[Senate Hearing 114-309]
[From the U.S. Government Publishing Office]
S. Hrg. 114-309
THE POTENTIAL MODERNIZATION OF THE STRATEGIC PETROLEUM RESERVE AND
RELATED ENERGY SECURITY ISSUES
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HEARING
BEFORE THE
COMMITTEE ON
ENERGY AND NATURAL RESOURCES
UNITED STATES SENATE
ONE HUNDRED FOURTEENTH CONGRESS
FIRST SESSION
ON
THE POTENTIAL MODERNIZATION OF THE STRATEGIC PETROLEUM RESERVE AND
RELATED ENERGY SECURITY ISSUES
__________
TUESDAY, OCTOBER 6, 2015
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Printed for the use of the
Committee on Energy and Natural Resources
______
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COMMITTEE ON ENERGY AND NATURAL RESOURCES
LISA MURKOWSKI, Alaska, Chairman
JOHN BARRASSO, Wyoming MARIA CANTWELL, Washington
JAMES E. RISCH, Idaho RON WYDEN, Oregon
MIKE LEE, Utah BERNARD SANDERS, Vermont
JEFF FLAKE, Arizona DEBBIE STABENOW, Michigan
STEVE DAINES, Montana AL FRANKEN, Minnesota
BILL CASSIDY, Louisiana JOE MANCHIN III, West Virginia
CORY GARDNER, Colorado MARTIN HEINRICH, New Mexico
ROB PORTMAN, Ohio MAZIE K. HIRONO, Hawaii
JOHN HOEVEN, North Dakota ANGUS S. KING, JR., Maine
LAMAR ALEXANDER, Tennessee ELIZABETH WARREN, Massachusetts
SHELLEY MOORE CAPITO, West Virginia
Karen K. Billups, Staff Director
Patrick J. McCormick III, Chief Counsel
Tristan Abbey, Senior Professional Staff Member
Angela Becker-Dippmann, Democratic Staff Director
Sam E. Fowler, Democratic Chief Counsel
Scott McKee, Democratic Professional Staff Member
C O N T E N T S
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OPENING STATEMENTS
Page
Murkowski, Hon. Lisa, Chairman, and a U.S. Senator from Alaska... 1
Cantwell, Hon. Maria, Ranking Member, and a U.S. Senator from
Washington..................................................... 21
WITNESSES
Moniz, Hon. Ernest, Secretary, U.S. Department of Energy......... 23
Blair, Adm. Dennis C., USN (Ret.), Former Director of National
Intelligence and Commander-in-Chief, U.S. Pacific Command and
Co-Chair, Commission on Energy and Geopolitics, Securing
America's Future Energy........................................ 64
Book, Kevin, Managing Director, ClearView Energy Partners, LLC... 75
Bordoff, Jason, Founding Director, Center on Global Energy
Policy, and Professor of Professional Practice in International
and Public Affairs, Columbia University........................ 88
Ladislaw, Sarah, Director and Senior Fellow, Energy and National
Security Program, Center for Strategic and International
Studies........................................................ 99
ALPHABETICAL LISTING AND APPENDIX MATERIAL SUBMITTED
Blair, Adm. Dennis C.:
Opening Statement............................................ 64
Written Testimony............................................ 67
Responses to Questions for the Record........................ 125
Book, Kevin:
Opening Statement............................................ 75
Written Testimony............................................ 78
Responses to Questions for the Record........................ 127
Bordoff, Jason:
Opening Statement............................................ 88
Written Testimony............................................ 90
Cantwell, Hon. Maria:
Opening Statement............................................ 21
Ladislaw, Sarah:
Opening Statement............................................ 99
Written Testimony............................................ 102
Moniz, Hon. Ernest:
Opening Statement............................................ 23
Written Testimony............................................ 25
Responses to Questions for the Record........................ 117
Murkowski, Hon. Lisa:
Opening Statement............................................ 1
A Turbulent World: In Defense of the Strategic Petroleum
Reserve dated July 27, 2015................................ 2
Wyden, Hon. Ron:
Statement for the Record..................................... 130
THE POTENTIAL MODERNIZATION OF THE STRATEGIC PETROLEUM RESERVE AND
RELATED ENERGY SECURITY ISSUES
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TUESDAY, OCTOBER 6, 2015
U.S. Senate
Committee on Energy and Natural Resources
Washington, DC.
The Committee met, pursuant to notice, at 10:37 a.m. in
Room SD-366, Dirksen Senate Office Building, Hon. Lisa
Murkowski, Chairman of the Committee, presiding.
OPENING STATEMENT OF HON. LISA MURKOWSKI, U.S. SENATOR FROM
ALASKA
The Chairman. Good morning. I call this hearing of the
Committee to order.
We have a lot of ground to cover this morning. We have a
couple excellent panels of witnesses, so let us begin.
We are honored and pleased to once again have before the
Committee the Secretary of Energy, Dr. Ernest Moniz. Welcome
back. It is always good to see you.
We have an opportunity this morning to talk about the
Strategic Petroleum Reserve (SPR) and other energy security
related issues. Back in July, I prepared for the Committee a
report on the Strategic Petroleum Reserve, A Turbulent World:
In Defense of the Strategic Petroleum Reserve. If I must say so
myself, it is pretty darn good. [Laughter.]
[The information referred to follows:]
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The Chairman. I would recommend it to you all if you have
not had an opportunity to read it.
We have some pretty unparalleled opportunities here in the
United States with regards to our oil and our oil production.
While it is good and strong, I think it is important that we be
ever vigilant in this area. OPEC's spare capacity has fallen,
unplanned production outages persist in Iraq, in Libya and
elsewhere and further trouble always seems to lurk just over
the horizon.
The Strategic Petroleum Reserve remains critical to our
nation's energy security, and it is an asset. You will hear me
repeat, as often as I possibly can, that this is about a
national security asset.
I think it is important that we focus on the energy
security aspect of it. It is an insurance policy, absolutely.
It is a source of leverage and stability for us from a
geopolitical perspective, absolutely.
While I believe it should be modernized, I think the
question that many of us have asked is, what exactly does
modernization really mean? I am going to make four brief points
this morning in that direction.
The Administration proposes some $2 billion in new funding
for SPR life extension projects and to improve marine
distribution capability. I think that these proposals merit
careful consideration by the Committee. I look forward to
hearing from Secretary Moniz as he makes the case on these.
I had an opportunity back in July to tour one of our
Strategic Petroleum Reserves, and I think that ensuring
operational effectiveness of the Reserve should be a first
priority for us. We cannot let these lapse into disrepair so
that they cannot fulfill the purpose which is intended and
again, taking us back to energy security.
Second, the Administration is also studying the creation of
petroleum product reserves on the West Coast. This is PADD 5
and on the East Coast, PADD 1. I am not opposed, in principle,
to building additional product reserves, but I do have some
reservations about them. Petroleum products have a much shorter
shelf life than crude and a much more direct impact on the
American consumer. Guarding against the use of the SPR for
political purposes, I think, should be an enduring concern for
all of us.
Third, I am also not opposed, in principle, to revising the
emergency release authorities as the Administration and some of
my colleagues have proposed, but generally, I am wary of
proposals that expand the power and the ability of the Federal
Government to intervene in the free market. Any sort of
``preemptive release'' clause must be very carefully examined.
While the Quadrennial Energy Review briefly discusses this
proposal, I do not think that the Administration has, as of
this point in time, made a convincing case for new authority. I
look forward to the discussion on that as well.
The final point, and I raised this in the white paper that
we released in July, the Strategic Petroleum Reserve does not
necessarily exist in a vacuum. Up in Alaska the Trans-Alaska
Pipeline (TAPS) is another vital piece of energy infrastructure
and it too is vital to our national security, yet we are seeing
its throughput decline at a deeply troubling pace. TAPS must
operate for decades to come. We have got the resources in our
state to ensure that it does.
I think when we are talking about energy security our focus
should be broad in evaluating our energy security, pursuing all
of our options, including further increases in domestic
production.
I am going to close my comments again by reiterating that
we call it the ``Strategic Petroleum Reserve'' for a reason. As
the name suggests, we hope never to use it. We hope to use it
as that strategic reserve, but we keep it around for good
reason. In the event that something happens, if there is an
event, whether it is in the Straits of Hormuz or wherever it
may be, in case the world slips and we find ourselves in need,
we need to know the strategic asset, this national energy
security asset, is there.
I have said before that it would be a mistake to treat the
reserve as anything but a reserve. It is not an ATM for new
spending or a vestige of our national energy policy. If we
begin to treat it as that, I think, we risk selling at the
wrong time, at the wrong price and losing its substantial
benefits.
So again, I am looking forward to having a good discussion
about energy security in this context with not only the
comments from the Secretary, but our second panel as well.
With that I will turn to Ranking Member Cantwell.
STATEMENT OF HON. MARIA CANTWELL, U.S. SENATOR FROM WASHINGTON
Senator Cantwell. Thank you Madam Chairman, and thank you
for holding this hearing on modernization of the Strategic
Petroleum Reserve and related energy security issues. I thank
Secretary Moniz and the other witnesses for joining us for this
very important discussion. I especially want to thank the
Secretary for his leadership on the Quadrennial Energy Review,
which is an important document that helps frame the discussion
of our nation's energy policy priorities and infrastructure
needs.
In July, this committee successfully reported out the
Energy Policy Modernization Act on a bipartisan basis. Senator
Murkowski and I had many discussions about the pieces of that
legislation but there was one thing that we could easily agree
on. And that was the critical importance of the Strategic
Petroleum Reserve.
Forty years ago, we created the Strategic Petroleum Reserve
to prevent economic and security impacts of crude oil supply
disruptions. That's exactly what had happened with the Arab oil
embargo in 1973. The 1975 law that created the SPR specifically
authorizes the president to draw down the SPR, if he or she
determines there is a severe energy supply interruption. The
core policy reason for the reserve hasn't changed since then-
nor should it.
The Strategic Petroleum Reserve is our most important,
Federal, energy security asset. We need it just as much today
as we did then. Perhaps even more so, given the energy market
volatility we have seen over the past decade. The global oil
markets may have changed--but so have the nature of the threats
to the infrastructure, which is so key to our economic and
national security.
We make commitments to the International Energy Program,
and supply interruptions could happen at any time. Whether it's
response to volatility somewhere else in the world or a natural
disaster like hurricanes, we are seeing with increasing
frequency devastation to our critical energy infrastructure. So
you just never know when you may need to use the oil in the
SPR.
Even with more U.S. oil being produced today, we need to
have emergency crude oil contingency plans.
There are several immediate and medium-term geopolitical
risks capable of rendering severe or even catastrophic oil
supply losses, such as possible attacks on major Middle East
supply nodes or routes, major weather events, or severe
disruptions originating in places like Nigeria or Venezuela.
Any of these situations could result in major disruptions and
trigger an SPR drawdown.
Our colleagues on this committee are quite familiar with
the findings of the Quadrennial Energy Review (QER).
The report notes that, ``Challenges remain in maximizing
the energy security benefits of our resources in ways that
enhance our competitiveness and minimize the environmental
impacts of their use....the network of the oil distribution has
changed significantly.''
The QER explains that the Strategic Petroleum Reserve's
ability to protect the U.S. economy from severe economic
impacts in the event of a supply emergency or associated price
spike has been diminished by infrastructure congestion--
literally, the congestion of too much product not being able to
get the product to where we want and when we want.
In fact, the Department of Energy did a test sale in 2014
and identified a series of challenges within the SPR
distribution system. Investments are needed to modernize the
SPR to make sure the infrastructure has the ability to respond.
The SPR is in need of $2 billion worth of repairs and
upgrades. However, it is estimated that the $2 billion
investment to modernize the SPR can help save the U.S. economy
approximately $200 billion in the event of a sustained and
large oil supply disruption.
So we'll hear from Secretary Moniz about some of these
issues--about the fact that some of the salt caverns were built
in the 1930's and that some of them raise issues of their
integrity. At least two caverns have been taken offline. Some
of the wells are more than 60 years old. We need to invest in
above-ground infrastructure like water, brine disposal, power
distribution systems and physical security--all the things that
will help us respond to an emergency.
And because pipelines have essentially reversed direction
of flow since the SPR was built 40 years ago, that's where this
issue of congestion comes in and a strategy of how are we going
to deal with that congestion to make sure that we are going to
get product to the market, so it would have the intended impact
that we would like it to have.
So once again, I thank the Secretary Moniz for his work on
the QER--a long process but a good roadmap for telling us what
we need to do to improve our infrastructure--not just on the
SPR, but on other issues as well. And I thank the chair for
holding this important hearing.''
The Chairman. Thank you, Senator Cantwell.
At this time we will turn to the Secretary of Energy, Dr.
Ernest Moniz.
Welcome to the Committee. We look forward to hearing from
you about this very important national energy security asset.
STATEMENT OF HON. ERNEST MONIZ, SECRETARY, U.S. DEPARTMENT OF
ENERGY
Secretary Moniz. Thank you, Chairman Murkowski, Ranking
Member Cantwell, and distinguished members of the Committee. I
have submitted a fairly detailed testimony, so I will just make
a few summary comments here to open up the discussion.
Clearly we need an energy security policy based on 21st
century energy market changes, challenges, vulnerabilities and
needs. Its key components are a modernized SPR configured to
enable appropriate draw down and distribution capacity, energy
infrastructure, the resilience and reliability including
emergency response and a broader concept of energy security to
include our international engagements, our allies and our
partners.
I'll touch on the latter two points very briefly and make a
few more comments on the petroleum reserve.
As you have both said, it's our nation's most central
Federal energy security asset, and it should be treated as
such. Some have concluded that selling large volumes of oil
from the SPR for purposes not related to energy security will
have no or little impacts on its energy security benefits, and
I do not subscribe to those views. In fact, I believe the SPR
remains an extremely powerful and valuable energy security
tool.
As we evaluate the energy security value of the SPR we must
take into account several factors including, this is
particularly relevant--relative to 1975, the change nature of
oil markets since the SPR was established. We are linked to the
global market, we are exposed to global prices and including
disruption driven global price spikes, and these historically
have had significant economic impact even if there is little
direct impact on our imports today.
Second, our international commitments not only our
obligation of 90 days of import protection but also another
international obligation which is based upon oil use, not oil
imports, and that is our obligation based upon the last data to
provide 43 and a half percent of the amount of a total
coordinated OECD response to a disruption. So again, I think
it's important to emphasize that we have an import obligation
and an oil use dependent obligation.
And then third, the actual distribution capacity of the
SPR. The 2014 test sale did identify a significant gap between
the SPR's drawdown and distribution capacities. Much of that is
driven by what's happened in the last several years in terms of
the changed scale and geography of our oil production.
To address disruption scenarios a key need would be our
ability to get SPR oil onto the water to supply coastal
refineries.
Changing markets and international commitments are not the
only concern with the SPR. Like much of our publicly supported
infrastructure the SPR needs additional investment to maximize
its value. In this case funding in three distinct areas.
One is deferred maintenance. The President's budget for
Fiscal Year 2016 proposes a major down payment on the backlog
of SPR deferred maintenance, cutting it in half. Unfortunately
the House and Senate Appropriation bills marks, if enacted,
would not support that. Indeed we might be going in the wrong
direction in terms of increased deferred maintenance.
Second, life extension. Almost 40 years old and some
caverns are much older than that. The SPR needs a significant
life extension program to ensure its effectiveness for decades
to come in such areas as crude oil transfer and security.
And third, modernization. We also need to modernize the SPR
to accommodate, again, the dramatically different locations and
volumes of domestic oil production and changes in global oil
markets.
The Quadrennial Energy Review, a QER, that's been alluded
to, released in April, examined what the SPR would need to
protect the U.S. economy in an energy supply emergency. As
already stated, roughly $2 billion are needed, about $800
million for life extension and about $1.2 billion for
modernization such as dedicated marine terminals to respond
quickly in emergencies.
The return on these could be huge. A study out of Oak Ridge
suggests that, for example, adding about two million barrels
per day distribution capacity could save our economy in a major
disruption tens of billions of dollars, up to $200 billion
depending upon the nature of the disruption.
So we need a robust SPR to guard against the economic harm
of such a major disruption, and this is not theoretical. If we
look at many events in the Middle East, including just last
week the Russian military intervention in Syria, adding another
element of geopolitical uncertainty in that entire region.
Just to finish with a couple of words on energy
infrastructure, resiliency and reliability. This was discussed
extensively in the QER. This is challenging.
Our existing infrastructure is not always well matched to
our supplies. We have aging facilities prone to failure. We
have climate change impacts that we must guard against which
put many facilities at risk. And of course, we have enhanced
concerns about cyber and physical attacks that could take a
heavy toll. The QER had over 60 recommendations for addressing
infrastructure needs.
Finally, just to end by saying that a collective approach
to energy security in the international sphere is what we need
today. This situation in Ukraine and growing European
dependence on a dominant supplier of energy is what stimulated
a lot of discussion within the G7 plus EU in terms of this
collective responsibility. I've just returned from the G20
Energy Ministers Meeting in Istanbul where this dialog
continues, and the reality is that this is an important and
sensitive time in this arena. It's a time when we are, in fact,
encouraging other major countries to buildup their petroleum
reserves to work collectively with ours. And so, I think, we
need to be very careful about the signals we send today in
terms of collective energy security.
I appreciate the opportunity to come here and look forward
to the discussion and to working further with the Committee.
[The prepared statement of Secretary Moniz follows:]
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The Chairman. Thank you, Mr. Secretary.
Your concluding words are the ones that I find most
intriguing. You are over in Europe, you are in Istanbul at the
G20, you are working in this collective approach that you have
been talking about with our G7 or EU allies and the focus is on
improving energy security from a broader perspective. You come
home from that meeting and the discussion here is the Congress
is looking to sell off parts of that strategic reserve that we
are encouraging other nations to participate in, to again,
build out and enhance this collective energy security.
Tell me how this works when the United States is trying to
persuade China, trying to persuade India, to participate in
these international energy security conversations? Isn't it a
little bit hypocritical for us, as a country, to be saying come
on in and yet we are basically treating our energy security
asset as the cash machine here?
Secretary Moniz. Well of course we are, as you know, and as
called for in a product of your Committee, we are carrying out
a strategic study which we expect to finish next May basically,
in terms of what we need to do in terms of the size and the
authorities of the petroleum reserve.
Now without those I am not going to talk about a specific
size. But the fact is that, as I said, that the markets are
totally different today than they were in the 70's. The real
issue is a major disruption that leads to a substantial price
excursion which affects all of us. And that's why we are
working with China and by the way, the collaboration is
excellent. They have come and visited our SPR. We have a visit
to their developing SPR in November. They are building up
toward a 500 million barrel petroleum reserve in China. India
is building up reserves as well.
So again, as I said earlier, I think this is a time of
considerable geopolitical uncertainty and what we need is a
more unified international collective response to the economic
risks we would all face.
The Chairman. I would certainly hope that we would agree
that we need a consistent response too. We cannot ask them to
move forward in this collective approach while at the same time
we are weakening our own energy security cushion, if you will.
I appreciate you saying you cannot comment on the right
sizing of the SPR at this point in time. You are going through
the studies. I was walked through all of the varied layers of
analysis that will be part of that review, but wouldn't it be
premature for us to be selling off portions of the reserve
before we have that considered analysis, before we really know
what the right size is, before we really understand how aspects
of this modernization need to proceed?
Secretary Moniz. Well I would certainly assume that that's
why Congress has asked us to do the study.
The Chairman. Well.
Secretary Moniz. Was to be able to have a detailed and
significant analysis. And this analysis is being performed with
many, both analytical companies and universities to bring
together, I think, the first really integrated strategic look
in a very, very long time.
The Chairman. And a very necessary...
Secretary Moniz. And we certainly would like to have that
answer.
The Chairman. A very necessary review. I think it is
something that we asked for a reason, and I would certainly
hope that we would take advantage of this considered review
before we weaken our ability to utilize the recommendations
that come with this.
Right now we have a mindset here in this Congress, and I,
unfortunately, even with your guidance here, even within the
Administration, that says we need this money now because we
need to spend it on a transportation bill, and if we do not
spend it on a transportation bill somebody is looking for
another bill on the House side. They have already identified it
for research in the healthcare world.
We are looking at this as nothing more than a cash machine
at a time when we are looking for more money, and I think that
this is wrong and irresponsible.
I believe very, very strongly that what we need to do is
make sure that as we move to modernize, as we move to make sure
that we have that strong energy asset, we do not erode our
ability to utilize it in the time of an emergency when we do
not know what is going on. We do not know what may come next,
but we know that if we drained it out and we do not have the
flexibility to move when we need it then there is going to be a
lot of fingers pointing saying where did it go? I think part of
what we are trying to ascertain here is what is it that we need
and how can we be smart with this as our energy asset?
Senator Cantwell?
Senator Cantwell. Thank you, Madam Chair, and thank you,
Mr. Secretary, again, for your work on the document that helped
produce the focus here.
Explain why the 90-day requirement should not be the only
consideration that we should be looking at when we are talking
about modernization?
Secretary Moniz. Well, Senator Cantwell, again, the 90 days
is certainly an international obligation based upon imports.
But as I said, we also have an international obligation based
upon the use and that is the 43 and a half percent of draw down
capacity for a coordinated response.
But second, beyond the international obligations I just
believe it's in our best interest to have a very strong
petroleum reserve. That is what gives us the flexibility to
respond if there is a very major disruption. And we have had
brainstorming sessions, workshops, with external experts
looking at what are the risks of major disruptions and they
certainly are there, major disruptions, perhaps more than three
million barrels a day, for example, suddenly disrupted. And by
the way, the risk also of multiple disruptions because things
could be linked.
So, as I said, that has the expected impact of a major
price spike in those cases. We are in a situation with a
diminished global reserve capacity, and so it's being able to
use government stocks in a rapid way that could ameliorate the
economic harm that we might face.
Senator Cantwell. Do you think the President should have
new authority in this area?
Secretary Moniz. Well we have said that in the QER it
raised the issue of a variety of authorities. Some of them are
very specific such as with the two product reserves they have
very, very different authorities for use. And we think that
should be harmonized within the petroleum reserve.
But then there are more, bigger policy issues, such as how
one defines what a major disruption is in the sense of having
the ability to respond when there is likely to be a major price
spike as opposed to after there's been a major price spike. So
those are the kinds of policy issues that I think we need to
discuss in terms of looking at authorities appropriate to what
is now a genuine global market in contrast to the market of the
1970's.
Senator Cantwell. In the Quadrennial Energy Review you also
talked about and we had a couple of votes here in Committee
about commodity congestion--the inability for utilities to even
get products, based on the competing commodity needs. So I
think the Quadrennial Review does a pretty good job of
outlining the fact that we need to improve there as well. I
wish people here would swim in their own lanes when it comes to
these things, but usually that is not how the legislative
process works. Clearly we have to do both. Is that correct? We
have to improve infrastructure commodity passage or as my
colleague from Minnesota who is not here at the moment talked
about the fact that utilities in Minnesota who have
requirements to serve their consumers could not get their coal
supply actually to them because of commodity congestion. That
is the same problem, the underlying issue here is about the oil
market. So it is getting the oil and getting other commodities
to market takes both an infrastructure improvement and a
modernization of the SPR. Is that correct?
Secretary Moniz. Yes, it does. And there, in terms of the
SPR modernization, yes, there is a congestion issue in terms of
the Gulf of Mexico. But that issue, as you say, is much, much
broader than that in terms of our energy infrastructure. I
believe there has been some progress, for example, with regard
to the train congestion. I met with the CEO of one of the major
railroads, BNSF, and understood the steps that they are taking
to try to not have a repeat of those kinds of issues.
So I think there's a lot of work going on in the private
sector, but the fact is we haven't yet caught up to the
incredible increase in our gas and oil production from new
geographies. We also have things like large crops, etcetera,
all coming together to lead to some congestion.
So in the QER in addition to specific energy
infrastructure, we also had recommendations because it was an
Administration-wide document. We also had shared
infrastructures that all commodities use as part of the focus
as well.
Senator Cantwell. Thank you.
Thank you, Madam Chair.
The Chairman. Senator Barrasso?
Senator Barrasso. Thank you very much, Madam Chair.
Welcome back.
As you talk about the role that energy plays in our
national security, global security, in your testimony you
advocate for an expanded view of energy security that broadly
encompasses the needs of the United States, our allies and
trading partners. You go on to say the crisis in Ukraine
highlighted the vulnerability of our European allies to
increasing reliance on a single dominant supplier for much of
its energy supplies. You explained, it is not only true in
regard to natural gas, but also crude oil. Your words. You cite
the European Commission's finding that some European refineries
are optimized for using Russian crude, and the EU refining
capacity is increasingly in the hands of a shrinking number of
Russian owners.
So I am encouraged the Administration continues to approve
U.S. liquefied natural gas exports, but I question about the
Administration, why it seems to be dithering when it comes to
crude oil exports. Do you agree the U.S. crude oil exports
would benefit the energy security of our allies and trading
partners and if not, why not?
Secretary Moniz. Well, sir, again, first I think, it's
important that we do distinguish, you had this discussion
before, I think, in terms of the natural gas and oil situations
in the United States being quite different. In natural gas we
are, of course, I mean, we, with some Canadian imports,
although those have gone down too. We are essentially self
sufficient and our export will very shortly start the exports
with LNG out of the lower 48.
On oil it's still very different where we are a seven
million barrel a day importer of crude oil, a much greater
exporter now of oil products, of course.
So the specific issue raised, as you well know, it's in the
responsibility of the Department of Commerce to make that
policy judgment. But it is also true that recent studies
including the last summary study of the EIA on the
congressionally requested studies on exports show that the
impacts for the next 10 years or so are likely to be pretty
modest, to put it mildly, in terms of exports.
Senator Barrasso. Because I guess I would ask if that is
your litmus test if crude oil imports have to get to zero or
near zero before the Administration would support crude oil
exports because we all know that much of our nation's refining
capacity really was built to handle heavy crudes that are
imported from outside the United States, not what is being
produced in the United States right now as a result of
technological advances and with fracking and how we get to this
oil. It is very different in terms of what our refining
capacity is. But is that your litmus test? We have to get to
zero of imports before we can export what is essentially a
different product.
Secretary Moniz. No, sir, I did not say that. Of course, we
should emphasize again, we are exporting. I think it's now four
million barrels, maybe a bit more, of product. That goes to
South America and Europe, so they are getting the benefit of
our increased production. That's the first point. I've
forgotten my second point now. [Laughter.]
Secretary Moniz. The product, okay, maybe that was----
Senator Barrasso. Last month the White House Press
Secretary said we will not support legislation like the one
that has been put forward by Republicans, but last week the
Senate Banking Committee advanced legislation introduced by
Senator Heitkamp, a Democrat, to repeal the crude oil export
ban.
It does not seem the Administration supports efforts to
move this bill according to the White House spokesperson. Does
the Obama Administration oppose all legislative efforts to
repeal this crude oil ban?
Secretary Moniz. Well the, by the way, I thought of my
other point.
Senator Barrasso. Oh, good.
Secretary Moniz. Which was on the additional production of
light oil. The fact is that when you look at spreads, Brents,
WTI, Louisiana Light, it's hard to argue that there's been a
lot of production being hemmed in by current rules.
Secondly, I would note again, of course, commerce, again,
is responsible. They have taken two steps. One was the ruling
on lightly processed, high API oil to be exported as a product.
Secondly, more recently, the approval of the swap with Mexico
of light for heavy.
So I think the Commerce has taken steps to address this and
it's on their desk in terms of any further steps.
Senator Barrasso. When you talk about production being
hemmed in, of course that means jobs lost in the United States
in the oil industry from people that are actually out there
working, trying to just make a living and put food on the
table. So it is a consideration for our economy.
Secretary Moniz. But Senator, again, the evidence today is
that this is not occurring. The EIA's analysis would say that
if there were substantially greater production in the United
States somewhere up north of 12, then there might become an
impact there. But right now the evidence does not suggest a
major impact.
Senator Barrasso. Final question. The Nord Stream pipeline
running from Russia to Germany under the Baltic Sea circumvents
Eastern Europe. I understand a number of Eastern European
leaders have expressed opposition to expanding Nord Stream. I
do not know if that came up at your recent meeting. But what,
if any, steps is this Administration taking to stop the
expansion of Nord Stream?
Secretary Moniz. Well, of course, we are working with our
European colleagues both at the national level and at the
European Commission level. The European Commission has made it
very clear in their energy security plan that they are looking
for diversification of supply which the Nord Stream would not
do.
We have been advocates and frankly, to answer your
question, yes, these were discussed a few days ago in with the
G20. We remain, for example, very strong advocates of getting
Caspian gas into Europe, through the Southern corridor that
needs additional interconnections. Greece to Bulgaria,
etcetera.
In addition we're very interested in, don't have a direct
role, but we maintain the discussions in terms of the
production and monetization of Eastern Mediterranean gas,
Israeli, Cypriot and of course, Egypt now, potentially with a
major find.
I think those are the issues that really add to diversity
of supply and would increase European energy security.
Senator Barrasso. Thank you.
Thank you, Madam Chairman.
The Chairman. Thank you.
Senator Manchin?
Senator Manchin. Thank you, Madam Chairman, and thank you,
Mr. Secretary, for being here and I appreciate your input.
Sir, you just mentioned that we have about seven million
barrels a day of imports that we depend on, and that is going
to stay, I think EIA even forecasts are about four million even
way up into the future.
Secretary Moniz. Of crude oil?
Senator Manchin. Of crude oil, coming into the United
States of America, right?
Your predecessor, Secretary Chu was here, and I asked him a
question. I said, about coal to liquids since we have 250
million known reserved tons of coal and what I think, two
barrels of oil can be produced from one ton of coal. Now that
is about 500 million barrels of reserves and I think Saudi
Arabia only has about 260 billion barrels of reserves. Sooner
or later we are going to have to use the resources we have not
to be dependent on foreign oil. If you use the coal to liquids
incorporated with biomass feed stock he believed it would have
a neutral, if any, a reduction of carbon footprint. Do you feel
the same about that? I mean if we would advance that type of
technology? The only thing we are considering is asking for a
pilot project to show that we can do it.
Secretary Moniz. So, Senator Manchin, first of all I think
the interesting technology prospect it would be coal with
carbon capture and potentially biomass feed stock together.
Senator Manchin. Yes, CBD.
Secretary Moniz. Theoretically possibly even become
completely carbon neutral or negative.
Senator Manchin. Negative.
Secretary Moniz. Potentially.
Senator Manchin. Right.
Secretary Moniz. In terms of the biomass part. So these
are, these kinds of conversion technologies are being
researched right now. As with a number of technologies there's
a ways to go on terms of cost.
Senator Manchin. You are claiming from the investment from
a pilot project?
Secretary Moniz. Yes, no, so I think on the research side,
I think, this is the kind of potential, you know, home run
that----
Senator Manchin. The State of West Virginia, as you know,
would be very much interested in using and developing this
pilot project.
Secretary Moniz. Right, right.
Senator Manchin. With the DOE because we think down the
road you are going to, with the Bakken and all that kind of
leveling out, we are going to have to have an energy policy
here that does not make us more dependent on foreign oil.
Secretary Moniz. Yes, I might also add that, our military
has also been interested in exploring this technology.
Senator Manchin. Yes and I think they have used it in B52s
and found that it performed extremely well, if not better, than
the conventional fuel.
Secretary Moniz. Yes, I think making the fuel to, as a
perfectly replaceable fuel.
Senator Manchin. Yes.
Secretary Moniz. Is certainly possible.
Senator Manchin. Well, sir, I would hope.
Secretary Moniz. So we can talk about that.
Senator Manchin. Yes, I hope that you would consider that
because the whole State of West Virginia will continue to do
the heavy lifting if you help us, work with us.
With that being said, on the export of crude I know my
concern was this with the export of crude. It is hard to go
home and explain why we would be exporting when, basically, the
prices here can be so volatile.
But the more you look into it, I thought if we did it from
a strategic standpoint, I think in the legislation that the
Chairman has been moving, it makes a lot of sense to me. I
support it wholeheartedly. It moves it strategically and also
gives the President a chance to use a trigger and basically
stop the export if the oil prices spike here and the pump price
goes up.
Would it not be advantageous for us to use our strategic
oil, using it basically to help our allies not be dependent on
the oils around the world that do not benefit us and revenues
that are used against us, strategically? If you looked at
export strategically?
Secretary Moniz. Well, again, the again, to repeat. We,
again, we are significant net, significant net importers of
crude oil or we are importers.
Senator Manchin. Right.
Secretary Moniz. Of crude oil, and we are major exporters
of oil products.
So the issue is, for example, okay, if I take the Mexico
situation. There, as I said earlier, Commerce approved a swap
of light for heavy. So it was a question of grade, in this
case, because the Mexican refineries are quite short of light
oil. So that's a case where there was a good match between a
swap. Okay?
But also as I said earlier the reality is, in terms of the
big picture, the current oil market analysis does not suggest
that there is an inability, for example, of the American
refining system to handle the light oil at least at today's
production levels. So again, the EIA analysis really requires a
seasoned impact only when the production gets significantly
larger, and you see that in terms of the spreads of the various
prices.
As far as price goes, by the way, it's again worth
repeating. Another EIA result of, I forget, maybe six months
ago, part of the series of five that the Congress requested.
And that it showed, pretty clearly, that our domestic product
prices, like gasoline, are linked to the global price and not
to the domestic price of say, WTI.
Senator Manchin. Yes, well, I thank you, sir. My time is
running out.
I would just say that the State of West Virginia would be
very interested in partnering up with the Department of Energy
for a coal biomass to liquid with carbon capture. We think we
can show it can be done. It can be a tremendous advantage for
our country and put us, strategically, in a position, I think,
that would make us independent, very much independent of
foreign oil.
Secretary Moniz. I'm happy to follow that up with you,
Senator Manchin.
Senator Manchin. Thank you, sir.
Secretary Moniz. Yup.
The Chairman. Let us go to Senator Cassidy.
Senator Cassidy. Mr. Secretary, I want to point out that we
could do a lot for train congestion moving crops to market by
building the Keystone XL pipeline as the State Department
reports said would save workers lives and lower carbon
footprint. I do not know why we don't, but nonetheless, it is a
political decision.
You, in your testimony, repeatedly referred to the relative
sea level rise in the Central part of the Gulf Coast which is
Louisiana. I emphasize ``the relative'' because it is
subsidence, as you point out in your testimony, much more so
than it is rising sea levels.
So just to put it on record, will you agree that we should
take whatever steps we can to make Louisiana's coast line more
resilient so that as these LNG export facilities are being
built they are not going to get wiped out, as you mention on
page 13, or the refinery capacity, you spoke of going down
after Hurricanes Rita and Katrina, were preserved even in the
setting of another storm? Is that a fair statement?
Secretary Moniz. Absolutely. The Gulf is, obviously, as you
well know, absolutely a critical energy hub for the whole
country. And the coastline issues, the storm surge issues, are
very, very important for the Gulf and therefore, I think, for
the country's energy system.
Senator Cassidy. Thank you for saying that.
I will point out that both Senator Cantwell's energy
statement as well as the Department of Interior's would take
the money that Louisiana is slated to receive under the GOMESA
program which by our state's constitution has to be used for
coastal restoration and redirects it elsewhere. If you will, it
removes the very resources needed to increase that resilience
that you, several times in your testimony, point the national
importance thereof.
So thank you. I did not mean to set you up on that, but it
just so flows. [Laughter.]
Secretary Moniz. I----
Senator Cassidy. It just so flows that it is just like I
cannot understand why people concerned about sea level rise are
taking resources away from Louisiana which are so critical to
our nation's infrastructure.
Next, one of the things, oh, by the way, this is also in
the EIA report. It also points out that there have been spreads
as much as $20 in the relatively recent past between Brent and
WTI. Now, as we know, Louisiana Light Sweet typically sells at
a premium relative to Brent and so the report, just to point
out, when you say significantly it is not astronomic. It goes
up to 13.5 million barrels per day by 2025 which would actually
be a reasonable increase. We certainly have the capability to
do that, and it does point out that if we did so and we
exported oil, gasoline prices would fall for the American
consumer. So we have to point out that if we lift the export
ban, gasoline prices fall. I am not sure, but that might have
been a little bit lost. You did not intend to obfuscate that,
but it may have been a little lost in what you were saying.
So----
Secretary Moniz. If I may comment, Senator Cassidy? I do
want to emphasize again, the 13 and a half million barrels a
day production was in the high resource case, not in the
reference case.
Senator Cassidy. Correct.
Secretary Moniz. So and the high resource case without a
low price is the one where one got a significant, about a
400,000 barrel a day impact, as I recall.
Senator Cassidy. Yes, but also it pointed out that----
Secretary Moniz. In that high case.
Senator Cassidy. I think it is the Aspen Institute, but it
was echoed by Larry Summers who said that if we allow oil
exports we could increase the American GDP by as much as 1
percent by 2020 resulting in hundreds of thousands of jobs.
Those are the blue collar workers who are independent of the
decreased price of gasoline. I will point that out again, the
Aspen Institute, Larry Summers, both touting that we could
increase GDP by 1 percent and that would be really good for the
average American family right now.
Granted it might not happen just because of market
conditions, but if it does occur we increase GDP, we lower
gasoline prices, and we create more American jobs. Again, it
just seems like something we should be doing.
Let me ask one more thing, and this is purely out of
curiosity. Chris Smith, I think it was, testified to Energy and
Commerce last April. He made a statement which I do not quite
follow. He says, ``the impacts of overall supply disruption of
global oil markets would have the same effect on domestic
petroleum product prices regardless of U.S. import levels or
whether or not U.S. refineries import crude oil from disrupted
countries.''
Now I am all for the SPR but I have to admit I read that in
preparation for this hearing and I was thinking what is the
purpose of the SPR if there is no lessening of the impact upon
us? Do you follow what I am saying? I can show you the quote.
It is from Chris Smith's testimony and, for everybody else's
reference, he is the Assistant Secretary.
Secretary Moniz. Yes.
Senator Cassidy. I know you know. [Laughter.]
Secretary Moniz. I would have to discuss his quote with
Chris Smith. But let me just say that, again, the issue of a
SPR use in the current market could be very important even in
some scenarios of major disruptions where the disruption is not
to our direct imports. It's actually----
Senator Cassidy. I get that. It is global.
Secretary Moniz. That actually we'd have to have
incremental barrels from the SPR get in there to back out some
of those imports so that the global market can be rebalanced.
Senator Cassidy. Well, I told----
Secretary Moniz. So I'm not sure if that's what he was
discussing or not.
Senator Cassidy. It just seemed like kind of counter to the
whole thing, but looking at this quote and if you can get back
to us.
Secretary Moniz. Okay.
Senator Cassidy. