2020 to 2030 timeframe at the expense of CFLi (see: IEA 
(2010) Phaseout of Incandescent Lights, OECD/IEA).
    We have not yet carried out a detailed energy impact analysis on 
these figures, however we assume that the replacement of GLS with 
CFLi's on a like-for-like basis would result in an electricity savings 
of 28% on average.

                         U.S. OIL DEMAND CURVE

    Question 6. I found one of the most interesting trends across your 
collective forecasts is the flat, or even declining, demand for oil in 
developed countries, including the United States, over the next 25 
years.
    Mr. Burkhard's testimony notes that CERA believes aggregate oil 
demand in developed markets peaked in 2005 and will not exceed that 
level again.
    The IEA predicts U.S. oil demand will drop by 10% by 2035.
    The EIA reference case predicts that total liquid fuels consumption 
in the U.S. will increase 17%, to 22.0 million gallons per day, but 
almost all of that increase will come from biofuels. Oil demand appears 
essentially flat or falling.
    All witnesses, if Congress and the Bush and Obama Administrations 
had failed to enact these policies, how likely is it that forecasted 
U.S. oil demand would be falling over the next 25 years?
    All witnesses, if Congress and the Administration had failed to 
enact these policies, what would you anticipate would be the effect on 
global oil prices in 2035, compared with your reference case?
    Answer. Progressive improvements in vehicle fuel efficiency, 
spurred by higher fuel costs as well as fuel-economy mandates (CAFE 
standards), and an expansion in biofuels production (Renewable Fuels 
Standard) contribute to the decline in US oil demand in the World 
Energy Outlook projections. In our Current Policies Scenario, US oil 
demand drops from 17.8 mb/d in 2009 to 16.1 mb/d by 2035. This takes 
account of recent changes to CAFE standards through 2016, in which cars 
must average fuel economy of 35.5 miles per gallon, and targets for 
biofuels production (that can substitute for use of oil products in 
transport). By 2035, our business-as-usual projections show US biofuels 
consumption rising to 1.21 mb/d, from 0.5 mb/d in 2009. The net change 
(+0.7 mb/d) in US biofuels consumption equates to roughly 40% of the 
drop in total oil demand during that time (1.7 mb/d). Without policies 
to promote vehicle efficiency and alternative fuels, the United States 
would undoubtedly see a higher level of oil demand and therefore some 
tightening of the global oil market, although our analysis in the World 
Energy Outlook does not specifically contain projections of such a 
scenario.

                    MEETING RENEWABLE FUELS TARGETS

    Question 7. I am discouraged by EIA's prediction that the market 
will be unable to meet the targets set forth in RFS-2, which is the 
revised Renewable Fuels Standard that Congress passed in 2007.
    That standard mandates production of thirty-six billion gallons of 
biofuels a year by the year 2022, sixteen billion gallons of which must 
be of ``cellulosic'' origin.
    Your agency's analysis states that: ``EIA's present view of the 
projected rates of technology development and market penetration of 
cellulosic biofuel technologies suggests that available quantities of 
cellulosic biofuels will be insufficient to meet the renewable fuels 
standard targets for cellulosic biofuels before 2022.''
    All witnesses, do you believe there will be enough flexible fuel 
vehicles available in America in 2022 to be able to consume biofuels 
production mandates in the RFS-2?
    Answer. The IEA has not looked at this specific question in its 
scenarios. However, the vast majority of vehicles that will be on the 
road in 2022 are not yet on the road today, so can still be strongly 
influenced by policy. While it may require new incentives to reach the 
number of flex-fuel vehicles needed to match blending requirements in 
RFS-2, the cost of producing such vehicles is relatively low and there 
are no technical barriers to producing these in quite large volumes 
over the next 11 years.

                   IMPLICATIONS OF BUSINESS AS USUAL

    Question 8. One thing I found lacking from most of the analyses was 
any kind of discussion of their broader implications. For example what 
kind of world will we live in 2035 if the forecasts contained in the 
reference cases prove accurate, a world that consumes 107 million 
barrels of oil per day.
    Mr. Burkhard, in your testimony you describe a world in which 
access to energy services has allowed an unprecedented number of people 
to join the ranks of the middle class. Further reduction in global 
poverty is an outcome we can all celebrate.
    But I appreciated Ambassador Jones' testimony as well, which 
devoted some attention to the risks of continuing on our present path. 
These include serious risks to national security, economic development, 
and of course the environment.
    If I may quote from the Ambassador's written testimony:

