[Senate Hearing 112-435]
[From the U.S. Government Publishing Office]





                                                        S. Hrg. 112-435
 
                            GASOLINE PRICES

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



                                HEARING

                               before the

                              COMMITTEE ON

                      ENERGY AND NATURAL RESOURCES

                          UNITED STATES SENATE

                      ONE HUNDRED TWELFTH CONGRESS

                             SECOND SESSION

                                   TO

 RECEIVE TESTIMONY ON CURRENT AND NEAR-TERM FUTURE PRICE EXPECTATIONS 
    AND TRENDS FOR MOTOR GASOLINE AND OTHER REFINED PETROLEUM FUELS

                               __________

                             MARCH 29, 2012


                       Printed for the use of the

               Committee on Energy and Natural Resources





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74-602                   WASHINGTON : 2012
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20402-0001



               COMMITTEE ON ENERGY AND NATURAL RESOURCES

                  JEFF BINGAMAN, New Mexico, Chairman


RON WYDEN, Oregon                    LISA MURKOWSKI, Alaska

TIM JOHNSON, South Dakota            JOHN BARRASSO, Wyoming
MARY L. LANDRIEU, Louisiana          JAMES E. RISCH, Idaho
MARIA CANTWELL, Washington           MIKE LEE, Utah
BERNARD SANDERS, Vermont             RAND PAUL, Kentucky
DEBBIE STABENOW, Michigan            DANIEL COATS, Indiana
MARK UDALL, Colorado                 ROB PORTMAN, Ohio
JEANNE SHAHEEN, New Hampshire        JOHN HOEVEN, North Dakota
AL FRANKEN, Minnesota                DEAN HELLER, Nevada
JOE MANCHIN, III, West Virginia      BOB CORKER, Tennessee
CHRISTOPHER A. COONS, Delaware

                    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
Daniel, Yergin, Chairman, IHS Cambridge Energy Research 
  Associates.....................................................     8
Gruenspecht, Howard, Acting Administrator, Energy Information 
  Administration, Department of Energy...........................     4
Horsnell, Paul, Head of Commodities Research, Barclays...........    22
Murkowski, Hon. Lisa, U.S. Senator From Alaska...................     2
Verrastro, Frank A., Senior Vice President and Director, Energy 
  and National Security Program, Center for Strategic and 
  International Studies..........................................    14

                               APPENDIXES
                               Appendix I

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

                              Appendix II

Additional material submitted for the record.....................    89


                            GASOLINE PRICES

                              ----------                              


                        THURSDAY, MARCH 29, 2012

                                       U.S. Senate,
                 Committee on Energy and Natural Resources,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 9:35 a.m. in room 
SD-366, Dirksen Senate Office Building, Hon. Jeff Bingaman, 
chairman, presiding.

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

    The Chairman. OK. Why don't we get started?
    Thank you all for coming today. This is an oversight 
hearing of the Senate Energy and Natural Resources Committee on 
the current and near-term future price expectations and trends 
for gasoline at the pump.
    As we all know, Americans are facing high prices when they 
go to fuel up their cars and trucks at the pump. They're 
struggling with the impact of those prices. The high prices are 
also a significant drag on our entire economy as we work to 
increase growth and job creation. We've organized this hearing 
to learn more about what is contributing to these higher 
prices, and what we can expect in the coming months as we 
approach the summer driving season.
    I've said on several occasions in recent days that I 
believe it's important for us to use accurate facts when we 
work on these important energy policy issues. That's a major 
reason why we asked the panel of experts to come speak to us 
today. To provide us with their views on what those facts are.
    Let me just note a few key points that I think are beyond 
dispute. If they are subject to dispute, maybe our witnesses 
can correct me on that. But I think they're accurate.
    We know that the price of oil is set on a world market and 
that changes in our own domestic oil production do not have a 
major impact on the price of oil on that market, that world 
market.
    We do not face cycles of high gasoline prices in the United 
States because of a lack of domestic production or a lack of 
access to Federal resources or because of environmental 
regulations getting in the way of us obtaining cheap gasoline.
    We also know that there are many factors that can impact 
world oil markets. We hope to hear more about those factors 
today from all of our witnesses. We look forward to hearing 
from them about the dynamics of these various factors and what 
we can expect in coming months.
    I also hope we can take what we learn and use it to focus 
on policies that can actually lead to more stable gasoline 
prices over time. This committee did good work on those issues 
in 2007 in developing the bipartisan energy bill we passed that 
year. That bill has delivered more biofuels for transportation 
and more efficient vehicles on our roads.
    It already has helped to significantly reduce our 
dependence on foreign oil. We need to continue our work to find 
ways to use less oil and to be less vulnerable to the 
volatility, of the world oil market. I hope today's discussion 
will give us useful information on how we can do that.
    Before we hear from our witnesses, before I introduce them, 
let me turn to Senator Murkowski for any comments she wants to 
make.

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

    Senator Murkowski. Thank you, Mr. Chairman.
    Welcome to our distinguished panel. We're all anxious to 
hear your comments this morning. I think we're all looking for 
the quick and easy answer, but I think realistically we know 
that there are no quick and easy answers to the fact that we 
are seeing significantly high prices at the pump.
    In this morning's Washington Post the headline is, as area 
gas prices top $4 a gallon, I do a little independent survey of 
my communities back home. Just do a week by week assessment 
here.
    Unleaded in Barrow is going for $5.75 a gallon.
    Juno, our State Capital, is $4.15.
    Nome is $5.98.
    Kotzebue, just above it, is $7 and 31 cents.
    So they're looking at what the national average is now and 
saying, boy, in the rear view mirror that looks pretty good 
because we're getting nailed with the high prices. They're 
looking for answers. So when there has been suggestion either 
in political commentary or in the news that somehow or other 
this is a political opportunity for us, I don't think most who 
are really feeling the pain at the pain, feeling the pain in 
their wallets and their pocketbooks, they don't view this as a 
political opportunity.
    They expect us to do something here. They want to know what 
it is that can be done. So this exchange this morning, I think, 
is important.
    We recognize that there are a lot of different factors that 
are driving up the fuel costs. Some are clearly beyond the 
control of this President, clearly beyond the control of this 
Congress. We recognize that.
    But there are some things that I think that we can 
influence. We've heard about how we've got limited ability to 
control the instability in the Middle East or with the growing 
demand in China and other emergent countries and economies. Of 
course, our influence there is limited. That is clearly 
contributing to higher oil prices. We recognize that.
    But there are a number of areas where the U.S. and 
particularly, our own Federal Government can have an impact.
    We can influence pipeline capacity by improving them on a 
timely basis.
    We can influence whether refineries stay in business by 
virtue of the regulations that we apply to them.
    We can influence the value of the dollar and tax rates on 
the production, delivery and use of fuel.
    I think, very importantly, the Federal Government controls 
access to millions of acres of Federal land with oil potential 
and of all the factors that I have listed, I think access is 
really the only area here where this committee has direct 
jurisdiction over. Our decisions help determine whether 
companies have access to the outer Continental Shelf, to the 
non-wilderness portion of ANWAR, much of the Rocky Mountain 
West. So if I seem somewhat eager to focus on access to Federal 
lands and waters it's because I think this is one of the areas 
and perhaps the most significant area that we can have the 
direct authority or that we do have the direct authority to 
help.
    I believe, quite strongly, supply and demand absolutely 
matter. It's not just one or the other. We are the world's 
number 3 producer of oil. We're the world's No. 1 consumer of 
oil.
    Our production is rising on state and private lands. The 
question that nobody seems to be asking, though, is what the 
price of oil would be if that weren't happening. If we weren't 
seeing this increase that the President keeps pointing to. In 
my mind there's no doubt that it would be higher, that the pain 
at the pump would, in fact, be worse.
    I think most of us are using the terminology around here 
now that we should pursue an ``All of the Above'' energy 
policy. I think that that means increased or higher efficiency 
standards for vehicles of all sizes. It means investments in R 
and D for alternatives. It certainly means a concerted effort 
to bring more of America's oil to market.
    With that, I look forward to the testimony and the 
questions and answers from those of us here on the committee.
    Thank you, Mr. Chairman.
    The Chairman. Thank you very much.
    Let me just briefly introduce our witnesses. We very much 
appreciate them being here.
    Dr. Howard Gruenspecht is the Acting Administrator and 
Deputy Administrator with the Energy Information Administration 
in the Department of Energy.
    Dr. Daniel Yergin is Chairman of IHS Cambridge Energy 
Research Associates here in Washington.
    Mr. Frank Verrastro is the Senior Vice President and 
Director of Energy and National Security Program for the Center 
for Strategic and International Studies here in Washington.
    Dr. Paul Horsnell is the Managing Director and Head of 
Commodities Research with Barclays Capital in London.
    Thank you all very much for being here. If you could each 
take whatever time you think is necessary to make the points 
that you think we need to understand. Your full statements will 
be included in the record as if read.
    Dr. Gruenspecht.

 STATEMENT OF HOWARD GRUENSPECHT, ACTING ADMINISTRATOR, ENERGY 
        INFORMATION ADMINISTRATION, DEPARTMENT OF ENERGY

    Mr. Gruenspecht. Thank you, Mr. Chairman, Ranking Member 
Murkowski and members of the committee. I appreciate the 
opportunity to appear before you.
    The Energy Information Administration is the statistical 
and analytical agency within the Department of Energy. Because 
EIA does not promote or take positions on policy issues and has 
independence with respect to the information it provides, our 
views should not be construed as representing those of the 
Department or other Federal agencies.
    Prices for all petroleum products have risen in recent 
months but gasoline prices are of particular concern to most 
consumers. The national average price of regular gasoline 
averaged $3.58 per gallon in February 2012, 37 cents higher 
than in February 2011. It's certainly risen since over the past 
month as well. The February price was at a historic high for 
any February. There is, however, significant regional variation 
in prices as illustrated in Figure 1 of my testimony.
    Crude oil price increases, I think, have eclipsed other 
drivers of motor fueled prices as shown in Figure 2 and 3 of my 
testimony. While both gasoline and diesel prices rose by 37 
cents per gallon from February 2011 to February 2012, the cost 
of crude oil to refiners rose by about $20 per barrel, about 48 
cents per gallon over the same period. The increases in crude 
oil prices since the start of 2011 appear to be related to a 
tightening world supply/demand balance and concerns over 
geopolitical issues that have impacted or have potential to 
impact supply flows from the Middle East and North Africa, a 
region that is critical to global oil supply.
    Demand growth in developing countries drove an 800,000 
barrel per day rise in world demand in 2011. Non-OPEC supply, 
mostly from outside of the Middle East, has had some recent 
setbacks, as described in my testimony. In addition both the 
United States and the European Union have acted to tighten 
sanctions against Iran including measures with both immediate 
and future effective dates.
    Current prices reflect expectations, as well as today's 
conditions, and many analysts see continuing demand growth with 
possible tightening in supply over the coming months--a 
combination that's affecting the market. For the first time 
since 1949 in 2011, EIA data show that the United States became 
a net exporter of petroleum products. That's not including 
crude oil, just the products that come out the other end of the 
refinery.
    However, we don't think that higher gasoline prices are 
being caused by higher product exports. U.S. gasoline exports 
have grown mainly as a result of refiners having excess 
capacity as U.S. consumption of petroleum based, liquid fuels 
has declined. Between 2007 and 2011 U.S. consumption of liquid 
fuels fell by 1.85 million barrels per day. Over the same 
period domestic production of ethanol and biodiesel, which 
displaces petroleum in motor fuels, increased by roughly half a 
million barrels per day.
    While the domestic demand for petroleum fuels has declined, 
many U.S. refiners had a competitive advantage in markets in 
Latin America and other regions that need gasoline imports to 
meet growing demand. U.S. refiners are taking advantage of 
these export opportunities. Accordingly, they reduced crude oil 
inputs to their refineries by only a little more than 300,000 
barrels per day between 2007 and 2011, despite the much larger 
decrease in liquid fuels consumption in the United States and 
the increase of the non-petroleum liquid fuels to meet that 
consumption.
    Without product exports domestic refiners would have 
reduced their runs by a much larger amount. In EIA's March 
short term outlook, the cost of crude oil to refiners continues 
to be the major factor affecting gasoline and diesel prices. 
The average refiner's acquisition cost of crude oil is forecast 
to increase from $102 a barrel in 2011 to almost $115 per 
barrel in 2012, but falls back in 2013.
    EIA recognizes that significant uncertainties could push 
oil prices higher or lower than our forecast. Based on options 
in futures prices for the 5 day period ending last Friday, 
market participants apparently believe that there's a 14 
percent chance that the June 2012 WTI futures contract will 
expire above $120 per barrel, $14 higher than the WTI spot 
price on March 23rd. For Brent, which trades at a significant 
premium over WTI, and is generally more representative of water 
borne crude prices in today's market, the probabilities of 
exceeding particular dollar thresholds are correspondingly 
higher.
    EIA's March outlook expects the average retail price of 
regular gasoline in the United States to average $3 and 79 
cents per gallon in 2012 compared with $3 and 53 cents per 
gallon in 2011. More recent information points toward a 
somewhat higher gasoline price forecast in the next outlook. 
Again, based on options in futures prices over the 5 days 
ending March 23rd, the probability of the June 2012 futures 
contract for reformulated blendstock expiring above $3 and 35 
cents per gallon, which would be comparable to a $4 per gallon 
national average retail price for regular gasoline, is 
approximately 44 percent.
    EIA expects diesel prices to average 36 cents per gallon 
above gasoline prices in 2012. Diesel prices are affected by 
world demand growth for diesel and other distillate fuels, 
particularly in the emerging economies. That growth has 
significantly outpaced gasoline demand growth in recent years.
    In conclusion, while EIA does not take policy positions, it 
has often responded to requests from this committee and from 
others for data and special analyses. I want to assure you that 
we stand ready to respond to such requests over the coming 
weeks and months.
    Mr. Chairman, Ranking Member Murkowski and distinguished 
members, I would be happy to answer any questions that you may 
have.
    [The prepared statement of Mr. Gruenspecht follows:]

Prepared Statement of Howard Gruenspecht, Acting 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 current and near-term 
future price expectations and trends for motor gasoline and other 
refined petroleum products.
    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. Therefore, our views should not be construed as 
representing those of the Department of Energy or other federal 
agencies.
                   recent gasoline and diesel prices
    Prices for all petroleum products have risen in recent months, but 
gasoline prices are of particular concern to most consumers. The 
national average price of regular grade gasoline averaged $3.58 per 
gallon in February 2012, 37 cents (11.5%) higher than in February 2011 
and an historic high for any February in both real and nominal terms. 
Diesel fuel prices have moved higher along a parallel path, averaging 
$3.95 in February 2012, also 37 cents per gallon (10.3%) higher than in 
the comparable year-ago period and an historic high for any February. 
As illustrated in the color-coded map in Figure 1*, there is 
significant regional variation in gasoline prices. During 2012, retail 
gasoline prices in the Rocky Mountain region have been well below the 
national average due to lower crude oil input cost for refiners in that 
region. On March 26, the average price in the Rocky Mountain region was 
$3.69 per gallon. That was 56 cents per gallon lower than the average 
price on the West Coast, which was $4.24 per gallon on the same day. 
The West Coast has recently experienced several refinery outages that 
pushed up retail prices in that region. The national average price for 
regular grade gasoline on March 26, 2012 was $3.92 per gallon.
---------------------------------------------------------------------------
    * Figures 1-3 have been retained in committee files.
---------------------------------------------------------------------------
    Key factors that drive petroleum product prices are the cost of 
crude oil to refiners, the costs of refining and marketing petroleum 
products, the balance between demand and available product supplies, 
and taxes applied to gasoline and other motor fuels. In the short term, 
changes in the cost of crude oil tend to be the single most important 
factor driving changes in product prices. But product prices are also 
affected by demand, which varies seasonally. Generally, gasoline prices 
peak during the summer driving season. Furthermore, imbalances between 
product demand and available supply affect prices. In extreme cases, 
local supply disruptions such as from unplanned refinery or delivery 
outages can push up product prices beyond any changes in crude oil 
prices. These types of imbalances are usually short-lived and tend to 
impact prices in specific local areas or regions.
    Recently crude oil price increases have eclipsed other impacts on 
petroleum product prices, including any downward effect stemming from 
recent weakness in U.S. gasoline and diesel demand. While both gasoline 
and diesel prices rose 37 cents per gallon from February 2011 to 
February 2012, the cost of crude oil to refiners rose by about $20 per 
barrel (48 cents per gallon) over the same period. Figures 2 and 3 show 
U.S. retail prices for gasoline and diesel fuel along with refiners' 
average crude oil costs, illustrating the significant impact of crude 
oil prices on product prices.
                       crude oil price increases
    Crude oil prices reflect both current market conditions and market 
participants' assessments of developments that could affect the future 
balance between supply and demand. The economic outlook is a key driver 
of demand expectations. Assessments of the decline rate for existing 
production, prospects for projects that can add liquids production at 
new and existing fields both inside and outside of member countries of 
the Organization of the Petroleum Exporting Countries (OPEC), and 
geopolitical developments that have the prospect to disrupt production 
and/or the flow of crude oil into the marketplace are key factors that 
enter into views of the future supply situation.
    The increases in crude oil prices since the beginning of 2011 
appear to be related to a tightening world supply-demand balance and 
concerns over geopolitical issues that have impacted, or have the 
potential to impact, supply flows from the Middle East and North 
Africa, a region that is critical to overall global supply of crude 
oil. While demand growth in the United States and especially in Europe 
has been weak, demand growth in developing countries has been 
relatively strong, resulting in world demand growth in 2011 of 0.8 
million barrels per day (bbl/d) over 2010. At the same time, non-OPEC 
supply has had some setbacks recently, including production drops in 
South Sudan, Syria, Yemen, and the North Sea. In addition, both the 
United States and the European Union have acted to tighten sanctions 
against Iran, including measures with both immediate and future 
effective dates. Current prices reflect expectations as well as current 
conditions, and many analysts see continued demand growth with possible 
tightening in supply over the coming months.
                changes in petroleum product trade flows
    EIA data indicates a significant shift in petroleum product trade 
flows, as the United States became a net exporter of petroleum products 
in 2011 for the first time since 1949. EIA has been asked whether this 
development has contributed to rising gasoline prices. We do not 
believe that there is any significant causal linkage between these two 
phenomena. U.S. gasoline exports have grown mainly as a result of 
refineries having excess capacity as U.S. consumption of petroleum-
based liquid fuels has declined. Between 2007 and 2011, U.S. 
consumption of liquid fuels fell by 1.85 million bbl/d (8.9%). Over 
this same period, domestic production of ethanol and biodiesel, which 
displaces petroleum-based components of motor fuels, increased by 0.51 
million bbl/d (112%). Imports fell in both absolute terms and as a 
share of U.S. petroleum product demand over this period.
    At the same time as domestic demand for petroleum-based liquid 
fuels declined, many U.S. refiners had a competitive advantage in some 
world markets that need to import gasoline. Most gasoline exports leave 
from Gulf Coast refineries to serve markets in Latin America where 
demand has been growing rapidly. U.S. refiners were able to take 
advantage of these export opportunities, and, accordingly, they only 
reduced crude oil inputs by 0.32 million bbl/d (2.1%) between 2007 and 
2011. Without those product exports, refiners would likely have reduced 
crude inputs and refinery output much more than what actually occurred.
    While the United States has been exporting gasoline from the Gulf 
Coast, we still import gasoline into the East Coast, which receives 
about 85 percent of U.S. gasoline imports. Both pipeline capacity and 
domestic waterborne shipping constraints currently discourage increased 
product volumes from traveling from the Gulf Coast to the East Coast. 
As long as European and other foreign gasoline supplies remain 
competitive, the East Coast is likely to continue to draw on these 
supplies. Also, if Gulf Coast refiners were not exporting to Mexico and 
other Latin American countries, Europe would likely be sending more 
supplies to those areas, potentially increasing the cost of gasoline 
imports to the Northeast.
              the near-term outlook for motor fuel prices
    In EIA's Short-Term Energy Outlook, the cost of crude oil to 
refiners continues to be the major factor affecting gasoline and diesel 
prices through the end of 2013. The average refiners' acquisition cost 
of crude oil is forecast to increase from $102 in 2011 to almost $115 
in 2012, but falls back a bit in 2013 to $110.
    Significant uncertainties could push oil prices higher or lower 
than projected. A number of non-OPEC countries are currently undergoing 
supply disruptions. Oil prices could be higher than projected if 
current disruptions intensify, new non-OPEC projects come online more 
slowly than expected, or OPEC members do not increase production. On 
the demand side, if the pace of global economic growth fails to recover 
in OECD countries, or if economic growth slows in non-OECD countries, 
prices could be lower.
    The value of options on futures contracts is one key indicator of 
forward-looking market sentiment. Call options provide the holder with 
the right to buy a commodity at a specified price up to a specified 
future date, while put options provide the right to sell at a specified 
price up to a specified future date. Given strike prices and the time 
to expiration, the value of options contracts can be used to calculate 
the market's current assessment of the uncertainty range for future 
prices and/or the market's view that prices for future delivery at 
specified dates will exceed or fall below any particular level. 
Application of this approach to market prices for the 5-day period 
ending March 23 suggests that market participants believe there is a 14 
percent probability that the June 2012 West Texas Intermediate (WTI) 
futures contract will expire above $120 per barrel, $14 higher than the 
WTI spot price on March 23. Given the higher absolute level of Brent 
crude prices, which are generally more representative of waterborne 
crude prices in today's market, the probabilities that the June Brent 
contract will exceed specified dollar thresholds are much higher.
    EIA expects to see continued constraints in transporting crude oil 
from the U.S. midcontinent region, and thus a continued price discount 
for landlocked crude oils, including WTI, relative to other world crude 
oil prices. The projected WTI price discount to the average U.S. 
refiner acquisition cost of crude oil narrows over the forecast from 
about $10 per barrel in the second quarter of 2012 to $4 per barrel by 
the fourth quarter of 2013, as physical pipeline capacity constraints 
diminish. EIA expects WTI prices to remain relatively flat in 2013, 
averaging about $106 per barrel, while the U.S. average refiner 
acquisition cost of crude oil declines to $110 per barrel, narrowing 
the gap.
    Given its forecast for crude oil prices, EIA is expecting an 
increase in gasoline and diesel prices in 2012 of almost 30 cents per 
gallon over their average prices in 2011. Product prices decrease along 
with crude oil prices in 2013. EIA expects regular-grade motor gasoline 
retail prices to average $3.79 per gallon in 2012, compared with $3.53 
per gallon in 2011. During the April-through-September summer driving 
season this year, prices are forecast to average about $3.92 per 
gallon, with a peak monthly average price of $3.96 per gallon in May. 
Based on implied volatilities calculated from options and futures 
prices over the 5 days ending March 23, the probability of the June 
2012 futures contract for reformulated blendstock for oxygenate 
blending (RBOB) expiring above $3.35 per gallon (comparable to a $4.00 
per gallon national monthly average retail price for regular grade 
gasoline) is approximately 44 percent. The corresponding market-based 
probability that the June 2012 RBOB contract will expire at a level 
that would imply a national monthly average retail price for regular 
grade gasoline of $5.00 per gallon or more is less than 1 percent.
    Diesel prices are projected to average $4.15 per gallon in 2012, 
which is 31 cents higher than in 2011. Prices are forecast to decline 
slightly to $4.11 in 2013. Throughout this forecast, diesel prices are 
expected to remain above gasoline prices. World demand growth for 
diesel fuel, primarily in the emerging economies, has significantly 
outpaced gasoline demand growth in recent years. EIA expects retail 
gasoline prices to average 36 cents per gallon below diesel in 2012 and 
40 cents per gallon lower in 2013.
    One of the major uncertainties that could impact gasoline and 
diesel prices in the Northeast this summer is the possible closure of 
the Sunoco Philadelphia refinery. If Sunoco is unable to find a buyer 
for its Philadelphia refinery, it plans on shutting the facility, which 
could create some local supply disruptions as the transition occurs. 
This issue was discussed in a recent EIA report, Potential Impacts of 
Reductions in Refinery Activity on Northeast Petroleum Product Markets, 
and we continue to monitor that situation.
    Given the near-term focus of this hearing, this testimony does not 
address longer-term projections related to the supply and demand for 
crude oil and petroleum products that are considered in EIA's Annual 
Energy Outlook and International Energy Outlook, which provide domestic 
and international energy projections through 2035 for a variety of 
cases reflecting alternative assumptions about economic growth, supply 
conditions, and policies. These longer-term projections may be relevant 
to policymakers' consideration of possible proposals that could 
significantly impact demand or supply trends for crude oil and 
petroleum products over an extended time period.
                               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. EIA has often responded to requests from 
this Committee and others for data and special analyses, and I want to 
assure you that we stand ready to do so over the coming weeks and 
months.
    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.
    Dr. Yergin, go right ahead.

  STATEMENT OF DANIEL YERGIN, CHAIRMAN, IHS CAMBRIDGE ENERGY 
                      RESEARCH ASSOCIATES

    Mr. Yergin. Mr. Chairman, Ranking Member Murkowski, members 
of the committee, it's an honor to be here. It's, obviously, 
this is a very timely hearing. I'm very pleased to be part of 
this distinguished panel in terms of trying to sort out the 
questions of what's happening with gasoline prices.
    Senator Bingaman and Senator Murkowski have really outlined 
the problem that is on the table to be addressed in terms of 
where gasoline prices are now and the pain that they're causing 
for motorists and consumers. It's also the larger question is 
we're looking at an economic recovery here. Europe is in a bad 
situation. What happens with oil prices will be very important.
    Gasoline prices, where they are now, is where they were 4 
years ago when we last--this committee was very concerned with 
what was happening. If we look at the prices, Howard gave us 
the latest prices through February. If we look at the prices at 
the end of March 2012 they are more or less the same place 
prices were in May, at the end of May 2008.
    So what's the same? Then the market was really being driven 
by what we might call demand shock from the emerging markets 
and this kind of aggregate disruption with a lot of supply 
being out in different parts of the world. Some of those same 
factors are at work today.
    The emerging markets are virtually the only source of 
growth in demand, although not as strong as it was half a 
decade ago.
    Disruptions and I think the number that's used now is that 
about 750,000 barrels a day are disrupted when you add up 
what's happening in different parts of the world.
    We also have just a basically, a tight market in terms of 
supply. It's tighter than it was last year. Spare capacity of, 
we estimate, 1.8 to 2.5 million barrels a day. That would 
create upward price pressure in any case.
    Two things are different. One is of grave concern and the 
other is one of some reassurance.
    One difference is geopolitics. Geopolitics was not a strong 
factor last time when we saw the prices that we're seeing 
today. It certainly is today.
    It began with the Libyan disruption, the Arab spring. But 
it's clearly focused right now on the Iran's nuclear program. A 
sense that a clock is ticking between now and the end of June 
when various sanctions go into place.
    I think you could say that it really a new phase, not only 
on Iran. But Iran's impact on the oil market began at the end 
of November when the United Nations came out with its report on 
Iran's nuclear program saying that it was putting together the 
capabilities for a nuclear device. Then you look what's 
happened to price since then. Since mid December world oil 
prices are up about 20 percent. U.S. gasoline prices are up 
about 20 percent.
    It is a unique situation because basically the Europeans 
and the United States have focused in now on targeting, very 
directly, Iranian oil revenues. Those revenues provide over 50 
percent of the Iranian government's total operating revenues. 
So between the EU's embargo and the U.S. sanctions, which 
imminently we presume will be put into place so that they'll 
start to play out in June, this is a wholly new situation to 
actually seek to reduce Iranian exports.
    Iran has responded with threats with military exercises. 
The oil market has jumped when they threaten to close the 
Strait of Hormuz. It's worth reflecting on that for a moment 
because of all the oil exporters the country that would be most 
punished by that is Iran, which does not have the same 
financial wherewithal of the other exporters.
    The other thing about that threat, it's kind of a classic 
threat to threaten the United States, to threaten Western 
Europe. But they didn't look quite closely at their numbers 
because actually China depends more on the Strait of Hormuz, 
over two million barrels a day, than we do. It was the Chinese 
Premier who reminded Tehran to avoid what he called, extreme 
action, involving the Strait.
    So the question is how to move the market into balance as 
this effort to reduce some significant share of Iranian oil 
exports now takes place without driving up the price of oil.
    Saudi Arabia plays a very key role. There's an article 
today by the Saudi Oil Minister. I think it's in today's 
Financial Times. Describing what they're doing and they have 
the extra spare capacity. What was noteworthy was this 
paragraph about how their inventories all around the world are 
full. That is actually good news.
    But what has to happen is to replace those Iranian barrels 
either with supplies from elsewhere or on the demand side. Both 
are necessary. I think that over the next few months we may see 
demand having a bigger impact in balancing than might be 
expected now. One thing we should keep our eye on is what 
happens with inventories.
    I said one thing is different that is of concern which is 
Iran. The other thing that is of difference is very positive 
news. It's what's happening with U.S. energy production.
    You know, 4 years ago when this committee assembled when 
oil prices were going up, there was a general mood of pessimism 
that the U.S. was finished as a producer. We were on the road 
to be a major importer of natural gas. We would be spending 
upwards of $100 million a year to import natural gas. That's 
completely turned around now as we are now in a position of 
abundant natural gas.
    The other thing that has happened is what has happened to 
U.S. oil production. U.S. oil production is up 20 percent since 
2008, over 1.1 million barrels a day. Senator Murkowski, the 
point you made, that has a big impact.
    If that 1.1 million barrels a day was not there, we would 
be looking at much higher prices than we're looking at today. 
This year we think U.S. oil production might increase by at 
least another 300,000 barrels a day. That's an important 
offset.
    The other important offset is what's happening with 
Canadian Oil Sands which have tripled, have actually tripled, 
since 2000. If you look at Canadian Oil Sands currently, that 
output is greater than Libya was producing before the Civil 
War. So it's a big number.
    So those are positives. So between what we might call peak 
demand in the United States, the production increase, the 
biofuels that Senator Bingaman referred to. This has changed 
our position. Our oil imports have declined from 60 percent in 
2005 to the latest number I've seen in your numbers, Howard, 44 
percent.
    What to do in the near term to mitigate prices at the pump? 
Obviously, you know, there are no silver bullets, magic buttons 
to push. What's key is additional supplies and rising 
inventories.
    I think the experience of the disruptions during hurricanes 
Katrina and Rita drive home the fact of the importance of the 
flexibility, flexibility in the movement of crude and products 
as a very important offset. That refers to the need we have for 
pipelines in this country for logistics addressing, of course, 
the Jones Act, the ability to move supplies.
    We need to build confidence about new supplies both North 
America and internationally.
    We, the United States, might look in the concert with the 
G-8 countries and the other IEA countries of what kind of 
coordinated measures, relatively modest measures, that 
individuals and companies can take that collectively, add up to 
modulate demand. Because what will happen here demand will be 
very important.
    Of course, any relaxation or realism on the part of Iran 
would be taken as very welcome by the market. So I think we 
should expect, kind of, ebbs and flows in responding to what 
happens.
    But if events remain on the, kind of, course described 
above and the calendar that's going to unfold between now and 
the end of June, we should expect that oil prices will be a 
register of those tensions and what unfolds in the months 
ahead. Certainly will be calibrated in the gauge at the 
gasoline pump.
    So there's the importance, to focus on those forces of 
supply and demand to offset the risk that we'll be seeing in 
the months ahead.
    Thank you.
    [The prepared statement of Mr. Yergin follows:]

  Prepared Statement of Daniel Yergin, Chairman, IHS Cambridge Energy 
                          Research Associates
    It is an honor to address the U.S. Senate Committee on Energy and 
Natural Resources. I appreciate the invitation to participate in this 
important hearing. It is timely--and indeed urgent--to discuss the 
current state of the oil and gasoline markets.
    Gasoline prices are going up again, as they did four years ago, 
once again creating pain for American motorists and for the overall 
economy--and this time looming as a major risk for economic recovery. 
It does seem to be back to the future. At the end of March, 2012, the 
average gasoline price was about $4.00 a gallon--the same level as at 
the end of May, 2008.
    Yet much has changed in terms of the causes. This is also true for 
the circumstances. One decisive change is that America's energy 
position is much more resilient and its resources understood to be more 
abundant than four years ago.
    The 2008 price increase was generated by a number of factors. The 
``Demand Shock'' was the most important--arising from surging 
consumption in emerging markets countries. Just a decade ago, at the 
beginning of the 21st century, almost two out of every three barrels of 
oil were consumed by developed countries. As the decade progressed, 
demand from emerging markets--especially China--surged, most notably in 
2004-2005. The emerging markets nations are on their way to using more 
oil than the developed world. Their share will continue to rise as 
their consumption of oil continues to surge, while demand in the 
developed world peaks.\1\
---------------------------------------------------------------------------
    \1\ Daniel Yergin, The Quest: Energy, Security, and the Remaking of 
the Modern World (New York: Penguin, 2011), Chapter 8 ``The Demand 
Shock'', Chapter 6 ``Aggregate Disruption.''
---------------------------------------------------------------------------
    In the price run-up last decade, the impact of this ``Demand 
Shock'' was augmented by what we have called the ``Aggregate 
Disruption''--the loss of supply from Venezuela, Nigeria, Iraq, and the 
US Gulf of Mexico due to Hurricanes Rita and Katrina. The result was an 
inordinately tight oil market, especially in 2005. On top of these 
fundamental factors of supply and demand, the ``financialization'' of 
oil became more pronounced as commodities emerged as a distinct asset 
class for a wide range of investors. Persisting weakness in the dollar 
also seemed to boost the oil price--and thus gasoline prices. On top of 
all of this was a pervasive pessimism about the adequacy of future 
supplies, both in the United States and in the world--in other words, a 
belief that the world was ``running out'' of oil and the United States 
was ``running out'' of natural gas.
                            what has changed
    Today some of the same factors remain at work. The emerging markets 
continue to dominate world demand growth. To be sure, the rate of this 
growth is lower than in some previous years. Nonetheless, world oil 
demand is expected to reach a record high of 89.5 million barrels per 
day this year, due primarily to emerging markets growth. Also, 
commodities remain a distinct asset class.
    Meanwhile, the oil market is again experiencing a number of supply 
disruptions. The loss of supply from Libya last year--about equivalent 
to the volumes lost due to Hurricanes Katrina and Rita--contributed to 
a tight oil market. That loss helped to push up world oil prices in 
2011 , on an average annual basis, to their highest level on an 
inflation-adjusted basis since the 1860s. The market has tightened 
further in recent months, and prices so far this year are higher than 
last year's average. Today, supply is disrupted from Sudan, Yemen, 
Syria, among other locations. At this point, disruptions have taken at 
least 750,000 barrels per day off the market.
    A key indicator of the current relatively tight market balance now 
is the thin cushion of spare production capacity--the difference 
between world oil production and production capacity. Spare capacity is 
expected to range between 1.8 and 2.5 million barrels per day in 2012, 
low compared with recent years. Such a tight balance would, in any 
circumstances, create upward pressures on price.
    This year, the dominant factor in pushing up world oil prices--and 
thus gasoline prices in the United States--is geopolitics--
specifically, rising tension over Iran. The report of the United 
Nations International Atomic Energy Agency at the end of November 2011 
introduced a new phase in the contention over Iran's nuclear program. 
In its report the IAEA warned of ``serious concerns regarding the 
possible military dimensions to Iran's nuclear programme.'' These 
concerns were based on its view that Iran ``has carried out activities 
relevant to the development of a nuclear explosive device.''\2\
---------------------------------------------------------------------------
    \2\ Implementation of the NPT Safeguards Agreement and relevant 
provisions of the Security Council resolutions in the Islamic Republic 
of Iran, report dated November 18, 2011 by the Director General of the 
International Atomic Energy Agency.
---------------------------------------------------------------------------
                      sanctions and iran's threats
    Since mid-December, both world oil and U.S. gasoline prices have 
increased about 20 percent.The European Union has agreed to place an 
embargo on the importation of Iranian oil and has restricted Iran's 
access to its financial markets. The United States is expected to make 
a determination imminently as to whether the world oil price and supply 
of non-Iranian oil are sufficient to implement new, tighter sanctions 
on oil transactions three months from now. These sanctions will deny 
access to the U.S. financial system to entities undertaking oil 
transactions with Iran's central bank, unless countries are certified 
to have made ``significant'' reductions in imports of Iranian oil. 
(Japan and some European countries were recently exempted.)
    The purpose of tighter US and EU sanctions and restrictions is to 
constrain the ability of Iran to sell its oil--and ultimately reduce 
the amount of oil revenues flowing into Tehran's coffers. Iranian oil 
exports, which have been running at about 2.2-2.5 million barrels per 
day , provide over half of Iran's total government revenues.\3\ This is 
the first major effort by the West to restrict directly Iran's oil 
exports. The stricter sanctions are driven by the conclusion that such 
severity is required by the seriousness of the risk that Iran is 
approaching and will cross what has been described as the ``red line'' 
in the development of nuclear weapons.
---------------------------------------------------------------------------
    \3\ IHS Global Insight, ``Iran's Economy'', March 2012
---------------------------------------------------------------------------
    Iran has stoked the tensions since November by threatening to 
``close'' the Strait of Hormuz, through which passes 35 percent of 
world oil exports, along with a substantial part of world liquefied 
natural gas (LNG) shipments and significant volumes of refined 
products. It has also held highly-visible naval exercises and weapons 
tests; refused access for IAEA inspectors to Iranian enrichment 
facilities; and, implicitly, threatened other responses.
    Iran's threat to close to the Strait of Hormuz would first and 
foremost punish Iran itself, which depends on the Strait for virtually 
all of its oil exports. Moreover, the threat looks toward the ``West'', 
aimed at intimidating Europe and the United States. But times have 
changed. China depends on transport through the Strait for more than 
two million barrels a day of supply, and China's Premier Wen Jiabao 
recently warned Tehran against ``extreme acts across the Strait of 
Hormuz''.
                         balance in the market
    It is the prospect of Iranian barrels dropping out of relatively 
tight market--and not being replaced--that is affecting crude oil 
prices. This in turn, is affecting the prices that Americans pay at the 
pump.
    Will tighter Iranian sanctions lead to a shortfall that makes the 
world oil market tighter still, and prices yet higher?
    The answer will be determined by one of two things: either 
``replacement'' barrels come into the market, or fewer barrels being 
needed because world demand is lower than anticipated.
    Saudi Arabia, holding almost all of the world's spare capacity, has 
the ability to fill a two million barrel a day gap in supply. However, 
that would virtually exhaust the world's spare capacity, a situation 
that would alarm the market. Additional supplies could come in over the 
course of the year from a number of countries--Iraq, Libya, Angola, 
Colombia--and the United States and Canada. Yet, such supplies cannot 
be called on immediately to address a major supply disruption.
    Oil demand may be modulated by the weakness of Europe's economy, an 
economic slowdown in China, increased efficiency in energy use, and the 
effects of higher oil prices.
                   the great revival in north america
    Looking ahead, new sources of oil supply are coming into the 
market. While new oil production capacity cannot come to the market 
overnight, there is much greater confidence in oil supplies than in 
2008. East Arica is emerging as a major new oil and gas play. Ghana is 
joining the ranks of exporters. Major new discoveries have been found 
off the coast of French Guyana in Latin America.
    But nowhere is the change in perspective more striking than in the 
United States--and North America more broadly. In 2008, the dominant 
view was that the United States was a region of declining oil and gas 
production, and that the decline was irreversible. It was expected that 
the United States was on course to be a major importer of LNG--and 
would end up spending upwards of $100 billion a year to do so. Since 
then, however, the unconventional natural gas revolution--the surge in 
shale gas production--has transformed the U.S. gas position. At current 
prices, there is a growing interest in having some natural gas will go 
into the transportation sector, particularly large trucks and fleets.
    The technology that underlies shale gas is also changing the 
outlook for oil supply in the U.S., which is now experiencing a ``great 
revival'' in production. North Dakota has recently overtaken California 
as the third-largest oil producing state in the country. Altogether, 
U.S. petroleum production is up almost 20 percent since 2008--some 1.1 
milllion barrels per day. It is expected that U.S. production could 
increase by another 300,000 barrels per day this year.
    The change in North America is not limited to the United States. 
The production of Canadian oil sands has almost tripled since the 
beginning of the 21st century. Today the output from the oil sands--1.7 
million barrels per day--is greater than Libya was producing before its 
civil war.
    While U.S. oil production has gone up, oil consumption in the 
United States is down--almost 10 percent since 2007--a decline of two 
million barrels per day. In fact, United States oil consumption in 2011 
was back to where it was 14 years before--in 1997. The result is that 
net U.S. oil imports have declined from 60 percent in 2005 to 44 
percent at the beginning of this year and are likely to continue to 
decline, as supply increases and more efficient cars come into the 
fleet.
                       ``energy less-dependence''
    All this does not add up to energy independence for North America, 
but it does add up to ``energy less-dependence''. Continuing to 
facilitate these trends would be very helpful.
    There are some more immediate things that can be done to help 
mitigate high prices at the pump. Additional supplies and rising 
inventories are the starting point. The experience during Hurricanes 
Katrina and Rita demonstrates that promoting flexibility in the 
movement of crude and products can help offset upward price pressures. 
Building confidence about future supplies, both in the United States 
and internationally, is another measure. The G-8 and IEA nations can 
coordinate to focus on the relatively modest measures that individuals 
and companies can take that collectively add up to help modulate 
demand. If for any reason there is some relaxation in tensions over 
Iran's nuclear program, then that will reduce the evident security 
premium in the price. But, if events remain on the course described 
above, then oil prices will be a barometer of those tensions and of 
what unfolds in the months ahead.

    The Chairman. Thank you very much.
    Mr. Verrastro.

  STATEMENT OF FRANK A. VERRASTRO, SENIOR VICE PRESIDENT AND 
  DIRECTOR, ENERGY AND NATIONAL SECURITY PROGRAM, CENTER FOR 
              STRATEGIC AND INTERNATIONAL STUDIES

    Mr. Verrastro. Thank you, Chairman Bingaman, Senator 
Murkowski, members of the committee, I, too, thank you for the 
opportunity to appear today.
    The rapid rise in gas prices has become a staple on the 
evening news, as you're all too well aware. It's understandably 
painful for the American consumers and it's actually a threat 
to the economic recovery. So I commend the committee for 
holding this hearing at this time.
    Given the expertise of this panel I won't repeat what Dan 
and Howard have just said because I agree with the forecast and 
what has actually occurred. I will instead highlight a few 
points. I've actually brought some slides to my testimony. If 
you'll refer to those, especially the first 3 and the last one, 
I think we can walk through this pretty quickly.
    The first slide actually shows crude oil prices. We did it 
registered in terms of Brent rather than WTI because WTI is no 
longer a world class marker. After last year's Arab spring 
crude oil prices essentially settled into a narrow band for the 
last half of the year. You can see that from July through 
December. This was largely as a consequence of what we feel 
were counterbalancing signals of fears of weaker economic 
growth and the Euro crisis on the one hand and perceived stress 
on the supply side on the other.
    At the beginning of the year, however, this all began to 
change. Between January 1 and March 9th, as both Dan and Howard 
have said, Brent prices rose by about $20 a barrel. For the 
past 2 weeks, prices have been bouncing around at a new, albeit 
higher band and yesterday closed at about $124. The price this 
morning at 8 o'clock was $125.04
    Economic improvement in the U.S. and elsewhere as well as 
weather related events certainly contribute to this bullish 
sediment. But concerns about supply stability were also readily 
apparent. Iranian threats to close the Strait of Hormuz drove 
much of that increase.
    When you look at Figure 2, and I know this has been an 
issue that Senator Franken has looked at. Given the upside 
potential of commodity--given the upside potential, commodity 
investments in oil have also increased. This is not unlike what 
occurred in 2008 and 2007.
    The bottom line here is at least for the near term the 
current psychology of the market is supportive of keeping 
prices at a higher level. I think the psychology is important 
because when you look at prices the old fundamentals used to be 
supply, demand and inventory. Now we're looking at current 
prices, future prices, weather, crude oil quality and this idea 
of breaking market momentum is really important when you see 
ups and downs in the market.
    Demand growth is still forecasted as we move through the 
year. The potential for real disruption threats are on in 
ongoing supply disruptions in South Sudan, Russia, Yemen, 
Canada, China, Syria, the North Sea and Nigeria. Potential 
dislocations as well in places like Brazil and Iraq. These will 
all continue to push upward pressure, even as we see increases 
coming out of the Saudi Arabia and the United States.
    In addition in the aftermath of Fukushima, Japan's 
inability to restart their nuclear reactors and 53 of the 54 
reactors are currently shut down. This has resulted in 
increased demand for oil as well as for LNG. Even without the 
closure of the Strait of Hormuz, the projected removal of 
several hundred thousand barrel a day of Iranian production as 
a consequence of sanctions, will put added stress on the market 
as we move further into the spring.
    In such a market even good news like Saudi Arabia's offer 
last week to increase production has been tempered by the 
notion that additional output will effectively deplete the 
world's available spare capacity because we're so close to that 
edge. That would leave price, near term increases in Libya and 
the use of strategic stocks as the only weapons available to 
dampen, even on a temporary basis, further upward movements in 
the event of additional and unanticipated disruptions. This is 
not a comforting thought.
    There's been a lot of discussion about the closing of 
refineries on the East Coast of the United States. What 
contributed--and what contribution that has made, the Trainer 
Refinery, Marcus Hook Refinery and maybe Philadelphia. As raw 
material feed stock is the largest component of gasoline prices 
the increase in crude prices, as Dan and Howard have already 
said, is necessarily reflected in the price we pay at the pump.
    But concerns about deliverability given the refinery 
closures on the East Coast and elsewhere were also factors. 
Given time, I believe that product imports from Europe, the 
Middle East and Asia, our shipments from the Gulf Coast will 
eventually close that gap. But prices, given transportation 
costs, are likely to be higher until we find lower cost 
logistical alternatives. They actually become readily 
available. Shipments from the Gulf, which is Pad Three, are an 
option, but deliverability will be influenced by the 
availability of Jones Act vessels or possibly waivers to the 
Jones Act, docking and storage facilities and regional and 
local pipeline capacity.
    The good news and this is Figure 3, is that absent a 
massive global disruption or market tightening beyond what we 
foresee today, if history is any guide, so this is just 
history. It's always easier to predict history than the future. 
The U.S. gasoline prices generally decline or tend to decline 
after July.
    Unfortunately for consumers and I think we're all of the 
same mind here, there is little that can be done in the near 
term. In a free market system price is always the final 
allocator of scarce resources. members of this committee have 
already offered a number of measures to help mitigate these 
impacts. I'm happy to discuss any and all of these.
    While I don't have time to elaborate on the oil price myths 
section of my testimony, I hope you will find these points both 
informative and entertaining. I welcome any questions or 
comments on those as we go forward.
    Final points. The remainder of my charts really relate to 
the changing energy landscape which Dan has so artfully already 
described. Raises the question of whether and how we want to 
use our vast unconventional resources along with an array of 
new technologies, efficiency and renewables to build a new 
energy future.
    Dr. Don Paul, who is a colleague of ours at CSIS, has 
characterized this as the great dilemma. It's an issue this 
committee will be dealing with in the next several months as 
well as the next several years.
    For the last 40 years U.S. Energy Policy has been 
predicated on the dual notions of growing demand and resource 
scarcity, especially in relation to oil and natural gas. We are 
now potentially looking at demand reduction and resource 
abundance. The landscape is being transformed even as we sit 
here today.
    Higher prices in technology, applications to scale are 
driving an unconventional resource revolution. This phenomenon 
has the potential for creating a new energy reality. One in 
which the United States, once again, becomes a global leader in 
oil and gas production coupled with efficiency, as you 
mentioned Senator Murkowski, improvements in alternative 
supplements.
    This revolution can substantially lessen oil imports 
achieving a significant reduction in our balance of payments. 
It will also simultaneously create an engine for growth, a 
platform for technology and innovation, new job creation, new 
tax and royalty revenues and the revitalization of domestic 
industries. But that development must be managed prudently and 
responsibly in line with balancing our environmental, economic 
and foreign policy goals.
    The policy motto which is on my last slide, is what we 
would advance in terms of discussing and balancing those 
tradeoffs. It's actually a policy model we developed for the 
2007 NPC study. It basically says that efficiency is the sweet 
spot, but at any given point of time, if you look at it as a 
dial, economic concerns or foreign policy concerns or 
environmental concerns can subordinate your energy policy. The 
trick is to make sure that you balance all the way through.
    If we are able to do this, the successful development of 
these resources, will give us, I believe, breathing space. To 
develop and dispatch the next generation of cleaner burning or 
lower carbon fuels that currently do not exist at scale.
    At this writing, as Senator Bingaman has said, U.S. oil 
production is at its highest level since 2003. Natural gas has 
eclipsed the previous output records set back in the 1970s. Oil 
imports comprise less than 45 percent of total consumption. 
Refined product exports are averaging almost 3 million barrels 
a day. This gives the domestic refining sector an enormous 
``value add.''
    As development continues at scale, new issues will 
undoubtedly arise including the build out of new supporting 
infrastructure, the role of exports, the timing and sequencing 
of development initiatives, including, Senator Murkowski, in 
Alaska with respect to TAPS which we need to get on, the right 
mix of Federal and state regulation. This new energy reality 
will require a serious policy rethink when it comes to mapping 
out the decades coming. With the ability to access these new 
unconventional resources we may very well be on the verge of an 
American energy renaissance. While the indications are quite 
positive with respect to resource abundance, we are in the very 
early stages of this narrative.
    I'd say Chapter one, page 10. We will collectively and 
that's industry and government need to make the right choices. 
Operationally, in terms of safer, smarter and cleaner as well 
as with respect to investments, policy and regulation that will 
enable this potential to become a reality.
    I appreciate the opportunity to elaborate on these issues. 
Look forward to answering your questions.
    Thank you.
    [The prepared statement of Mr. Verrastro follows:]

  Prepared Statement of Frank A. Verrastro, Senior Vice President and 
 Director, Energy and National Security Program, Center for Strategic 
                       and International Studies
    Chairman Bingaman, Senator Murkowski, Members of the Committee, 
thank you for the opportunity to appear before this Committee to 
discuss changes in the crude oil market and the outlook for gasoline 
and other refined petroleum products. The rapid rise in gas prices has 
become a staple on the evening news, is understandably painful for 
American consumers and adds another challenge to the economic recovery. 
So I commend the committee for holding today's hearing.
    I currently serve as Senior Vice President and Director of the 
Energy & National Security Program at CSIS. The Center is a bipartisan/
non-partisan think tank here in Washington that focuses on clarifying 
issues and developing solutions. I have been affiliated with the Center 
since 2003, but my energy roots go much deeper. In the 1970's I served 
briefly in the Oil and Gas Office of the U.S. Department of the 
Interior as well as in the Federal Energy Administration. In the Carter 
Administration, I was privileged to serve in the White House Office of 
Policy and Planning under Dr. James Schlesinger and later at the newly 
created U.S. Department of Energy, where I held a variety of policy 
positions, including serving as Deputy Assistant Secretary for 
International Energy Resources. The bulk of my career, however, was 
spent in the private sector, first with TOSCO Corporation as Director 
of Refinery Policy and Crude Oil Planning, and later for a 20 year run 
with Pennzoil Company as a Senior Vice President.
    I also had the pleasure of working with my fellow panelist this 
morning, Dan Yergin, on the 2007 National Petroleum Council (NPC) 
``Hard Truths'' report, where I chaired the Geopolitics and Policy Task 
Group. I would point out that the NPC effort, which, recognizing the 
expected growth in global energy demand, called for an ``all of the 
above'' approach to energy policy. I also served on the recently 
completed (2011) NPC report on the Prudent Development of North 
America's Oil and Gas Resources.
    So I come at this issue from a decidedly industry perspective 
cognizant of the economic, environmental, and policy implications of 
what I would characterize as a changing energy landscape--even as we 
sit here today.
    Given the expertise on this panel, instead of repeating what I 
expect many of my colleagues will describe in today's gasoline market, 
let me instead highlight a few major themes, and in the process dispel 
some myths. I have attached a series of charts to my testimony and will 
refer to them during this presentation to illustrate some key points.
  crude oil market activity--demand growth, supply uncertainty, iran 
             sanctions and fukushima support a bullish view
    With respect to the current oil market, it is instructive to roll 
back several months to get some perspective on the near term future 
(Figure 1).
    After last year's Arab Spring (though the situation remains quite 
fluid from country to country)--the riots in Egypt, clashes in Bahrain, 
Syria and Iran, and the unrest and conflict in Libya, crude oil prices 
essentially settled into a narrow band for the last half of 2011--
largely as a consequence of counterbalancing signals of fears of weaker 
economic growth and the Euro crisis (impacting demand) on one hand and 
real and perceived stress on the supply side.
    At the beginning of the year, however, this all began to change. On 
December 30, 2011 the price for Brent Crude was a few cents above $108/
barrel; by the middle of February, it had risen to $118/barrel, topping 
out (at least for now) at $128.08 on March 9. Economic improvement in 
the U.S. and elsewhere as well as weather related events contributed to 
this bullish sentiment. But concerns about supply stability were also 
readily apparent, and Iranian threats to close the Strait of Hormuz 
added to that mix. Given the upside potential, commodity investments in 
oil also increased, not unlike what occurred in the price run up we saw 
in 2007-08 (Figure 2).
    Bottom line is that, at least for the near term, the current 
``psychology'' of the market is supportive of keeping oil prices 
elevated. Demand growth is still forecasted as we move through the 
year. And potential and real disruption threats abound with ongoing 
supply reductions in South Sudan, Yemen, Canada, China, Syria, the 
North Sea, and Nigeria (collectively removing almost 800,000 barrels 
per day from the market) and potential shortfalls in such places as 
Brazil and Iraq even as we see increased output from the U.S. and Saudi 
Arabia.
    In addition, in the aftermath of Fukushima, Japan's inability to 
restart their nuclear reactors (53 of the country's 54 reactors are 
currently shut down) has resulted in increased demand for oil as well 
as for liquefied natural gas (LNG). And the projected removal of 
several hundred thousand barrels per day of Iranian output as a 
consequence of sanctions activity will put added stress on available 
global supplies. Iran is reported to have 5-6 VLCCs currently being 
utilized as floating storage facilities. But at some point, a reduction 
in sales will effectively force a scale back in production as there 
will be simply no place to put the excess oil.
    In such a market, even ``good news,'' like Saudi Arabia's offer to 
increase output to ensure that the market is balanced, has been met 
with either skepticism concerning the country's ability to deliver 
those barrels or the recognition that additional Saudi production will 
effectively remove the bulk of the world's available spare capacity 
``cushion'', leaving price, near term increases by Libya and use of 
strategic stocks as the only weapons available to dampen (even 
temporarily) further upward movements in the event of an additional, 
unanticipated disruptions. Not a comforting thought.
    One glimmer of hope here is that if the Iranian confrontation can 
be peacefully diffused, we could find ourselves with (at least 
temporarily) an oversupply of oil in the market--possibly, enough to 
temper the current bullish sentiment before doing economic damage.
    gasoline and u.s. refinery closures--more an issue of delivery 
                          logistics and timing
    Gasoline prices also began a similar but not identical ascent early 
in the year, rising from $3.25/gallon at the end of 2011 to $3.35/
gallon by mid-January; then beginning a steeper climb, rising to $3.70 
by the end of February and $3.87 as of Tuesday of this week.
    As the raw material feedstock is the largest component of gasoline 
prices, the increase in crude prices is reflected in the run up, but 
concerns about availability given the refinery closures on the east 
coast and elsewhere were also factors.
    Memorial Day is traditionally viewed as the onset of the ``driving 
season'' in the U.S. and in anticipation of increased demand, 
refineries begin gearing up for increased gasoline output in the spring 
as they come out of seasonal turnaround. The closure of Conoco's 
Trainer refinery and the Sunoco plant at Marcus Hook, PA means that 
come this summer, operational refining capacity in PADD I will have 
been reduced from 1.5 to roughly 1.1mmb/d (this is on top of the 
closure of Sunoco's 140,000b/d Eagle Point Refinery in New Jersey and 
Western Refining's 128,000b/d facility in Yorktown, Virginia last 
year). If/when Sunoco's Philadelphia refinery is closed, the capacity 
in PADD I will be reduced to around 700mb/d (half its former capacity). 
Add to that the surprise announcement to shutter the Hovensa refinery 
in St. Croix, and the availability of gasoline to parts of the east 
coast, from Florida to Ohio, will undoubtedly be impacted.
    Given time, imports ( product imports from Europe, the Middle East 
and Asia) or shipments from the U.S. Gulf coast will eventually close 
the gap, but prices (given transport costs) are likely to be higher 
until logistical alternatives (e.g., expansion of Colonial and regional 
pipeline systems) become available. Sunoco is likely to continue to 
keep its regional contract customers supplied with alternative volumes, 
but some spot purchasers may not have the same coverage. Shipments from 
the Gulf (PADD 3) are an option, but delivery will be influenced by the 
availability of Jones Act vessels (or waivers of the Jones Act), 
docking and storage facilities and regional/local pipeline capacity. 
Trucking deliveries from New York Harbor or other areas is also a near 
term, albeit higher cost option, and may require waivers on driver 
hours. Logistical delivery shifts from crude to refined product 
shipments will require cleaning crude tanks and pipes in Philadelphia 
and elsewhere.
    The ``good news'' is that, absent a massive global disruption or 
market tightening beyond what we foresee today, if history is any 
guide, U.S. gasoline prices also tend to decline after July (Figure 3).
                          so what can be done?
    Unfortunately for consumers, little can be done in the near term. 
In a free market system, price is the final allocator of scarce 
resources.
    There are, however, measures that can be taken to mitigate some of 
these impacts--several of which Members of this committee have already 
offered.
    Accelerating the permitting and construction of storage and 
pipeline connectors or water borne infrastructure would be helpful as 
would looking at EPA and state waivers on fuel specifications to allow 
for greater substitutability of available gasoline in the system. To 
the extent that waivers of Jones Act requirements would facilitate more 
timely and larger volume movement of gasoline supplies between states 
and PADD districts, efforts should be made to eliminate such barriers. 
Department of Transportation (DOT) waivers on the hours driven by tank 
truck drivers could also be helpful to ensure the timely delivery of 
supplies to selected regional markets. The use of the Strategic 
Petroleum Reserve has also been suggested, but this too requires 
movement of refined product from PADD 3 refineries to east coast 
consumers.
    In the long term, the President's goal of doubling fuel economy 
standards and increasing fuel choices makes eminent good sense. 
Doubling CAFE standards makes $4 gasoline feel like $2 gasoline to 
consumers. In addition, prudently developing America's vast energy 
resources (addressed in greater detail later in this statement) as well 
as the processing and delivery infrastructure needed to move it to 
market is also imperative.
    The Commodity Futures Trading Commission (CFTC) and the Energy 
Information Administration (EIA) are currently evaluating the role of 
investors in market movements and an examination/explanation of the 
difference between gasoline costs (crude oil, refining, transport costs 
plus federal, state and local taxes) and retail pump prices (which 
reflect local competition, station lease costs and advertising, fill up 
days and discount policies, branded or unbranded supplies and profits, 
etc.) could also be instructive.
    But, all that said, there is no immediate silver bullet here.
                          oil price mythology
    Claims by certain advocacy groups and political factions that 
merely announcing the intention to increase access or production of oil 
as a way of driving down prices are unproven at best, as they have 
never produced, on their own, any meaningful price impact. Claims that 
oil prices plunged simply because President Bush on July 14, 2008 
announced removing the moratorium on offshore development are, at best, 
half-truths without proper context. In point of fact, oil prices began 
their free fall well before the President's announcement (and continued 
long afterward) as a consequence of economic collapse and oversupply. 
2008 oil prices peaked above at $145 on July 4th and continued their 
decline through the summer and fall, reaching $ 37.04/barrel on 
December 5, 2008.
    In a similar vein, arguments that gas prices would be lower today 
if only the offshore moratorium had not been imposed after the Macondo 
accident, are also not persuasive. The addition of an incremental 
250,000 or 300,000b/d, while helpful, is of little consequence in an 89 
million barrel a day world. This is not to say that additional 
production volumes (from anywhere in the world) are not welcomed 
supplements as they add to global supply, but merely to suggest that 
volumes and context matter. Only last week, Saudi Minister Ali al-Naimi 
offered to increase the Kingdom's output by 2 million barrels per day 
over the next several months. Prices dropped by $2.48/barrel the next 
day, but then recovered before the week was out.
    A recent statistical analysis conducted by the Associated Press 
covering 36 years found no statistical correlation between marginally 
higher U.S. domestic oil output and (monthly inflation adjusted) 
gasoline prices. The fact is that oil is a global commodity and U.S. 
production has only a limited impact on worldwide supply/demand 
balances.
    ``Excessive'' regulation is often cited as a cause of reduced E&P 
activity, yet a recent report by PFC Energy points out that industry is 
coming back to America to invest. Partly due, no doubt, to the 
attractive resource prospects, but also as a result of America's legal 
and regulatory structure, improved economics, clean air and water, good 
schools, safe food, and quality of life. Moderation may be a useful 
concept here as both lax regulation and strangling overregulation have 
associated risks and costs.
    For most Americans the focus of energy policy right now is all 
about gasoline prices. Critics of the administration are quick to point 
out that when President Obama took office in January of 2009, gas 
prices were around $1.90/gallon. They conveniently fail to mention that 
the U.S. economy was in a virtual depression. For purposes of 
comparison, when President Bush took office in January of 2001, 
gasoline sold for an average of $1.55/gallon. In the summer of 2008, 
his last year in office, prices exceeded $4.25. The reality is that 
presidents have very little to do with near term fluctuations in 
gasoline prices.
    the changing landscape--opportunities and challenges; using the 
              unconventionals to build a new energy future
    The energy landscape continues to change. As the world's population 
grows, so too will the demand for energy. Oil demand growth earlier 
this century (2002-2007) had effectively eroded existing spare 
capacity, creating persistently tighter markets in which any 
geopolitical or weather related supply disruptions often resulted in 
exaggerated spikes in commodity prices. This picture was further 
complicated by infrastructure and capability limitations, heightened 
geopolitical and investment risks, volatile costs and prices and a 
growing concern about the environmental and security implications of 
the continued use of fossil fuels. At the same time, the emergence of 
new global players with increasingly larger energy and geopolitical 
footprints posed new threats to the ability of the U.S. to shape the 
global energy system of the future. In short, a new consensus was 
emerging that the time had come to fundamentally reform the system and 
develop new technologies, policies and strategies to simultaneously 
address the economic, environmental and foreign policy /security 
challenges related to the ways in which nations produce, transport and 
consume energy.
    Most analyst agree that for a variety of reasons (e.g., growing 
global demand, concentration of resources, limited access and 
governance challenges, infrastructure needs, balance of payments 
outflows, changing geopolitical alliances, environmental and security 
considerations, etc.) the current energy system is simply 
unsustainable. A transformation is already underway. But make no 
mistake--it will take decades to complete.
    For the last forty years, U.S. energy policy has been predicated on 
the dual notions of growing demand and resource scarcity, especially in 
relation to oil and natural gas--which are responsible for roughly two-
thirds of U.S. energy consumption. As a consequence, we have looked to 
imports to balance our supply-demand needs, and in the process, have 
experienced periods of significant price volatility. But that 
trajectory is changing.
    Fossil fuels (coal, oil and natural gas) account for more than 80 
percent of global energy consumption. Renewables and nuclear make up 
the rest. And while the growth in solar and wind has been enormous, the 
base is small, and intermittency and infrastructure challenges remain a 
significant hurdle to widespread adoption. In the wake of the Macondo 
oil spill in 2010, the Fukushima nuclear incident in 2011, and the 
shale gas ``revolution,'' the energy landscape is being transformed. 
Higher prices and technology applications at scale are driving an 
unconventional resource revolution as there are enormous unconventional 
oil and gas resources both here and abroad.
    This phenomenon has the potential for creating a new energy 
reality, one in which the United States once again becomes a global 
leader in oil and gas production. Coupled with efficiency improvements 
and alternative supplements, this revolution can substantially reduce 
U.S. oil imports, achieving a significant reduction in our balance of 
payments. It can also simultaneously create an engine for economic 
growth, a platform for technology and innovation, job creation, new tax 
and royalty revenues, and the revitalization of domestic industries. 
But the development must be managed prudently and responsibly, in line 
with balancing our environmental, economic, foreign policy and energy 
security goals..
    If properly and prudently managed, the successful development of 
these resources will give us the ``breathing space'' to develop and 
dispatch the next generation of cleaner burning/lower carbon fuels that 
currently do not exist at scale.
                        the shale gas experience
    The growth of shale gas production in the U.S over the past decade 
has been truly remarkable. As a consequence of access (mostly on 
private lands), higher prices (2007-8) and the application of hydraulic 
fracturing (fracking) technology and extended reach lateral wells, the 
ability to economically unlock this vast ``source rock'' resource has 
elevated the United States to the position of the world's largest 
natural gas producer. This is an astounding accomplishment, as only a 
few years ago it was projected that the U.S would become increasingly 
dependent on pipeline gas from Canada and imports of LNG from around 
the world.
    Less than a decade ago, shale gas comprised less than 2 % of 
domestic output. Today it accounts for almost a third. The enormous 
success in shale development has resulted in significantly lower 
prices, reduced consumers' electric bills and stimulated discussion 
about exports and the revival of a competitive domestic petrochemical 
industry (Figure 4: Map of Shale Gas Resources).
    The 2011 report by the NPC projects a possible resource base of 
several thousand trillion cubic feet (TCF), suggesting more than a 
hundred years supply at current consumption rates. As we continue to 
learn more about the shale resource plays, more recent supply forecasts 
have become even more bullish.
    That said, as with all energy sources, there continue to be 
operational risks and consequences. The practice of fracking is not 
without controversy. Environmental concerns about water contamination, 
water use at scale, recycling and proper disposal, land use, property 
values, noise, haze, methane and GHG emissions, seismicity concerns 
around wastewater disposal, congestion and other local issues will have 
to be responsibly addressed. However, technology, well integrity, 
operational ``best practices'' and community engagement, coupled with 
proper regulation and enforcement should make realization of the 
benefits of this resource achievable.
                               tight oil
    The application of lateral wells and fracking technology has had a 
similar impact on tight oil and shale oil development. Development of 
the Bakken has catapulted North Dakota past California as the nation's 
third largest oil producing state, and similar development is also 
taking place in the Niobrara, the Monterey, the Utica, Eagle Ford and 
other basins around the country (Figure 5: Domestic Unconventional Oil 
Resources).
    At the turn of the century, U.S. tight oil production was around 
150,000 barrels per day (b/d). Last year it approached nearly 1 million 
b/d. Current projections estimate that it could approach 2.5-3 million 
b/d (or more) by 2020. When coupled with increased production from the 
offshore, including the ultradeep water and lower tertiary formations, 
oil sands (yes, the U.S. has oil sands), shale oil, oil shale, natural 
gas liquids, conventional onshore production and the Arctic--U.S. 
liquids production could exceed 12 million b/d, exceeding the current 
output of Russia and Saudi Arabia (Figure 6: North American Oil Supply 
Potential).
    When alternative fuels and reduced demand due to efficiency 
improvements (CAFE standards) are factored in, U.S. imports (and our 
oil imports bill) can and will inevitably decline.
    Not surprisingly, many of the concerns related to shale gas 
development are also associated with accessing unconventional oil. As 
is the case with unconventional gas, industry has committed to step up 
its game with respect to responsible management of both ``above'' and 
``below ground'' issues, greater transparency, education and community 
engagement. Smarter, safer, cleaner is now an operational necessity.
    At this writing, U.S oil production is at its highest level since 
2003. Natural gas has eclipsed the previous output record set back in 
1973. Oil imports comprise less than 49%of total consumption, and 
refined product exports are averaging almost 3 million barrels per day, 
giving the domestic refining sector an enormous ``value add.''
    As development continues at scale, new issues will undoubtedly 
arise--including the build-out of new supporting infrastructure, the 
role of exports, the timing and sequencing of development initiatives 
(including in Alaska with respect to the TAPS pipeline), the right mix 
of federal and state regulation, etc. (Figures 7 & 8:, U.S. Refineries 
and Infrastructure Issues). However, the prospect of sizable new 
production opportunities in the U.S. and North America necessitates a 
re-assessment of our decades old tool kit and a serious policy 
``rethink'' when it comes to mapping out the coming decades.
    In formulating the final recommendations for the 2007 NPC ``Hard 
Truths'' report, we developed a policy model (Figure 9) that sought to 
balance and capture the trade offs often found between conflicting/
competing foreign policy/security, economic and environmental 
objectives. The essence of the approach was that we needed to balance 
rather than subordinate competing interests in order to achieve 
sustainable growth--as all of these issues and considerations are 
likely to be with us for decades to come. With the ability to access 
these new unconventional resources, we may very well be on the verge of 
an American energy renaissance. And while the indicators are quite 
positive with respect to resource abundance, we are in the very early 
stages of the narrative and will collectively (industry and government 
alike) need to make prudent choices with respect to both policy/
regulation and investment to enable this potential to become a reality.
    I appreciate the opportunity to elaborate on these issues and look 
forward to answering any questions.

    The Chairman. Thank you very much.
    Dr. Horsnell.

   STATEMENT OF PAUL HORSNELL, HEAD OF COMMODITIES RESEARCH, 
                            BARCLAYS

    Mr. Horsnell. Thank you. Chairman Bingaman, Ranking Member 
Murkowski, members of the committee, I'm very grateful for the 
opportunity to appear for you today. My written testimony 
details 6 salient points about the current gasoline and global 
crude oil markets. I'd like to use my time today to just 
briefly raise all 6 of those.
    The first of those points concerns some specifics of the 
U.S. gasoline market. As other panelists noted, prices have 
risen faster than other product prices and crude oil prices. 
That clearly does appear to be a fairly strong effect from the 
closures and potential further closures of capacity along the 
East Coast, in the Caribbean and some other refinery closures 
in Europe.
    Those concerns really appear to markets worried about the 
transition from domestic supply of gasoline in the Northeast 
market through to imported supplies. I think the points we 
would like to make is that there is no global deficit of 
gasoline. There's a lot of additional refinery capacity that's 
coming on, primarily in China and India and at the global 
level, even with a large amount, some two million barrels a day 
of U.S. and European refining capacity likely to have come off 
stream between last year and this year.
    There is no overall shortage. The problems then are very 
much these deliverability issues, transitional issues. That's 
very much where the market is now at a rather delicate stage as 
the peak of the driving season starts to come forward. I think 
our view is a fair degree of some of the rises in U.S. gasoline 
prices are down to some of these deliverability concerns. It's 
clearly an issue that our colleagues at the EIA are clearly 
following very closely.
    Turning more to the global crude oil market the point I'd 
like to make is on spare capacity. It is remarkably limited at 
the moment. We estimate around about 1.7 million barrels a day 
of sustainable spare capacity.
    By that I mean capacity that can be brought on market 
fairly timely within 30 days. Can be kept on stream for 90 
days. If you allow more time, then more capacity can come on, 
but on that strict definition it appears to be less than 2 
percent of the market.
    More worryingly with that level of spare, the market does 
appear to be balanced. As Saudi Minister Al-Naimi mentioned in 
his op-ed in the Financial Times today, the market does appear 
to be balanced. Why that's of some concern is we're coming off 
a period of 2 years where demand has tended to run a bit ahead 
of supply. Global inventories, implied inventories, have fallen 
for 8 straight quarters which is unprecedented. So to get 
prices up to this level and to have spare capacity down to that 
level and only have a reasonably balanced market is a matter of 
concern.
    I think our further concern is that there comes a cusp 
where the market will start to worry more about the loss of 
further spare capacity will no be relieved by seeing extra 
supply. I think we're very close to that point at this 
relatively thin level. The spare capacity perhaps is the 
dominant point because it is literally in all of the above item 
and that it picks up all the variations in supply and demand.
    But just to go through those I think our third feature is 
this very strong change which the previous panelists have 
already referred to in the geography of non-OPEC oil supply, a 
surge in production from North America, 550,000 additional from 
North America as a whole last year. We expect another half a 
million from North America this year which 80 percent will come 
from the U.S. Again to go back to Senator Murkowski's point 
about what things would have been like without it, I think the 
reflection of that is what's happening in the rest of non-OPEC 
areas.
    Non-OPEC production outside North America fell last year by 
some 580,000 barrels a day. So perhaps surprisingly non-OPEC 
production actually fell in 2011 simply because the dead 
weights coming from production losses particularly in the North 
Sea, but also in other areas. So again, without that 
contribution from the change in North American patterns, the 
fall in non-OPEC supply really would have been quite serious 
last year.
    The--federator that on to the very current market 
circumstances and this is our fourth salient point. There is 
currently a rather high rate of supply losses, in particularly 
non-OPEC areas, unusually high rate. Just to detail some of 
them the situation in Sudan and South Sudan has taken 400,000 
barrels a day of oil off the market and looks set to for an 
extended period given some of the recent deterioration in 
relationships and the border incidents.
    Production is down in Yemen. It's down from Syria. There 
have been some accidents in Canada.
    Just this week some further accidents in the North Sea have 
taken off another portion. In total, as of today, we estimate 
just over one million barrels a day of non-OPEC production is 
out unexpectedly. That's more than we would normally expect.
    It's part of the reason why the market is still balanced 
despite the very high rates of OPEC production that we're 
seeing at the moment. So again, it's very hard to factor in on 
it by definition as unexpected factors. But I think they are a 
significant feature of the current market.
    The fifth point is just on demand. Demand growth is 
continuing. It's modest at the global level. It's very heavily 
concentrated.
    If you take Brazil, India, China, Saudi Arabia, that's--
those 4 countries alone just as they have for over the past 5 
years constitute virtually all of the net global demand growth. 
Outside those four, demand has been falling for a fairly long 
period. This actually has some very specific features that draw 
attention to the impacts of Fukushima on Japanese demand.
    Japanese demand will not be expected to be falling as it 
has done for a while. But very strong Japanese demand last 
year, primarily for LNG, but also for oil. For this year we 
think some of that increase is the nuclear plants continue to 
stay down is going to be biased toward oil.
    As of now of the 54 Japanese nuclear units, there's only 
one currently operating. Even that one it's very likely to come 
off stream for maintenance during May. Again, that's a factor 
which has tightened up on the demand side. Method OECD demand 
has not fallen quite as much as we might have expected given 
those high prices.
    A final current feature and again, I don't want to repeat 
what previous panelists have said. There is an unusually high 
degree of geopolitical risk at this time. This really, again 
goes, back to spare capacity.
    We worry about geopolitical risk when spare capacity is 
low. If we're in the world 3 years ago and a lot of global 
spare capacity than the number of potential political issues 
that might impact on the oil market would be relatively 
limited. The response then would be relatively muted. As spare 
capacity gets less, the number of things that can affect prices 
increases and the sensitivity increases.
    So just to mention some other ones beyond those panelists 
have already done. There are concerns about Nigeria in the wake 
of the situation, politically, there over the course of the 
last few months. There are also some geopolitical concerns 
about sustainability of Iraqi production and in particular the 
continuing disputes between Baghdad and the regions of the oil 
law and getting the full potential of Iraqi productions to go 
forward. So it's not just Iran. There are a series of other 
geopolitical issues which I think do just play across the 
market radar occasionally.
    I'll still there in terms of describing those 6 but I do 
look forward to answering any questions you have. Thank you.
    [The prepared statement of Mr. Horsnell follows:]

  Prepared Statement of Paul Horsnell, Head of Commodities Research, 
                                Barclays
    Chairman Bingaman, Ranking Member Murkowski, and members of the 
committee, it is a pleasure to appear before you today and I thank you 
for your invitation to do so.
    In background, I am the Head of Commodities Research at Barclays. I 
lead a team of analysts in New York and London who research supply and 
demand conditions and other fundamental drivers across a wide range of 
traded commodity markets. My own particular focus is on oil markets 
which I have covered over a couple of decades, first as an academic 
working in the Oxford Institute for Energy Studies and then latterly as 
an analyst within the banking sector.
    The current oil market situation is one of high crude oil and 
gasoline prices. The US national average for the retail price of 
regular unleaded gasoline stands, as of 26 March, at $3.92 per gallon, 
which is 9% higher than a year ago and which is within 20 cents of its 
all-time high. In a few areas of the country the all-time high has been 
surpassed, for example in the EIA gasoline price survey the average of 
regular unleaded in Chicago stands at $4.47 per gallon, higher than the 
peaks reached in 2008 and then exceeded in 2011. Elsewhere in the 
world, retail gasoline prices are also at record levels, for example in 
the UK the national average for unleaded gasoline currently stands at 
the equivalent of $8.40 per US gallon. Indeed, across Europe both crude 
oil and retail prices are at record highs in domestic currency terms 
due to the combined effect of a stronger dollar and higher 
international commodity prices. Figure 1* below shows the value of the 
OPEC basket of crude oils in euro terms, which has reached new all-time 
highs after a sustained rise that has now lasted for more than three 
years.
---------------------------------------------------------------------------
    * Figures 1 and 2 have been retained in committee files.
---------------------------------------------------------------------------
    My focus here is on the fundamentals of the international oil 
market at this time. There are six salient characteristics of the 
current market that I will address in more depth below. First, there 
are some specific factors bearing on US gasoline prices that relate to 
East Coast refinery closures and the associated uncertainty. Second, 
the buffer of sustainable spare crude oil production capacity is 
currently thin at the global level. Third, a surge in North American 
supplies has coincided with a weak output profile elsewhere, leaving 
non-OPEC output as a whole rather stagnant. Fourth, so far 2012 has 
seen an unusually high level of production outages. Fifth, global 
demand growth is continuing albeit at a modest level, dominated by four 
countries in particular, taking global oil demand close to 90 mb/ d for 
the first time despite a continuing fall in OECD demand. Sixth, and 
finally, that there is a heightened level of geopolitical risk and 
geopolitical awareness in the oil market. I will now turn to each of 
these defining characteristics in turn.
1. US gasoline and the effect of refinery closures
    Some of the rise in gasoline prices is not due to global issues or 
to changes in the price of crude oil. Indeed, a large part of this 
year's rise in US retail gasoline prices has been due to the specifics 
of the US physical gasoline market. US wholesale gasoline prices have 
increased more this year than either crude oil prices or other oil 
product prices. From the last trading day of 2011 through to 26 March, 
the price of May gasoline increased by 23%. By contrast, over the same 
period US West Texas Intermediate crude oil for May delivery rose by 
just 8.1%, May Brent rose by 18.2% and May heating oil rose by 13.4%. 
As is shown in Figure 2, the May gasoline crack has risen by more than 
$20 per barrel since December, ie wholesale gasoline prices have risen 
by over $20 per barrel more than WTI crude prices.
    The higher rate of increase of wholesale gasoline prices relative 
to crude and other products reflects market concerns as to the impact 
of a series of closure announcements for oil refineries on the US East 
Coast and in the Caribbean. The closure of refineries with high 
gasoline yields (and with other closures possible) means that the a 
large tranche of the North East gasoline market is transitioning from 
being supplied within the region to, in future, being met by imports or 
by increased flows from the Gulf Coast. In terms of the latter, there 
are a variety of market views as to how binding pipeline and shipping 
constraints are likely to be, and the concern among physical traders is 
that regional inventories might fall fairly sharply when the driving 
season begins. Market price dynamics appear to be attempting to 
incentivise imports to meet any potential gap over the next three 
months in particular, as well as reflecting concerns as to a potential 
abrupt tightening of the physical gasoline market in the NY Harbor area 
in the wake of the refinery closures.
    The element of the gasoline price rises that is due to the 
uncertainties in the wake of the East Coast closures is localised and 
does not reflect the global availability of refinery capacity and 
gasoline. There is no global shortage of gasoline, and sufficient 
supplies can ultimately be obtained, albeit at a cost. Those supplies 
can only be obtained at higher import costs, and that is what US 
wholesale prices are beginning to reflect. At a global level, we still 
expect the net addition of refinery capacity to outpace global oil 
demand growth in 2012, just as it did in 2011. That is despite 
substantial closures in North America and Europe, estimated at almost 2 
mb/d across 2011 and 2012 combined, with further closures possible. In 
particular, there has been a rapid build up in Chinese refinery 
capacity. Between 2010 and 2013 we expect Chinese capacity to have 
risen by 3.4 mb/d, Indian capacity to rise by 1.8 mb/d, other Asian 
capacity to rise by 1.7 mb/d and Middle East capacity to rise by 1.3 
mb/d. We do not expect there to be refinery constraints at a global 
level, nor do we expect any lasting global issues in the deliverability 
of gasoline. However, the abrupt closure of so much North American 
capacity has clearly unsettled the market, and led to concerns that the 
physical markets in the regional might remain tight and dislocated, at 
least in the early part of the driving season. Ultimately imports and 
the tweaking of any logistical issues and bottlenecks will solve the 
problem, however that may well come at the cost of a higher equilibrium 
price in order to keep imports flowing in to the required extent.
2. Global spare oil production capacity
    Beyond the factors specific to the US gasoline market, there are 
also pressures coming through from crude oil markets. While there is 
significant global spare capacity in the refining of oil, there is 
currently little spare capacity in crude oil production. If we define 
sustainable capacity as being that which can be brought into production 
within 30 days and which can be kept on stream for at least 90 days, 
then we estimate that global spare capacity today stands at no more 
than 1.7 mb/d, with virtually of that being held by Saudi Arabia. This 
is a little less than 2% of global oil demand, i.e. the global crude 
oil industry is currently producing at 98% of its sustainable maximum. 
Loosening that definition and allowing for capacity that takes as long 
as 90 days to come on stream may take the total to a shade above 2.5 
mb/d. However in our view the stricter definition is the more useful 
one when it comes to the consideration of filling supply gaps in a 
crisis. Such high rates of capacity utilisation normally involve higher 
and more volatile prices, producing a far greater reaction to potential 
supply shocks than during periods when spare capacity is more ample.
    The current level of total OPEC production (i.e. crude oil plus 
natural gas liquids and other oil liquids) is running at an all-time 
high of 37.5 mb/d. Thus far, this extremely high output level has not 
resulted in any significant or sustained observable market surplus or 
inventory build, although in our view it has removed a long-lived 
imbalance. Global oil demand has exceed global oil supply for an 
unprecedented eight quarters in a row, which has whittled away at the 
significant level of surplus inventories built up during the 2008-9 
downturn. To return the global system to a more even footing, there 
would be a case for the desirability of a few quarters of inventory 
builds to start to rebuild cover. With OPEC producing at the current 
elevated levels, we are projecting a modest global inventory build for 
both Q1 and Q2, breaking that long run of inventory draws. The scale of 
those projected builds is perhaps not enough to restore an optimal 
cushion, but it should help stall the increase in crude prices as long 
as there are no further significant supply shocks.
    Thus far in 2012 the physical global crude market is reflecting 
tightness, with participants prepared to pay a premium to accelerate 
their deliveries of crude oil. This situation, known as backwardation, 
has held in the Brent market for just over a year, and means that there 
is currently no prompt surplus of crude and that there is no market 
incentive or need to clear the market by holding more inventories. We 
would expect to see the erosion of prompt physical market differentials 
as being an early sign that the tightness was at least beginning to 
fade, but thus far the strong bid for prompter physical crude has been 
maintained.
3. Significant changes in the geography of non-OPEC supplies
    Despite the strong increase in US oil supply and the prospects of 
significant further increases, non-OPEC supply as a whole has 
stagnated, indeed it fell in 2011. A sharp divergence in crude oil 
production growth has opened up between North America and the rest of 
non-OPEC output. In 2011 North American oil supply surged by 550 
thousand b/d, of which growth two-thirds came from the US alone. 
Barclays expects a further 500 thousand b/d of growth in 2012, of which 
more than 80% is expected from the US. In contrast, non-OPEC supply 
outside North America fell by 580 thousand b/d in 2011, cancelling out 
all of the North American growth, with the UK and Norway being the 
major sources of decline. In 2012 we expect non-OPEC supply outside of 
North America to decline by 220 thousand b/d, and outside the Americas 
as a whole we expect it to decline by 410 thousand b/d.
    Because of the weakness elsewhere, the increase in US production 
has served primarily to prevent the market from becoming even tighter, 
rather than creating any overall tendency towards surplus. It has, 
however, begun a significant remapping of the geography of global oil 
trade, made more obvious when the additional effect of lower regional 
oil demand is factored in. The gap between North American oil demand 
and supply narrowed by 870 thousand b/d in 2011, and we expect a 
further 750 thousand b/d narrowing in 2012. For the US alone, the 
implied trade gap narrowed by 720 thousand b/d in 2011 and is expected 
to narrow by a further 690 thousand b/d in 2012.
4. There is currently an unusually high rate of non-OPEC production 
        outages
    Beyond a more general malaise in the performance of non-OPEC 
production outside of North America, there is also currently an 
unusually high level of production outages. These are due to various 
factors including civil disturbances, civil and other wars, geological 
disappointments and accidents. As of this week, the tally of outages 
includes a loss of 0.4 mb/d from Sudan/South Sudan, 0.15 mb/d from 
Yemen, 0.15 mb/d from Syria, 0.2 mb/d from Canada (syncrude outages) 
and a tail of other outages including the latest problems in the North 
Sea Elgin/Franklin fields that together bring the total to just over 1 
mb/d. While, with the exception of the Sudanese outage, none of these 
situations have been large enough in volume terms to garner much 
sustained attention, the combined effect has been enough to prevent any 
overall inventory and supply cushion from building up over the course 
of Q1.
5. Global demand growth continues, albeit modest and highly 
        concentrated
    The strong difference in recent years between weak OECD and strong 
non-OECD demand growth has continued into 2012, but with some new 
features. Within the OECD, the reshaping of Japan's energy sector 
following the Fukushima accident has produced strong Japanese demand 
for fuel oil and direct burning crudes, as well as sharp increase in 
LNG demand. As of now, of the 54 Japanese nuclear units there is only 
one that is operational. Even that single remaining plant is due to 
come offline for maintenance in a few weeks. With Japanese LNG regas 
capacity becoming a little stretched, and with the utilisation of gas-
fired generation now high, oil looks likely to garner a significant 
slice of incremental Japanese power demand. The y/y increase in 
Japanese use of fuel oil and direct burning crudes stands at more than 
350 thousand b/d and is likely to rise further, providing a significant 
offset to the weakness of OECD demand elsewhere. Overall, Barclays 
expects OECD demand to fall by 370 thousand b/d in 2012, less than the 
660 thousand b/d fall seen in 2011 due to an improving US economy and 
the increased use of oil in Japanese power generation.
    Overall, Barclays expects global demand growth of around 1 mb/d in 
2012, with the OECD decline being offset by emerging market growth. The 
main sources of that net growth are expected to be the same countries 
that have dominated global demand growth in recent years. From 2008 to 
2011, global oil demand grew by 2.6 mb/d. Over the same period, demand 
growth of 3.2 mb/d came from just four countries; namely Brazil, India, 
China and Saudi Arabia. We are not expecting any dramatic slowing in 
the pace of demand growth from these four countries in 2012, and their 
combined growth is, at just over 1 mb/d, expected to represent all of 
the net global demand growth.
6. An elevated degree of geopolitical risk
    The impact of geopolitical risk on oil prices is a function of the 
level of spare sustainable capacity. At high levels of spare capacity, 
the potential for geopolitical tension to rattle markets and to become 
priced in is limited. As spare capacity falls, the impact of 
geopolitical developments is likely to increase, and at the current 
extremely limited level of spare capacity there is some danger that 
geopolitical concerns could begin to dominate. Currently the potential 
situations include, for example, the political tension and attacks in 
Nigeria, and the downside risks to Iraqi output in the face of tensions 
over oil policy and oil payments between central government and the 
regions. However, the tightening constraints on Iranian exports has 
perhaps been the main geopolitical issue for oil markets this year, 
with physical markets starting to consider the effects of the 
realignment of global trade flows in the face of the impending EU 
import ban. The Barclays base case scenario has a relatively benign 
outcome for oil prices, with some cooling from current levels to 
achieve an annual average of $115 per barrel for Brent. That base case 
involves no significant escalation or extended supply loss in any 
geopolitical situation.
Conclusion
    Current retail gasoline prices are the result of the combined 
effect of specific gasoline market factors (namely East Coast and other 
refinery closures) and the feed through of higher crude oil prices. For 
prices to cool probably requires some improvement in the position in 
most of the six areas we note above. That would include avoiding the 
worst-case scenario in the market transition effects and the concerns 
on system flexibility caused by the refinery closures; the appearance 
of more slack within the global crude oil system be that through 
improved non-OPEC supply performance or by a more significant downturn 
in demand; and more limited oil market implications from the various 
geopolitical concerns currently at play. The key summary parameter is 
global spare sustainable capacity, and the tightness of that does 
appear to be a source for magnification of the market sensitivity to 
further supply-side or demand-side shocks.

    The Chairman. Thank you. Thank all of you for your 
excellent testimony. Let me start with the 5 minutes of 
questions.
    Let me ask on the issue of the refining capacity. The 
decision that companies have made to close some of their 
refining capacity and the effect that might be having on the 
price of gasoline, particularly in the East, East Coast. Maybe 
you, any of you, I don't know if Dr. Gruenspecht, do you have 
any more insights you can give us on that point as to what is 
causing them to shut down this refining capacity and if there 
is any clear indication as to how much of the price increase 
we're seeing results from that?
    Mr. Gruenspecht. Thank you, Mr. Chairman.
    As you know the EIA has put out a couple of pretty detailed 
reports on the Northeast evolving refining situation. We're not 
privy to company decisions to close or sell refineries which 
are made within the strategic plans of each company.
    But, it's very likely that the reason refiners are closing, 
particularly refineries on the East Coast, is that they're not 
making money. They're not profitable operations.
    East Coast refiners operate in a pretty competitive 
environment. They have higher crude acquisition costs than 
companies in other parts of the United States because they're 
bringing in water borne crudes from Africa which are some of 
the most expensive light, sweet crude oil. The refiners in the 
Midcontinent are getting cheaper crude oil. The refiners on the 
Gulf can process lower quality crude oil because they have 
different refining capabilities.
    At the same time Europe has an excess supply of gasoline 
available for export which tends to keep prices on the East 
Coast relatively moderate through competition with those 
refineries. We're really not seeing high prices on the East 
Coast relative to other parts of the country at this time. In 
fact the Chicago area has higher prices now than Philadelphia.
    There are concerns. I agree with Paul Horsnell that it's 
more about the logistics than about the supply of gasoline. 
Looking forward there are some concerns particularly related to 
the one major refinery that's still operating in the area, 
Sunoco Philadelphia. If that refinery were to shut down there 
might be some areas in the Northeast that could potentially be 
subject to low supply, particularly of ultra low sulfur diesel.
    Let me just leave it there because others may want to 
speak.
    The Chairman. Dr. Yergin.
    Mr. Yergin. Yes. Just to add two points to that. I mean, 
what Howard says, one of the refining companies has publicly 
said that they have been losing a million dollars a day. You 
can't go on very long losing a million dollars a day.
    I think we need to look at what's happening in refineries 
in the context of what's happening to overall U.S. energy 
demand. U.S. demand for oil is down two million barrels a day 
in since 2007. That's a 10-percent drop. In fact our demand 
levels now are back to what they were in 1997.
    So that is part of the context in which it's kind of 
rebalancing that both Howard and Frank talked about is 
occurring.
    The Chairman. Yes, Frank, go ahead.
    Mr. Verrastro. Yes, Senator. So in a past life I was 
Director of Crude Supply and Refining Policy at TOSCO which at 
that time was the largest independent in the United States. I 
think Howard and Dan have summarized it absolutely correctly.
    So the refining business has always been difficult. We're 
in a situation now where we have declining product demand. But 
if you're an East Coast refinery and you're dependent on light, 
sweet crude to make gasoline, your acquisition costs are 
higher, but you're pressured on the back end because there's a 
lot of competition.
    Especially in the last 2 years while a lot of the East 
Coast refineries were dependent on Libyan crude. When Libya 
went down they were looking for substitutes. The crude quality 
substitutes for them were Algerian, Nigerian Angolan which is 
same oil that a lot of the Europeans were looking for at the 
time. So their acquisition costs necessarily rose.
    Dan's absolutely right that they were losing a million 
dollars a day which is difficult to do. There's one offsetting 
factor. I know in the case of Sunoco they intend to keep a 
terminal facility, which means they intend to continue to 
supply customers.
    So it won't be all of their customers. I suspect contract 
customers will probably continue to get product. They'll work 
out arrangements for that. Their spot customers, however, might 
be in a different situation.
    Then the logistics and as Paul talked about the 
deliverability system is really important. Philadelphia has 
historically been a crude oil port. But if the refineries 
aren't there in order to bring in product you have to change 
out the tanks, change out the pipes and the pumps and the 
storage facilities to actually move product.
    New York is typically a refining center or rather a product 
import center. But to get those supplies down to Western 
Pennsylvania or Ohio, probably in the near term means trucking. 
So this will all work out in time, but it's just over the 
summer driving season it might be a little difficult.
    The Chairman. Dr. Horsnell, did you have anything more to 
add on this?
    Mr. Horsnell. Just briefly. I'll just point out that it's 
an issue really for refineries right the way across North 
America and Europe. Those are at a disadvantage either by 
position or by the nature of their inputs or their nature of 
their refinery equipment are all under pressure. So it's not 
just an East Coast specific factor.
    I'd also just also say if I might this, the problems, 
potential problems they share and I would again stress these 
are transitional. These are to do with moving from a 
domestically supplied market through to a great reliance on 
imports.
    The Chairman. Senator Murkowski.
    Senator Murkowski. Thank you, Mr. Chairman.
    Gentlemen, thank you all for your testimony this morning. 
Very important. Very interesting.
    I want to explore a little bit more on this issue on where 
we are with spare capacity. I think it was you, Dr. Horsnell, 
you used the term remarkably limited when we talk about the 
global spare capacity. I think in previous statements you've 
used the terminology ridiculously thin.
    So anyway you cut it there's just not enough that is out 
there. It seems to me that when we're talking about the 
geopolitics, what's happening in Iran, Yemen, what we're seeing 
with the increased demand in developing countries. All of these 
things that we have no control over.
    This issue of spare capacity is really a key one when we're 
talking about the impact on prices and the vulnerability that 
we have from an energy perspective and certainly from a 
security perspective. So let me ask the question. It goes back 
to where I was going in my opening comments. When we're talking 
about increased domestic production here, if we were to bring 
on two and a half million barrels a day here and OPEC then 
responded by holding back that same amount as the U.S. sources 
come online OPEC is going to hold back.
    Would that not amount to greater spare capacity within the 
system and potentially a cheaper price of oil?
    I throw that out to any of you.
    Go ahead, Mr. Verrastro.
    Mr. Verrastro. So all things being equal that would be 
correct. But the demand side of the ledger is also important, 
so if demand also goes up and absorbs that extra production. So 
you're right that if OPEC were to hold more spare capacity 
that's the cushion for when the flag goes up. But if demand 
also starts rising as a result of lower prices or if it's non 
OECD demand expansion that we're seeing, it's good to stay 
ahead.
    So I would welcome any and all production. It doesn't 
necessarily translate at any given time to lower prices.
    Senator Murkowski [presiding]. OK.
    Dr. Yergin.
    Mr. Yergin. Senator Murkowski, I think your focus on spare 
capacity really goes to the heart of the matter. Before The 
Quest, the book, The Prize, when I was writing it I spent a 
fair amount of time reading Senate hearings from the early 19--
--
    Senator Murkowski. Sorry about that.
    [Laughter.]
    Mr. Yergin. No, they were extremely interesting and lively. 
Very lively.
    But spare capacity was the kind of the nub that things came 
down to. If you look back and when prices went up in the last 
decade you look back at 2005. It was a spare capacity issue. 
The market was as tight as it has been on the eve of the 1973 
crisis.
    When you adjust it for the fact that world demand is a lot 
higher it tells you it's a tight market. I noticed Paul's 
number on spare capacity was even a little tighter than ours. 
That, you know, it is worrying that we--it's a market without a 
lot of flexibility when you have that kind of very tight spare 
capacity.
    So it is, along with inventories, it is one of the real 
things that we need to focus on.
    Senator Murkowski. Let me ask in another way then. Perhaps, 
Dr. Horsnell or Dr. Gruenspecht, you can weigh in as well.
    So if the Saudis were to do what has been asked by some 
back here to put an additional two and a half million barrels a 
day out on the market. Doesn't that then remove some of the 
world's spare capacity? Could that not act to create a higher 
risk premium and impact the price of oil because you're now in 
a position where yes, they've done what we've asked.
    They're theoretically trying to help out here. But by doing 
so you eliminate or certainly reduce that spare capacity that 
is then available so you don't have that safety net, if you 
will, and could that not have an unintended consequence in 
terms of a price increase?
    Dr. Horsnell.
    Mr. Horsnell. Yes, I think that's a very good point, 
Senator. I think we're very close to that point where the 
calming effect of bringing on more supply could very much be 
overwhelmed.
    Senator Murkowski. Bringing on more supply from OPEC? Yes.
    Mr. Horsnell. If Saudi Arabia did increase dramatically 
from this point, OK. There's more supply. That should be a 
depressing effect on prices.
    But then spare capacity would, but if they brought on two 
and a half that's all global spare capacity. There will be 
nothing left at all. I think that would very much unnerve the 
market. So I think very much on that cusp where further 
increases may not bring prices down too much further.
    I guess to illustrate in terms of how much could be brought 
on timely. The two and a half million I think on to Minister 
Al-Naimi's recent statements would probably take 90 days to 
bring it on stream. What could be brought on in 30 days is 
probably 1.7, 1.8 million barrels a day.
    But bringing all that on would then leave the system with 
no spare capacity at all. As Dr. Yergin said, that would be a 
very----
    Senator Murkowski. Let me just--my time has expired. But I 
just want to make sure that I understand this. In term--when 
we're talking about spare capacity, it's not only what you have 
out there as reserve, if you will, or additional supply. It's 
your ability to bring it on within a timely manner.
    Is there anyone other than the Saudis that have that 
ability to provide for additional capacity?
    Mr. Yergin. Essentially no, I think. Just a little bit in a 
few other countries in the Middle East.
    Mr. Gruenspecht. Yes, I think there is a little bit. But--
--
    Senator Murkowski. But limited.
    Mr. Gruenspecht. There's no question that Saudi Arabia 
would be the major holder of spare capacity.
    Senator Murkowski. Thank you, Gentlemen.
    The Chairman [presiding]. Senator Franken.
    Senator Franken. Thank you, Mr. Chairman.
    Gentlemen, thank you for your testimony.
    We're currently working to pass legislation to reduce tax 
loop holes that benefit the top 5 oil companies, to benefit 
them to the tune of $2 billion plus a year. These companies 
made $137 billion in profits last year. These are the top 5 
companies.
    Let me repeat that. In a time of budgetary constraints 
American taxpayers are subsidizing companies that make $137 
billion in profits in 1 year. They made nearly a trillion 
dollars of profits over the last decade.
    We're looking to move, again, $2 billion worth of these tax 
loop holes. You would think that these companies, who have the 
privilege to drill on oil rich lands that belong to the 
American people, would acknowledge that it is a little absurd 
to get a $2 billion subsidy from American taxpayers when you 
are making billions of profits off of government lands.
    Now there are some in this body who claim that getting rid 
of these tax loop holes will cause gas prices to rise. They 
claim the oil companies will do less exploration as a result. 
But as it turns out last year they put $38 billion of their 
profits to just repurchasing their own stock while again, these 
subsidies are only $2 billion.
    So let's go to Mr. Verrastro. What do you think of the, 
about the assertion that getting rid of $2 billion worth of 
subsidies will raise gas prices? Would it follow--just what do 
you think of that? Would that raise prices?
    Mr. Verrastro. I have a couple thoughts on that, Senator.
    I think the subsidies, I know subsidies have been thrown 
around the Senate and tax loop holes. There are provisions in 
the tax code that were put there for a reason. I think you can 
argue that some of those are price sensitive, right?
    I think there's different baskets. The independents are a 
cash-flow operation. So taking away the expensing of geologic 
and geophysical costs would make a lot of sense cause they need 
that money to drill their next well.
    The majors are in a different situation. My sense would be 
that the Foreign Tax Credit, for example, would be the big one 
for them. There's a number of other things. No one likes to get 
taxed, but I mean you make a fair point when you look at 
quarterly profits or annual profits verses the whole account.
    Senator Franken. These are essentially loop hole subsidies. 
Wouldn't it follow that if cutting these subsidies would 
increase the price of oil in one way to bring gas prices down 
would be to increase subsidies? Then why don't we just do that?
    Why don't the taxpayers just pay more?
    Mr. Verrastro. No. I think that the exploration and 
production budgets, right? The ENP budgets now are allocated on 
a certain basis.
    Companies, I think, one of the big problems is that the 
government's role and stakeholder's are different from the 
private sector's role and stakeholder's, right? So you actually 
have a fiduciary obligation. I'm not defending the industry, 
but you have a fiduciary obligation to get the best response 
for your shareholders, right?
    So some of that means reinvestment, some of that means 
repurchasing stock, some of that means putting money in 
research. I guess I would contest it on the grounds that 
there----
    Senator Franken. Listen. All of you are saying that among 
the factors driving the price of gasoline are demand in 
developing countries, non-OPEC supply setbacks and uncertainty 
vis-a-vis Iran. Wouldn't losing these subsidies to the top 5 
oil companies have an essentially miniscule or nonexistent 
effect on the price at the pump?
    Mr. Verrastro. Senator, if you put it that way, yes.
    Senator Franken. OK. That's not what I've heard from my 
colleagues on the other side.
    Mr. Verrastro. I just think you have to put it in context, 
right? There's a lot more around--
    Senator Franken. That's the context I just put it in and 
you agreed with me.
    Mr. Verrastro. it's----
    Senator Franken. So there.
    Mr. Verrastro. It's $2 billion in the course of what it 
would mean to substantially raising or lowering gasoline prices 
now. Right, you're absolutely correct.
    Senator Franken. OK. Let me ask you another question. 
It's--I'll read from a letter from--to the Minneapolis Star 
Tribune from a Commissioner at the U.S. Commodities Futures 
Trading Commission.
    He says. ``The March 24th story in the strip, lawmakers say 
excessive speculation drives up gas prices seeks balance by 
giving the other side of the issues with regard to the impact 
of speculation in oil trading. Senators Al Franken and Amy 
Klobuchar of Minnesota are right, however, as speculation has 
caused unfair prices.''
    Even Goldman Sachs in a research report last year 
acknowledges the fact. Also data generated by the St. Louis 
Federal Reserve Petroleum Marketers Association and others 
indicate that one of the major factors in high prices is oil 
speculation. That's why Senators Klobuchar and Senator Sanders, 
myself, among others have introduced legislation to force the 
Commodities Futures Trading Commission to place limits on 
speculators and Chilton, who is a Commissioner, has agreed.
    What do you think about it? Can you tell me what has 
happened over the last decade with respect to the ratio of 
speculators and end users in the oil markets?
    Mr. Verrastro. So I would suggest that maybe Paul or Howard 
might be better situated to answer this question.
    I think there has been a change historically between 
commercial players and traders or money managers, market 
managers. It used to be that the commercial traders did a lot 
more of the exchange because they actually used the oil. That 
has reversed itself over the last decade. Clearly money 
managers play an increasing role.
    In 2007 and 2008 we actually saw, in terms of dollars, a 
lot of money moving to commodities whether it was gold or 
silver or oil. So it's treated as a global commodity.
    In terms of the impact of actual speculative activity 
whether it's before the fact driving prices up or it's after 
the fact supporting the price increases. CFTC's examination and 
EIA's examinations probably have better data.
    Senator Franken. OK. I know my time is up. So I don't want 
to ask Mr. Gruenspecht to speak to that unless it comes up from 
someone else's question.
    The Chairman. Alright. OK.
    Senator Barrasso is next.
    Senator Barrasso. Thank you, Mr. Chairman.
    Mr. Yergin, I'd like to ask you about the Strategic 
Petroleum Reserve.
    Yesterday the Financial Times reported that the Obama 
Administration is proposing that the U.S. and Japan and several 
European Nations tap their Strategic Oil Reserves to address 
gasoline prices. This would be the second time this 
Administration has tapped the Strategic Reserve. The Obama 
Administration tapped it last June and to my knowledge has not 
yet filled the Reserve back to capacity.
    I understand that the International Energy Agency has not 
supported the Obama Administration's recent proposal. The 
Executive Director of the IEA has said no specific supply 
disruption is currently underway. Germany has also resisted the 
proposal. Germany's Economy Minister has insisted that 
Germany's oil reserves are for a ``genuine physical shortage.''
    In your Wall Street Journal op-ed, you stated that, ``There 
should be some caution about using our Strategic Reserves 
before it is absolutely necessary.'' So do you think that it is 
appropriate to tap the Strategic Petroleum Reserve at this 
time?
    Mr. Yergin. I think caution is still the word. I think the 
Strategic Petroleum Reserve and the whole system of the 
International Energy Agency emergency sharing was set up to 
deal with disruptions and major threats to GDP.
    I think that we're heading, you know, if you listen to 
these numbers that have been used here today about spare 
capacity. Paul described the high degree of geopolitics. What's 
different about the geopolitics this time? That part of it is 
actually aimed at reducing an important source of oil supplies 
in the market.
    But that hasn't happened yet. That's not going to happen 
til June. So I think that the SPR is a very important asset 
along with this whole thing. But it's really there to deal with 
a disruption. You know, there are a lot of uncertainties ahead.
    Senator Barrasso. Thank you.
    I'd also want to talk about your--the interview you gave 
cause I read it from the U.S. Chamber of Commerce. You stated 
that Keystone, Keystone pipeline, is really a symbol for the 
oil sands. The major argument against it has to do with carbon 
emissions.
    You also said that the numbers have been misconstrued. You 
explain that a barrel of petroleum made from oil sands oil, in 
terms of the CO2. You went on to say that Americans 
use other oils that also add about that same amount of extra 
CO2 to the atmosphere. You said you hope that the 
President's decision will be reversed I think by the beginning 
of 2013, if not before then.
    Will you please elaborate on how critical you think the 
Canadian oil sands and the Keystone XL pipeline are to 
America's energy security?
    Mr. Yergin. I think that what's happened is that the United 
States and Canada become much more integrated in terms of 
energy. Canada is, by far, a larger source of imports. It 
happens to be our neighbor. I think, what is it, the longest 
undefended border in the world? That the growth of the oil 
sands has been really quite extraordinary going from being a 
fringe to being something really significant.
    If you look on a well to wheels basis the carbon footprint 
is about 5 to 15 percent higher. There's a lot of work being 
done to bring down that, even that disparity. What strikes me 
about the Keystone in the discussion is that there has been 
less discussion about the security aspects of that.
    If you look at the through put that would pass, the volumes 
that would pass through that pipeline, is equivalent to one-
third of Iran's total exports. That's a big number. That's a 
world class number. So that side of it is, I think, has to be 
part of the equation and part of the discussion.
    Senator Barrasso. Thank you.
    I'd also like to ask you about the EPA's pending Tier 3 
regulations for American refiners. They're going to require 
further reductions in sulfur content in gasoline. There have 
been some ideas of how much that would impact. Apparently the 
cost of producing gasoline would be increased by 6 to 9 cents a 
gallon.
    Do you think it's appropriate to move forward with these 
regulations?
    Mr. Yergin. I haven't studied that. So I can't answer that. 
I don't know if Frank can?
    Senator Barrasso. Let me ask you one other thing then. I'd 
like to ask you about oil futures markets. That's come up 
previously in the discussions.
    You know, in January this committee held a hearing on U.S. 
and global energy outlook at the time. Ambassador Richard 
Jones, the Deputy Executive Director of International Energy 
Agency testified with Dr. Gruenspecht and others. Ambassador 
Jones said, ``The invisible hand of market speculators is often 
referred to as having held oil prices artificially high. Yet 
detailed research,'' he said, ``has so far failed to identify a 
smoking gun in the commodities derivatives market.''
    He went on to explain that there is no clear link between 
futures market activity and oil price moves. That, ``Evidence 
is slim surrounding so-called excessive speculation.'' Do you 
think that these are fair statements by Ambassador Jones?
    Mr. Yergin. I think from our understanding there is the oil 
has become, commodities, have become an asset class. Invested 
in that, that there is a--the role. Of course the word 
speculation, if you're an airline and you need to hedge your 
supply, you need a speculator on the other side who is going to 
hedge it and so that kind of how it actually works.
    But that that's, you know, that's one factor. But it's not 
the overwhelming factor. All you have to do today is look at 
the factors that, if going back to Senator Murkowski's question 
about the spare capacity. The supply/demand balance and that is 
the policy the U.S. Government to reduce the flow of Iranian 
oil into the world market. That gives, you know, that's what 
the reaction is.
    If you're an airline, you're going to hedge yourself 
against the uncertainties. I think I find that there's not a 
clear scenario about what happens. But there's a sense of the 
great seriousness, a somber seriousness, about these issues 
that are on the table.
    Senator Barrasso. Thank you very much, Mr. Chairman. My 
time is expired. Thank you.
    The Chairman. Thank you.
    Senator Manchin. Thank you very much, Mr. Chairman. Thank 
you all for your service.
    The thing I was wondering though is that you were talking 
about oil prices and gasoline prices and what it means to the 
people at the pump. In West Virginia it's right at close to $4. 
It's very hard.
    We have probably one of the states, the most rural states 
and commuting for jobs than most any other state. We always say 
you have to drive to survive in West Virginia. So you can only 
imagine the hardship it's putting on people.
    With that being said, I'm hearing so much from all of you 
all as experts that there's very little we can do. You can 
imagine the frustrations when we go home and people say, well 
can't you help me? We feel frustrated.
    We think we can help by alternative fuels, coal to liquids, 
natural gas, compressed natural gas, things of this sort. 
That's not going to be traded the way you're trading oil. Where 
we have a little bit more control over our own destiny which we 
know the technology is there.
    Even Secretary Chu has said, coal to liquids with biomass 
really makes sense. It does not leave a carbon footprint. It 
basically can work and it has worked.
    The Germans basically perfected Fischer-Tropsch in 1936. 
Senator Jennings Randolph flew a plane, an airplane, in 1942 
from West Virginia to Washington, DC, on a coal to liquids that 
the Air Force has tested in. We couldn't even get a bill passed 
here to use alternative fuels for our military which makes no 
sense at all. Yet we are held captive by global markets that we 
have no control over.
    I'd like to hear and Doctor, it might be hard for you 
because being in it, but if I could hear from all of you. Do 
you not believe that we should be changing and we could change 
and the technology is there and it can make a difference in the 
price at the pump?
    We'll just start right and go right down the line.
    Mr. Horsnell. Yes, and I don't want to misinterpret the 
other panelists. I don't think anybody was saying there's 
nothing you can do about it. I think what we were saying is 
that the problem is an all of the above problem.
    Senator Manchin. I want to know about coal to liquids and I 
want to know about natural gas as a transportation fuel.
    Mr. Horsnell. Again, that's the reason why oil prices are 
now clearing at a higher level is to bring on new technologies, 
to create base through energies.
    Senator Manchin. These are old technologies. 1936.
    Mr. Horsnell. They were old technologies but they at $20 
crude they were not economic. We're now moving into levels 
where if somebody can get those technologies to work 
economically then clearly that's where the price signal is 
given. So I don't think there's anything that precludes those 
technologies that are----
    Senator Manchin. Do you think we should be developing those 
technologies and trying to move forward so we have a little 
more control of our destiny as far as price at the pump?
    Mr. Horsnell. As part of the sort of, all of the above 
solution since----
    Senator Manchin. Do you agree we're not going to though, 
right? Because of the EPA and because of all the different 
infringements we have on government?
    Mr. Horsnell. As a non-American I don't want to say 
precisely what----
    Senator Manchin. OK. Let me go down to an American then.
    Mr. Horsnell. Yes, alright. I think it's fair to say that 
greatly at a global level progress in alternative fuels has 
been relatively slow. Some of that is to do due to economics 
and with--but it does take quite a long time to bring these 
things in.
    So, again, that's back on to the all of the above. A start 
has to be made at some point.
    Senator Manchin. Mr. Verrastro.
    Mr. Verrastro. Thank you, Senator. So I'm again, going to 
enter into some dangerous territory here and follow Paul's 
comments that there are some benefits to be derived from higher 
oil prices. The first and foremost of that is that a lot of 
these unconventional wouldn't have been developed.
    Shale gas wouldn't have been developed before the fact that 
we had private land access, this new technology and $12 gas 
price in 2007 and 2008. That's what spurred the development. 
Ultra deep water, oil sands, the unconventionals, a lot of this 
new production is higher cost production. One of the benefits 
of reaching a level, not $125, but a higher level means you can 
bring on more production and then moderate future prices.
    I agree with you on expanding the use of alternative fuels. 
I think the problem, as Paul has said, has been that gasoline 
actually does very well in terms of energy content rich. The 
ability it's portable. It's fungible. It's storable.
    Senator Manchin. But I know we're going to run out of time. 
Let me tell you what I'm saying. Coal to liquids.
    Mr. Verrastro. Coal to liquids.
    Senator Manchin. Secretary Chu says himself that liquids, 
using carbon capture and sequestration with biomass actually 
reduces the amount of carbon dioxide in the atmosphere. We know 
we can do it. We have the technology, but this agency, EPA, the 
Administration, will not help us move in that direction.
    Mr. Verrastro. So I think part of the problem, Senator, 
with all due respect to West Virginia, is that on the coal 
side, CCS, at scale is an enormous lift. I agree with 
everything the Secretary said. With those conditions it's 
absolutely right.
    But if we do fuel efficiency at 60 miles to the gallon it's 
going to be difficult for anything to compete with the gasoline 
hybrid engine.
    Senator Manchin. Dr. Yergin.
    Mr. Yergin. If I could divide it into two. I think what 
Frank says that coal to liquids, the technology is doable. It's 
the cost.
    I think the other side, natural gas. I think a difference 
that even from a year or two ago is the sense that natural gas 
is going to be part of the diversification of the 
transportation fleet in certain types of vehicles. We seem to 
be on the cusp of that.
    But the other thing is I do think that it is incredibly 
important what's happening on the demand side. To go from 30 
miles per gallon to 54 miles per gallon, that is worth many, 
many oil fields to make that happen. So I think the efficiency 
part of it is also a----
    Senator Manchin. I'm just saying, just having control over 
our own destiny. We have no control over global pricing of oil.
    Mr. Gruenspecht. There was an effort to develop light duty 
vehicles to run on natural gas. It has been tried, but didn't 
succeed very well in the marketplace.
    I think there's a lot of interest in natural gas for heavy 
duty vehicles, for trucks, for liquefied natural gas as a fuel 
for trucks. We are going to include a sensitivity case in the 
upcoming Annual Energy Outlook that addresses that. There's 
also a lot of potential for methanol from natural gas either as 
an additive to gasoline, but not so much in the United States 
where we're using ethanol as an additive to gasoline.
    If throughout the world the gasoline pool was supplemented 
with methanol the same way that we use ethanol in the United 
States there would be a lot of opportunity to displace oil. 
There's also probably some opportunity for straight methanol 
fueled vehicles. I agree with Dr. Yergin on the challenges in 
the costs of some of the coal to liquid technology especially 
with carbon capture and sequestration.
    Senator Manchin. Thank you very much. I'm sorry.
    The Chairman. Thank you.
    Senator Risch.
    Senator Risch. Thank you, Mr. Chairman.
    First of all, let me say thank you for your testimony. I 
think that probably for people who are watching this it's an 
eye opener. As far as how important the refining process is in 
all of this, I think Americans have a tendency to think about 
this as the price of a barrel of oil. They ignore the different 
kinds of oil that's out there.
    But more importantly they ignore the fact that once a 
barrel of oil is produced there is a complex process by which 
it is turned into something they can put in their automobile. 
Actually use and transport in it to the place where it can be 
used. So your testimony in that regard is very welcome I think 
as far as helping clear up this picture.
    Again, though it underscores the fact that the law of 
supply and demand is indeed a law. Here in this town with the 
politicians we find that the, a lot of people believe, that the 
law of supply and demand is merely a suggestion. Unfortunately 
we have to overcome that from time to time.
    As you know we're debating a bill on the floor right now. I 
guess I come at it from a 180 from where Senator Franken comes 
at it. He talks about these awful loop holes and subsidies.
    Language is an amazing thing in this town. When those were 
put into place they were called incentives in order to get the 
companies to produce more oil and gas so that we could have--
this is so that the law of supply and demand would work in 
favor of the consumer. Now they're labeled as loop holes and 
subsidies as opposed to incentives.
    So I appreciate your helping to clear that up. I guess I 
come from this from a relatively simple standpoint. I don't 
know how anyone who has even the slightest understanding of 
economics can believe that by increasing the cost, namely the 
taxes, that you will somehow lower the price to the consumer. I 
mean, that just, that absolutely boggles my mind.
    Now you can go into a long theoretical discussion about oil 
in the long run it will bring in alternative fuels, etcetera, 
etcetera. But my constituents are looking for a price reduction 
today. You can't reduce the price by increasing the cost.
    Finally let me say one thing. Appreciate your thoughts on 
the speculators. Again, you need market makers. I think 
everyone would agree that you need market makers.
    Am I right or am I wrong on that?
    I mean, if you're just going to buy from the producer 
there's always room for manipulation in that regard. But if 
you've got market makers, you get a free market that is very, 
very difficult to eliminate. The problem I have with what 
Senator Franken talks about and that is limiting the 
speculators.
    How in the world, maybe you guys can answer this? How in 
the world if we absolutely prohibited speculation in America, 
put a 25 year sentence, mandatory, on anybody who engaged in 
speculation in the price. How would you stop that from 
happening in another country?
    After all we make up only 330 million people on the planet 
that's got 7 billion. It seems to me they'd open up tomorrow in 
London or in Singapore or somewhere else. Do the exact same 
thing that they're doing here.
    Am I right or am I wrong on that?
    Dr. Yergin.
    Mr. Yergin. I think Paul should answer some of that. But I 
think that definitely, you know, we're just, we're part of a 
world oil market. We're not the world oil market. We're the 
North--U.S. oil market.
    You know, if you re-look at these annual reports that 
Southwest Airlines, it's clear that without the ability for 
them to hedge their price risk, they would not have been able 
to stay in business is what their message is. To hedge you need 
somebody on the other side of that who--and that's what future 
markets do. So if we didn't have these kinds of markets in a 
situation, we'd be looking at today airlines would be taking 
their airplanes out of the skies and be putting them, parking 
them in the deserts because they were not able to hedge their 
financial risk.
    That's what those markets do. Obviously the markets have to 
be regulated. They have to be understood very closely. When you 
have a big traded commodity, people need to manage their risk 
in order to stay in business.
    Senator Risch. Thank you, Dr. Yergin.
    Mr. Horsnell, you seemed to be modestly familiar with Great 
Britain. Could we pass a law here in Washington, DC, that would 
regulate the speculators in London?
    Mr. Horsnell. I think I bring in one further country into 
this which is actually Switzerland. In what we've seen, 
noticed. I cover more the fiscal oil markets, but the trend we 
notice, particularly over the last couple of years, has been a 
very large movement of oil trading out of London and then into 
Switzerland.
    Some of the most important traders now are not banks, they 
are Swiss based traders. You know, that may be again, part of 
the process you were talking about. It's much harder to get 
full visibility on an oil market where the balance has shifted 
away from more a regulated sense, should we say, and into other 
areas.
    I think there are various shifts going on. Part of it is 
from banks into traders from New York and London into 
Switzerland. That might be an interesting development as the 
years go by in this particular area.
    Senator Risch. My time is up.
    Mr. Verrastro. Senator.
    Senator Risch. Yes.
    Mr. Verrastro. Can I add just one point on you talked about 
the tax incentives. I think that's absolutely right. I think 
time changes. I actually think the debate would be markedly 
different if there was a discussion of corporate tax rates 
overall.
    Senator Risch. Right.
    Mr. Verrastro. That we wouldn't be in this position of 
subsidies and tax incentives.
    Senator Risch. Oh, I think you would.
    Mr. Verrastro. There would be a balancing of the----
    Senator Risch. Here they'll call anything that has to do 
with a corporation, a loop hole or a subsidy. So I'd like to 
share your optimism, but I don't.
    Thank you, Mr. Chairman. My time is up.
    The Chairman. Senator Cantwell.
    Senator Cantwell. Thank you, Mr. Chairman. It's good to see 
all of you gentlemen here. Thank you.
    I've enjoyed this discussion. I certainly believe in market 
fundamentals myself. Certainly believe in making sure that 
market fundamentals are policed.
    But I can remember a time on this committee that we talked 
and talked and talked and talked about what was wrong with 
electricity when Enron was manipulating the market. There were 
a lot of people that thought it was 3,000 things other than 
manipulation until we proved that it was manipulation. Then 
everybody was like, oh, it's manipulation.
    So I think the point here is what is the functionality of 
the markets that we really want to see? I was looking at your 
testimony, Dr. Yergin, about the financialization of oil in the 
commodities market. So I was curious as to your thoughts on 
this.
    At what point does it really become a problem? Because it's 
quite clear the Commodities Exchange Act made it very clear 
that the Commodities Futures Market were created for two basic 
purposes.
    One, to provide a revenue for producers and consumers of 
physical commodities to hedge their risk.
    Two, to establish a fair price on supply and demand 
fundamentals.
    So we had Mr. Tillerson come before the Finance Committee a 
year ago now. That was when oil was at $98 a barrel and I asked 
him what should that price be. He volunteered it really, if 
you're basing it on the next production price for a barrel of 
oil, it should be, he said, between $60 and $70.
    So it's clear that this is the process and the cost of 
having both legitimate hedgers and speculators in the market. 
That there is a fear factor that's driving it up. There's a 
financial whistle.
    But my question is really about these institutional 
investors that make the commodities like an asset class like 
securities. So these are people who are not in the market for 
any other reason than to make profit. They're not in the 
hedging for legitimate purposes or price discovery. They're 
there because it's a great financial play.
    I'm curious as to at what point, at what price point, or 
what percentage point, do you think that that becomes a 
problem? I don't mean the price of oil. But if you, if Mr. 
Tillerson is right and here's what he says the production cost 
is. A lot of people think 15 to 20 percent is added on for the 
fear factors and then obviously there's all sorts of other 
things that happen on any given day.
    But at what price do you think this asset class 
financialization really becomes a problem?
    Mr. Yergin. I think that the financialization certainly has 
to do with what you're talking about. Institutional investors 
or hedge funds, who are, you know, who are in there regarding 
this as an asset class. I think it's a little bit, when I use 
the term financialization I meant something even broader. 
Because you see like Calpers, the largest pension fund in the 
United States, regards commodities as an asset class and a way 
you invest in commodities is a way to play economic growth in 
China and so forth.
    So it's, you know, it's not easy to separate it into 
segments. I understand that's the question you're asking. I 
think, you know----
    Senator Cantwell. I'm not even asking you to guess what it 
is. I'm just saying at what point, if I said, OK, they're 
affecting the price by 50 percent or they're affecting the 
price by 30 percent or 30 percent of the price above $60 to 
$70, which Mr. Tillerson says is the marginal cost for 
producing another barrel of oil. So if that's what it is, and 
we know there's all sorts of these other factors.
    Mr. Yergin. Right.
    Senator Cantwell. But at what point do you think that asset 
class investment changes the commodities market and becomes a 
problem? If it's affecting 30 percent of the price? If it 
affects 40 percent of the price? If it affects 50 percent?
    Mr. Yergin. You know, I don't know what the point is I 
would say, by the way that cost even since he's testified, the 
costs of developing the marginal barrel have gone up so much 
that that number would be raised somewhat. But I think, you 
know, I guess you're asking not in terms of the current 
circumstances, but at what point----
    Senator Cantwell. Would you worry about it, yes.
    Mr. Yergin. You know, I don't have an answer for that right 
now. I'm looking rather at the market and saying based upon, as 
you said, supply and, you know, the fundamentals are what's 
there. There's a fear factor or premium factor in it.
    I don't know. Do you have a number in mind or?
    Senator Cantwell. I definitely believe that we should get 
these asset class investors out of this market. That's my 
personal opinion. When I look at Mr. Verrastro's chart here and 
I see this level of volatility at this end and this level of 
growth. I start asking myself is it worth $50 a week more to a 
Washington consumer driving to allow a bunch of commodity index 
fund investors to drive up this price when it hurts the U.S. 
economy?
    I think the answer is no. Because commodities markets are 
about price and supply--you know, price and supply discovery. 
So they are to provide that marketplace for legitimate hedgers.
    So saying that we're going to allow a bunch of investors to 
treat the commodities market like they want to treat the rest 
of Wall Street from a securities and investment perspective, I 
think is the wrong idea for commodities, something particularly 
as vital as gasoline.
    Mr. Yergin. Right. No, I understand.
    One other thing I would kind of add is I think that point 
about if those markets were to lead the United States and not 
be--I'd rather see these markets in the United States regulated 
with the kind of scrutiny they have that incurring somewhere 
else where they're not under scrutiny. So part of the issue is 
it is a global marketplace.
    Senator Cantwell. I would add to that because I bet you, 
you could get the Europeans and the Chinese and everybody else 
to add in because I've heard from many of those people. They've 
been to my office. I think it's amazing that they come to my 
office, even elected people from Japan, saying what can you do 
to get these investors out of the commodities market because 
they're feeling the pinch around the globe.
    Thank you, Mr. Chairman.
    The Chairman. Thank you.
    Senator Portman.
    Senator Portman. Thank you, Mr. Chairman. I enjoyed the 
testimony earlier. I'm sorry I had to run to another of the 3 
hearings going on at the same time.
    One thing that I think struck me about your earlier 
testimony is the fact that is as hard as Congress tries we 
can't repeal one law and that's the law of supply and demand. 
It's working right now. It's working to the detriment of folks 
at the level of the gas pump.
    It's pain at the pump because, you know, we have a 
disconnect right now. We have a little bit increase in demand 
and we have some supply constrictions.
    Looking at your testimony, Mr. Gruenspecht, you talked 
about prices being based on global supply concerns.
    Mr. Yergin, you talked about in your op-ed recently I saw, 
but also in your testimony today, the geopolitics, sanctions on 
Iran. You talk about concerns over the Straits of Hormuz 
exacerbated by the fact that we don't have the spare production 
we should have, tight markets, Libya, other geopolitics, 
certainly again, the focus on Iran right now. The oil market is 
reading the front page of the paper I think is what you said.
    I guess my question is that given that that's the situation 
if we were to increase production in this country, all things 
being equal don't you believe that would have an effect on 
price?
    Mr. Yergin. Yes. In a very simple answer, yes. I think the 
increase that we have had in the last 4 years has actually been 
very beneficial because we would be looking at much higher 
prices in a much tighter market without it.
    So what's happening in the United States both on the demand 
side but on the supply side have a big influence on the global 
market.
    Senator Portman. So the statement that someone made which 
was surprising to me but even in the last few weeks as we've 
been talking about this on the floor and so on which is U.S. 
domestic production doesn't affect the price of gasoline. I 
don't see how that can be true if in fact there is this supply 
and demand reality out there.
    Second is, as you all have talked about today, it matters 
as to where we're getting our source. So it's not just supply 
and demand. It's where the supply comes from and increasingly 
volatile and dangerous parts of the world are not a good place 
to rely on as we saw last year with Libya.
    So I just think it's not only supply and demand, but tell 
me. Isn't it also the fact that if we had more domestic 
production and I would say even production from countries where 
there is more reliable source like Canada that that would have 
a positive impact on price? Do you all agree with that? Does 
anybody disagree with that?
    That there's an issue here as to the quality of supply?
    Mr. Gruenspecht. Yes, but I don't think that we're going to 
have a separate price from the rest of the world.
    Senator Portman. No, that's----
    Mr. Gruenspecht. It is a world market, so----
    Senator Portman. That's not what I'm saying. It's set 
globally, but in terms of the U.S. price where we're getting 
our supply does that matter?
    Mr. Gruenspecht. I think where we're getting our supply may 
matter, but matter less for the price than for other aspects, 
security aspects. Also production is an important part of the 
U.S. economy, jobs, economic activity. It's not just a matter 
of prices.
    I think both supply and demand in the United States are 
part of a global picture. Policies influencing U.S. supply and 
demand affect world markets both directly and indirectly. So 
indirect effects can arise. For example, the technologies that 
we use to raise fuel economy in the United States go to the 
rest of the world and contribute to a lower demand globally. 
That has a big effect.
    The same is true on the supply side. Our supply 
technologies are applied elsewhere. This is mostly about oil, 
but if you have something like shale gas which has had a very 
big effect on the United States, and those technologies are 
applied in the rest of the world, there's a significant, 
indirect affect. The same applies to our deep water and tight 
oil technologies.
    Senator Portman. Yes. No, and methods of hydraulic fracking 
and horizontal drilling. It's not natural gas. It's natural 
gas.
    It's tight oil. In my State of Ohio right now we have wet 
gas, dry gas, sand and oil coming from the Utica shale.
    It's about a futures market to, isn't it? So it's about 
what the future might hold with this new technology.
    Mr. Gruenspecht. Right.
    Senator Portman. That can have an effect. Let me ask one 
more question. Feel free to jump in here. I've only a few 
seconds left.
    But in terms of this issue of affecting the price of gas at 
the pump on taxes, you know, I look at what happened with the 
Windfall Profits Tax. I look at what happened in the UK and 
their experience. But let me hear from and maybe a counter 
point of view here if you disagree with me.
    But what do you think the affect would be on the price of 
gas at the pump if the taxes were raised on oil companies by 
let's say, $25 billion, over the next 10 years? Would it have a 
positive or negative affect or no affect?
    Mr. Verrastro. So to the extent you're paying more in tax 
and less investment in ENP activity you're reducing supply. 
Right? That's pretty clear.
    In terms of the direct impact----
    Senator Portman. You can take it to the next level.
    Mr. Verrastro. I'm sorry?
    Senator Portman. So what does that mean?
    Mr. Verrastro. Yes, so that I was just going to take that a 
little bit further. So when you get to the point that increased 
production is a good thing I think your assumption that 
production, all things being equal, lowers price. More 
production, more supply, good for the world.
    But there's a demand side as well. So I don't know that 
there's a definite guarantee you increase production but prices 
don't necessarily go down because we are 18 million barrels a 
day, give or take, of demand in a 90 million barrel a day 
world. We produce about 7 million barrels a day of liquids.
    So you increase that by 400,000 barrels a day that's a 
great thing. It's more than Iraq is increasing. It doesn't mean 
that the fundamentals change all that much.
    So I just think we have to be careful.
    Senator Portman. Yes, but all else being equal if you 
didn't have that additional supply it would have a converse 
effect.
    Mr. Verrastro. I absolutely agree with that. I think the 
additional supply has been terrific and it's very helpful. I 
think the concern that this is a dynamic market and there's 
leads and lags in investment needs to be made.
    But to make the assertion that more or less production, 
unless it's a huge scale, you know, two or three million 
barrels is a big deal. Two or three hundred thousand barrels a 
day, significant, that's a big contributor. It's great for the 
United States. It doesn't affect, materially, market prices.
    Senator Portman. Thank you very much.
    Thank you, Mr. Chairman.
    The Chairman. Senator Coons.
    Senator Coons. Thank you. Thank you, Mr. Chairman. Thank 
you for the opportunity to be a part of this hearing today.
    In Delaware, where I'm from, we've had some real success in 
re-opening the Delaware City Refinery which was idled. But 
there have been some difficult announcements in the past year 
by Sunoco and Conoco Phillips that they are either idling or 
closing 3 major refineries on the Delaware River in 
Pennsylvania. That in combination, represent half of the 
refining capacity on the East Coast.
    Chairman Bingaman and Senator Risch have previously asked 
questions about refining capacity, logistics and how that 
contributes to price. I'm concerned about trying to make clear 
whether or not Federal Government regulatory actions have 
contributed to these decisions to idle or close these 
refineries and the very negative impact that can have on 
employment and possibly on gasoline prices or whether these are 
really the result of market decisions and of private business 
decisions.
    Mr. Verrastro, do you have any opinion about that?
    Mr. Verrastro. Thank you, Senator.
    So 2 quick points.
    I think we were due for a rationalization of domestic 
refining capacity in this country. In point of fact, if East 
Coast refineries are operating at 70 percent utilization and 
two closed down, Delaware City actually will be better 
economically, all things considered.
    I think we're actually going to be going through a bigger 
rationalization in the future for some of the reasons the 
Senators have raised about domestic production increasing from 
the mid-continent. This is lighter, sweeter oil. Our Gulf Coast 
refineries are configured to be able to run heavy, sour oil and 
make a lot of nice products as a result of that. But this is 
kind of the big build that's coming.
    In terms of refinery economics you look at the total cost 
and then the total value of the product. I would argue that 
refiners have been under siege with higher prices if you have 
an unsophisticated refinery because crude oil prices that you 
need and Senator, you talked about crude oil, light, sweet, 
heavy, sour, naphthenic verses paraffinic, not necessarily good 
and bad. When you're buying a specifically type of crude oil 
you need that to produce the product slate that your customers 
demand.
    So if product prices are competitive at the back end and 
your crude oil cost goes up, that's the big driver. So clearly 
have EPA regulations have an impact on the prices in terms of 
maybe, cents per gallon. That's true. There's a CAPEX and an 
OPEX piece here. I don't think that was just positive in the 
closure of those refineries.
    Senator Coons. There was a study that was recently released 
by DBL Investors that looks at the historical role of Federal 
subsidies in shaping the energy market. They concluded that 
94.6 percent of all Federal subsidies and support over the last 
century have gone to oil, gas and nuclear and roughly 5 
percent, less than 5 percent, to the development of biofuels 
and renewables.
    Dr. Yergin, does that suggest anything about what our path 
forward ought to be if we're going to pursue an ``All of the 
Above'' energy strategy and try and over the long run work our 
way out of facing higher gasoline prices?
    Mr. Yergin. Who did that study?
    Senator Coons. DBL Investors.
    Mr. Yergin. Right. I think EIA has done a different, very 
different view.
    Mr. Gruenspecht. Thanks, Dan.
    [Laughter.]
    Mr. Yergin. I'll let him answer.
    Mr. Gruenspecht, do you want to take that one?
    Mr. Gruenspecht. It's hard to put these things together. We 
try to do it from a neutral perspective.
    What you include, what period of time you look at, how you 
measure some of these things are all factors. We've done a 
series of studies including one pretty recently looking at 
Federal subsidies and support.
    I think it changes over time. In reality there's been 
significant support for renewable technologies and some 
significance for efficiency. Some of the subsidies, like of the 
subsidies for synthetic coal, have expired. So things change 
over time.
    There have been specific subsidies to both fossil and non-
fossil fuels and increasingly to efficiency.
    Senator Coons. Last question if I might.
    Mr. Yergin. Can I just? Can I just?
    Senator Coons. I'm going to run out of time.
    Mr. Yergin. OK.
    Senator Coons. So if I could focus you, Dr. Yergin, on the 
last question.
    Master limited partnerships is one of the ways that 
financing has been made available that's help build 
transmission pipelines and help with capital investment. With 
capital investment that's not currently open to all forms of 
energy. Would opening up existing support, tax advantage, 
financing support like master limited partnerships to all 
energy strategies be a possibly sustainable path forward to 
broadening our energy market?
    Mr. Yergin. Again, I haven't studied that. But I think, for 
instance in terms of wind farms it might apply. It might be a 
reasonable way to do it.
    If I can, just go back to the subsidies thing. I think what 
Senator Risch said that, you know, that word subsidies 
incentives goes back and forth. I did read one study that said 
that the on the subsidies to the oil and gas industry and by 
far the largest one was the Foreign Tax Credit.
    I then checked the footnotes and there was only footnote 
and it was to a book called, The Prize, which I know very well, 
said kind of just the opposite thing. So I think that as Howard 
said, how these things get defined are really, lead to very 
different conclusions.
    Senator Coons. Thank you.
    The Chairman. Senator Hoeven.
    Senator Hoeven. Thank you, Mr. Chairman.
    Mr. Yergin, I will probably start with you although I'm 
going to refer to comments that each of you have made. You've 
talked about the supply and demand equation. World demand is 
going higher for crude oil and for energy in general. So we 
have tight or very little spare capacity in the crude oil 
markets.
    So that, kind of, there's two aspects of that, the supply 
and demand equation creates upward pressure on gas prices today 
based on supply and demand. But also then there's the 
anticipated futures situation. If we know we have growing 
global demand. We're not growing supply that creates upward 
pressure on gas prices as well.
    Mr. Yergin, is that accurate so far in terms of reflecting 
your statements?
    Mr. Yergin. Yes.
    Senator Hoeven. OK.
    So my question to you and to the others is going to be, so 
if the Administration has policies and if this Congress sets 
policies that allow for more access, on shore drilling and 
offshore drilling, on Federal lands and offshore. If we allow 
more access would that tend to help create more supply? Would 
that tend to reduce gas prices both today in terms of actual 
supply as we start to produce more. But also in terms of market 
signals saying hey, we're going to try to produce more energy 
rather than constrict it?
    Mr. Yergin. I think the increase in supply would have an 
impact. Here I have a slight disagreement with Frank. I think a 
3, 4 hundred thousand barrel a day increase in the United 
States, if we saw that kind of increase coming out of Iraq or 
some other country, we'd be thrilled.
    I think that here too, that that's actually quite a 
significant number of barrels coming into the market when every 
barrel counts. I think this kind of what Frank did describe. 
This change in both psychology and outlook in the United 
States, that we have a more resource rich opportunity here than 
was thought of a few years ago.
    That will contribute to the psychology of the market. You 
know, it just doesn't happen overnight.
    Senator Hoeven. Right.
    But there's both aspects. There's both the immediate 
supply/demand equation, but also anticipated in terms of where 
we're going. That affects outlooks in terms of pricing 
decisions and also drives prices as well.
    For example, if we have policies that provide more access 
onshore and off that for example, if I was to build pipelines 
rather than blocking pipelines. Logistics, I think one of you 
referred to the importance of logistics earlier. That 
streamline permitting rather than adding regulatory red tape 
that reduce regulatory burden rather than add to regulatory 
burden.
    Wouldn't those types of factors send clear signals that 
we're going to work to expand supply and the market would take 
that into effect in pricing? I'd like each of you to respond to 
that question if you would.
    Mr. Yergin. Yes, well just to finish. I think, yes. I think 
one of the things you pointed to is the expediting of 
decisionmaking would be very valuable to people who are 
committing capital and making investment decisions in terms of 
giving them the confidence to go ahead.
    Senator Hoeven. Dr. Gruenspecht.
    Mr. Gruenspecht. I really think my answer to Senator 
Portman's earlier question about both direct and indirect 
effects is probably where I would stand on that.
    Senator Hoeven. But you would agree that if you take a 
whole range of steps to increase supply that would tend to help 
in terms of dollar and pressure on prices verses a whole step, 
a whole range of steps that constrict supply would tend to 
create upward pressure. Would that generally be true?
    Mr. Gruenspecht. Yes, I think all else being equal, that is 
true.
    Senator Hoeven. Very good. Thank you.
    Mr. Verrastro.
    Mr. Verrastro. So I think part of the issue is timing, 
right? So there's a difference in this currently tight market 
if you bring a lot of barrels to bear immediately it has a big 
impact. Saying that you're going to do something that results 
in production 15 years down the road, even 5 years down the 
road, has less of an impact.
    Just to clarify I think I'm in the same boat with Dan on 
this. I mean, I'm not downplaying the Bakken. I think 
production of 3 or 4 hundred thousand barrels a day is 
enormously helpful.
    Senator Hoeven. But I want you to respond to my question, 
not Dr. Yergin's or----
    [Laughter.]
    Mr. Verrastro. Senator, you managed to describe Keystone 
without saying Keystone. I think that there's a couple things 
happened with Keystone. I think there's--should a pipeline be 
built if some people are willing to put up $7 billion and build 
a pipeline to bring oil sands to the Gulf Coast.
    Is that a good thing?
    Absolutely.
    Senator Hoeven. Very good. That's a great place to stop. 
Thank you, Dr. Verrastro.
    [Laughter.]
    Mr. Verrastro. I need to say one more thing.
    Senator Hoeven. Dr. Horsnell.
    Mr. Verrastro. One more point. Right now there's between 
700,000 barrels a day and a million barrels a day excess 
capacity rail and pipe that can bring. There's no limitation on 
what's coming down from Canada right now and probably won't be 
until 2016.
    So I don't think it's a national security issue right now.
    Senator Hoeven. But there's a big difference when it's 
hauled by rail which adds a significantly higher cost to it.
    Mr. Verrastro. The bulk of that----
    Senator Hoeven. There's also the issue of Canada being 
the--having the third largest oil reserves in the country. The 
question of whether we're going to develop them with things 
like in situ which is better environmental stewardships.
    Mr. Verrastro. Absolutely.
    Senator Hoeven. Similar to conventional drilling or see 
that product go offshore, Doctor. But I do want to give Dr. 
Horsnell an opportunity to respond as well.
    Mr. Horsnell. Yes. I think it's a question of timing. I 
think that expectation that the supply situation may have 
turned and may improve as we move into the midterm is something 
which starts to anchor longer term price expectations. Early 
there does seem to be much more stability in longer term price 
expectations over the last year or so with most of them 
pointing to $90 to $100 as a good long run price.
    So your price where the oil sands are developed where the 
alternative technologies do come on and where this development 
continues. So for anchoring the long term, but doesn't perhaps 
not bring a down pressure on short term prices.
    Mr. Yergin. Right. Our expectations are changing exactly 
for the reasons your saying.
    Senator Hoeven. I am over my time here. So just very 
quickly, but Mr. Verrastro, would you agree that logistics are 
important that building pipelines and making sure we can access 
oil is--would you agree that those logistics are very important 
in terms of pricing around the country?
    Mr. Verrastro. Senator, that's it. Absolutely. Absolutely.
    The big build is the next thing that's coming.
    Senator Hoeven. So you'd say it's very important we do 
that?
    Mr. Verrastro. Absolutely.
    Senator Hoeven. Very important?
    Mr. Verrastro. Yes.
    Senator Hoeven. Thank you.
    Mr. Horsnell. If I could just add to that in answer. I 
noticed on the agenda of the Canadian Energy Research Institute 
which has a conference every year in Calgary. They're spending 
a session talking about native land rights.
    Very clearly, saying that they wish to develop that 
resources. If they can't get the pipeline to come down South 
then they will try to build it out toward the coast and sell it 
to China. So again, those pipeline logistics are absolutely 
critical for long term trade patterns.
    Senator Hoeven. Thank you, Doctor.
    The Chairman. Thank you.
    We are in the middle of a vote. So I'm going to go to the 
floor to vote. Senator Wyden has already voted and has 
returned.
    Senator Shaheen, you go ahead with your questions and then 
Senator Wyden will conclude the hearing with any additional 
questions he has or any other Senators. But thank you all very 
much for being here.
    Senator Shaheen.
    Senator Shaheen. Thank you very much, Mr. Chairman.
    I listened to all of your testimony earlier. I'm confused, 
I think, as I think many of my constituents are. If supply is 
up and demand is down, why are we not seeing the market react 
in a way that--why are we seeing gas prices go up so 
precipitously? You know, I appreciate the geopolitical impact 
on prices, but why is there not some leavening impact from 
having demand down?
    Oil and oil products are really global markets. While 
supply is up in the United States and demand is down in the 
United States, as has been discussed in this hearing, globally 
demand is still rising because of the developing countries and, 
as discussed by my colleagues because of some of the supply 
issues.
    So I think that is the answer. Although it's not what your 
constituents would obviously like to hear.
    Senator Shaheen. Right.
    But it does speak to the fact that given that, even if we 
dramatically increase supply here and reduce demand we're still 
going to be at the whim of what happens in the global markets.
    Senator Shaheen. Yes.
    Mr. Gruenspecht. The bottom line is if in fact one can find 
alternatives or displace oil demand than we are less subject to 
the global winds. In terms of supply contributing to the global 
United States supply, United States supply does matter also.
    Mr. Yergin. I think that if you go back to what happened in 
the mid 1980s, our supply went way up. Our demand went down. 
That was a big factor that led to oil prices coming down.
    So what happens in the United States really does have an 
impact because we're still the largest consumer. But we're part 
of this global market. But if we make a big shift, if we 
continue to become more efficient, if our supply increases, 
then that will affect the prices that your constituents pay and 
the pump and what they pay for heating oil.
    I mean even, you could look at Norway which is, you know, 
produces much more oil than it needs. Its citizens still pay 
world prices because it's one market. If we were 110 percent 
self sufficient, then it would be a different game.
    Senator Shaheen. Mr. Verrastro, I was interested in your 
policy model, the triangle, that has energy efficiency in the 
center. I will tell you I'm particularly interested in this 
because Senator Portman and I have legislation that tries to 
incentivize energy efficiency in our building sector, 
throughout the government, in our industrial sector. I wonder 
if you can speak to the importance of energy efficiency in that 
model?
    Mr. Verrastro. Sure, Senator. When we try to compare 
security, availability, affordability, the only sweet spot was 
efficiency. Right?
    You can get all of those gains from efficiency. It's 
grossly overlooked. I mean I think it's better in the United 
States than it is in a lot of places around the world. It's 
true that a barrel saved, you know, here on the Beltway, is the 
equivalent of a barrel saved in China.
    I don't think we put enough attention to it. It's difficult 
to get your arms around, especially in the building code 
because there's state and local codes. There's just incentives 
between, for example, renters and the people that own the 
buildings, right? So in new construction I think there's a way 
of doing it, but the regulatory structure really needs to be 
overhauled as well.
    But it's critically important.
    Senator Shaheen. Actually our legislation does include 
voluntary building codes that have incentives to try to 
encourage states to adopt them. So I appreciate the point 
you're making.
    Mr. Yergin, the New Hampshire legislature has just asked 
the Public Utilities Commission to look at the use of, the 
growing use of, natural gas in New Hampshire with the concern 
that as we have in the past been over reliant on oil and coal 
that there is some concern that we might become over reliant on 
gas. I wonder if you could speak to that in light of the new 
reserves and whether there's reason to be concerned about that 
or whether we should be looking for a diverse--and whether we 
shouldn't be looking for a diversified portfolio?
    Mr. Yergin. I think a diversified portfolio is prudent 
under any circumstances. Just to go back to your previous 
questions. In The Quest, I talk about energy efficiency is the 
fifth fuel. That indeed, we are twice as energy efficient as a 
country today than we were 20 or 30 years ago and we ought to 
become twice as efficient again.
    I think that, you know, I think a lot of people raise the 
question, as we've seen the shale gas develop over the last 5 
years, is this going to be another cycle. Are these supplies 
going to disappear? I think that progressively you've seen 
consumers, industrial companies, utilities, more and more 
confident that there is major supply here and that that supply 
is going to continue. We're not going to have another one of 
these whipsaw.
    But prudency just says that, you know, obviously don't put 
all your eggs in any one energy basket.
    Senator Shaheen. We should pass energy efficiency, right?
    Mr. Yergin. Absolutely.
    Senator Shaheen. My legislation with Senator Portman?
    Mr. Yergin. Right. Immediately.
    Senator Shaheen. Thank you all very much for your 
testimony.
    Senator Wyden [presiding]. Thank you all very much for 
being with us. Apologies that it's so hectic. You can see 
Senators running hither and thither trying to keep up with 
hearings and the floor.
    I read all of your testimony last night. Of course, we're 
lucky to have all of you 4 individuals with lots of expertise 
in this area. I come to really try to zero in on a couple of 
factual judgments. It really stems from some of the discussions 
you and I have had, Dr. Yergin, with respect to changes in the 
energy business.
    Let me ask specifically about the oil futures business. 
When I look at the numbers it seems to me that there has been a 
dramatic change in the last 4 years. I want to just see if we 
can get on the record whether you share that view?
    It looks to me like 4 years ago the non-commercial trader, 
the person, who is in effect, called a speculator. These 
traders held less than half of the futures contracts for crude 
oil. So a number of years ago we were talking about, you know, 
people who held these futures. They were trucking companies. 
They were airlines. These kinds of people who weren't, you 
know, traders.
    Now today according to the Chairman of the Commodities 
Futures Trading Commission, these traders now account for 85 
percent of the crude oil futures market. I read your testimony 
last night and none of you touched on this factor, the changes 
in the oil futures market. So I think the first question I want 
to get into and just go right down the row.
    Do each of you believe that this change in the significant 
number of traders, commercial traders, in the oil futures 
market is significant? Just a yes or no, let's go down the row.
    Doctor.
    Mr. Gruenspecht. Maybe is not allowed? I actually think 
it's a legitimate question and one that we're very interested 
in. But it's a hard questions for a short answer.
    Senator Wyden. We're not imposing any gag orders.
    Mr. Gruenspecht. OK. That's good. Because someone has a 
title or how they're categorized as an organization does not 
necessarily tell you what the motivation is behind a particular 
trade is one question.
    There's a lot of activity that goes on off the exchanges 
that is not included in the data. I would tend to agree with 
you that's there's a lot more activity.
    Senator Wyden. Very good.
    Mr. Gruenspecht. But I'm just trying to be straight 
forward.
    Senator Wyden. We're just going to try to see if we can get 
some facts on the record. Then I'm going to ask some questions 
that will get any of your opinions.
    Dr. Yergin.
    Mr. Yergin. It's hard----
    Senator Wyden. Particularly for you because you have 
educated me on the fact that there are a lot of changes going 
on. Because you all didn't touch on this one in your testimony, 
I just want to see if you all share my view that this has been 
a significant change.
    Mr. Yergin. I think, yes, it's been a significant change. I 
don't think based upon our understanding today that it is the 
driving force that can accentuate things. I was thinking that 
when there was a crisis with Iran in 1979 and 1980, there were 
no futures markets and the price also went up very sharply.
    So that it's part of the mix and a very visible part.
    I guess, Frank, it's your graphic.
    Mr. Verrastro. So Senator, part of the reason I think we 
didn't go in detail in any of our testimony was because at one 
point I think we anticipated a second panel with the 
Commissioners, CFTC Commissioners. So we were going to leave 
that, kind of, to their area of expertise.
    I agree with what Howard and Dan said. I mean, I think 
there's been a change in the market. I don't want to 
characterize it as necessarily good or bad.
    There are new players. It's part of what we're calling the, 
kind of, the new fundamentals which used to be just supply, 
demand and inventory. There's a lot more. It's a lot more 
complex market.
    Senator Wyden. OK.
    Mr. Horsnell. I think the reason it wasn't really 
highlighted in testimony is that, you know, we're reasonably 
happy with the supply/demand explanations as to where prices 
are and why they've behaved. There's not a big residual left 
over to be explained by something else. So in that sense I 
don't think that change makes a difference as to where the 
price is today.
    I think I'm back on it some ways. This is a great American 
business success story, the success of these changes in 
deepening the liquidity, deepening the involvement. For me more 
liquidity is a good thing. These are a significant part, but of 
a very large, global oil market that makes up, which has all 
kinds of other bits on top of it.
    Seeing more liquidity come onto regulated exchanges, again, 
should actually be seen as good news. I'd much prefer to see 
activity taking place somewhere where I can see it. So I don't 
think it's a problem in terms of increasing prices.
    One further thing on this and just go back on stuff. I do 
think we need to draw distinction between activity by 
institution, investors and hedge funds.
    Senator Wyden. Let me just see if I can get one additional 
question in.
    Goldman Sachs has produced an analysis suggesting that the 
speculation premium on crude oil could be $23 a barrel or 56 
cents a gallon at the pump.*
---------------------------------------------------------------------------
    * Goldman Sachs, Global Energy Weekly: Commodities Research, March 
21, 2011, or http://www.energianews.com/newsletter/files/
80e9ebe0ff67bd94432a4031ee17c2b9.pdf.
---------------------------------------------------------------------------
    The Consumer Federation produced their analysis concluding 
speculation adds 20 percent to the price at the pump or roughly 
50 cents.*
---------------------------------------------------------------------------
    * Consumer Federation of America, Excessive Speculation and Oil 
Price Shock Recessions, October 2011 or http://www.consumerfed.org/
pdfs/SpeculationReportOctober13.pdf.
---------------------------------------------------------------------------
    A year ago as we discussed briefly, earlier, the Exxon 
Mobil CEO stated that speculation had increased the price of a 
barrel of oil by $20.**
---------------------------------------------------------------------------
    ** Reference: [`CNBC Transcript: Rex Tillerson, ExxonMobil Chairman 
& CEO, Speaks with Erin Burnett, March 9, 2011' and `Senate Finance 
Committee hearing, May 12, 2011']. For CNBC Transcript follow link: 
http://www.cnbc.com/id/41947400/
CNBC_EXCLUSIVE_CNBC_TRANSCRIPT_REX_TILLERSON_EXXONMOBIL 
_CHAIRMAN_CEO_SPEAKS_WITH_ERIN_BURNETT_TODAY_ON_CNBC
---------------------------------------------------------------------------
    Now can I just get a yes or no with respect to this 
question whether you think these analyses, because all 3 of 
them, all 3 of them, agree that there was a speculative premium 
for a barrel of oil. I would just like to know whether the 4 of 
you think that all of these analyses are wrong.
    Let's just go right down the row and I've taken an extra 
minute. But they were 3 separate analyses done by 3 different 
organizations with different philosophical roots. All of them 
concluded that there was a speculation premium.
    I'd just like to know if you think those analyses are 
wrong.
    Let's just go right down the row.
    Mr. Gruenspecht. I would want to read the specific studies 
first before I commented on them. Sometimes the different 
assessments of the role of speculation have to do with the 
standard of proof or burden of proof that's applied. If you 
apply an innocent until proven guilty beyond a reasonable doubt 
standard, I think my reading of the literature as a whole, not 
just these 3 studies which I haven't read, is that speculation 
wouldn't be convicted.
    If instead you assume that guilt is confirmed unless 
innocence is demonstrated beyond a reasonable doubt a standard 
that some jurisdictions use when considering whether to 
exonerate and release convicted prisoners, speculation is 
probably not going to get out of jail anytime soon.
    Senator Wyden. I'm going to take that as a no. You think 
these analyses----
    Mr. Gruenspecht. No, no. I have a feeling that different 
people who have this discussion are really applying different 
standards of proof. That's the issue as much as the competition 
of these different results.
    That's my view.
    Senator Wyden. Dr. Yergin.
    Mr. Yergin. Oil prices, natural gasoline prices are both up 
20 percent since the U.N. issued its report about Iran's 
nuclear program. So I would not call it a speculative premium, 
I'd call it a risk premium or a security premium. But there is 
a premium that reflects this increased tension and anxiety in 
the market.
    Mr. Verrastro. Not surprisingly I agree with both Howard 
and Dan. I mean, I think that there is a premium in the market 
over and above finding and development costs. I wouldn't 
attribute it all to speculation. I would like to see what the 
studies are and the definitions are really important, Senator.
    Mr. Horsnell. Yes, likewise. It's a no for me. Those 
studies don't sound or those results don't sound very 
plausible.
    I think part of the evidence of this is if there was a 
large speculative premium then prices would then be higher than 
a market price which should mean that we'd be seeing large 
surfaces building up. People in the fiscal market will be 
asking for discounts because they want to play the proper 
fiscal price, not the inflated speculative price. What we 
actually see in the International Fiscal Market today in Brent, 
people paying large premiums to get their deliveries 
accelerated.
    It's quite the reverse. There is no global surplus building 
up and so we have limited spare capacity. We've had 8 straight 
quarters of global inventories draws.
    We finally have a balanced market at this price. So I just 
think that is, it's incorrect to think in terms of speculative 
premium.
    Senator Wyden. Let's go to Senator Murkowski.
    I just think it's striking, gentlemen, when all 4 of you 
say that organizations from Goldman Sachs to the CEO of Mobil 
are off base. We've got to do some more digging on this because 
I will tell you I don't just operate under the assumption that 
somebody with a Xerox machine can turn out a study. That ought 
to be what we make public policy.
    But when you have this cross section of groups and 
individuals representing such a wide array of philosophies 
saying that there's a significant speculation, you know, 
premium. That's something that has to be addressed by 
policymakers.
    I gather that Senator Murkowski was here, but she's had a 
turn, so----
    Senator Murkowski. I've had a turn.
    Senator Wyden. Then let's recognize Senator Udall.
    Senator Udall. Thank you, Mr. Chairman and Senator 
Murkowski, as always, is very gracious.
    Gentlemen, this has been informative, enjoyable. I've 
learned a lot, as I think we all have this morning.
    I want to just piggyback on what Senator Wyden just pointed 
out. That is that we ought to be realistic as policymakers here 
in Washington that if we're going to squeeze Iran, that we're 
going to see a risk premium then build into international oil 
markets. I think you all agree.
    I think it would behoove all of us here when we start to 
talk about high oil prices and therefore high prices at the 
pump. We've become outraged. We first ought to say, we've all, 
for the most part here in Washington said it's in our national 
security interest to squeeze Iran. As a part of that process we 
can anticipate gasoline prices are going to rise.
    We ought to be straight with the American public that 
that's in part what's happening. I do think that Senator 
Cantwell made some good points about the difference between 
legitimate hedgers and speculators. It would be interesting to 
try and differentiate between the two.
    But in that context I wanted to follow up on what she began 
to allude to which is international global energy markets. 
Could you all address how the U.S. could support competitive 
and open global energy markets? How do we work with the 
international community so we can reduce the pain at the pump, 
not just for our citizens, but as Senator Cantwell pointed out, 
Japan, the Europeans and the Chinese?
    I've been pushing the State Department and the USTR to see 
what they could do to use all options diplomatic and economic 
to help stabilize prices in that arena. But I'd be curious of 
your thoughts starting with you, Dr. Gruenspecht, of how we 
could do that.
    Mr. Gruenspecht. EIA is not a policy agency, but I will 
point out that the State Department is establishing for the 
first time a new bureau of energy at the Assistant Secretary 
level. I believe that that's an initiative. I think the nominee 
has been nominated and has actually had his hearing recently.
    I think even before that, I think there's been a lot of 
outreach. In the shale gas area there's been a lot of 
international outreach done by the Department of Energy and the 
State Department about sharing technology. There's a lot of 
interest, a lot of investment in foreign companies, in our 
horizontal drilling and hydraulic fracturing operations in part 
because they would like to gain some experience in the tight 
oil in the United States.
    Tight oil has been a big, important game changer leading to 
some of the increases in production in North Dakota and the 
Eagle Ford in Texas and some other places as well if that 
technology becomes more globally available as one would expect 
happened with shale gas, which began in the United States, and 
has become global. Maybe tight oil will become global and 
become an opportunity to really change the supply/demand 
balance in world oil markets.
    So I think there's a lot of opportunity.
    Senator Udall. So exporting our technology----
    Mr. Gruenspecht. I think exporting our technology and 
exporting our efficiency technologies, again, because the same 
thing here to the extent that vehicles are more efficient 
globally. You know, we're the biggest gasoline market, but 
there are other markets for gasoline and diesel fuel around the 
world. Things we can do to disseminate technologies that either 
increase supply or reduce demand and frankly, both are very, 
very important.
    I know that the State Department and others in the 
government are very interested in that.
    Senator Udall. Dr. Yergin, I know you've got the answer 
here.
    Mr. Yergin. Hardly. But I think what you're also talking 
about is encouraging other countries to have more open markets 
to investment and to a timely ability to make timely 
investment. I think that, as your suggesting, as part of our 
trade agenda, would be a very constructive to this cause that 
again, gets more supplies into the market and more quickly.
    Mr. Verrastro. So augmenting what my colleagues have 
already said, I think there's two additional pieces. When you 
look at international institutions, I think the use of the IEF, 
the International Energy Forum and the bilateral arrangements. 
I actually think that by bringing Saudi Arabia into the G20 it 
really helped them in the post Libyan conflict.
    There was a day in July, it was either end of June or July, 
when we had a Global Security Forum at CSIS and Mike Froman was 
on our panel. It was the same day as an OPEC meeting. It was--
Minister Al-Naimi described it as the worst OPEC meeting ever. 
There was concern about the U.S. Government expressing concern 
that OPEC didn't step up to the table and increase supplies 
given that Libya was offline.
    The Saudis did. I mean, so the hawks in OPEC, Venezuela and 
Iran looked to increase price not volume. The Saudis actually 
stepped up and said we want a balanced market, we'll increase 
supply. So I think we're deluding the impact of OPEC by 
actually bringing responsible players in the G20.
    I do think and Senator Murkowski, I know you've talked 
about this before, that the IEA sharing arrangement really 
needs an overhaul in terms of obligations and how we identify 
stockholding and a bunch of things that we do on a joint basis. 
How we engage China and India. I mean, unless we make the 
change that institution is very much in danger of being 
irrelevant.
    Senator Udall. Dr. Horsnell, do you want to bring an EU 
perspective to us or a British perspective so to speak?
    Mr. Horsnell. I am not certain I have grounds enough to do 
that, but on a personal spread, I mean, I think I'll say that 
there are, as mentioned already, specific circumstances where 
there is a foreign policy aspect. I've already mentioned 
perhaps the one that surprises people that the biggest supply 
interruption today is the situation in South Sudan and Sudan. 
So again, I'm sure that's something which State is fully aware 
of that there is a major oil component onto that.
    I really think--endorse the comments or working with the 
IEF working--Howard's team is working with Jody improving the 
transparency of the global market is always an extremely good 
thing.
    I think one thing I'll say also is the IEA and the role of 
the IEA I think that has been a drift in recent years for 
energy policy to become a little unilateral, a little bit 
bilateral, when clearly multilateral response it will work 
better to these kinds of aspects. It's been worrying, perhaps a 
little bit over the course of the last couple of months that 
the potential effectiveness of some of the levers that are left 
to control over heated markets might be diluted by this move 
toward unilateral, bilateral energy policy when perhaps we 
should be building up the IEA rather than undermining it at 
this point.
    Mr. Yergin. If I could add one other thing to follow on 
that. What Howard says, the U.S. State Department now has an 
energy bureau. The reason it has an energy bureau is because 
the U.S. Senate encouraged it to have an energy bureau. That is 
a difference to have that as a clear component in foreign 
policy.
    Senator Udall. I'm sure that was driven by Senator 
Bingaman, Senator Murkowski, who ably lead this committee. I 
would finally just propose that, to my colleagues, that we 
could go back to the Murkowski/Bingaman bill that we produced 
in the last Congress and move it forward. We would see a lot of 
positive results on this very topic we're discussing today.
    Thank you, Mr. Chairman.
    Senator Wyden. Thank you.
    Senator Murkowski.
    Senator Murkowski. Thank you, Mr. Chairman.
    I thank my colleague for the plug there on our energy bill.
    Let me ask, this is good discussion here about the role of 
speculation. I'm going to ask you to speculate just a little 
bit here. What do you think the response in the market would be 
if there were a commitment here in this country to bring on a 
million, two million, barrels a day?
    Even if we recognize, OK, it's going to be 5 years before 
we actually see that out in the market. But a commitment say 
whether it is an opening of ANWAR, whether it's substantial 
commitment to additional production. Even though it's not here 
today, how do you think that impacts the market?
    Dr. Gruenspecht.
    Mr. Gruenspecht. I think it really depends on the amount of 
oil and the nature of the commitments because a lot of 
commitments get made.
    Senator Murkowski. Let's just assume for discussion sake 
that it could be a real commitment, a real commitment of a 
million barrels a day.
    Mr. Gruenspecht. OK. Over 10 years, I think only modest 
price impacts would be expected frankly. If supply from 
drilling in one area, like the United States is offset by 
reductions in supply from other parts of the world which could 
happen or if demand is relatively more responsive to changes in 
supply, that is, demand is more price responsive over a longer 
time period.
    So in the short run the million barrels tomorrow is a 
different thing than a million barrels 10 years from now, both 
in terms of offsetting supply responses and in terms of the 
demand response.
    Senator Murkowski. So you're going to have a modest impact 
on prices today?
    Mr. Gruenspecht. Modest impact on prices, but again, a lot 
of economic, environmental and geopolitical benefits. I mean, 
those are the things that I think you could be more confident 
of.
    Senator Murkowski. What about the rest?
    Dr. Yergin.
    Mr. Yergin. I think we can, you know, looking over the 
imbroglio with Iran right now. I think you can sort of see a 
change in expectations in the market already occurring among 
other countries and participants in the market as they see the 
U.S. instead of being in this inevitable decline is on an 
upsurge and it's demand going down. So I think it's there.
    So to use a variant on what Paul Horsnell said, I think it 
would re-anchor longer term expectations. Obviously it's not--
it has to be credible and people have to see it coming. But I 
think even now things that can increase the sense of 
confidence.
    What we need and this goes back to Senator Wyden's question 
about why is this premium there? If there's a greater sense of 
confidence and it can come from many different directions, it 
is an ingredient that would be even helpful in the short term.
    Senator Murkowski. Yup.
    Mr. Verrastro.
    Mr. Verrastro. So I guess I am more in line with Howard's 
comments. Dan's comments are very well advanced. I think that 
the value add here is especially as we move into the 
unconventionals since we're doing it first.
    If the U.S. can demonstrate that they can get it right in 
terms of both shale gas and tight oil production, it has huge 
implications throughout the globe. Then if you're looking at a 
global supply/demand balance you can increase volumes by huge 
numbers.
    I guess though that the next piece is this kind of great 
dilemma idea. It's just like what do we want to be when we 
increase. I know the environmental community gets very upset 
when you talk about 200 years of natural gas because if you're 
looking to move to a lower carbon economy that delays that 
reckoning date.
    There was some sense of, in terms of the narrative being 
consistent, that if you on the path to a cleaner fuel economy 
because you were running out prices were getting higher and 
volatility was increasing. That gave you additional impetus. If 
now you're sitting on a vast and abundant resource and you 
develop it, you extend, which I think probably needs to be 
extended.
    But you extend the life of conventional fuels. They're 
cleaner. They're safer. But they go on longer.
    In my mind that actually gives us breathing space to figure 
out the next step because we're not there yet.
    Senator Murkowski. Dr. Horsnell, I'm going to ask you a 
more specific question, if I may. This is my last. But I wanted 
to ask that one because as we talk about to the potential for 
ANWAR, the push back that we get on it as well.
    It's not going to have any impact because you won't be able 
to see production on line for a period of 8, 10 years under a 
best case scenario. So therefore just don't even start. I don't 
accept that logic. I do think that it does help to bring 
exactly the confidence that Dr. Yergin has mentioned here.
    Dr. Horsnell, the last question for you is if you can share 
with us a little bit of the experience that Great Britain had a 
couple years ago faced with high gas prices. They made a 
decision to increase their taxes, quite dramatically. We just 
came from a vote that would attempt to basically do the same, 
effectively increase the taxes on the oil and gas industry.
    You've now reversed that position because it's my 
understanding that in the 2-years since the increase in taxes, 
what you have seen is a tripling of the decline in production 
in the UK in these past 2 years. So you're reversing that. Can 
you just speak to the experience there and what led to the 
decision to impose the taxes and now to reverse those?
    Mr. Horsnell. Yes. That's a very good question. I think it 
is fair to say that the tax increase was greeted by the 
industry with a certain amount of shock, not only just because 
of it was a tax increase, but also because it made the whole 
fiscal regime somewhat unstable.
    It was a surprise. It was industry making some very long 
term decisions on how to exploit the declining phase of the 
North Sea and then finding that the fiscal regimes bounced 
around. It certainly meant that in the occasional polls where 
people are asked, you know, what's the most dangerous or what's 
the best place to invest? What's the worst place to invest?
    I think the government may, of course, be surprised to see 
the UK was pretty close to the top as being a bad place to 
invest. The political stability was being undermined by some of 
that fiscal instability.
    Senator Murkowski. So in other words in a country like the 
United Kingdom you were stacked up against other Nations like 
Angola and saying you are a bad investment opportunity?
    Mr. Horsnell. Yes. Again it shows the--of the investment in 
the North Sea is very much that one of that enhanced oil 
recovery in making the best of the last stage. But it did 
appear that the capital could be more effectively employed 
elsewhere and really to sort of stem the prospects of any 
migration of capital to make sure that the tail in the North 
Sea continues. That was part of the reversal running through.
    Again, I'm not an expert on UK tax. But in terms of the 
broad sweep of what's happened there I think the instability of 
the tax regime was something which did impact on the flow of 
that investment.
    Senator Murkowski. Thank you. I appreciate the fact that 
you have come all the way to be part of the testimony this 
morning. Very credible panel. You have certainly enhanced that 
credibility. We appreciate that.
    Thank you, Mr. Chairman.
    Senator Wyden. Thank you, Senator Murkowski.
    Gentlemen, let me leave you with one other kind of thought. 
Because I know, not just this committee, but others in this 
country are going to ask your opinion about some of the 
policies that we're going to have to address in the days ahead. 
I sort of, start this judgment and come to the hearing to offer 
up the idea that to get good public policy you've got to get 
your arms around at least some common ground on the facts.
    You may not get everybody to agree on every aspect of the 
factual situation. But you've got to find some ways to get to 
common ground on some of these key facts. In particular I serve 
on the Intelligence Committee, for example, and I certainly 
share the judgment that Iran is part of this whole debate. 
There's no question about this.
    But I will tell you I'm very reluctant to accept the idea 
that all of the risk is the situation in Iran. That's, to a 
great extent, where you all have guided much of this 
discussion. You look, for example, at the fact that Goldman 
Sachs practically invented the commodity index fund. I mean, 
these are people who know a lot about the impact of non-
commercial investment.
    These are people who have played an enormous role in this 
sector. They produced an analysis suggesting that the 
speculative premium on crude oil could be $23 a barrel or 56 
cents a gallon at the pump. You have the CEO of the largest, 
you know, oil company stating that speculation had increased 
the price of a barrel of oil by $20.
    So these are significant judgments. I hope that as we go 
forward we can continue to have this discussion. I understood 
that a number of you said that you hadn't had a chance to look 
thoroughly at these studies. I respect that.
    But I hope that you will. I would very much personally like 
to have your judgments with respect to whether you think those 
analyses are wrong. I just want you to know as somebody who has 
been on this committee for quite some time, I'm prepared to 
accept the proposition based on my work here and on the 
Intelligence Committee that the situation in Iran is certainly 
a part of this calculus.
    But I don't buy the theory that this is the entire concern 
that we're dealing with. I hope that you will take a look at 
those studies because it was the fact that there were 3 of them 
and certainly by two sources with considerable expertise in 
industry activities.
    One, the Consumer Federation advocates for consumers but 
they do a good job of getting the facts and doing their 
homework. The fact that all 3 of them reached this judgment, to 
me, has got to be a significant part of this debate as we try 
to at least see if we can find some common ground to make 
policies. I'm prepared, as part of that effort, to make policy 
to acknowledge there's no question that the situation in Iran 
is part of the debate.
    Dr. Yergin, your colleague got his hand up first. But we're 
happy to hear from both of you.
    Mr. Gruenspecht. I just want to say that the EIA is very 
interested in this topic. In 2009 we launched the Energy and 
Financial Markets Initiative, precisely with the aim of 
assessing the influences of financial activities and market 
speculation, hedging on prices, as well as how traditional 
fundamentals work.
    We've produced a website, Energy and Financial Markets. 
What drives crude oil prices? We certainly discuss the role of 
futures trading and we are very interested in increasing the 
evidence, the body of evidence, so to speak.
    We update that website on a monthly basis. We've brought 
together many of the leading researchers in the area. I know 
there's a paper by Professor Singleton, actually a former 
colleague of mine that when I was at Carnegie Mellon, he's now 
in California.
    We brought him in. We brought the CFTC over. We are working 
with them. We've held a couple of workshops.
    We need to improve our understanding of physical and 
financial market linkages. We want to continue to collaborate 
with other Federal agencies to improve both the data in this 
area which is a lot of our mission and the analysis in the 
area. This is a serious commitment by EIA.
    I know that the, I guess the nominee to be the 
Administrator of EIA has been before this committee recently. 
He's very interested in and has great expertise in this area. I 
think it will help us get more traction in this area.
    Given the standard of proof that people apply does vary, 
what's important is to get more evidence. That's where EIA's 
role should be.
    Thank you.
    Senator Wyden. Dr. Yergin.
    Mr. Yergin. I think that the financialization of commodity 
markets which you're describing has really been quite marked 
since 2005. So it is really important to understand it. It 
affects the oil market.
    I think in terms of facts on the ground I think there's a 
general agreement that there's a premium. It's kind of what's 
driving the premium. Just want to say it isn't all Iran.
    I mean what is unique about this situation with Iran, it's 
not only the tension. But it's that the policy of the U.S. 
Government, the policy of Europe is to drive down Iranian oil 
in the market. Drive a million, maybe more, barrels out of the 
market in a very tight market.
    So the second factor is that we have a very tight market 
anyway that it does in its tightness remind me of 2005. It 
reminds me of the eve of the 1973 oil crisis. It's kind of that 
tight.
    We were using a number of 750,000 barrels a day of other 
outages. I noticed Paul's number is even higher, closer to a 
million barrels a day of sort of above average. So it's Iran, 
but it's also and the concerns there and the focus of policy of 
what's going to start happening before or after the end of 
June.
    But on the other hand it's also that this is all occurring 
in a rather tight market to begin with. So that's certainly 
part of it.
    Senator Wyden. There's never been a time when Dr. Yergin 
didn't highlight additional issues in my judgment on this 
question. Without keeping you here all afternoon, I'd just note 
that Saudi Arabia has 2.5 million barrels a day of capacity. 
They're now engaged in a major drilling program to expand their 
capacity.
    Reuters is reporting now of 140 drill rigs operating in 
Saudi Arabia. So this conversation is obviously going to be 
continued on the question of capacity, on the question of Iran, 
on the question of speculation. But I want the 4 of you to walk 
out of here with a request from me that I would be very 
appreciative if you would analyze those 3 studies, the Goldman 
Sachs analysis, the Consumer Federation of America and we can 
certainly get you the testimony that led the Exxon Mobil CEO to 
offer the judgment of speculation that increased the price of a 
barrel of oil by $20.
    I would like to hear from you four, recognized authorities 
in the field whether you think those 3 studies are off base 
because I'm stipulating to the fact that I think Iran is a 
factor. I stipulate trying to follow, almost daily, what's 
happening in the capacity area. But it is hard to walk away 
from these judgments from 3 people who have spent a 
considerable amount of time, all of whom, concluding there is a 
significant speculation premium.
    So the door is going to be open to you. I would be very 
interested in your reaction.
    [The information referred to follows:]

    EIA is working hard to improve understanding of the determinants of 
oil prices, including both physical and financial factors, through the 
Energy and Financial Markets Initiative that was launched in September 
2009. That initiative seeks to assess the influences of financial 
activities and markets, such as speculation, hedging, investment, and 
exchange rates on energy price movements in addition to EIA's 
traditional coverage of physical fundamentals such as energy 
consumption, inventories, spare production capacity and geopolitical 
risks. In addition to developing a website feature ``Energy and 
Financial Markets: What Drives Crude Oil Prices?,'' which among other 
material presents data on correlations between oil prices, other 
commodities, and financial instruments and is updated on a monthly 
basis, EIA has also brought together many of the leading experts in the 
area of oil price formation for a workshop in August 2011 (with another 
planned for this summer) to improve our understanding of physical and 
financial market linkages. We will be continuing our collaboration with 
other federal agencies and market participants to improve data and 
analysis in this area.
    As discussed in greater detail below, the three studies you 
reference that directly or tangentially consider the effects of futures 
markets transactions on physical oil prices are fairly limited and 
quite inconclusive. My observation during the hearing--that differing 
assessments of the role of oil futures speculation in price formation 
often turn to a significant extent on the standard of proof that is 
used--still seems relevant.
    Committee staff has indicated that your request regarding the 
Goldman Sachs analysis concerns a statement from the March 21, 2011 
edition of the Goldman Sachs Energy Weekly that reads as follows: ``We 
estimate that each million barrels of net speculative length tends to 
add 8 to 10 cents to the price of a barrel of oil.'' I would offer the 
following observations:

   EIA is not sure what calculation underlies this statement, 
        but it appears that the cited relationship may reflect a simple 
        linear regression between weekly changes in money manager 
        positions reported by the Commodity Futures Trading Commission 
        (CFTC) Commitment of Traders (COT) report and the front month 
        futures price for West Texas Intermediate (WTI) crude oil.
   The existence of an empirical relationship between prices 
        and a measure of net speculative length over a given period 
        does not speak directly to causality. In this regard, some 
        current research by experts suggests that it is more likely 
        that traders and investors respond to oil price movements 
        rather than the reverse. Parties identified as producers or 
        consumers in COT reports may also be engaged in speculative 
        activity. That is, the categorization of traders used in the 
        COT reports may not reflect the actual motivation for 
        individual trades.
   Some analysts, including Goldman Sachs, have also noted that 
        speculative length in oil tends to move with leading economic 
        indicators and also that changes in speculative length can be 
        used to assess ``what the market is pricing in'' at a 
        particular point in time.
   As noted by both Committee members and witnesses in previous 
        hearings, a large share of energy derivatives trading occurs 
        outside of exchanges and is not reflected in the CFTC COT 
        position data. While the price of exchange-traded contracts 
        should be representative of prices in the broader market given 
        the opportunity for arbitrage, the extent to which measures of 
        net speculative length in the broader market track the measure 
        for exchange-traded contracts is unknown.

    Rex Tillerson, the CEO of ExxonMobil, was asked at a May 2011 
hearing of the Senate Finance Committee what the oil price might be if 
it were based on the fundamentals of just supply and demand. His 
response referenced a purely economic approach in which competition 
drives the price to the cost of developing the next marginal barrel. He 
identified that cost as falling in the $60 to $70 per barrel range. 
Responding to a question regarding the role of futures markets, Mr. 
Tillerson noted that the market operates by considering a whole range 
of things it worries about and then translates that back to a price 
today. I would offer the following observations:

   The model of perfect competition in economic textbooks 
        referenced by Mr. Tillerson does not reflect the situation in 
        current world oil markets, where key member countries of the 
        Organization of the Petroleum Exporting Countries (OPEC) 
        exercise significant market power. In particular, global 
        resources are generally not developed in marginal cost order, 
        as certain OPEC member countries hold undeveloped high-quality 
        resources that could be developed at a significantly lower cost 
        than resources being developed in other countries. Resource 
        development decisions are also significantly influenced by tax 
        and production sharing policies and legal regimes that vary 
        significantly across countries.
   The fact that oil resource development is not governed by 
        the textbook competitive model of a resource-extraction 
        industry creates significant risk to developers of high cost 
        oil resources and alternatives to oil. I would not expect that 
        companies would use the current price of oil, about $120 per 
        barrel for light sweet crude oil with ready access to 
        waterborne transport, as the cost threshold for decision making 
        regarding new oil development or alternative fuel projects. 
        Rather, I would expect that they would want their projects to 
        meet their investment return criteria even if the actual oil 
        price were well below the present level. The application of 
        lower oil prices in ``stress testing'' new projects reflects 
        past experience with oil price variability and the recognition 
        that changes in economic conditions, technology, or the 
        policies of key OPEC producers could significantly impact 
        prices that might prevail by the time a development project 
        that could require a decade or more to reach fruition begins to 
        produce.
   Both supply and demand are relatively unresponsive to price 
        movements in the short-term. This means that modest shifts in 
        demand functions, including those attributed to strong economic 
        growth particularly in developing countries, or in supply 
        functions, which can arise from geopolitical events, disasters, 
        and other causes, can require relatively large price 
        adjustments to restore market balance. Very inelastic supply 
        and demand may provide an opportunity for non-fundamental 
        factors to play a significant role in price formation in the 
        short term. For example, spreads between futures contracts with 
        different delivery dates could create a profitable opportunity 
        to accept physical delivery as part of an arbitrage strategy, 
        resulting in higher demand that, in the face of inelastic 
        supply, puts upward pressure on spot prices.
   Over an extended period of time, both supply and demand are 
        likely to be much more responsive to price changes than they 
        are over a short time period. For this reason, supply and 
        demand adjustments may be more effective in bounding prices 
        over a period of decades than they are over a short time span.

    The paper by the Consumer Federation of America (CFA) argues from a 
number of different perspectives, including discussion of the 
statements by Goldman Sachs and Mr. Tillerson of ExxonMobil discussed 
above. It also presents some empirical relationships. I would offer the 
following observations:

   The CFA paper uses a limited number of fundamental crude oil 
        variables to arrive at its estimation of a price that excludes 
        oil futures trading, and then attributes the difference between 
        the estimated price and the actual price as due to futures 
        trading.
   All of the variables presented focus solely on crude oil 
        production and inventories, ignoring world demand for petroleum 
        products. Over the last decade, the increased demand for crude 
        oil to produce petroleum products, especially from emerging 
        market economies, is a very important factor that should be 
        included in any analysis of crude oil prices.
   The CFA paper uses global finding costs and reserve-to-
        production ratios, but does not take into account differences 
        in the behavior of OPEC and non-OPEC producers, which as 
        already noted appear to exert a significant effect on world oil 
        markets.

    Returning to the ``bottom line'' question, it is clear for the 
reasons outlined above and others that measuring the effect of trading 
in oil futures and options markets on the price of oil is a challenging 
task. While the two statements and the paper you referred to address 
important questions that merit close attention from EIA and other 
energy market analysts, they are far from conclusive in quantifying how 
futures markets transactions have impacted oil prices.

    Gentlemen, if you have something you feel strongly about 
I'll let you offer it. Otherwise I think we've got to wrap this 
up. Would either of you like to?
    Mr. Horsnell. Yes, I mean, just on that point. Look, 
personally I'll be very happy to look at all 3 of those 
organizations on that point.
    Senator Wyden. Good.
    Mr. Horsnell. Cause I believe they are wrong. But I 
wouldn't like you to----
    Senator Wyden. I got the drift on that.
    [Laughter.]
    Mr. Horsnell. I wouldn't like you to have the impression 
that those views represent the majority of views or the 
consensus among oil analysts. It's very much a minority view. I 
think it's an incorrect view based on faulty analysis.
    Senator Wyden. That's why you are being welcome to show us 
why people like Goldman Sachs are wrong.
    Alright. Gentlemen, we thank you. You've been very patient 
through a morning that's been hectic even by Senate standards. 
With that the Energy committee is adjourned.
    Let me also say for the information of all members, all 
questions and additional statements for today's hearing are due 
by 5 p.m. tomorrow, March 30.
    We are adjourned.
    [Whereupon, at 12:05 p.m. the hearing was adjourned.]
                               APPENDIXES

                              ----------                              


                               Appendix I

                   Responses to Additional Questions

                              ----------                              

    Response of Howard Gruenspecht to Question From Senator Bingaman
    Question 1. Senator Coons (at the 116 minute mark), cited a report 
from DBL investors that 94.6% of federal subsidies over the last 
century have gone to oil and gas production, and nuclear energy. He 
then asked Dr. Yergin if that data suggested anything to him about what 
the federal government's path forward should be given its pursuit of an 
``all of the of the above'' energy strategy and move away from high 
gasoline prices. Dr. Yergin deferred to Dr. Gruenspecht, mentioning 
that EIA had conducted a study that had reached a much different 
conclusion.
    The report to which Dr. Yergin referred was published by EIA on 
August 1, 2011 and entitled ``Direct Federal Financial Interventions 
and Subsidies in Energy in Fiscal Year 2010.'' As I understand it, the 
EIA report is much more limited in scope than the DBL Investors report 
because it only focuses on one year of federal support for energy. 
Further, the year on which it focuses, 2010, contains significant 
``one-time'' spending on energy as a result of the Recovery Act. As a 
result this ``snapshot'' data appears to me to be not at all 
representative of historical U.S. energy policy.
    Dr. Gruenspecht, do you view 2010 as an anomaly or the norm (in the 
context of the past century) in terms of federal spending on renewable 
energy and biofuels production? Can you offer EIA's assumptions about 
federal spending on renewable energy and advanced biofuels in the 
current Annual Energy Outlook? Are these projected to increase or 
decrease? By how much? How will that affect the deployment of renewable 
energy systems and the availability of advanced biofuels?
    Answer. EIA's report, ``Direct Federal Financial Interventions and 
Subsidies in Energy in Fiscal Year 2010,'' indicated that many federal 
provisions will sunset soon, which makes 2010 an unusual year in the 
context of the past several decades. Measuring federal support to 
various forms of energy can be significantly affected by the criteria 
used to identify subsidies and the time horizon one chooses. EIA's 
study provided a snapshot for the FY2010 and was ``limited to subsidies 
that are provided by the federal government, provide a financial 
benefit with an identifiable federal budget impact, and are 
specifically targeted at energy markets.''
    The report identified the unusual number of relatively recent 
Congressional actions that increased subsidies in some areas, ``A key 
factor in the increased support for conservation programs, end-use 
technologies and renewables was the passage of several pieces of 
legislation responding to the recent financial crisis and subsequent 
economic downturn, particularly the American Recovery and Reinvestment 
Act of 2009 (ARRA) and the Energy Improvement and Extension Act (EIEA). 
Some of the ARRA-related programs that account for a large portion of 
the growth in subsidies and support between FY 2007 and FY 2010 (Table 
ES2) are temporary and the subsidies associated with them are scheduled 
to phase out over the next few years (see ``Energy Provisions Included 
in Legislation Responding to the Recent Financial Crisis''). Other 
recent legislation impacting energy subsidies included the Food, 
Conservation, and Energy Act of 2008, which provided significant new 
subsidies to biofuels (primarily ethanol and biodiesel) producers, and 
the Tax Relief, Unemployment Insurance Reauthorization, and Job 
Creation Act of 2010, which extended the sunset dates for several tax 
expenditure programs, as well as the grant program for qualifying 
renewables.''
    EIA's Annual Energy Outlook 2012 (AEO2012), makes projections 
assuming that statutory provisions affecting energy production 
terminate on their scheduled sunset dates. This approach enables EIA's 
Reference case to be used as a baseline for analyses that consider the 
effect of changes to current laws and policies. In particular, blending 
tax credits for most biofuels end in 2011, the production tax credits 
for wind expires in 2012, and credits for other renewable sources end 
in 2013, resulting in a significant change in the rate of renewable 
power builds, particularly wind power. For biofuels, the expiration of 
blending tax credits does not significantly alter projected biofuels 
production since increasing biofuels use is still mandated by the 
federal renewable fuel standard.
    The AEO2012 Early Release reference case forecasts that the share 
of U.S. electricity generation coming from renewable fuels (including 
conventional hydropower) will increase from 10 percent in 2010 to 16 
percent in 2035. This increase in generation is expected to be led by 
non-hydro renewables. Similarly, liquid biofuels are expected to 
increase from 1 percent of domestic energy consumption in 2010 to 4 
percent of domestic energy consumption in 2035. The outlook for 
cellulosic biofuels has become less optimistic: ``Although liquids 
production from many sources is higher in AEO2012 than was projected in 
the AEO2011 Reference case, production of advanced cellulosic biofuels 
is lower. Over the past three consecutive years, production goals for 
cellulosic ethanol in the EISA2007 RFS have not been achieved. While 
EIA has projected a need for waivers in all Reference case projections 
since the passage of the EISA2007 RFS, EIA's view of technology 
development and market penetration rates for cellulosic biofuel 
technologies has grown somewhat more pessimistic in AEO2012.''
   Responses of Howard Gruenspecht to Questions From Senator Cantwell
                          oil company profits
    From 2003 to 2008, oil revenues for the top five oil companies 
increased by 86 percent while profits increased by 66 percent. Yet oil 
output by the five major oil companies over this same time period 
declined by more than 7 percent, from 9.85 million to 9.12 million 
barrels per day. These additional profits were not earned as a result 
of additional production effort on the part of the oil companies but 
due almost entirely to the record crude oil prices, which are set in 
the world oil marketplace.
    Combined, it's been literally a trillion-dollar decade for the oil 
and gas giants. From 2002 to 2011, ExxonMobil gained $310 billion, 
Shell $204 billion, Chevron $152 billion and BP $147 billion--despite 
its loss year because of the 2010 Gulf of Mexico oil spill. As the 
price of oil rose, company revenues and profits soared with ExxonMobil 
eventually becoming the most profitable corporation in the history of 
American industry.
    That's a really good return for an era of volatile, but 
significantly lower oil prices than we are seeing today and are likely 
to see in the future.
    Question 1a. Given that the 5 major oil companies made over a 
trillion dollars in profits over the last decade--and that's profits, 
not revenues--and their cost of production is still around $11 per 
barrel, what do you estimate their profits will total over the next 
decade?
    Answer. EIA does not estimate oil company profits. As your question 
suggests, profits are sensitive to oil prices, but many of the major 
oil companies also have extensive refinery operations and have a 
diversified portfolio, including natural gas. Developments affecting 
those markets, as well as the costs of upstream and downstream 
operations and the terms of production sharing agreements and other 
contractual arrangements between resource-owing countries and major oil 
companies are other key factors that will drive future profits.
    Question 1b. And when it comes to gas prices, many of my 
constituents complain about oil company profits. From an oil producer's 
perspective, how much profit is there in each gallon of $4 gas?
    Answer. The price of crude oil directly affects oil producers' 
profits and returns to owners of oil resources. There are times when 
the wholesale price of gasoline falls below the price of various crude 
oils, and oil producers and resource owners still receive the price of 
crude oil for revenue. Refinery profits are generated from product 
revenues less crude oil costs and other feedstock, energy use, and 
operating costs. As indicated in my testimony, the high price for 
gasoline stems mainly from the high price for crude oil, not refining 
profits.
    One misconception about oil industry profitability is that high 
profits in the upstream portion of the business (e.g., crude oil 
production) subsidize the downstream refining and marketing sectors. 
Within the United States (U.S.), about 45 percent of refining capacity 
is run by companies that are independent of any upstream business 
(e.g., Valero), about 40 percent is operated by integrated oil and gas 
companies (e.g., ExxonMobil), and the remaining 15 percent is 
associated with joint ventures (e.g., Motiva, a joint venture between 
Shell and Saudi Arabia Refining Inc.). After ConocoPhillips finishes 
splitting its company into two separate companies (one that produces 
oil and one that refines and markets products), only 30 percent of 
refining capacity will be associated with integrated companies and 55 
percent will be operated by independent refiners. That is, most U.S. 
refining capacity must survive financially on its own. However, even 
within integrated companies, refining and marketing are run as 
independent businesses from the upstream business.
    Question 1c. The tightening supply of oil and reduced spare 
capacity has been cited as the major driver for today's price 
increases. Based off our experience of rising oil prices from 2003 to 
2008, how will this market adjust to this tightening supply?
    Answer. Between 2003 and 2008 total world liquid fuels consumption 
increased by an average 1.1 million barrels per day (bbl/d) each year, 
with China accounting for 41 percent of the increase. During this 5-
year period total production from non-OPEC countries increased by an 
average of only 0.18 million bbl/d, compared with an average annual 
growth of 0.77 million bbl/d over the previous 5 years. Consequently, a 
greater reliance was put on OPEC-member countries to increase 
production, which contributed to a decline in surplus crude oil 
production capacity from an estimated average of 5.4 million bbl/d in 
2002 to 1.4 million bbl/d in 2008. This trend contributed to rising 
crude oil prices.
    Higher prices motivate consumers to consume less and competitive 
producers to produce more. We have already seen a consumption response 
in the United States with total liquid fuels consumption falling from a 
high of 20.8 million bbl/d in 2005 to 18.8 million bbl/d in 2011 even 
as total U.S. population and real GDP increased over this period by 5.7 
percent and 5.5 percent, respectively. For example, households are 
driving less, mass transit ridership is up, and the fuel economy of new 
vehicles has improved significantly.
    We have also seen a response by firms to increase production 
through new technology and drilling activity, although as discussed 
above, activity now results in production later. For example, according 
to Baker-Hughes the number of rigs drilling for oil in the United 
States averaged 200 in 2005. On April 5, 2012 there were 1,329 rigs 
drilling for oil. In addition, during 2005 only about 13 percent of the 
rigs were drilling horizontal wells. By 2012 the share of horizontal 
rigs, which allow firms to maximize production from tight oil and gas 
formations, had increased to 59 percent. As a result of past activity, 
EIA expects that total production by non-OPEC countries will increase 
by 0.85 million bbl/d in 2012, compared with an increase of 0.04 
million bbl/d in 2011.
    However, the lead time required to develop and drill new resources 
can be lengthy, particularly offshore. Consequently, the market's 
response to unexpected supply disruptions can be limited and dependent 
on readily-accessible supplies, such as surplus crude oil production 
capacity, which is held only by OPEC member countries. In the April 
2012 Short-Term Energy Outlook, EIA projects OPEC surplus crude oil 
production capacity to increase slowly from an estimated 2.5 million 
bbl/d in March 2012 to 3.7 million bbl/d at the end of 2013. This is 
due to OPEC member countries increasing their production capacity, non-
OPEC supply growth, and the recovery of production in countries 
currently experiencing supply disruptions, such as Libya, Syria, Yemen, 
and Sudan/South Sudan.
    Question 1d. Because oil companies enjoyed greater profits while 
producing less oil when prices increased from 2003-2008, what incentive 
exists for these companies to produce more in response to a tightening 
market?
    Answer. At 9.12 million barrels per day, the total production of 
the five largest investor-owned oil companies in 2008 was less than 11% 
of the world's total production of liquid fuels. Because each company 
has such a small share of the total market, they are much better off 
producing more oil even if the incremental production causes a small 
decline in the world oil price.
    There are several reasons why international oil company production 
can decline even as oil prices rise. Most of the oil produced by the 
largest oil companies is produced overseas under ``production sharing 
agreements'' (PSA), which are contracts with foreign governments that 
specify the government and company production shares under different 
oil prices. PSAs are designed to increase the foreign government's 
share of total production--and to reduce the international oil 
company's share--as oil prices rise. Even if total oil production from 
an overseas oil field is growing, under the terms of a PSA, the 
international oil company's share of production from that field can 
decline if rising oil prices reduces the company's share of the total 
production.
    Depletion and restricted access are also reasons why international 
oil production might decline even as oil prices increase. Typically, 
large, low-cost oil fields are discovered and developed first; with 
smaller, more difficult, and/or more costly prospects being developed 
later in an oil province's production history. The depletion of low-
cost oil fields can cause production in an oil province to decline even 
as oil prices rise. Finally, international oil company production can 
decline even as prices rise and world oil production increases because 
the investor-owned companies do not have commercial access to many of 
the most prolific oil regions in the world.
 alternative fuels provide competition at the pump, lowering gas prices
    While I appreciate the expert testimony that I think has been 
helpful in understanding the current dynamics of world oil markets, I 
am more interested in real solutions that will lower prices at the 
pump. That's what my constituents care about and probably what every 
American family and business cares about. We know that no amount of 
domestic oil drilling is going to change the world price of oil. AP's 
recent analysis of the last 36 years of data shows there is no 
statistical correlation between how much oil comes out of U.S. wells 
and the price at the pump. Similarly, the EIA found that even the most 
comprehensive domestic drilling proposals would only decrease gasoline 
prices by 3 to 5 cents--and not until 2030. But I think there is less 
awareness that broadening fuel choices can harness the power of free 
market competition to keep a lid of gasoline prices and the price 
volatility that keeps hammering our economy. Simply put, we need to 
prioritize ways to end the monopoly that oil has over our 
transportation system. Alternative fuels, such as methanol and ethanol, 
can compete within an open market. These fuels can be produced from 
domestic energy resources available in every state--including natural 
gas, agricultural waste, energy crops, and even trash--often for less 
than the price of gasoline.
    That finding is clear in the experience Brazil has had with flex 
fuel vehicles (FFVs). In 2008--as the U.S. and most of the world was 
over a barrel with no alternative to $147 oil--90 percent of the 
vehicles on the road in Brazil were FFVs. These were vehicles, many 
made by American car manufacturers, capable of burning blends ranging 
from 100 percent gasoline to 100 percent alcohol. When prices spiked, 
Brazilians made the obvious choice and simply bought more of their 
domestically-produced biofuel than gasoline, which was as much as three 
times the price of alcohol. It only costs around $100 or less to 
manufacture a flex fuel capable vehicle, an investment that will 
quickly be recouped by savings at the gas pump.
    Methanol could be the key to breaking oil's monopoly over the 
transportation system and our foreign oil dependence. That's because 
methanol is easily produced from America's abundant new natural gas 
supplies at the equivalent of $3 per gallon. It can also be produced 
from other domestic resources such as coal and biomass, which could 
keep hundreds of billions of dollars in the American economy rather 
than enriching foreign treasuries. Methanol capable vehicles were first 
produced in the United States in 1980s and are broadly available on the 
Chinese market today. This investment is also an important insurance 
policy against future oil price spikes likely in response to 
international events like Iran shutting down the Strait of Hormuz.
    The U.S. Energy Security Counci--the highest level non-governmental 
group ever assembled to address our nation's urgent energy challenges--
believe an Open Fuels Standard is the simplest, least-cost approach for 
reducing the strategic importance of oil, and the corresponding 
liability of gasoline price spikes that wreak havoc on our economy and 
American family budgets. In fact, this Council--a bipartisan group of 
former cabinet Secretaries, Senators, oil company and Fortune 500 
CEOs--said that making new cars capable of running on alternative fuels 
was the single most important thing Congress can do to have a lasting 
impact on America's energy security.
    So I would like to know what would happen if millions of gallons of 
alternatives to petroleum became available and effectively ended the 
monopoly oil has on our nation's transportation system.
    Question 2a. Let's say that 20 to 30 percent of our nation's 
petroleum demand could be replaced with alternative fuels such as 
methanol derived from natural gas or ethanol from non-food biomass at 
prices less than the current price of gasoline, what impact do you 
think that would have on overall gasoline prices?
    Answer. A scenario in which 20 to 30 percent of U.S. petroleum 
demand could be replaced by alternative fuels that could be profitably 
produced and sold at prices below the price of gasoline in energy 
equivalent terms, if realized, could exert significant downward 
pressure on both crude oil and gasoline prices. If comparable 
penetration of such fuels could also be achieved in foreign markets for 
motor fuels would also increase downward pressure on prices. An 
important factor in considering the posited scenario involves the 
extent to which alternative fuels are compatible with existing vehicles 
and infrastructure.
    Question 2b. Do you think that having competing fuels at the gas 
pump would help lower prices because consumers can switch between 
fuels?
    Answer. Given the uncertainties associated with global fuel 
markets, if significant long term growth in economically competitive 
alternative fuel consumption were achieved, a large displacement of 
crude oil could result in a material reduction in the prices of 
petroleum based transportation fuels. An increase in the price-
responsiveness of demand for petroleum-based motor fuels could also 
reduce the size of the change in the oil price needed to restore market 
balance in the wake of a shock affecting oil supply or demand.
    Question 2c. How do continued elevated oil prices, say any level 
above $80 a barrel, make petroleum alternatives more competitive?
    Answer. High oil prices allow petroleum alternatives to sell for a 
higher price than they would under low oil prices, which provide a 
potential market opportunity for certain higher cost alternatives to 
become economically viable. Absent policy initiatives, alternative 
fuels must compete against the wholesale cost of the fuel they 
displace. Crude oil has generally made up the overwhelming majority of 
the wholesale gasoline price. In 2010 the annual WTI spot price was 
$79.48 per barrel (or about $1.90 a gallon) and wholesale gasoline in 
New York Harbor was available for an average of $2.10 per gallon. 
However as mentioned in the first part of the question, alcohols must 
generally now compete on an energy equivalent basis as additional 
volumes must be added for high-level blends (e.g., E-85). To be 
competitive with retail regular gasoline at $2.00 a gallon in a high-
level blend; ethanol and methanol would need to be available for $1.35 
a gallon and $1.03 a gallon, respectively.
                           future oil prices
    Question 3a. My take aways from the witnesses today is that the era 
of cheap oil over, and world demand, particularly in developing 
countries, is ready to take off. That makes sense because the reality 
is the world today is overly dependent on the giant, conventional oil 
fields discovered back in the 1950s and 1960s. The chief economist for 
the International Energy Agency was very direct on this point in an 
interview in October 2010. He said,

          ``The era of cheap oil is over. Each barrel oil that will 
        come to market in the future will be much more difficult to 
        produce and therefore more expensive. We all--governments, 
        industry, and consumers--should be prepared for oil prices 
        being much higher than several years ago.''

    Yes, it's true that we can find more oil if we drill deeper and 
deeper and in waters farther away from land. We can also squeeze more 
oil out of more tar sands or shale. But all those options greatly 
increase costs and environmental impacts. It is important to note that 
this supply crunch happens at the very same time world oil demand is 
expected to increase rapidly. According to the International Energy 
Agency, not only will world oil demand grow by 25 percent by 2030, but 
93 percent of new demand will come from non-OECD countries--mainly 
China and India. So not only will there be more people demanding access 
to a shrinking, limited supply of oil, we'll now be fighting with China 
and India who can now afford to bid against us for this finite and 
currently irreplaceable resource.
    Even a top Saudi Arabian energy official recently expressed serious 
concern that world oil demand could peak in the next decade which 
explained why they were working to diversify their country's economic 
base. If the Saudi government is talking about diversifying, I think 
that should be a wakeup call for all of us: we need to be figuring out 
how we diversify A.S.A.P.
    The price of a barrel of oil is roughly the same as the price at 
the beginning of 2008. And today's national average price of gasoline 
is only 20 cents below its highest ever in the summer of 2008 when oil 
reached almost $150 per barrel. Yet few would say our economy is quite 
as robust now as it was then.
    I would be interested in hearing what the panelists would estimate 
the price of oil to be today, given all the new economic and 
geopolitical factors, if our economy was firing on all cylinders again?
    Answer. Recent experience demonstrates that world oil prices can be 
extremely volatile, and it is very difficult, even in the short-term, 
to estimate the sensitivity of world oil prices to an individual 
factor, such as U.S. economic growth. Global economic growth is likely 
to be a more important influence on oil demand than growth in the U.S. 
economy alone. However, the price of oil is affected by numerous 
factors that occur on a global basis and there is a very wide range of 
uncertainty about the future probability of occurrence and values of 
many of these factors.
    As reported in EIA's Short-Term Energy Outlook for April, the 95% 
confidence interval for January 2013 oil prices (WTI) ranges from $68 
to $164 per barrel. The upper and lower bounds of this range are 
estimated using the market prices of WTI call and put options, and the 
breadth of the 95% confidence interval reflects the high uncertainty 
among market participants about the future values of a number of 
factors that significantly affect oil prices
    Question 3b. I think we are only a few years from the whole world 
being back to 2008 levels of growth or beyond. What will that mean for 
world oil prices within the next five years?
    Answer. In 2008, oil prices reached a high of $145 per barrel in 
July (daily spot price in nominal dollars) and a low of $30 per barrel 
in December of that year as the global recession substantially dampened 
demand. Improving economic conditions, especially in the developing 
economies, largely supported continuing oil price increases from 2009 
and into 2011. Continuing unrest in many oil-supplying nations of the 
Middle East and North Africa has helped to keep oil prices high into 
2012.
    Because so many different factors affect oil prices and there is 
such great uncertainty regarding the future value of those factors, it 
is not possible to state definitely how one of those factors will 
affect future oil prices. Recognizing the uncertainty in long-term oil 
prices, EIA presents three price paths in its long-term energy outlooks 
that span a very wide range of potential prices (and still do not 
encompass all possibilities). The 2020 oil price assumptions in the 
International Energy Outlook 2011 vary from $51 per barrel to $186 per 
barrel (real 2010 dollars). These price paths represent possible 
scenarios that vary expectations about world oil demand and decision-
making by key OPEC member countries with access to high-quality oil 
resources. These factors, in addition to the economics of non-OPEC 
conventional liquids supply and the unconventional liquids supply in 
both OPEC and non-OPEC regions, will all play a role in determining 
future oil prices.
    Question 3c. Is it safe to say that the era of cheap oil is over? 
Will the average price of oil be over $100 for the foreseeable future, 
unless we have another economic collapse like the one in 2008?
    Answer. Many analysts expect rising demand for oil in the 
developing world to push crude oil prices higher in real terms over the 
coming years. EIA's Annual Energy Outlook Early Release Reference case, 
projects the price of light sweet crude oil at Cushing, Oklahoma in 
real 2010 dollars will rise to $120 per barrel by 2016 and then 
steadily increase to $145 per barrel by 2035. However, past experience 
suggests that analysts should be humble in making long-term price 
projections, which are highly uncertain. There is always a possibility 
of surprises in alternative fuel technologies, in identifying new 
sources of traditional fuels, as has recently occurred in natural gas 
markets with the advent of shale gas, or in production policies adopted 
by OPEC member countries with access to high quality resources that can 
be developed at relatively low cost. Therefore, I think it would be 
unwise to completely rule out the possibility that annual average oil 
prices would fall below $100 absent an economic collapse.
    Response of Howard Gruenspecht to Question From Senator Landrieu
    Question 1. Dr. Gruenspecht, your study--Potential Impacts of 
Reductions in Refinery Activity on Northeast Petroleum Product 
Markets--has been widely cited since its release in February. One issue 
that has received attention is EIA's contention that American domestic 
tank vessel capacity might be in ``short supply'' if another Northeast 
refinery closes and more product must move from the Gulf to the 
Northeast. I understand that three weeks ago you learned that EIA's 
analysis accidentally counted only American tankers and did not count 
American tank barges, including modern articulated tug barges. 
According to American Maritime Partnership, EIA has undercounted 
American tank vessel capacity by approximately 50%.
    Your study continues to be cited for the proposition that American 
tank vessel capacity may be inadequate and has led others to suggest 
Jones Act waivers. It has been three weeks. When do you plan to correct 
the record? Don't you have the responsibility to let the media, policy-
makers and the public know that your conclusions will likely change?
    Answer. Updated information on the availability of Jones Act 
vessels was made public April 4, through EIA's This Week in Petroleum. 
EIA has modified the report and added a direct link to this article on 
the home page of the EIA study referenced in your question. The timing 
of this update was due in large part to the fact that the most widely 
used information source is private, and ultimately we were not able to 
obtain the copyright permission to publish data from that source. From 
our perspective, the issue of needing to move product from the Gulf 
Coast to the Northeast was not the number of vessels, but rather their 
availability, which is still a concern as discussed in This Week in 
Petroleum. For example, it would take 20 barges with a capacity of 
100,000 barrels each to supply 100,000 bbl/d of ultra-low sulfur diesel 
from the Gulf Coast to the Northeast on a dedicated basis. (If larger 
vessels were available, fewer would be needed.) These vessels are 
presumably in service elsewhere now, and it is not clear how their 
current service would be replaced.
    As indicated in the April 4 This Week in Petroleum article, supply 
disruptions and the largest costs would likely be incurred during the 
initial transition period following a shutdown of the Sunoco 
Philadelphia refinery as the market resolves any initial supply 
dislocations. While the maritime industry is flexible and confident of 
its ability to supply needed volumes, which could be large, short-term 
flexibility is more limited than long-term flexibility. If the initial 
volume need is high, rerouting vessels from existing service may come 
at a higher cost than usual rates. Imports would play an important 
balancing role, potentially reducing the need for domestic shipping. 
While we acknowledge the U.S. maritime industry's confidence, it 
remains unclear exactly how and at what cost the Northeast would be 
supplied, and what, if any, additional costs might be incurred outside 
of the Northeast if significant domestic shipping is diverted from 
other uses in the short run.
  Responses of Howard Gruenspecht to Questions From Senator Murkowski
    Question 1. I know there are no ``silver bullet'' solutions that 
will immediately bring down gasoline prices, but I wonder if you have 
any thoughts about steps that we might take to at least try and 
alleviate some of the pain people are feeling at the pump in the short 
term?
    Answer. Although there may be no ``silver bullet'' to immediately 
bring down gasoline prices, several ways to save at the pump can be 
found on the http://www.fueleconomy.gov/ website. Among the many fuel 
saving tips presented are:

   Drive sensibly.--Speeding, rapid acceleration and rapid 
        braking wastes gasoline. Avoiding this behavior may give an 
        equivalent gasoline savings of $0.19--$1.28 per gallon.
   Remove excess weight from your vehicle.--An extra 100 pounds 
        in your car can reduce the MPG by up to 2 percent. Lightening 
        your load may result in an equivalent gasoline savings of 
        $0.04--$0.08 per gallon.
   Avoid excessive idling.--Idling can use a quarter to half a 
        gallon of gasoline per hour. Reducing idling can lead to fuel 
        cost savings ranging from $0.01--$0.04 per minute.
   Keep tires properly inflated.--Gas mileage can improve up to 
        3 percent with properly inflated tires, resulting in an 
        equivalent gasoline savings of up to $0.12 cents per gallon.

    There are many more gasoline saving tips offered on the website. In 
addition, this information is also available for mobile devices at: 
http://fueleconomy.gov/m/.
    Question 2. Can you please give us a sense of where our crude 
inventory is today, vs. six months ago? Do you recall what the 
inventory was in June of last year, when we sold 30 million barrels of 
oil out of our strategic stockpile, vs. what it was six months prior?
    Answer. According to the latest International Energy Agency (IEA) 
report, as of January 2012, total OECD commercial crude oil inventories 
were 916.5 million barrels, which is 44.1 million barrels lower than 
the level six months prior (as of July 2011). The U.S. portion of 
January 2012 OECD commercial crude oil inventories was 340.0 million 
barrels, down 8.1 million barrels from six months prior.*
---------------------------------------------------------------------------
    * Graph of ``Commercial Crude Oil Inventories'' has been retained 
in committee files.
---------------------------------------------------------------------------
    Prior to the July 2011 release of strategic reserves in response to 
the Libya supply disruption, OECD commercial crude oil inventories were 
977.1 million barrels, which was 20.5 million barrels higher than their 
level six months earlier. The U.S. portion of OECD commercial crude 
stocks in June 2011 was 358.5 million barrels, 25.1 million barrels 
higher than their level six months prior. The EIA's latest initial 
estimate of U.S. commercial crude oil inventories for March 2012 is 
363.2 million barrels, which is 31.4 million barrels above U.S. crude 
oil inventories six months earlier in September 2011.
                                 ______
                                 
   Responses of Frank A. Verrastro to Questions From Senator Cantwell
                          oil company profits
    Question 1. From 2003 to 2008, oil revenues for the top five oil 
companies increased by 86 percent while profits increased by 66 
percent. Yet oil output by the five major oil companies over this same 
time period declined by more than 7 percent, from 9.85 million to 9.12 
million barrels per day. These additional profits were not earned as a 
result of additional production effort on the part of the oil companies 
but due almost entirely to the record crude oil prices, which are set 
in the world oil marketplace.
    Combined, it's been literally a trillion-dollar decade for the oil 
and gas giants. From 2002 to 2011, ExxonMobil gained $310 billion, 
Shell $204 billion, Chevron $152 billion and BP $147 billion--despite 
its loss year because of the 2010 Gulf of Mexico oil spill. As the 
price of oil rose, company revenues and profits soared with ExxonMobil 
eventually becoming the most profitable corporation in the history of 
American industry.
    That's a really good return for an era of volatile, but 
significantly lower oil prices than we are seeing today and are likely 
to see in the future.

          a. Given that the 5 major oil companies made over a trillion 
        dollars in profits over the last decade--and that's profits, 
        not revenues--and their cost of production is still around $11 
        per barrel, what do you estimate their profits will total over 
        the next decade?
          b. And when it comes to gas prices, many of my constituents 
        complain about oil company profits. From an oil producer's 
        perspective, how much profit is there in each gallon of $4 gas?
          c. The tightening supply of oil and reduced spare capacity 
        has been cited as the major driver for today's price increases. 
        Based off our experience of rising oil prices from 2003 to 
        2008, how will this market adjust to this tightening supply?
          d. Because oil companies enjoyed greater profits while 
        producing less oil when prices increased from 2003-2008, what 
        incentive exists for these companies to produce more in 
        response to a tightening market?

    Answer. As you can imagine, there are a number of factors that 
affect oil company profits--not the least of which include global 
supply and demand dynamics, which affect the value of the commodity; 
production volumes; crude oil quality and refinery operations/needs; 
transport and infrastructure costs, operational overhead (exploration 
and production costs), taxes, royalties, cost of capital, etc. , so 
attempting to predict company profits over the next decade is a 
humbling and difficult task. Our analysis as well as work done by the 
International Energy Agency and others suggests that average production 
costs--given the expense and technical complexity of new sources of 
production (e.g., offshore, unconventionals, subsalt, etc.)--is 
considerably higher than the $11 per barrel you have identified. In 
addition, in just the short period of time since the Senate hearing was 
convened, oil prices have declined by almost $ 11/barrel, so for a 
producer with say, two million barrels per day of oil production, 
realized revenues from oil sales over that period would be reduced, on 
average, by some twenty-two million dollars a day (or over eight 
billion a year) before even taking into account any adjustments in 
cost. Projecting that range of outcomes (with even a moderate degree of 
confidence) out for a decade requires modeling and assumptions beyond 
our capabilities here.
    It should also be noted that as prices, costs and profits rise and 
fall, depending on a particular company's resource portfolio, certain 
resource plays become more or less economic, which in turn, impacts 
production volumes and revenues going forward.
    With respect to the major oil companies' role in gasoline 
marketing, it is fair to say that they are only tangentially involved 
in the marketing of gasoline at the retail level. The vast majority of 
commercial gas stations are either branded franchisees or independent 
operators. And while crude oil costs represent the single largest 
component reflected in gasoline prices, federal, state and local taxes 
as well as refining, transportation and marketing costs are also 
reflected in the price consumers pay at the pump. In addition, a 
distinction can be drawn between gasoline costs and final consumer 
prices and this difference would be attributable to the markup and 
costs (including profit) of the retail establishments, reflecting their 
variable lease costs, locations and cash flow requirements (as they 
typically adjust their pump prices to reflect by neighboring 
competition and the anticipated costs of their next deliveries). As a 
consequence, pump prices typically rise when a (upward) crude 
adjustment is announced or anticipated even though the ``cost'' of 
gasoline in station's tanks reflected prices of crude from an earlier 
period.
    If supply availability continues to tighten (relative to perceived 
demand), it is reasonable to expect prices to remain high, or rise even 
higher. Alternatively, a slackening of demand or an oversupply of 
product forces prices to drop.
    Oil companies are in business to produce and sell a product, to 
keep their customers supplied and reward their shareholders' 
investment. Since the industry is not monolithic, if markets tighten as 
a consequence of increased demand or short supply, as prices rise, 
companies will increase production to ensure competitive viability and 
increase revenues.
 alternative fuels provide competition at the pump, lowering gas prices
    Question 2. While I appreciate the expert testimony that I think 
has been helpful in understanding the current dynamics of world oil 
markets, I am more interested in real solutions that will lower prices 
at the pump. That's what my constituents care about and probably what 
every American family and business cares about. We know that no amount 
of domestic oil drilling is going to change the world price of oil. 
AP's recent analysis of the last 36 years of data shows there is no 
statistical correlation between how much oil comes out of U.S. wells 
and the price at the pump. Similarly, the EIA found that even the most 
comprehensive domestic drilling proposals would only decrease gasoline 
prices by 3 to 5 cents--and not until 2030. But I think there is less 
awareness that broadening fuel choices can harness the power of free 
market competition to keep a lid of gasoline prices and the price 
volatility that keeps hammering our economy. Simply put, we need to 
prioritize ways to end the monopoly that oil has over our 
transportation system. Alternative fuels, such as methanol and ethanol, 
can compete within an open market. These fuels can be produced from 
domestic energy resources available in every state--including natural 
gas, agricultural waste, energy crops, and even trash--often for less 
than the price of gasoline.
    That finding is clear in the experience Brazil has had with flex 
fuel vehicles (FFVs). In 2008--as the U.S. and most of the world was 
over a barrel with no alternative to $147 oil--90 percent of the 
vehicles on the road in Brazil were FFVs. These were vehicles, many 
made by American car manufacturers, capable of burning blends ranging 
from 100 percent gasoline to 100 percent alcohol. When prices spiked, 
Brazilians made the obvious choice and simply bought more of their 
domestically-produced biofuel than gasoline, which was as much as three 
times the price of alcohol. It only costs around $100 or less to 
manufacture a flex fuel capable vehicle, an investment that will 
quickly be recouped by savings at the gas pump.
    Methanol could be the key to breaking oil's monopoly over the 
transportation system and our foreign oil dependence. That's because 
methanol is easily produced from America's abundant new natural gas 
supplies at the equivalent of $3 per gallon. It can also be produced 
from other domestic resources such as coal and biomass, which could 
keep hundreds of billions of dollars in the American economy rather 
than enriching foreign treasuries. Methanol capable vehicles were first 
produced in the United States in 1980s and are broadly available on the 
Chinese market today. This investment is also an important insurance 
policy against future oil price spikes likely in response to 
international events like Iran shutting down the Strait of Hormuz.
    The U.S. Energy Security Council--the highest level non-
governmental group ever assembled to address our nation's urgent energy 
challenges--believe an Open Fuels Standard is the simplest, least-cost 
approach for reducing the strategic importance of oil, and the 
corresponding liability of gasoline price spikes that wreak havoc on 
our economy and American family budgets. In fact, this Council--a 
bipartisan group of former cabinet Secretaries, Senators, oil company 
and Fortune 500 CEOs--said that making new cars capable of running on 
alternative fuels was the single most important thing Congress can do 
to have a lasting impact on America's energy security.
    So I would like to know what would happen if millions of gallons of 
alternatives to petroleum became available and effectively ended the 
monopoly oil has on our nation's transportation system.

          a. Let's say that 20 to 30 percent of our nation's petroleum 
        demand could be replaced with alternative fuels such as 
        methanol derived from natural gas or ethanol from non-food 
        biomass at prices less than the current price of gasoline, what 
        impact do you think that would have on overall gasoline prices?
          b. Do you think that having competing fuels at the gas pump 
        would help lower prices because consumers can switch between 
        fuels?
          c. How do continued elevated oil prices, say any level above 
        $80 a barrel, make petroleum alternatives more competitive?

    Answer. Presenting the consumer with alternatives at the pump is 
always beneficial from a price competition perspective and the ability 
to diversify the supply sources is also good from a supply security 
perspective. That said, the alternative choice must be scalable, 
economic, and have supportive infrastructure to aid in distribution. In 
the case of alternative fuels such as ethanol and methanol, there are 
some barriers to adoption that make deploying this option ``at scale'' 
challenging--and these obstacles relate primarily to infrastructure and 
cost, although energy content (and competitive pricing) also comes into 
play. They do, however, represent excellent ``niche'' fuel 
opportunities, particularly when consumed in areas geographically 
proximate to their production.
    According to estimates by the Energy information Administration 
(EIA), daily U.S. gasoline consumption is roughly 8.6 million barrels a 
day (MMb/d) or approximately 361 million gallons a day (mgd)--so a few 
million gallons of alternatives are unlikely to be large enough to 
impact oil markets. Today, almost 75 percent of gasoline is blended 
with ethanol. Last year the United States consumed approximately 850 
thousand barrels a day (Mb/d) of ethanol, about 10.3 percent of the 
total gasoline consumed. To achieve a 20 percent saturation, the United 
States would need to produce and consume 1.7 MMb/d of alternative fuels 
and 2.6 MMb/d to achieve 30 percent. Currently, the United States has 
only a production capacity of 900 Mb/d (EIA). This means that the 
production capacity would need to increase significantly or imports of 
the additional biofuels would be required to reach a 20-30% reduction 
in petroleum-derived fuels.
Annual U.S. ethanol production and consumption*
---------------------------------------------------------------------------
    * Graph has been retained in committee files.
---------------------------------------------------------------------------
                                eia 2011
    Adoption of either alternative fuel is likely to be much more 
expensive and would require a significant investment in the 
infrastructure and production capabilities which may offset the 
reduction in fuel price due to cheap feedstock prices. According to a 
NREL study referenced by EIA, it costs about $200 million to build a 
69.3 MM gallons/year cellulosic facility (AEO 2007-EIA). Of course, 
sustained high world oil prices would play a significant role in 
helping to bring about better technologies which can reduce the cost.
    Ethanol and methanol are less energy intensive per volume as 
gasoline which means that consumers will have to refuel more often than 
they would now. Ethanol contains .67 times the energy intensity per 
volume as gasoline does. This means that the miles driven per gallon of 
ethanol would be 33 percent less than that of gasoline. A consumer 
would need 1.5 times gallons. This factor increases by 2 times in the 
case of methanol (Please see the table 1).

                                                    TABLE 1.
----------------------------------------------------------------------------------------------------------------
                                                                                        Gallons of gasoline
                             Fuel                                Btu per gallon              equivalent
----------------------------------------------------------------------------------------------------------------
Conventional gasoline                                                    125,071                              1
----------------------------------------------------------------------------------------------------------------
Fuel Ethanol                                                              84,262                           0.67
----------------------------------------------------------------------------------------------------------------
E85 (74% blend on average)                                                94,872                           0.76
----------------------------------------------------------------------------------------------------------------
Fuel Methanol                                                             56,800                           0.50
----------------------------------------------------------------------------------------------------------------
M85                                                                       65,400                           0.57
----------------------------------------------------------------------------------------------------------------
Distillate fuel oil (diesel)                                             138,690                           1.11
----------------------------------------------------------------------------------------------------------------
Biodiesel (B100)                                                         128,520                           1.03
----------------------------------------------------------------------------------------------------------------

    The feedstock (and other resources, such as water) used in the 
production of alternative fuels should also be considered: If using 
food-based feedstock or if farmers switch to fuel crops away from food 
crops, then we run into the food security vs. fuel security issue. 
Increased demand for ethanol and methanol could also lead to increased 
costs for the feedstock to accommodate for the increased demand. If we 
expect that demand for ethanol and methanol to increase then we should 
expect that the cost for the feedstock to increase accordingly to 
accommodate for the higher demand. Further studies would need to be 
completed in order to identify the price effect if we use our new found 
abundant supplies of Natural Gas (which are inexpensive and plentiful).
    A major concern is the issue of transporting ethanol and methanol 
to centers of demand from production sites. Since both are very 
corrosive they are not able to flow through the existing pipeline 
system. A new infrastructure would need to be built to carry them, 
which increases costs. On the infrastructure front, refueling stations 
would need to have dedicated pumps to handle the higher blends of 
biofuel. Refueling stations will also need to accommodate for larger 
storage in order to keep multiple fuels and enough inventory on hand. 
In some locations, where the retail footprint is limited, this could be 
problematic. In addition, retail outlets that replace existing gasoline 
pumps with alternate fuels would need to be convinced that they have 
adequate customers to warrant the investment.
    One way to avoid the transportation costs is to consume ethanol and 
methanol close to their production sites. For example the Midwest would 
benefit from being close the bio-based production while Pennsylvania 
would benefit from methanol derived from natural gas production. In 
this case transportation would not be an issue and a localized 
infrastructure can be built to accommodate for the transformation in 
fuel type. A recent report by the Department of Energy shows a lower 
price for ethanol in the areas closer to the source $3.06/gallon of E85 
in the Midwest compared to $3.76 in New England, and a national average 
of $3.14. (See Clean Cities Alternative Fuel Report January 2012)

 
 
    Ethanol (E85) Information  Reported by Clean Cities ($ per gal)      Regular Gasoline Information  Reported
                                                                               by Clean Cities ($ per gal)
 
                                   Average Price/      Number of Data      Average Price/
                                 Standard Deviation        Points        Standard Deviation     Number of Data
                                      of Price                                of Price              Points
 
New England                     $3.76 / 0.47         3                  $3.60 / 0.17         41
Central Atlantic                $3.23 / 0.20         79                 $3.46 / 0.19         38
Lower Atlantic                  $3.23 / 0.27         55                 $3.46 / 0.14         57
Midwest                         $3.06 / 0.19         189                $3.29 / 0.17         172
Gulf Coast                      $3.05 / 0.15         32                 $3.15 / 0.13         20
Rocky Mountain                  $2.99 / 0.24         56                 $3.09 / 0.27         52
West Coast                      $3.35 / 0.17         70                 $3.68 / 0.31         54
----------------------------------------------------------------------------------------------------------------
NATIONAL AVERAGE                $3.14 / 0.24         484                $3.37 / 0.27         434
 


    In conclusion, while alcohol-based fuels can be produced 
domestically and hence reduce the United States' dependence on foreign 
imported oil, significant obstacles remain to rolling this option out 
on a nationwide basis. There are production constraints, feedstock 
availability concerns, infrastructure, and transportation limitations. 
Biofuels should be made available in areas where the feedstock in 
produced as it can be a good niche fuel.
    With respect to the impact of oil prices in excess of $80/barrel 
and the impact on alternatives, two points are worth noting: first, as 
you suggest, higher oil prices should help make (currently more 
expensive) alternatives more economically competitive; but also note 
that at $80/barrel or more with the addition of new technologies and 
the vast unconventional resource base, oil is likely to be plentiful 
for years to come.
                           future oil prices
    Question 3. My take aways from the witnesses today is that the era 
of cheap oil over, and world demand, particularly in developing 
countries, is ready to take off. That makes sense because the reality 
is the world today is overly dependent on the giant, conventional oil 
fields discovered back in the 1950s and 1960s. The chief economist for 
the International Energy Agency was very direct on this point in an 
interview in October 2010. He said,

          ``The era of cheap oil is over. Each barrel oil that will 
        come to market in the future will be much more difficult to 
        produce and therefore more expensive. We all--governments, 
        industry, and consumers--should be prepared for oil prices 
        being much higher than several years ago.''

    Yes, it's true that we can find more oil if we drill deeper and 
deeper and in waters farther away from land. We can also squeeze more 
oil out of more tar sands or shale. But all those options greatly 
increase costs and environmental impacts. It is important to note that 
this supply crunch happens at the very same time world oil demand is 
expected to increase rapidly. According to the International Energy 
Agency, not only will world oil demand grow by 25 percent by 2030, but 
93 percent of new demand will come from non-OECD countries--mainly 
China and India. So not only will there be more people demanding access 
to a shrinking, limited supply of oil, we'll now be fighting with China 
and India who can now afford to bid against us for this finite and 
currently irreplaceable resource.
    Even a top Saudi Arabian energy official recently expressed serious 
concern that world oil demand could peak in the next decade which 
explained why they were working to diversify their country's economic 
base. If the Saudi government is talking about diversifying, I think 
that should be a wakeup call for all of us: we need to be figuring out 
how we diversify A.S.A.P.
    The price of a barrel of oil is roughly the same as the price at 
the beginning of 2008. And today's national average price of gasoline 
is only 20 cents below its highest ever in the summer of 2008 when oil 
reached almost $150 per barrel. Yet few would say our economy is quite 
as robust now as it was then.

          a. I would be interested in hearing what the panelists would 
        estimate the price of oil to be today, given all the new 
        economic and geopolitical factors, if our economy was firing on 
        all cylinders again?
          b. I think we are only a few years from the whole world being 
        back to 2008 levels of growth or beyond. What will that mean 
        for world oil prices within the next five years?
          c. Is it safe to say that the era of cheap oil is over? Will 
        the average price of oil be over $100 for the foreseeable 
        future, unless we have another economic collapse like the one 
        in 2008?

    Answer. With respect to forecasting oil prices under a more robust 
economic scenario, I will defer to my colleagues/panelists that have 
extensive econometric modeling capabilities. I agree with the assertion 
that greater economic growth (even with improved efficiency) means 
greater demand for energy, including oil--especially in the transport 
fleet.
    On the issue of supply response, however, I would note that one of 
the ``benefits'' of today's higher prices has been to push innovation 
and technology to be able to unlock a vast new unconventional resource 
base, both in the U.S. and globally. At present prices, extraction of 
resources from ultradeep water, pre-salt, lower tertiary, tight oil, 
shale oil and oil sands plays, etc., has the potential for dramatically 
altering the production profile landscape--and adding several million 
barrels per day of new production growth in the not too distant future. 
This added output (depending on demand growth and OPEC policy 
decisions) should help moderate price spikes and restore available 
``spare'' capacity cushions.
  Responses of Frank A. Verrastro to Questions From Senator Murkowski
                          short term solutions
    Question 1. I know there are no ``silver bullet'' solutions that 
will immediately bring down gasoline prices, but I wonder if you have 
any thoughts about steps that we might take to at least try and 
alleviate some of the pain people are feeling at the pump in the short 
term?
    Answer. As indicated in my testimony, typically gasoline prices 
tend to rise and fall seasonally. And while we began (for a variety of 
reasons, both domestic and internationally) 2012 with elevated gasoline 
prices, downward adjustments are already working their way through the 
distribution system. Current gas prices are averaging about $3.73 per 
gallon nationwide, down from just under $4 per gallon only a few weeks 
ago.
    Reduced demand through trip consolidation or ride sharing, public 
transit options and telecommuting can help alleviate short term 
expenses as would proper tire inflation and engine maintenance, but as 
you have indicated, there are no immediate ``silver bullets.'' 
Suspension of gasoline taxes, even temporarily, are not an answer, as 
the pump price reductions (if they were to occur) serve to increase 
demand and drive prices upward. Further, reinstating the taxes would 
prove problematic politically and in the interim deny the Highway Trust 
and other state funds of needed revenue sources.
               refinery closures / transport constraints
    Question 2. I wonder if you could talk a little bit about the 
supply issue we will likely face on the East coast, as we stand to lose 
over a million barrels a day of refined product output from refinery 
closures there, and considering that we have so little pipeline 
capacity to move products like gasoline and home heating oil up from 
the Gulf. I know we have become a net exporter of refined products and 
I just wonder why we couldn't simply use those products up East? Other 
than pipeline, what is the most efficient way to move products up from 
the Gulf Coast?
    Answer. During the March 29 hearing, we discussed expansion of the 
Colonial pipeline and movement of refined petroleum products from the 
Gulf to the East coast using both Jones Act and non-Jones Act vessels. 
As indicated in my testimony, compensating for the East coast refinery 
closures and transport constraints--at least in the near term--are 
issues of logistics and timing. At this writing, Bakken crude (from 
North Dakota) is being moved eastward (via rail) to the northeast and 
barged down to the Pennsylvania area. Refined product is being rerouted 
(by rail and tanker truck) to service areas where refineries are closed 
and crude pipelines and tanks are being converted to handle increased 
refined product flows. Product imports are also being increased to 
certain areas.
                                  spr
    Question 3. We've seen in the news that the U.S. has asked France 
and Great Britain to coordinate a release from our strategic petroleum 
stocks, and that the release could take place in a matter of weeks. Not 
only has the head of the IEA responded that that a coordinated IEA 
release is not warranted because there is no significant supply 
disruption on world oil markets, it is becoming clear that neither 
Germany nor Italy are willing to participate in such a sale, with the 
German government stating that there is no physical shortage at the 
moment. What are your thoughts about the use of our strategic 
stockpiles at this time?
    Answer. As I indicated in my statement, I believe oil markets are 
currently adequately supplied, inventories are building and production 
is increasing even as concern over demand and economic growth 
continues. And while conditions can change dramatically in the space of 
weeks or in reaction to a major supply disruption event (or even the 
removal or more Iranian oil from the market as a consequence of 
successful sanctions), at the present time, I see no reason to release 
strategic stockpiles.
                  market perception of new production
    Question 4. Would you say that the markets react better to ``good'' 
oil projects vs. ``challenging'' oil projects--in other words, is new 
production viewed more credibly when it comes from more fiscally and 
politically stable sources?

          a. What sorts of governmental actions can reduce the fiscal 
        or political stability of an oil producing nation?

    Answer. The ``market'' typically takes into account a variety of 
factors when evaluating oil prospects, including project commerciality, 
sustainability, continued access, security, crude quality relative to 
refining and consumer demand, technical challenges, availability of 
infrastructure to move commodities to market, governance and 
geopolitics--to name a few. All things being equal, secure and stable 
projects are preferred, but resource size and the ability to monetize 
assets in a reasonable timeframe also come into play. Government 
actions to facilitate or improve any of the above factors are welcome.
    Question 5. In your opinion, if, ten years ago, the U.S. had scaled 
back its exploration and development so that 2 million fewer barrels 
per day were now online (without assuming any changes to what we have 
witnessed in global supply and demand trends over the same period), 
would that have translated to higher prices today?
    Question 6. In your opinion, if, ten years ago, the U.S. had 
increased exploration and development so that U.S. production were now 
at 10 million barrels per day (without assuming any changes to what we 
have witnessed in global supply and demand trends over the same 
period), would that have translated to lower prices today?
    Answer. As indicated uniformly by all of the panel members, oil 
prices at any given point in time reflect both the perception and 
reality of global supply, demand, the state of inventories, and 
political risk/events. That said, all things being equal, increased 
supply generally translates into lower prices, while reduced supply 
does the opposite. OPEC actions and cumulative demand levels are worth 
noting here, however. OPEC reductions in output can always be used to 
offset production increases by certain nations with the net effect of 
maintaining tight markets and higher prices. Two million barrels per 
day of extra production should have allowed spare capacity cushions to 
improve and thereby moderate any price spikes but in a 90 million 
barrel per day world, even 2 million barrels represents a bit more than 
a 2% cushion.
    Question 7. You testified that while 2-300,000 barrels per day 
coming online would probably not make a meaningful difference in 
prices, that 2-3 million barrels per day is ``a big deal.'' Can you 
define ``big deal?''
    Answer. My point was that in the current (i.e.,89-90 million barrel 
per day global) market with persistent instability in the MENA 
counties, ongoing outages in a variety of areas, the ongoing turmoil 
with Iran, etc., incremental output on the magnitude of 200-300,000 
barrels per day, while a welcomed addition, would likely be, in and of 
itself, insufficient to substantially reduce prices. Adding 3 million 
barrels per day of ``prompt'' near term barrels to that same market, 
could, however, have a meaningful impact, especially if market 
sentiment suggested a resumption of output from Iraq and Libya, 
sustained increased production from Saudi Arabia and a possible 
resolution to the Iranian threat.
    Question 8. Is there any scenario in which major increases in 
production and spare capacity lead to higher prices?
    Answer. The only arguable case where major production increases 
beget higher prices would result from unanticipated increases in demand 
(which offset the output additions). Such instances (see 2003-04) 
usually are accompanied by reductions in spare capacity as it takes 
time for new incremental production to ramp up and get to market. Your 
question specifically posits increased production AND spare capacity 
growth, which necessarily suggests that supply exceeds demand, and thus 
should lead to a reduction in price.
                 reference prices for senate responses
    On March 29, 2012, the price for Brent crude oil was $ 123.23/
barrel; On May, 16, 2012, the price had fallen to $111.63; Similarly, 
the price for West Texas Intermediate (WTI) on the day of the Senate 
hearing was $102.79/barrel; on May 16, the price was almost $10 less at 
$ 92.97.
                                 ______
                                 
      Response of Paul Horsnell to Question From Senator Bingaman
    Question 1. During a discussion of the effect of tax incentives for 
oil and gas on the price of gasoline prompted by a question from 
Senator Portman (111 minute mark of the recording), Mr. Verrastro noted 
that, all things being equal, removal of $23 billion in incentives over 
ten years would cause the price of oil and gas to increase, but he also 
noted that the effect would likely be small. I am curious to get the 
reaction of the other witnesses to Senator Portman's question--moving 
beyond simple economic theory into an actual analysis of the pricing 
effects. A recent Congressional Research Service Memo to my office will 
be a good starting point. It notes that, in the highly unlikely case 
that oil and gas companies are able to pass on all (and not just a 
portion) of the costs of removing $23 billion in tax incentives over 
ten years, consumers will see only a maximum increase in gasoline 
prices of 1.7 cents per gallon. For a fifteen gallon tank of gasoline, 
that equals twenty-five cents.
    Please comment on the accuracy of this analysis and also on the 
ability of these companies to pass on all of the costs associated with 
a removal of certain tax incentives.
    Answer. The impact on domestic gasoline prices, given that these 
are formed in a global market, would appear to be very limited. The 
impact of reduced US production (muted by some switch of activity 
elsewhere) is unlikely in my view to have a discernible impact. The 
more tangible effects are perhaps likely to be on other indicators, 
such as the US balance of payments and the composition and scale of 
oilfield employment. However, in terms of our medium-term projections 
of global oil market balances and prices, this is not a factor that we 
would assign a large weight to in that global context.
     Responses of Paul Horsnell to Questions From Senator Cantwell
                          oil company profits
    From 2003 to 2008, oil revenues for the top five oil companies 
increased by 86 percent while profits increased by 66 percent. Yet oil 
output by the five major oil companies over this same time period 
declined by more than 7 percent, from 9.85 million to 9.12 million 
barrels per day. These additional profits were not earned as a result 
of additional production effort on the part of the oil companies but 
due almost entirely to the record crude oil prices, which are set in 
the world oil marketplace.
    Combined, it's been literally a trillion-dollar decade for the oil 
and gas giants. From 2002 to 2011, ExxonMobil gained $310 billion, 
Shell $204 billion, Chevron $152 billion and BP $147 billion--despite 
its loss year because of the 2010 Gulf of Mexico oil spill. As the 
price of oil rose, company revenues and profits soared with ExxonMobil 
eventually becoming the most profitable corporation in the history of 
American industry.
    That's a really good return for an era of volatile, but 
significantly lower oil prices than we are seeing today and are likely 
to see in the future.
    Question 1a. Given that the 5 major oil companies made over a 
trillion dollars in profits over the last decade--and that's profits, 
not revenues--and their cost of production is still around $11 per 
barrel, what do you estimate their profits will total over the next 
decade?
    Answer. On the revenue side the average crude oil price over the 
past ten years has been $68.50 per barrel for Brent. As a working 
assumption we would estimate that the average Brent price over the next 
ten years would be at least 50% higher than that. As an offset, on the 
supply side we would expect to see a significant escalation in 
production costs, a high proportion of incremental global output 
accruing to national oil companies rather than integrated companies, 
and fiscal regimes on a global basis that are more rent acquisitive for 
producer governments. As a non-equity analyst, I will leave the full 
cash-flow calculation of the net effect to the equity analysts. 
However, in broad terms I would expect company profits over the next 
decade to increase, but by significantly less than average Brent prices 
will. Refining operations are expected to remain a source of losses for 
integrated companies.
    Question 1b. And when it comes to gas prices, many of my 
constituents complain about oil company profits. From an oil producer's 
perspective, how much profit is there in each gallon of $4 gas?
    Answer. According to the Energy Information Administration, the 
national average for regular unleaded ($3.85 at the time of the EIA's 
calculation), can be broken down as 67% crude oil cost, 16% refining, 
6% distribution and marketing, and 11% taxes. Midstream and downstream 
profitability (outside of Midwest refining) is limited, it is the 
upstream that is the main profit generator, and that profit is realized 
in the transaction between the producer and the refiner, not between 
the retailer and the motorist.
    Question 1c. The tightening supply of oil and reduced spare 
capacity has been cited as the major driver for today's price 
increases. Based off our experience of rising oil prices from 2003 to 
2008, how will this market adjust to this tightening supply?
    Question 1d. Because oil companies enjoyed greater profits while 
producing less oil when prices increased from 2003-2008, what incentive 
exists for these companies to produce more in response to a tightening 
market?
    Answer. The Barclays oil equity analysts have estimated that the 
increase in oil company capex plans in 2012 is 11%, and the average 
breakeven price for this investment as required by the integrated group 
is $109 Brent post capex and dividends. Strategy updates from the 
companies imply that in 2012 they are typically basing spending and 
volume projections on a $100 Brent average compared to $75 Brent in 
2011, and the associated increase in capex does seem to imply that 
there is an effective incentive to invest more at higher prices.
 alternative fuels provide competition at the pump, lowering gas prices
    While I appreciate the expert testimony that I think has been 
helpful in understanding the current dynamics of world oil markets, I 
am more interested in real solutions that will lower prices at the 
pump. That's what my constituents care about and probably what every 
American family and business cares about. We know that no amount of 
domestic oil drilling is going to change the world price of oil. AP's 
recent analysis of the last 36 years of data shows there is no 
statistical correlation between how much oil comes out of U.S. wells 
and the price at the pump. Similarly, the EIA found that even the most 
comprehensive domestic drilling proposals would only decrease gasoline 
prices by 3 to 5 cents--and not until 2030. But I think there is less 
awareness that broadening fuel choices can harness the power of free 
market competition to keep a lid of gasoline prices and the price 
volatility that keeps hammering our economy. Simply put, we need to 
prioritize ways to end the monopoly that oil has over our 
transportation system. Alternative fuels, such as methanol and ethanol, 
can compete within an open market. These fuels can be produced from 
domestic energy resources available in every state--including natural 
gas, agricultural waste, energy crops, and even trash--often for less 
than the price of gasoline.
    That finding is clear in the experience Brazil has had with flex 
fuel vehicles (FFVs). In 2008--as the U.S. and most of the world was 
over a barrel with no alternative to $147 oil--90 percent of the 
vehicles on the road in Brazil were FFVs. These were vehicles, many 
made by American car manufacturers, capable of burning blends ranging 
from 100 percent gasoline to 100 percent alcohol. When prices spiked, 
Brazilians made the obvious choice and simply bought more of their 
domestically-produced biofuel than gasoline, which was as much as three 
times the price of alcohol. It only costs around $100 or less to 
manufacture a flex fuel capable vehicle, an investment that will 
quickly be recouped by savings at the gas pump.
    Methanol could be the key to breaking oil's monopoly over the 
transportation system and our foreign oil dependence. That's because 
methanol is easily produced from America's abundant new natural gas 
supplies at the equivalent of $3 per gallon. It can also be produced 
from other domestic resources such as coal and biomass, which could 
keep hundreds of billions of dollars in the American economy rather 
than enriching foreign treasuries. Methanol capable vehicles were first 
produced in the United States in 1980s and are broadly available on the 
Chinese market today. This investment is also an important insurance 
policy against future oil price spikes likely in response to 
international events like Iran shutting down the Strait of Hormuz.
    The U.S. Energy Security Council--the highest level non-
governmental group ever assembled to address our nation's urgent energy 
challenges--believe an Open Fuels Standard is the simplest, least-cost 
approach for reducing the strategic importance of oil, and the 
corresponding liability of gasoline price spikes that wreak havoc on 
our economy and American family budgets. In fact, this Council--a 
bipartisan group of former cabinet Secretaries, Senators, oil company 
and Fortune 500 CEOs--said that making new cars capable of running on 
alternative fuels was the single most important thing Congress can do 
to have a lasting impact on America's energy security.
    So I would like to know what would happen if millions of gallons of 
alternatives to petroleum became available and effectively ended the 
monopoly oil has on our nation's transportation system.
    Question 2a. Let's say that 20 to 30 percent of our nation's 
petroleum demand could be replaced with alternative fuels such as 
methanol derived from natural gas or ethanol from non-food biomass at 
prices less than the current price of gasoline, what impact do you 
think that would have on overall gasoline prices?
    Answer. Depending on the taxation regime, were 20 to 30% of total 
US demand capable of being replaced by competitive alternative fuels, 
that would reduce US oil demand by between 3.5 mb/d and 5.5 mb/d. Were 
that transition achieved over a very short period, the opening up of a 
surplus on the global market should drive prices towards their 
sustainable cost floor close to $80. Were the transition more prolonged 
over years, I would expect damping pressure on back of the curve prices 
but no sudden collapse or structural change in prices at the front of 
the curve.
    Question 2b. Do you think that having competing fuels at the gas 
pump would help lower prices because consumers can switch between 
fuels?
    Answer. The gains from competitive switching at the pump appear 
perhaps more limited than wholesale switching through choice of vehicle 
technology. On current automobile technology and the limits to 
switching with current models, there is the danger that the 
infrastructure costs and duplication might outweigh any competitive 
gains. The margins available for the retail sale of gasoline are thin 
enough as to suggest that there is a danger of losing retailers, 
particularly if they had to bear the cost of increasing pump provision 
and extra storage tanks etc.
    Question 2c. How do continued elevated oil prices, say any level 
above $80 a barrel, make petroleum alternatives more competitive?
    Answer. Sustained prices above $80 could allow some alternatives to 
become competitive, dependent on the relative fiscal regime applied to 
gasoline and alternatives. However, on a pure like-for-like basis, with 
no subsidies for alternatives or relative taxation disadvantages 
against oil, gasoline remains surprisingly competitive relative to many 
alternatives at $80 on a pure energy basis, even before one factors in 
the advantages of the current scale of gasoline and existing 
infrastructure.
                           future oil prices
    My take aways from the witnesses today is that the era of cheap oil 
over, and world demand, particularly in developing countries, is ready 
to take off. That makes sense because the reality is the world today is 
overly dependent on the giant, conventional oil fields discovered back 
in the 1950s and 1960s. The chief economist for the International 
Energy Agency was very direct on this point in an interview in October 
2010. He said,

          ``The era of cheap oil is over. Each barrel oil that will 
        come to market in the future will be much more difficult to 
        produce and therefore more expensive. We all--governments, 
        industry, and consumers--should be prepared for oil prices 
        being much higher than several years ago.''

    Yes, it's true that we can find more oil if we drill deeper and 
deeper and in waters farther away from land. We can also squeeze more 
oil out of more tar sands or shale. But all those options greatly 
increase costs and environmental impacts. It is important to note that 
this supply crunch happens at the very same time world oil demand is 
expected to increase rapidly. According to the International Energy 
Agency, not only will world oil demand grow by 25 percent by 2030, but 
93 percent of new demand will come from non-OECD countries--mainly 
China and India. So not only will there be more people demanding access 
to a shrinking, limited supply of oil, we'll now be fighting with China 
and India who can now afford to bid against us for this finite and 
currently irreplaceable resource.
    Even a top Saudi Arabian energy official recently expressed serious 
concern that world oil demand could peak in the next decade which 
explained why they were working to diversify their country's economic 
base. If the Saudi government is talking about diversifying, I think 
that should be a wakeup call for all of us: we need to be figuring out 
how we diversify A.S.A.P.
    The price of a barrel of oil is roughly the same as the price at 
the beginning of 2008. And today's national average price of gasoline 
is only 20 cents below its highest ever in the summer of 2008 when oil 
reached almost $150 per barrel. Yet few would say our economy is quite 
as robust now as it was then.
    Question 3a. I would be interested in hearing what the panelists 
would estimate the price of oil to be today, given all the new economic 
and geopolitical factors, if our economy was firing on all cylinders 
again?
    Answer. I estimate that global demand growth this year is likely to 
be a bit over 1 mb/d, with Japanese demand growth following their 
nuclear shut downs being the key positive factor within an otherwise 
sluggish OECD pattern. The decline in US demand in 2012 is currently 
placed at 0.22 mb/d, after a 0.34 mb/d decline in 2011. Were the US 
economy to return to pre-2008 rates of growth, oil demand might be in a 
range from flat to higher by 0.3 mb/d. In other words the global market 
might be tighter than it is today by up to 0.5 mb/d even when not 
allowing for the positive spillover effects from an improved US economy 
onto other economies. That would likely be a source of upside pressure 
on prices, perhaps, other things being equal, to levels higher than 
early-2008 but lower than mid-2008.
    Question 3b. I think we are only a few years from the whole world 
being back to 2008 levels of growth or beyond. What will that mean for 
world oil prices within the next five years?
    Answer. In my view there has to be an interplay between global 
growth and oil prices, and current oil prices would be inconsistent 
with substantially higher global growth. If a return to 4.5% global 
growth was factored in, oil market balances would like extremely tight. 
The net result is more likely to be the combination of higher prices 
and some throttling back of global growth.
    Question 3c. Is it safe to say that the era of cheap oil is over? 
Will the average price of oil be over $100 for the foreseeable future, 
unless we have another economic collapse like the one in 2008?
    Answer. The market as a whole does appear to be looking for a long-
term sustainable floor to prices given by the cost of Canadian oil 
sands or marginal US production, currently in the $80 to $90 range. 
That range coincides with consideration of the objectives of key 
producer countries given fiscal positions. Given short term factors 
including geopolitics, I would expect prices to average somewhat higher 
than that sustainable floor. Stress points such as the global economic 
conditions of late-2008 and early-2009 may drive prices below that 
floor, but we would not expect that position to be sustainable. Thus, 
while we may well see periods of low prices, I would not expect to see 
low prices on a sustained basis unless there was a major and unexpected 
technological shock on either the supply or the demand side of the 
market.
     Responses of Paul Horsnell to Questions From Senator Murkowski
                          short term solutions
    Question 1. I know there are no ``silver bullet'' solutions that 
will immediately bring down gasoline prices, but I wonder if you have 
any thoughts about steps that we might take to at least try and 
alleviate some of the pain people are feeling at the pump in the short-
term?
    Answer. In my view the short-term might well sort itself out 
without much in the way of direct market intervention by consumer 
governments. Wholesale gasoline price pressures should recede if the 
start of the main gasoline demand season goes without supply hitches, 
and if the data continues to show relatively good availabilities. In my 
view the gasoline crack (the differential between wholesale gasoline 
and crude oil) was driven up too far on fears of the potential from 
problems (the June crack rose from $15 in December to nearly $35 at the 
start of April, and there is scoop for that crack to compress from 
those peaks. With US retail gasoline prices now lower y/y for the first 
time since late-2009, the upwards momentum in prices does seem to have 
stalled.
                              speculation
    Question 2. My understanding of speculation is that it is as simple 
as people buying and selling a good based on their changing view of 
supply and demand in the future. Would you agree that buying and 
selling conveys information about current and expected future oil 
supply and demand conditions?

          a. What does the current market environment tell us about 
        expectations of future supply and what are the main factors 
        that could change those expectations?
          b. How might the markets perceive a credible commitment to 
        increasing U.S. production by an addition 1 to 2 million 
        barrels, even if it could take 5 years to bring those supplies 
        into production?

    Answer. Yes, it is correct that expectations about future 
fundamentals are reflected in the market, and in the shape of the oil 
price curve over time. At time of writing, the WTI futures curve is 
currently showing about $105 per barrel for prompt delivery, and about 
$85 per barrel for delivery in 2020. That back of the curve price is 
the lowest it has been for three years, and it has fallen by $10 per 
barrel over the course of 2012 so far. In my view that sharp change in 
the shape of the oil price curve and the reduction in longer-dated 
prices reflects a relatively more relaxed market view about future 
availability, and the boom in US production has played a particularly 
important part in that. Given that $10 move down this year, it looks as 
if much of the impact of the potential for US supply has already been 
priced in, and further commitment to that might be a matter of 
consolidating and cementing those gains lest long-term prices start to 
creep up again.
               speculation + recent goldman sachs report
    Question 3. There has been quite a lot of talk lately about a March 
2011 Goldman Sachs report that looked at the impact of speculation on 
the price of crude. A recent Forbes magazine article interpreted the 
report to say that the premium factored into oil prices due to 
speculation is as much as $23.39 a barrel. My staff had the opportunity 
to speak to some folks from Goldman Sachs yesterday who commented that 
Forbes was ``deeply, deeply wrong to mischaracterize their comments in 
this way.'' Can you talk a little bit to the role that speculators play 
in the market and the notion that oil isn't currently trading at its 
``real price''?

          a. Forbes stated in their article that every $10 rise in the 
        price of crude oil translates into a 24 cent rise in the price 
        of gasoline at the pump. Do you agree with this analysis?

    Answer. I suspect the Forbes statement is not the result of any 
statistical analysis and is more of a tautology. There are 42 US 
gallons in a barrel, and rounded to the nearest cent, $10 divided by 42 
is 24 cents. I suspect that the Forbes statement is just that 
tautology, ie if per barrel prices by $10 that is exactly the same as 
per gallon prices rising by 24 cents. It becomes less of a tautology 
when it is a barrel of crude oil being compared to a gallon of 
gasoline, as in the short term crude oil and gasoline prices can move 
apart significantly. However, in the longer term the assumption of full 
pass--through of crude oil costs into gasoline seems a fair one.
    I do believe that oil is currently trading close to its real or 
market clearing price. The clearest evidence of this appears to come 
from global supply and demand balances. After eight quarters of global 
inventory draws, the rise in prices seems to have allowed the global 
market to balance in Q1 at an average Brent price of just over $118 per 
barrel. Were the price inflated by other factors, I would expect to see 
a significant and sustained global surplus of oil, not two years of 
supply deficits followed by a quarter of rough balance. The oil market 
currently trades with plenty of liquidity and innovation, with the 
depth of risk management and market access all along the curve having 
increased significantly. I would see hedge funds as one source of that 
increased liquidity.
    The specialist commodity hedge funds tend to be driven by their 
analysis of supply and demand flows, indeed they tend to be more 
fundamentally driven than many other market participants. In that sense 
supportive global market balances tend to produce a flow of hedge fund 
money to the long side, and those funds tend to go to the short side 
for weaker balances. As of this moment, in my view there is relatively 
little positioning among the specialist hedge funds in oil. Indeed, in 
general many of those funds have had a difficult year, having been long 
last May when prices fell, and having not been long when prices rallied 
at the start of the year. They do not seem to have driven prices over 
the past year in particular. There are also speculative flows in 
natural gas markets, which do not seem to have prevented the 
readjustment in prices downwards in response to a surplus, and I do not 
believe oil would have behaved any differently had there been sustained 
supply surpluses rather than the supply deficits that characterized 
2010 and 2011.
             impact of refinery closures & iran connection
    Question 4. I am particularly interested in the comments you made 
that the abrupt closure of so much North American refinery capacity has 
unsettled the market and led to concerns of tight supplies, at least 
into the early part of the driving season, when more imports make their 
way into that market. You pointed out that there has been a rapid 
buildup in refinery capacity elsewhere in the world, such as China & 
India and I am wondering if you expect that some of our fuel imports 
will come from those countries?

          a. You stated that ultimately imports and the tweaking of 
        logistical issues and bottlenecks will solve the supply 
        problem, and I wonder if you could explain exactly what that 
        means from a practical standpoint?

    Answer. International flows of oil products would certainly 
rebalance, but I would think it unlikely that direct oil products 
exports from China to the US would increase significantly, although the 
Reliance refinery in India could well play a swing role into the US. 
More likely, product exports of all types from Europe into Asia would 
decrease, and the European gasoline surplus would continue to be the 
main balancing item for the US East Coast. The market does seem to have 
shown some unease as to how precisely the logistics of a greater 
reliance on product imports will function. That unease should lessen 
just with the experience of seeing it work, that terminals are flexible 
enough and the inventory cover is large enough to keep the system 
working well even with longer supply chains.
                  market perception of new production
    Question 5. Would you say that the markets react better to ``good'' 
oil projects vs. ``challenging'' oil projects--in other words, is new 
production viewed more credibly when it comes from more fiscally and 
politically stable sources?

          a. What sorts of governmental actions can reduce the fiscal 
        or political stability of an oil producing nation?

    Answer. In my view it does appear clear that the market has taken a 
more interested view of the prospects for upstream growth in the US 
than it has, for example, in the context of the potential for expansion 
of output in Iraq. The former carries less risk of all types, and it 
appears to us that expectations of a 2 mb/d expansion in the US by the 
end of the decade are having a more concrete impact on the oil price 
curve than potentially larger increases in Iraq in the best case 
scenario.
    Question 6. In your opinion, if, ten years ago, the U.S. had scaled 
back its exploration and development so that 2 million fewer barrels 
per day were now online (without assuming any changes to what we have 
witnessed in global supply and demand trends over the same period), 
would that have translated to higher prices today?
    Answer. In a world of plentiful OPEC spare capacity the difference 
might have been marginal, if OPEC had increased output to fill that gap 
and still had a significant cushion of spare capacity. However, an 
extra 2 mb/d requirement from OPEC as of today would seem difficult and 
could even exhaust spare capacity completely. Prices would therefore be 
significantly higher in order to ration demand and create some supply 
buffer.
    Question 7. In your opinion, if, ten years ago, the U.S. had 
increased exploration and development so that U.S. production were now 
at 10 million barrels per day (without assuming any changes to what we 
have witnessed in global supply and demand trends over the same 
period), would that have translated to lower prices today?
    Answer. Yes, the entire oil price curve would be expected to be 
lower under those circumstances. The main endogenous reaction would 
have been from OPEC, and this scenario the increase in US production 
would likely have been matched by OPEC producing less than they 
currently are. However, even if overall supply was no higher, global 
spare capacity would be higher and that would imply downward pressure 
on the oil price curve.
    Question 8. You testified that while 2-300,000 barrels per day 
coming online would probably not make a meaningful difference in 
prices, that 2-3 million barrels per day is ``a big deal.'' Can you 
define ``big deal?''
    Answer. In this context the reference was to supply changes that 
make an observable and immediate change in global oil market balances, 
enough to generate a large enough surplus as to require prices to fall. 
The impact of the discovery of the East Texas oil field on the oil 
market in the early 1930s is an example of such a change. The modern 
oil market is used to fields of 200 thousand b/d coming on stream and 
the price implications of individual new developments tend to be mild. 
However, were 2 mb/d to be brought on stream within a short period, the 
surplus created would likely be such as to either require a sharp 
downwards repricing unless there was a policy-driven matching supply 
cut elsewhere.
    Question 9. Is there any scenario in which major increases in 
production and spare capacity lead to higher prices?
    Answer. The combination of major supply increases and spare 
capacity increases would imply that capacity growth was outpacing 
demand growth, and would therefore generally be associated with lower 
equilibrium prices. The only sustainable reasons why prices might 
possibly not fall would be some step change and significant increase in 
geopolitical risk, and the longer term a scenario of very significant 
increases in costs.
                                 ______
                                 
     Responses of Daniel Yergin to Questions From Senator Bingaman
    Question 1. During a discussion of the effect of tax incentives for 
oil and gas on the price of gasoline prompted by a question from 
Senator Portman (111 minute mark of the recording), Mr. Verrastro noted 
that, all things being equal, removal of $23 billion in incentives over 
ten years would cause the price of oil and gas to increase, but he also 
noted that the effect would likely be small. I am curious to get the 
reaction of the other witnesses to Senator Portman's question--moving 
beyond simple economic theory into an actual analysis of the pricing 
effects. A recent Congressional Research Service Memo to my office will 
be a good starting point. It notes that, in the highly unlikely case 
that oil and gas companies are able to pass on all (and not just a 
portion) of the costs of removing $23 billion in tax incentives over 
ten years, consumers will see only a maximum increase in gasoline 
prices of 1.7 cents per gallon. For a fifteen gallon tank of gasoline, 
that equals twenty-five cents.
    Please comment on the accuracy of this analysis and also on the 
ability of these companies to pass on all of the costs associated with 
a removal of certain tax incentives.
    Answer. I am not familiar with that study and its methodology and 
thus am not in a position to offer an opinion.
    Question 2. Senator Coons (at the 116 minute mark), cited a report 
from DBL investors that 94.6% of federal subsidies over the last 
century have gone to oil and gas production, and nuclear energy. He 
then asked you if that data suggested anything to him about what the 
federal government's path forward should be given its pursuit of an 
``all of the of the above'' energy strategy and move away from high 
gasoline prices. You deferred to Dr. Gruenspecht, mentioning that EIA 
had conducted a study that had reached a much different conclusion.
    The report to which you referred was published by EIA on August 1, 
2011 and entitled ``Direct Federal Financial Interventions and 
Subsidies in Energy in Fiscal Year 2010.'' As I understand it, the EIA 
report is much more limited in scope than the DBL Investors report 
because it only focuses on one year of federal support for energy. 
Further, the year on which it focuses, 2010, contains significant 
``one-time'' spending on energy as a result of the Recovery Act. As a 
result this ``snapshot'' data appears to me to be not at all 
representative of historical U.S. energy policy.
    Could you please offer your thoughts on how federal support for oil 
and gas production over the last one hundred years helped the industry 
develop in the United States, and if renewable energy sources and 
advanced biofuels should be afforded similar long-term preferences in 
order to help develop those domestic markets?
    Answer. I am not familiar with that DBL analysis. There is, of 
course, considerable debate as to what constitutes a ``subsidy'' or an 
``incentive'' and what the difference is between the two!. In past 
decades, the depletion allowance was the best known for the oil 
industry, but it is of little relevance today. Some argue that the 
foreign tax credit constitutes a very large ``subsidy''. The research I 
did for The Prize leads me to think otherwise and that the judgments of 
both the executive and legislative branches in the 1950s confirmed it 
was indeed an appropriate credit.
    The ethanol tax credit, of course, expired at the end of last year, 
but the requirement for biofuels from the 2007 legislation remains. It 
may well need to be adjusted depending on the progress on second 
generation biofuels. Without various forms of subsidies/incentives (and 
state mandates), the wind and solar industry would not be anywhere 
close to where they are today in terms of development. While costs have 
come down greatly, incentives continue to be important to their 
competitive economics.
     Responses of Daniel Yergin to Questions From Senator Cantwell
                          oil company profits
    Question 1. From 2003 to 2008, oil revenues for the top five oil 
companies increased by 86 percent while profits increased by 66 
percent. Yet oil output by the five major oil companies over this same 
time period declined by more than 7 percent, from 9.85 million to 9.12 
million barrels per day. These additional profits were not earned as a 
result of additional production effort on the part of the oil companies 
but due almost entirely to the record crude oil prices, which are set 
in the world oil marketplace.
    Combined, it's been literally a trillion-dollar decade for the oil 
and gas giants. From 2002 to 2011, ExxonMobil gained $310 billion, 
Shell $204 billion, Chevron $152 billion and BP $147 billion--despite 
its loss year because of the 2010 Gulf of Mexico oil spill. As the 
price of oil rose, company revenues and profits soared with ExxonMobil 
eventually becoming the most profitable corporation in the history of 
American industry.
    That's a really good return for an era of volatile, but 
significantly lower oil prices than we are seeing today and are likely 
to see in the future.

          a. Given that the 5 major oil companies made over a trillion 
        dollars in profits over the last decade--and that's profits, 
        not revenues--and their cost of production is still around $11 
        per barrel, what do you estimate their profits will total over 
        the next decade?
          b. And when it comes to gas prices, many of my constituents 
        complain about oil company profits. From an oil producer's 
        perspective, how much profit is there in each gallon of $4 gas?
          c. The tightening supply of oil and reduced spare capacity 
        has been cited as the major driver for today's price increases. 
        Based off our experience of rising oil prices from 2003 to 
        2008, how will this market adjust to this tightening supply?
          d. Because oil companies enjoyed greater profits while 
        producing less oil when prices increased from 2003-2008, what 
        incentive exists for these companies to produce more in 
        response to a tightening market?

    Answer. The companies you cite, between 2000 and 2011, had net 
income of $970 billion, and their capital investment over the same 
period was $1.02 trillion. They paid income taxes, on an aggregated 
basis, at 43 percent. What also helps to bring these numbers into 
perspective is that upstream capital costs in the first quarter of 2012 
were almost two and a half times higher than they were in 2000. In 
other words, your ``going in'' costs for a new oil field in 2012 would 
be more than double even what they were in 2004.
    Tight spare capacity leads to higher oil prices. The market adjusts 
to higher prices through increased efficiency, substitution, and 
development of alternative supplies. Price shocks can have e very 
negative economic impacts. (The Quest, pp. 181-83). And that's a big 
worry for our economy right now.
 alternative fuels provide competition at the pump, lowering gas prices
    Question 2. While I appreciate the expert testimony that I think 
has been helpful in understanding the current dynamics of world oil 
markets, I am more interested in real solutions that will lower prices 
at the pump. That's what my constituents care about and probably what 
every American family and business cares about. We know that no amount 
of domestic oil drilling is going to change the world price of oil. 
AP's recent analysis of the last 36 years of data shows there is no 
statistical correlation between how much oil comes out of U.S. wells 
and the price at the pump. Similarly, the EIA found that even the most 
comprehensive domestic drilling proposals would only decrease gasoline 
prices by 3 to 5 cents--and not until 2030. But I think there is less 
awareness that broadening fuel choices can harness the power of free 
market competition to keep a lid of gasoline prices and the price 
volatility that keeps hammering our economy. Simply put, we need to 
prioritize ways to end the monopoly that oil has over our 
transportation system. Alternative fuels, such as methanol and ethanol, 
can compete within an open market. These fuels can be produced from 
domestic energy resources available in every state--including natural 
gas, agricultural waste, energy crops, and even trash--often for less 
than the price of gasoline.
    That finding is clear in the experience Brazil has had with flex 
fuel vehicles (FFVs). In 2008--as the U.S. and most of the world was 
over a barrel with no alternative to $147 oil--90 percent of the 
vehicles on the road in Brazil were FFVs. These were vehicles, many 
made by American car manufacturers, capable of burning blends ranging 
from 100 percent gasoline to 100 percent alcohol. When prices spiked, 
Brazilians made the obvious choice and simply bought more of their 
domestically-produced biofuel than gasoline, which was as much as three 
times the price of alcohol. It only costs around $100 or less to 
manufacture a flex fuel capable vehicle, an investment that will 
quickly be recouped by savings at the gas pump.
    Methanol could be the key to breaking oil's monopoly over the 
transportation system and our foreign oil dependence. That's because 
methanol is easily produced from America's abundant new natural gas 
supplies at the equivalent of $3 per gallon. It can also be produced 
from other domestic resources such as coal and biomass, which could 
keep hundreds of billions of dollars in the American economy rather 
than enriching foreign treasuries. Methanol capable vehicles were first 
produced in the United States in 1980s and are broadly available on the 
Chinese market today. This investment is also an important insurance 
policy against future oil price spikes likely in response to 
international events like Iran shutting down the Strait of Hormuz.
    The U.S. Energy Security Council--the highest level non-
governmental group ever assembled to address our nation's urgent energy 
challenges--believe an Open Fuels Standard is the simplest, least-cost 
approach for reducing the strategic importance of oil, and the 
corresponding liability of gasoline price spikes that wreak havoc on 
our economy and American family budgets. In fact, this Council--a 
bipartisan group of former cabinet Secretaries, Senators, oil company 
and Fortune 500 CEOs--said that making new cars capable of running on 
alternative fuels was the single most important thing Congress can do 
to have a lasting impact on America's energy security.
    So I would like to know what would happen if millions of gallons of 
alternatives to petroleum became available and effectively ended the 
monopoly oil has on our nation's transportation system.

          a. Let's say that 20 to 30 percent of our nation's petroleum 
        demand could be replaced with alternative fuels such as 
        methanol derived from natural gas or ethanol from non-food 
        biomass at prices less than the current price of gasoline, what 
        impact do you think that would have on overall gasoline prices?
          b. Do you think that having competing fuels at the gas pump 
        would help lower prices because consumers can switch between 
        fuels?
          c. How do continued elevated oil prices, say any level above 
        $80 a barrel, make petroleum alternatives more competitive?

    I disagree with the argument that U.S. oil production has no impact 
on the world market. If U.S. production had not risen by 18 percent--
almost a million barrels per day--since 2008, we would have had a 
perilously tight oil market that would have put our economy at great 
risk.
    Answer. Your emphasis on Brazilian experience is very important. ( 
For a discussion of the Brazilian experience and its relevance to the 
United States, please see pages 651-55 of The Quest. It describes the 
introduction of the flex-fuel vehicles). Actually, the ethanol share of 
the Brazilian motor fuel market relative to gasoline has declined 
recently owing to the high price of sugar. In addition, Brazil has had 
to import ethanol from the United States.
    The development of Brazilian ethanol is a significant development, 
important both for Brazil and world markets. But it helps to keep it in 
perspective. The United States currently produces about two-and-a-half 
times the amount of ethanol as Brazil. Moreover, just the increase 
alone in Brazilian oil production since 2000 is twice the country's 
total output of ethanol.
    In the United States, it is generally thought that there are land 
and food constraints that limit significant further growth in 
conventional ethanol. It is now an important component in U.S. motor 
fuel supply--almost 10 percent on a volumetric basis. (On an energy 
basis, its share is lower).. But there is also generally thought to be 
a blend wall in terms of further ethanol use in engines. Despite the 
high hopes for second generation biofuels, none have yet emerged that 
meet the tests of scale and cost. However, it significant that the 
research and investment effort continues, and many different groups are 
trying to find competitive solutions.
                           future oil prices
    Question 3. My take aways from the witnesses today is that the era 
of cheap oil over, and world demand, particularly in developing 
countries, is ready to take off. That makes sense because the reality 
is the world today is overly dependent on the giant, conventional oil 
fields discovered back in the 1950s and 1960s. The chief economist for 
the International Energy Agency was very direct on this point in an 
interview in October 2010. He said,
    ``The era of cheap oil is over. Each barrel oil that will come to 
market in the future will be much more difficult to produce and 
therefore more expensive. We all--governments, industry, and 
consumers--should be prepared for oil prices being much higher than 
several years ago.''
    Yes, it's true that we can find more oil if we drill deeper and 
deeper and in waters farther away from land. We can also squeeze more 
oil out of more tar sands or shale. But all those options greatly 
increase costs and environmental impacts. It is important to note that 
this supply crunch happens at the very same time world oil demand is 
expected to increase rapidly. According to the International Energy 
Agency, not only will world oil demand grow by 25 percent by 2030, but 
93 percent of new demand will come from non-OECD countries--mainly 
China and India. So not only will there be more people demanding access 
to a shrinking, limited supply of oil, we'll now be fighting with China 
and India who can now afford to bid against us for this finite and 
currently irreplaceable resource.
    Even a top Saudi Arabian energy official recently expressed serious 
concern that world oil demand could peak in the next decade which 
explained why they were working to diversify their country's economic 
base. If the Saudi government is talking about diversifying, I think 
that should be a wakeup call for all of us: we need to be figuring out 
how we diversify A.S.A.P.
    The price of a barrel of oil is roughly the same as the price at 
the beginning of 2008. And today's national average price of gasoline 
is only 20 cents below its highest ever in the summer of 2008 when oil 
reached almost $150 per barrel. Yet few would say our economy is quite 
as robust now as it was then.

          a. I would be interested in hearing what the panelists would 
        estimate the price of oil to be today, given all the new 
        economic and geopolicial factors, if our economy was firing on 
        all cylinders again?
          b. I think we are only a few years from the whole world being 
        back to 2008 levels of growth or beyond. What will that mean 
        for world oil prices within the next five years?
          c. Is it safe to say that the era of cheap oil is over? Will 
        the average price of oil be over $100 for the foreseeable 
        future, unless we have another economic collapse like the one 
        in 2008?

    Answer. If the world economy were ``firing on all cylinders'', the 
world oil price would likely be higher--especially at a time when U.S. 
and European policy is to squeeze down Iranian oil exports.
    As always when projecting future prices, one must be alert to 
``surprises'' that change the picture. But the growth of demand from 
the emerging markets is the dynamic element in the world oil market. 
The United States has already reached ``peak demand''. It will be a 
challenge to meet the needs of these markets as their populations enter 
``middle income'' and start buying automobiles, etc. Fortunately, the 
U.S. auto fleet is going to become more efficient, which has worldwide 
impact. Recent developments in supply--tight oil in the United States, 
oil sands in Canada, and Brazilian off-shore--create somewhat more 
confidence about meeting the challenge of demand. As you suggest, price 
is signaling the need for new supplies, alternatives, and greater 
efficiency. But many of the constraints to developing new supplies are 
above ground.
    U.S. oil production is up almost 20 percent since 2008. Had that 
increase not taken place, we would undoubtedly be looking at 
considerably higher oil prices.
      Response of Daniel Yergin to Question From Senator Murkowski
                          short term solutions
    Question 1. I know there are no ``silver bullet'' solutions that 
will immediately bring down gasoline prices, but I wonder if you have 
any thoughts about steps that we might take to at least try and 
alleviate some of the pain people are feeling at the pump in the short 
term?
    Answer. Much of what happens in the oil industry is long-term in 
nature. But we are seeing the rapid development of shale gas and tight 
oil. Facilitating the growth of tight oil in North America would be 
helpful. Understanding--and helping to relieve--logistical bottlenecks 
for new supplies is another step. Getting more supplies into the market 
on a global basis would be immediately helpful. Encouraging efficiency 
in the operation of federal government vehicles would be a contribution 
on the demand side.
                              Appendix II

              Additional Material Submitted for the Record

                              ----------                              

                            Congressional Research Service,
                                                    March 28, 2011.

                               MEMORANDUM
To: Senator Jeff Bingaman

Attention: Ryan Martel

From: Molly Sherlock, Specialist in Public Finance, 7-7797

Subject: Repealing Tax Incentives for Major Integrated Oil and Gas 
Companies: An Analysis of the Repeal Big Oil Tax Subsidies Act (S. 
2204)

    This memorandum responds, on an expedited basis, to your request 
for an analysis of the Repeal Big Oil Tax Subsidies Act (S. 2204). As 
discussed during our conversation on March 27, 2012, this memorandum 
provides the following information. First, the revenues that would be 
generated by repealing certain tax incentives for oil and gas are 
reviewed. Second, how these revenues might result in increased gas 
prices for consumers is discussed. Third, these revenues are compared 
to net income levels in recent years for affected companies.
    The Repeal Big Oil Tax Subsidies Act (S. 2204) would modify and 
repeal certain oil and gas related tax incentives.\1\ The proposed 
changes would only affect major integrated oil companies.\2\ 
Specifically, this legislation would: 1) modify the foreign tax credit 
rules for dual capacity taxpayers that are major integrated oil 
companies; 2) prevent major integrated oil companies from claiming the 
Section 199 production activities deduction for oil and gas related 
activities;\3\ 3) limit the deduction for intangible drilling costs 
(IDCs) for major integrated oil companies; 4) fully disallow percentage 
depletion for major integrated oil companies;\4\ and 5) disallow the 
deduction for tertiary injectants for major integrated oil companies.
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    \1\ Details on oil and gas related tax provisions that would be 
repealed can be found in Department of the Treasury, General 
Explanations of the Administration's Fiscal Year 2013 Revenue 
Proposals, Washington, DC, February 2012, http://www.treasury.gov/
resource-center/tax-policy/Documents/General-Explanations-FY2013.pdf.
    \2\ A major integrated oil company is defined in the Internal 
Revenue Code (IRC) as being one with average daily worldwide production 
of crude oil of at least 500,000 barrels, as having gross receipts in 
excess of $1 billion, and as having a 15% of greater ownership interest 
in a crude oil refiner. Generally, major integrated oil companies are 
believed to be the ``big 5,'' ExxonMobil, Chevron, BP plc, Royal Dutch 
Shell, and ConocoPhillips.
    \3\ For more information on this provision, see CRS Report R41988, 
The Section 199 Production Activities Deduction: Background and 
Analysis, by Molly F. Sherlock.
    \4\ Integrated oil companies have generally not been able to claim 
percentage depletion since 1975. While this bill proposes to prevent 
major integrated oil companies from claiming percentage depletion, the 
JCT has estimated that this measure would have no revenue effect.
---------------------------------------------------------------------------
    The Joint Committee on Taxation (JCT) has estimated that repealing 
the tax provisions listed above for major integrated oil companies 
would generate $24.0 billion in revenues between 2012 and 2022. More 
than 90% of the revenues would be raised through repeal of two of the 
five provisions listed above: modifications to the dual capacity rules 
and limitations on the Section 199 deduction. Over the ten-year period 
spanning 2013 through 2022, the JCT has estimated that additional 
revenues would increase by $23 billion or on average $2.3 billion per 
year.
    Repealing tax incentives for oil and gas will result in higher tax 
payments for affected companies. These higher tax payments reflect the 
statutory incidence of the tax incentives. The economic incidence of 
the tax is determined based on how the tax affects prices in markets 
for oil and gas and related products. Oil companies facing higher tax 
burdens may pass this additional cost forward to consumers, increasing 
prices for refined petroleum products (e.g., gasoline). Alternatively, 
affected companies may not be able to fully pass forward higher tax 
burdens to consumers. If the burden cannot be passed forward, oil and 
gas companies will see a reduction in their own profits, with the 
burden of the tax being borne primarily by shareholders.\5\ The purpose 
of this memorandum is not to provide a full analysis of the potential 
impact on markets from repealing oil and gas tax incentives in S. 
2204.\6\ Instead, the purpose of this memorandum is to relate the 
magnitude of the tax revenues that would be raised by repealing these 
provisions to markets for gasoline and profits of affected 
companies.\7\
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    \5\ This assumes that the incidence of the corporate tax is borne 
primarily by owners of capital. Some smaller portion of the burden of 
the corporate tax is likely borne by labor. For additional background 
on corporate tax incidence, see Jennifer C. Gravelle, Corporate Tax 
Incidence: A Review of Empirical Estimates and Analysis, Congressional 
Budget Office, Working Paper 2011-01, June 2011, http://www.cbo.gov/
sites/default/files/cbofiles/ftpdocs/122xx/doc12239/06-14-2011-
corporatetaxincidence.pdf.
    \6\ The potential market impacts of repealing certain oil and gas 
related tax provisions are discussed in CRS Report R42374, Oil and 
Natural Gas Industry Tax Issues in the FY2013 Budget Proposal, by 
Robert Pirog.
    \7\ Tax provisions that affect profits, rather than incremental 
costs or revenues, are generally believed not to affect output. Both 
the Section 199 deduction and dual capacity provisions are taxes on 
profits. Thus, from this perspective, repealing these two provisions 
that account for 90% of the revenues generated in S. 2204, would not 
affect crude oil output. With no tax-induced change in oil production, 
gas prices would not change.
---------------------------------------------------------------------------
    Some may be concerned that repealing tax incentives may lead to 
higher gasoline prices. In 2011, the U.S. consumed nearly 6.9 billion 
barrels of crude oil and petroleum products.\8\ Of this, nearly 3.2 
billion barrels was gasoline. Thus, in 2011, the U.S. consumed 
approximately 133.9 billion gallons of gasoline.\9\ If U.S. prices on 
gasoline had been $2.3 billion higher in 2011, this would have 
translated into a 1.7-cent per gallon price increase. In 2011, the 
average price of a gallon of gas was $3.58.\10\ If total consumer 
spending on gasoline had been $2.3 billion higher in 2011, the average 
price of a gallon of gas would have been 0.48% higher.
---------------------------------------------------------------------------
    \8\ U.S. Energy Information Administration (EIA), Petroleum & Other 
Liquids, Product Supplied, data available at: http://www.eia.gov/dnav/
pet/pet_cons_psup_dc_nus_mbbl_a.htm.
    \9\ There are 42 U.S. gallons in a barrel.
    \10\ U.S. Energy Information Administration (EIA), Motor Gasoline 
Retail Prices, U.S. City Average, available at: http://www.eia.gov/
totalenergy/data/monthly/pdf/sec9_6.pdf
---------------------------------------------------------------------------
    While the numbers above may be instructive for understanding 
potential magnitude of the proposed changes in oil and gas tax 
incentives, these figures should not be taken as predictions of market 
prices should oil and gas tax incentives be repealed. First, the 
figures above assume that all of tax revenues gained by repealing tax 
incentives for oil and gas companies would contribute to higher 
gasoline prices, which is very unlikely to be the case.\11\ In reality, 
crude oil is an input for many products, gasoline being just one. If 
the burden of the tax was spread across all crude oil, petroleum, and 
gas-related products, the increase in the price of gasoline would be 
less. Second, integrated oil and gas companies may not pass the 
benefits of tax incentives forward to consumers. Instead, these tax 
benefits may instead contribute to corporate profits.
---------------------------------------------------------------------------
    \11\ For a repeal of tax incentives to increase gasoline prices, 
the repeal of tax incentives would have to result in reduced crude oil 
production. Provisions that affect taxes on profits, such as the 
Section 199 deduction, are unlikely to change current output decisions 
and current production levels.
---------------------------------------------------------------------------
    In 2011, total net income (profits) for the five major oil 
companies was $132.9 billion.\12\ For these five companies, net income 
in 2011 was higher than it had been in recent years. Between 2007 and 
2011, net income averaged $98.8 billion (ranging from $63.7 billion in 
2009 to $132.9 billion in 2011). If tax burdens on these five companies 
were to increase, on average, by $2.3 billion per year, and profits 
were roughly $98.8 billion per year, the revenues raised would 
represent roughly 2.3% of profits for the major integrated oil 
companies. Reduced profits mean reduced returns for shareholders, and 
could potentially depress wages in the sector. However, given the 
magnitude of the tax incentives relative to industry profit levels, 
these effects are likely to be small.
---------------------------------------------------------------------------
    \12\ See CRS Report R42364, Financial Performance of the Major Oil 
Companies, 2007-2011, by Robert Pirog.
---------------------------------------------------------------------------
    Ultimately, the price of gasoline depends on a number of 
factors.\13\ The price of crude oil is a primary factor explaining the 
price of gasoline. In the short run, tax policy is unlikely to affect 
production of crude oil, since current production is a function of past 
investment decisions. Over time, tax incentives that encourage 
investment might support additional production capacity. High market 
prices, however, will also create an incentive for capital investment 
to increase production capacity. The small size of the tax incentives 
relative to market prices and industry profits suggests that changes to 
these tax incentives are not likely to have a large effect on the oil 
and gas industry.\14\
---------------------------------------------------------------------------
    \13\ For additional background, see CRS Report R42382, Rising 
Gasoline Prices 2012, by Neelesh Nerurkar and Robert Pirog.
    \14\ For a full economic analysis of the market effects of 
repealing tax incentives for oil and gas, see Maura Allaire and Stephen 
Brown, Eliminating Subsidies for Fossil Fuel Production: Implications 
for U.S. Oil and Natural Gas Markets, Resources for the Future, Issue 
Brief 09-10, December 2009, http://rff.org/RFF/Documents/RFF-IB-09-
10.pdf.
---------------------------------------------------------------------------
                                 ______
                                 
                                Edwards Energy Consultants,
                                          Katy, TX, March 29, 2012.
Energy and Natural Resources Committee Office,
304 Dirksen Senate Building, Washington, DC.
Attn: Allison Seyferth

    I am concerned that the testimony of Howard Gruenspecht as 
presented to the committee today may be grossly misleading. He 
attributes the increase in gasoline and diesel prices entirely to 
increases in the cost of crude when his own figures contained in his 
testimony show that refiners' profit margins increased significantly as 
well.
    On the second page of his testimony he states ``Recently crude oil 
price increases have eclipsed other impacts on petroleum product 
prices, including any downward effect stemming from recent weakness in 
U.S. gasoline and diesel demand. While both gasoline and diesel prices 
rose 37 cents per gallon from February 2011 to February 2012, the cost 
of crude oil to refiners rose by about $20 per barrel (48 cents per 
gallon) over the same period. Figures 2 and 3 show U.S. retail prices 
for gasoline and diesel fuel along with refiners' average crude oil 
costs, illustrating the significant impact of crude oil prices on 
product prices.''
    The numbers shown on the Figures 2 and 3, referred to by Mr. 
Gruenspecht, are not the same as his stated values. The increases in 
gasoline and diesel fuel, as shown on his own figures, were about 68 
cents per gallon and 55 cents per gallon, respectively, about 22 cents 
per gallon more than Mr. Gruenspecht stated. Had he used the correct 
numbers he would have had to explain the justification for the 
additional price increase that occurred, which was more than the 
increase in the cost of crude. That justification is important and its 
exclusion and his obscuring this fact are troublesome.
    The trend in product price increases greater than crude costs 
continues to an even greater extent this year. Since the end of last 
year the wholesale price of gasoline has increased 60 cents per gallon 
while the price of crude has increased less than 20 cents per gallon. 
Thus refining profits represent two-thirds of the gasoline price 
increase. Is there a valid justification for a profit margin increase 
of this magnitude in light of declining demand and stringent economic 
times? Should not these facts be highlighted rather than obscured by 
mis-statement?
    I hope my comments are helpful. If you wish further detail or 
explanation, please contact me.
            Best regards,
                                        William R. Edwards.

                                    

      
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