          . . . the global energy system, in which all countries are 
        interdependent, faces a future that is increasingly untenable. 
        To continue business-as-usual risks heightened insecurity, 
        increasing economic volatility, and irreparable harm to the 
        environment. We truly need a transformation in the world's 
        energy system to a more secure, sustainable model.
    I completely agree. Energy policy raises complex questions of 
equity and justice. I believe that too often, people who point to the 
unsustainable nature of our energy system are labeled as ``anti-
growth''. For all our sakes, I hope we can begin to move beyond such 
characterizations, and start talking about policy that can foster both 
growth and sustainability.
    All Witnesses, would you please comment on the implications of 
continuing on our business-as-usual trajectory (i.e. the trajectory 
outlined in the EIA reference case)?
    Answer. Continuing a business-as-usual trajectory leads to a future 
fraught with risk and unsustainable from an economic, security and 
environmental perspective. In our Current Policies Scenario, in which 
government policies are unchanged, we project world primary energy 
demand to rise by almost 50% over the next 25 years, underpinned by an 
unmitigated increase in global consumption of fossil-fuels (oil, gas 
and coal) led by emerging economies. The result is an energy mix that 
still remains heavily slanted toward fossil-fuels in 2035, and tighter 
energy markets characterized by higher prices and heightened 
volatility. Furthermore, continued dependence on fossil-fuels at levels 
in our Current Policies Scenario results in a global average 
temperature increase exceeding six degrees Celsius by 2100. At the same 
time, energy security risks on the supply side also increase. Suppliers 
of oil and gas become more concentrated, with the OPEC share of global 
oil supply rising toward half of the market by 2035. The level of 
investment to maintain existing supply and develop new ones is massive. 
There is a real risk that this spending will not fully come forward. 
National companies, which often have other demands placed on their 
financial resources and are not always market-oriented, are exercising 
greater control over development of indigenous supplies.

             INVESTMENT LEVELS NEEDED IN NEXT HALF CENTURY

    Question 9. The International Energy Agency has said that 
investment totaling $45 trillion might be needed over the next half-
century to prevent energy shortages and greenhouse gas emissions from 
undermining global economic growth. Is this analysis still up to date 
and accurate?
    Answer. Analysis performed for the IEA publication Energy 
Technology Perspectives 2010 (ETP) shows that a transition to a low-
carbon energy system would require the investment of USD 46 trillion 
additional to the investment required in the ETP's Baseline scenario 
from 2010 to 2050. These additional investments are needed to achieve 
the global goal of halving energy related CO2 emissions by 2050 
compared to 2005 levels. Half of these additional investments are 
needed in the transport sector for advanced vehicle technologies. 
However, the transition to a low-carbon economy will result in 
significant energy security and economic benefits. For example, this 
additional investment would yield important fuel cost savings, due to 
efficiency improvements and as lower fuel demand drives down prices. 
Gross fuel-cost savings are estimated to be USD 112 trillion over this 
period. Subtracting these fuel savings from the additional investment 
costs yields net savings of USD 66 trillion. Even if both the 
investments and fuel savings over the period to 2050 are discounted 
back to their present values using a 10% discount rate, the net savings 
amount to USD 8 trillion.

                    HOW TO INCREASE ENERGY DIVERSITY

    Question 10a. A common theme across all the witness testimony is 
that global energy demand is increasing and fossil fuel prices are 
likely to continue to increase. So it seems like if the U.S. continues 
to ignore this problem, the economic and security impacts will be 
significant. The witnesses also all seem to agree that diversifying 
America's sources of energy is a key way to mitigate these harmful 
impacts.
    What are the most economically efficient policies to increase U.S. 
energy diversity without the need for government to pick technology or 
special interest winners or losers?
    Answer. Energy security is enhanced both by measures to diversify 
the energy mix and to reduce the intensity (and overall level) of 
energy use. Measures to promote energy efficiency represent the most 
economical opportunities for increasing US energy security. Significant 
opportunities exist in vehicles, buildings, appliances, lighting, 
industrial equipment and power generation technology.
    Diversity, however, is also critical. Unfortunately, the US primary 
energy mix today remains heavily weighted toward fossil-fuels (37% oil, 
24% coal, 24% gas). Nuclear accounts for only about 9.5% of primary 
energy demand. The shares of other sources are even less: biomass, 
under 4%; hydropower, less than 1%; and other renewable energy sources, 
less than 1%. In the Current Policies Scenario of the World Energy 
Outlook 2010, fossil fuels still dominate the mix in 2035, accounting 
for more than three-quarters of US primary energy demand. IEA 
recommendations that would promote US energy diversity include: i) 
focus on decreasing fossil fuel dependence by pushing for strong energy 
efficiency and clean energy supply policies, ii) evaluate the costs and 
benefits of establishing a consistent CO2 price, taking account of 
international experience in order to support market-pull measures for 
the accelerated introduction of clean energy technologies and iii) 
reinforce the development of open and competitive energy markets 
through consistent regulatory frameworks.
    Question 10b. Do you agree with many energy experts who argue that 
a predictable price on carbon designed in a way that minimizes price 
volatility is the most economically efficiency and technology neutral 
way to realize greater energy efficiency and diversity?
    Answer. Putting a price on carbon is a cornerstone policy in 
climate change response. It is inherently economically efficient 
because it captures a wider range of activities across the economy than 
a policy targeted only on a particular technology or narrow sector, and 
as such a lower-cost mix of measures should come forward to meet a 
given target. Also, It has the benefit of being technology neutral.
    Carbon price volatility can be managed in many ways, which is 
important for investor confidence. In an emissions trading scheme, 
banking of allowances between years is a critical tool for participants 
to be able to manage changing conditions, and has been very successful 
in managing price volatility in the US SO2 allowances 
program and in the European Emissions Trading System. Other proposed 
trading schemes introduce price caps and floors as a safety-valve 
against price excursions. These could be helpful if they are set at 
high enough levels, and if there is confidence in the market that they 
will not be altered. Finally a fixed carbon price (carbon tax) provides 
the most predictable investment climate, as long as there is investor 
confidence that the price is not subject to change with political 
cycles. However a fixed carbon price has the disadvantages that there 
is no guarantee on the level of emissions reductions that will be 
delivered, and it relies on the political will to set the tax at a high 
enough level, and willingness to increase it if emissions are higher 
than anticipated. Given the revolution in our energy systems needed to 
stay within the 2 degrees climate target agreed at Canc#n, caps on 
emissions may be preferable to give certainty over delivery of 
emissions targets, and in this case price volatility is manageable with 
appropriate design choices (such as banking). However in the real world 
there is no one ``right'' policy mix: the most effective policy is that 
which maximises economic efficiency, within the constraints of 
political and public acceptability.
    Moreover there are market barriers and imperfections that mean that 
a carbon price alone is not sufficient. In particular for energy 
efficiency, there is a huge reservoir of untapped potential for 
efficiency improvements that are already cost-effective at today's 
energy prices. The key to unlocking this potential is not so much to 
increase prices further, as it is to remove the non-economic barriers 
to energy efficiency's exploitation. These barriers include lack of 
information and split incentives (i.e. those manufacturing equipment or 
constructing buildings are usually not those who will use them), and 
policies need to be designed in light of real-world, rather than 
theoretical, consumer behaviour. Energy efficiency standards, 
labelling, and incentive schemes are all powerful tools in 
supplementing a carbon price to unlock this energy efficiency 
potential.
    Question 10c. Are there links between policies to reduce greenhouse 
gas emissions and increasing energy diversity? If such policies are 
successful in significantly reducing world demand for fossil fuels, 
what impact on future prices is that likely to have?
    Answer. In practice, many policies aimed at reducing GHG emissions 
from the energy sector will also have the effect of increasing energy 
diversity. Policies that promote the development and deployment of non-
fossil fuel and renewable energy sources will lead to diversification 
away from fossil fuels. These can include renewables standards, feed-in 
tariffs, direct support to utilities to expand or develop non-fossil 
fuel energy sources, or the implementation of a carbon price (through a 
cap and trade system or through taxation). Policies designed to 
increase energy efficiency will not, per se, increase energy diversity, 
but can contribute to energy security as well as reducing GHG 
emissions.
    The 450 Scenario of the IEA's World Energy Outlook 2010 assumes 
strong global action to reduce GHG emissions. In this scenario energy 
diversity is greatly increased by 2035 compared to 2008. In the US, in 
2008, 49% of electricity generation came from coal, and 21% from gas, 
with just under 29% coming from non-fossil fuel sources. By contrast, 
in the 450 Scenario in 2035, these fossil fuels' combined contribution 
to electricity generation is projected to fall to just over 37%, with 
nuclear contributing just over one quarter, and various renewable 
technologies making up the remaining 37%, with none of these making up 
more than 14% of the total energy mix. The reduced demand for fossil 
fuels compared to a scenario with no additional policy to reduce GHGs 
is expected to lead to significantly lower prices. For instance, in the 
450 Scenario, the oil price is expected to reach $90 per barrel in 2009 
dollars by 2035, as compared to $135 per barrel in 2035 in the Current 
Policies Scenario, which assumes no policy change from mid-2010.
                                 ______
                                 
    [Responses to the following questions were not received at 
the time the hearing went to press:]

           Questions for Jim Burkhard From Senator Murkowski

    Question 1. The need for oil exploration: About two years ago you 
said that ``If oil demand does not begin to recover next year, the oil 
market could face a large surplus of production capacity for the next 
several years--even if growth in production capacity slows 
significantly:'' This of course was when oil was barely above $40 a 
barrel, and it's obvious that demand has picked up enough and that OPEC 
has restricted enough output to more than double that price. My 
question is on investment in new reserves. Are enough exploratory 
operations underway to comfortably back up production for projected 
demand growth?

        US ENERGY COMPANIES VERSUS NATIONAL OIL COMPANIES (NOCS)

    Question 2. Can you describe how U.S. oil and gas producers operate 
with any disadvantages relative to National Oil Companies such as the 
OPEC owner companies?

                              OIL MARKETS

    Question 3. If only about 3 percent of the world's oil travels 
through the Suez canal and the SUMED pipeline, yet we are seeing some 
influence on the global commodity price resulting from instability 
around the Suez, does this indicate that seemingly small disruptions, 
real or potential, can have comparatively large impacts on global 
markets?

                         MAJOR OIL DISCOVERIES

    Question 4. What was the impact on global investment and markets 
when the Tupi field was discovered off of Brazil in 2006, and how does 
the addition of a multibillion barrel discovery impact the host nation 
and the industry?

                      CRISIS-DRIVEN ENERGY POLICY

    Question 5. The Outer Continental Shelf Lands Act was implemented 
after the Arab oil embargo and subsequent price controls and economic 
shocks of the 1970's, as was the authorization of the Trans-Alaska 
Pipeline System. Are these patterns of crisis and response as an 
unavoidable trend in U.S. energy policy?

          a. Is the U.S., in your group's view, more proactive or 
        reactive in its energy policy?

                         CLEAN ENERGY STANDARD

    Question 6. Should we learn a lesson from the Renewable Fuel 
Standard, which has fallen short of expectations, when considering an 
aggressive electricity mandate like the one the President is calling 
for? How likely is it that we will create unforeseen problems if we put 
a CES in place? To name just one example, will transmission problems 
and our inability to add significant amounts of renewable energy to the 
grid--become the new ``blend wall''?

                          ALTERNATIVES TO OIL

    Question 7. How substantial of an impact do you believe advanced 
biofuels, electric vehicles, and other technologies will have on 
petroleum consumption by 2020? By 2030?

                         FOREIGN OIL DEPENDENCE

    Question 8. If Congress had allowed the Coastal Plain of ANWR and 
other parts of Alaska to be opened to production, in 1 995 for example, 
we would be producing domestic oil at a considerably higher rate. What 
would that mean for our nation's energy security? Would we he more 
protected, or less protected, from civil unrest in Egypt, Jordan, and 
other parts of the Middle East? In the event of a supply disruption 
abroad, would we be better equipped, or less prepared, to deal with 
import shortages?

                          PROJECTED OIL PRICES

    Question 9. In a hypothetical scenario of September 2012., with 
unemployment is down to 8.0%, the economy growing at greater than 3.0% 
each quarter, and world markets on the upswing, where would you 
forecast the price of oil?

                          OFFSHORE MORATORIUM

    Question 10. How does the amount of oil that could he taken offline 
by unrest in the Middle East compare to the amount of production that 
will be lost because of the absence of new exploratory permits in the 
Gulf of Mexico, and the absence of resumed exploratory operations?

                           ECONOMIC RECOVERY

    Question 11. Adam Sieminski, the Chief Energy Economist for 
Deutsche Bank, recently wrote that ``We estimate that a [10 dollar] 
rise in the oil price subtracts approximately 0.5 percentage points off 
U.S. growth.'' Do any of you agree with Mr. Sieminski's assessment?

          a. Would this calculation change if the US supplied 60% of 
        its own oil as opposed to importing 60% of its oil?

                            PRICE INCREASES

    Question 12. The head of the Bipartisan Policy Center noted earlier 
this week that ``A one-dollar, one-day increase in a barrel of oil 
takes $12 million out of the U.S. economy. If tensions in the Mideast 
cause oil prices to rise by $5 for even just three months, over 5 
billion dollars will leave the U.S. economy.'' Do any of you disagree 
with that assessment?

                       IMPACT OF FEDERAL POLICIES

    Question 13. What role does the federal government's stimulus 
policies, and the Federal Reserve's second round of quantitative 
easing, have played in boosting commodity prices? Have these policies 
boosted the price of oil, and, if so, by how much?

                        MODULAR NUCLEAR REACTORS

    Question 14. What role do you believe small modular nuclear 
reactors will have in meeting the global demand for electricity? What 
countries are moving forward with this technology and what countries 
are interesting in acquiring these reactors?

                            OIL SPILL REPORT

    Question 15. Have you reviewed the recommendations made by the 
President's Oil Spill Commission? I lave you conducted any analysis on 
the impact those recommendations, if fully implemented, would have on 
domestic oil production, our import levels, and the global price of 
oil?

                                 CHINA

    Question 16. Can you shed light on what China's energy picture 
really looks like, not just for renewable energy, but also its future 
demand for oil, natural gas, and coal?

            Questions for Jim Burkhard From Senator Cantwell

  EFFECT OF DOMESTIC DRILLING ON GAS PRICES AND FOREIGN OIL DEPENDENCE

    Question 1. In response to the recent political unrest in the 
Middle East, and rising oil prices, we have heard familiar calls to 
expand domestic drilling in the United States--including offshore and 
in the pristine Arctic National Wildlife Refuge (ANWR)----typically 
with the claim that such actions will lower gasoline prices or reduce 
our dangerous over-reliance on foreign oil.
    An Energy Information Administration (EIA) study from May 2008\1\ 
projected the effects on oil prices of drilling in the Arctic National 
Wildlife Refuge. According to EIA's projections, in the most optimistic 
case, drilling in AN WR would reduce crude oil prices by approximately 
$1.44 per barrel. I understand this would translate to approximately 3 
to 4 cents per gallon of gasoline at the pump about 20 years from now.
---------------------------------------------------------------------------
    \1\ http://www.eia.doe.gov/oiaf/servicerpt/anwr/results.html
---------------------------------------------------------------------------
    It seems that EIA has found that drilling offshore would have a 
similarly negligible effect on prices. FIA issued an analysis in 2009 
that examined the impact of maintaining the historical moratorium on 
drilling off the Atlantic, Pacific, and Eastern Gulf of Mexico. 
According to that analysis: ``With limited access to the lower 48 
OCS...there [would be] a small increase in world oil prices...The 
average price of imported low-sulfur crude...is $1.34 per barrel 
higher, and the average U.S. price of gasoline is 3 cents per gallon 
higher.''
    Mr. Jones, Diwan, or Burkhard, would you please comment on your 
views on the ability of expanded domestic drilling to affect world oil 
prices?

         IS OPEC ABLE TO OFFSET ANY INCREASED DOMESTIC DRILLING

    Question 2. A number of experts have argued that any price impact 
of increased domestic production can be easily offset by OPEC. 
According to another EIA factsheet\2\:
---------------------------------------------------------------------------
    \2\ EIA Factsheet. ``Gasoline Explained: Factors Affecting Gasoline 
Prices'', available at http://tonto.eia.doe.gov/energyexplained/
index.cfm?page=gasoline_factors_affecting_prices

          One of the major factors on the supply side is OPEC, which 
        can sometimes exert significant influence on prices by setting 
        an upper production limit on its members, which produce about 
        40% of the world's crude oil. OPEC countries have essentially 
        all of the world's spare oil production capacity, and possess 
---------------------------------------------------------------------------
        about two-thirds of the world's estimated crude oil reserves.

    Mr. Newell, Diwan, and Burkhard, is it true that OPEC, by modestly 
curtailing its output, has the power to offset any downward pressure 
that a marginal increase in US oil production might otherwise produce?

                  EFFECT OF SPECULATION ON OIL PRICES

    Question 3. Several of the testified that oil price movements can 
be explained by supply and demand fundamentals, and these explain the 
upward pressure we've seen in recent months. We often hear about the 
lack of a ``conclusive'' smoking gun that links oil price spikes to 
speculation in the derivatives markets.
    However, as you may know, the recently-passed Dodd-Frank Act 
requires the Commodities Future Trading Commission (CFTC) to establish 
rules to eliminate excessive position limits. Unfortunately, the 180-
day deadline for those rules has passed and the regulatory process of 
establishing position limits is still in the early stages, and the 
limits are planned to be phased in over time.
    Can the witnesses please comment on the likelihood of seeing a huge 
oil price spike this summer of the magnitude that we saw in the summer 
of 2008?
    Do any of the witnesses believe that putting some limits on 
excessive speculation reduces the chances of rapid rise in oil prices 
similar to the summer of 2008?

            EFFECT OF NEW PRODUCTION TECHNOLOGIES ON PRICES

    Question 4. There seems to he some disagreement on whether 
investment in developing new production technologies ends up reducing 
the price of fossil fuels. We have heard a great deal about how oil and 
gas production is a capital intensive business that requires 
significant investment in new technologies to access new resources, 
whether those are unconventional resources, such as oil sands or shale, 
or hard to access resources, such as ultra-deepwater drilling.
    Does investment in developing such hard-to-access resources result 
in lower fossil fuel prices? Or does it simply enable the production of 
harder to access and more expensive resources, thereby ensuring that 
oil and natural gas will only continue to flow as long as global prices 
remain high? Are you concerned that the U.S. is locking itself into 
dependence on a resource that is destined to get more and more 
expensive over time?
    Do you believe there is now a new normal for fossil fuel prices? 
Just a decade ago OPEC had a $22 to $28 a barrel target range. In 2004, 
Ali Naimi, the Saudi oil minister called $30 to $34 a barrel a ``fair 
and reasonable price'' for oil. Why is the world now so willing to 
accept considerable higher level of fossil fuel prices?

                         U.S. OIL DEMAND CURVE

    Question 6. I found one of the most interesting trends across your 
collective forecasts is the flat, or even declining, demand for oil in 
developed countries, including the United States, over the next 25 
years.
    Mr. Burkhard's testimony notes that CERA believes aggregate oil 
demand in developed markets peaked in 2005 and will not exceed that 
level again.
    The IEA predicts U.S. oil demand will drop by 10% by 2035.
    The EIA reference case predicts that total liquid fuels consumption 
in the U.S. will increase 17%, to 22.0 million gallons per day, but 
almost all of that increase will come from biofuels. Oil demand appears 
essentially flat or falling.
    If Congress and the Bush and Obama Administrations had failed to 
enact these policies, how likely is it that forecasted U.S. oil demand 
would be falling over the next 25 years?
    If Congress and the Administration had failed to enact these 
policies, what would you anticipate would be the effect on global oil 
prices in 2035, compared with your reference case?

                    MEETING RENEWABLE FUELS TARGETS

    Question 7. I am discouraged by EIA's prediction that the market 
will be unable to meet the targets set forth in RFS2, which is the 
revised Renewable Fuels Standard that Congress passed in 2007.
    That standard mandates production of thirty-six billion gallons of 
biofuels a year by the year 2022, sixteen billion gallons of which must 
be of ``cellulosic'' origin.
    Your agency's analysis states that: -ETA's present view of the 
projected rates of technology development and market penetration of 
cellulosic biofuel technologies suggests that available quantities of 
cellulosic biofuels will be insufficient to meet the renewable fuels 
standard targets for cellulosic biofuels before 2022.''
    Do you believe there will be enough flexible fuel vehicles 
available in America in 2022 to be able to consume biofuels production 
mandates in the RFS-2?

                   IMPLICATIONS OF BUSINESS AS USUAL

    Question 8. One thing I found lacking from most of the analyses was 
any kind of discussion of their broader implications. For example what 
kind of world will we live in 2035 if the forecasts contained in the 
reference cases prove accurate, a world that consumes 107 million 
barrels of oil per day.
    Mr. Burkhard, in your testimony you describe a world in which 
access to energy services has allowed an unprecedented number of people 
to join the ranks of the middle class. Further reduction in global 
poverty is an outcome we can all celebrate.
    But I appreciated Ambassador Jones' testimony as well, which 
devoted some attention to the risks of continuing on our present path. 
These include serious risks to national security, economic development, 
and of course the environment.
    If I may quote from the Ambassador's written testimony:

          ...the global energy system, in which all countries are 
        interdependent, faces a future that is increasingly untenable. 
        To continue business-as-usual risks heightened insecurity, 
        increasing economic volatility, and irreparable harm to the 
        environment. We truly need a transformation in the world's 
        energy system to a more secure, sustainable model...''

    I completely agree. Energy policy raises complex questions of 
equity and justice. I believe that too often, people who point to the 
unsustainable nature of our energy system are labeled as ``anti-
growth''. For all our sakes, I hope we can begin to move beyond such 
characterizations, and start talking about policy that can foster both 
growth and sustainability.
    Would you please comment on the implications of continuing on our 
business-as-usual trajectory (i.e. the trajectory outlined in the EIA 
reference case)?

                    HOW TO INCREASE ENERGY DIVERSITY

    Question 11. A common theme across all the witness testimony is 
that global energy demand is increasing and fossil fuel prices are 
likely to continue to increase. So it seems like if the U.S. continues 
to ignore this problem, the economic and security impacts will be 
significant. The witnesses also all seem to agree that diversifying 
America's sources of energy is a key way to mitigate these harmful 
impacts.
    What are the most economically efficient policies to increase U.S. 
energy diversity without the need for government to pick technology or 
special interest winners or losers?
    Do you agree with many energy experts who argue that a predictable 
price on carbon designed in a way that minimizes price volatility is 
the most economically efficiency and technology neutral way to realize 
greater energy efficiency and diversity?
    Are there links between policies to reduce greenhouse gas emissions 
and increasing energy diversity? If such policies are successful in 
significantly reducing world demand for fossil fuels, what impact on 
future prices is that likely to have?
                                 ______
                                 
            Questions for Roger Diwan From Senator Murkowski

        US ENERGY COMPANIES VERSUS NATIONAL OIL COMPANIES (NOCS)

    Question 1. Can you describe how U.S. oil and gas producers operate 
with any disadvantages relative to National Oil Companies such as the 
OPEC owner companies?

                              OIL MARKETS

    Question 2. If only about 3 percent of the world's oil travels 
through the Suez canal and the SUMED pipeline, yet we are seeing some 
influence on the global commodity price resulting from instability 
around the Suez, does this indicate that seemingly small disruptions, 
real or potential, can have comparatively large impacts on global 
markets?

                         MAJOR OIL DISCOVERIES

    Question 3. What was the impact on global investment and markets 
when the Tupi field was discovered off of Brazil in 2006, and how does 
the addition of a multibillion barrel discovery impact the host nation 
and the industry?

                      CRISIS-DRIVEN ENERGY POLICY

    Question 4. The Outer Continental Shelf Lands Act was implemented 
after the Arab oil embargo and subsequent price controls and economic 
shocks of the 1970's, as was the authorization of the Trans-Alaska 
Pipeline System. Are these patterns of crisis and response as an 
unavoidable trend in U.S. energy policy?

          a. Is the U.S., in your group's view, more proactive or 
        reactive in its energy policy?


                         CLEAN ENERGY STANDARD

    Question 5. Should we learn a lesson from the Renewable Fuel 
Standard, which has fallen short of expectations, when considering an 
aggressive electricity mandate like the one the President is calling 
for? How likely is it that we will create unforeseen problems if we put 
a CES in place? To name just one example, will transmission problems 
and our inability to add significant amounts of renewable energy to the 
grid--become the new ``blend wall''?

                          ALTERNATIVES TO OIL

    Question 6. How substantial of an impact do you believe advanced 
biofuels, electric vehicles, and other technologies will have on 
petroleum consumption by 2020? By 2030?

                         FOREIGN OIL DEPENDENCE

    Question 7. If Congress had allowed the Coastal Plain of ANWR and 
other parts of Alaska to be opened to production, in 1 995 for example, 
we would be producing domestic oil at a considerably higher rate. What 
would that mean for our nation's energy security? Would we he more 
protected, or less protected, from civil unrest in Egypt, Jordan, and 
other parts of the Middle East? In the event of a supply disruption 
abroad, would we be better equipped, or less prepared, to deal with 
import shortages?

                          PROJECTED OIL PRICES

    Question 8. In a hypothetical scenario of September 2012., with 
unemployment is down to 8.0%, the economy growing at greater than 3.0% 
each quarter, and world markets on the upswing, where would you 
forecast the price of oil?

                          OFFSHORE MORATORIUM

    Question 9. How does the amount of oil that could he taken offline 
by unrest in the Middle East compare to the amount of production that 
will be lost because of the absence of new exploratory permits in the 
Gulf of Mexico, and the absence of resumed exploratory operations?

                           ECONOMIC RECOVERY

    Question 10. Adam Sieminski, the Chief Energy Economist for 
Deutsche Bank, recently wrote that ``We estimate that a [10 dollar] 
rise in the oil price subtracts approximately 0.5 percentage points off 
U.S. growth.'' Do any of you agree with Mr. Sieminski's assessment?

          a. Would this calculation change if the US supplied 60% of 
        its own oil as opposed to importing 60% of its oil?

                            PRICE INCREASES

    Question 11. The head of the Bipartisan Policy Center noted earlier 
this week that ``A one-dollar, one-day increase in a barrel of oil 
takes $12 million out of the U.S. economy. If tensions in the Mideast 
cause oil prices to rise by $5 for even just three months, over 5 
billion dollars will leave the U.S. economy.'' Do any of you disagree 
with that assessment?

                       IMPACT OF FEDERAL POLICIES

    Question 12. What role does the federal government's stimulus 
policies, and the Federal Reserve's second round of quantitative 
easing, have played in boosting commodity prices? Have these policies 
boosted the price of oil, and, if so, by how much?

                        MODULAR NUCLEAR REACTORS

    Question 13. What role do you believe small modular nuclear 
reactors will have in meeting the global demand for electricity? What 
countries are moving forward with this technology and what countries 
are interesting in acquiring these reactors?

                            OIL SPILL REPORT

    Question 14. Have you reviewed the recommendations made by the 
President's Oil Spill Commission? I lave you conducted any analysis on 
the impact those recommendations, if fully implemented, would have on 
domestic oil production, our import levels, and the global price of 
oil?

                                 CHINA

    Question 15. Can you shed light on what China's energy picture 
really looks like, not just for renewable energy, but also its future 
demand for oil, natural gas, and coal?

            Questions for Roger Diwan From Senator Cantwell

  EFFECT OF DOMESTIC DRILLING ON GAS PRICES AND FOREIGN OIL DEPENDENCE

    Question 1. In response to the recent political unrest in the 
Middle East, and rising oil prices, we have heard familiar calls to 
expand domestic drilling in the United States--including offshore and 
in the pristine Arctic National Wildlife Refuge (ANWR)----typically 
with the claim that such actions will lower gasoline prices or reduce 
our dangerous over-reliance on foreign oil.
    An Energy Information Administration (EIA) study from May 2008\1\ 
projected the effects on oil prices of drilling in the Arctic National 
Wildlife Refuge. According to EIA's projections, in the most optimistic 
case, drilling in AN WR would reduce crude oil prices by approximately 
$1.44 per barrel. I understand this would translate to approximately 3 
to 4 cents per gallon of gasoline at the pump about 20 years from now.
---------------------------------------------------------------------------
    \1\ http://www.eia.doe.gov/oiaf/servicerpt/anwr/results.html
---------------------------------------------------------------------------
    It seems that EIA has found that drilling offshore would have a 
similarly negligible effect on prices. FIA issued an analysis in 2009 
that examined the impact of maintaining the historical moratorium on 
drilling off the Atlantic, Pacific, and Eastern Gulf of Mexico. 
According to that analysis: ``With limited access to the lower 48 
OCS...there [would be] a small increase in world oil prices...The 
average price of imported low-sulfur crude...is $1.34 per barrel 
higher, and the average U.S. price of gasoline is 3 cents per gallon 
higher.''
    Mr. Jones, Diwan, or Burkhard, would you please comment on your 
views on the ability of expanded domestic drilling to affect world oil 
prices?

         IS OPEC ABLE TO OFFSET ANY INCREASED DOMESTIC DRILLING

    Question 2. A number of experts have argued that any price impact 
of increased domestic production can be easily offset by OPEC. 
According to another EIA factsheet\2\:
---------------------------------------------------------------------------
    \2\ EIA Factsheet. ``Gasoline Explained: Factors Affecting Gasoline 
Prices'', available at http://tonto.eia.doe.gov/energyexplained/
index.cfm?page=gasoline_factors_affecting_prices

          One of the major factors on the supply side is OPEC, which 
        can sometimes exert significant influence on prices by setting 
        an upper production limit on its members, which produce about 
        40% of the world's crude oil. OPEC countries have essentially 
        all of the world's spare oil production capacity, and possess 
---------------------------------------------------------------------------
        about two-thirds of the world's estimated crude oil reserves.

    Mr. Newell, Diwan, and Burkhard, is it true that OPEC, by modestly 
curtailing its output, has the power to offset any downward pressure 
that a marginal increase in US oil production might otherwise produce?

                  EFFECT OF SPECULATION ON OIL PRICES

    Question 3. Several of the testified that oil price movements can 
be explained by supply and demand fundamentals, and these explain the 
upward pressure we've seen in recent months. We often hear about the 
lack of a ``conclusive'' smoking gun that links oil price spikes to 
speculation in the derivatives markets.
    However, as you may know, the recently-passed Dodd-Frank Act 
requires the Commodities Future Trading Commission (CFTC) to establish 
rules to eliminate excessive position limits. Unfortunately, the 180-
day deadline for those rules has passed and the regulatory process of 
establishing position limits is still in the early stages, and the 
limits are planned to be phased in over time.
    Can the witnesses please comment on the likelihood of seeing a huge 
oil price spike this summer of the magnitude that we saw in the summer 
of 2008?
    Do any of the witnesses believe that putting some limits on 
excessive speculation reduces the chances of rapid rise in oil prices 
similar to the summer of 2008?

            EFFECT OF NEW PRODUCTION TECHNOLOGIES ON PRICES

    Question 4. There seems to he some disagreement on whether 
investment in developing new production technologies ends up reducing 
the price of fossil fuels. We have heard a great deal about how oil and 
gas production is a capital intensive business that requires 
significant investment in new technologies to access new resources, 
whether those are unconventional resources, such as oil sands or shale, 
or hard to access resources, such as ultra-deepwater drilling.
    Does investment in developing such hard-to-access resources result 
in lower fossil fuel prices? Or does it simply enable the production of 
harder to access and more expensive resources, thereby ensuring that 
oil and natural gas will only continue to flow as long as global prices 
remain high? Are you concerned that the U.S. is locking itself into 
dependence on a resource that is destined to get more and more 
expensive over time?
    Do you believe there is now a new normal for fossil fuel prices? 
Just a decade ago OPEC had a $22 to $28 a barrel target range. In 2004, 
Ali Naimi, the Saudi oil minister called $30 to $34 a barrel a ``fair 
and reasonable price'' for oil. Why is the world now so willing to 
accept considerable higher level of fossil fuel prices?

                         U.S. OIL DEMAND CURVE

    Question 6. I found one of the most interesting trends across your 
collective forecasts is the flat, or even declining, demand for oil in 
developed countries, including the United States, over the next 25 
years.
    Mr. Burkhard's testimony notes that CERA believes aggregate oil 
demand in developed markets peaked in 2005 and will not exceed that 
level again.
    The IEA predicts U.S. oil demand will drop by 10% by 2035.
    The EIA reference case predicts that total liquid fuels consumption 
in the U.S. will increase 17%, to 22.0 million gallons per day, but 
almost all of that increase will come from biofuels. Oil demand appears 
essentially flat or falling.
    If Congress and the Bush and Obama Administrations had failed to 
enact these policies, how likely is it that forecasted U.S. oil demand 
would be falling over the next 25 years?
    If Congress and the Administration had failed to enact these 
policies, what would you anticipate would be the effect on global oil 
prices in 2035, compared with your reference case?

                    MEETING RENEWABLE FUELS TARGETS

    Question 7. I am discouraged by EIA's prediction that the market 
will be unable to meet the targets set forth in RFS2, which is the 
revised Renewable Fuels Standard that Congress passed in 2007.
    That standard mandates production of thirty-six billion gallons of 
biofuels a year by the year 2022, sixteen billion gallons of which must 
be of ``cellulosic'' origin.
    Your agency's analysis states that: -ETA's present view of the 
projected rates of technology development and market penetration of 
cellulosic biofuel technologies suggests that available quantities of 
cellulosic biofuels will be insufficient to meet the renewable fuels 
standard targets for cellulosic biofuels before 2022.''
    Do you believe there will be enough flexible fuel vehicles 
available in America in 2022 to be able to consume biofuels production 
mandates in the RFS-2?

                   IMPLICATIONS OF BUSINESS AS USUAL

    Question 8. One thing I found lacking from most of the analyses was 
any kind of discussion of their broader implications. For example what 
kind of world will we live in 2035 if the forecasts contained in the 
reference cases prove accurate, a world that consumes 107 million 
barrels of oil per day.
    Mr. Burkhard, in your testimony you describe a world in which 
access to energy services has allowed an unprecedented number of people 
to join the ranks of the middle class. Further reduction in global 
poverty is an outcome we can all celebrate.
    But I appreciated Ambassador Jones' testimony as well, which 
devoted some attention to the risks of continuing on our present path. 
These include serious risks to national security, economic development, 
and of course the environment.
    If I may quote from the Ambassador's written testimony:

          ...the global energy system, in which all countries are 
        interdependent, faces a future that is increasingly untenable. 
        To continue business-as-usual risks heightened insecurity, 
        increasing economic volatility, and irreparable harm to the 
        environment. We truly need a transformation in the world's 
        energy system to a more secure, sustainable model...''

    I completely agree. Energy policy raises complex questions of 
equity and justice. I believe that too often, people who point to the 
unsustainable nature of our energy system are labeled as ``anti-
growth''. For all our sakes, I hope we can begin to move beyond such 
characterizations, and start talking about policy that can foster both 
growth and sustainability.
    Would you please comment on the implications of continuing on our 
business-as-usual trajectory (i.e. the trajectory outlined in the EIA 
reference case)?

                    HOW TO INCREASE ENERGY DIVERSITY

    Question 11. A common theme across all the witness testimony is 
that global energy demand is increasing and fossil fuel prices are 
likely to continue to increase. So it seems like if the U.S. continues 
to ignore this problem, the economic and security impacts will be 
significant. The witnesses also all seem to agree that diversifying 
America's sources of energy is a key way to mitigate these harmful 
impacts.
    What are the most economically efficient policies to increase U.S. 
energy diversity without the need for government to pick technology or 
special interest winners or losers?
    Do you agree with many energy experts who argue that a predictable 
price on carbon designed in a way that minimizes price volatility is 
the most economically efficiency and technology neutral way to realize 
greater energy efficiency and diversity?
    Are there links between policies to reduce greenhouse gas emissions 
and increasing energy diversity? If such policies are successful in 
significantly reducing world demand for fossil fuels, what impact on 
future prices is that likely to have?

                                    
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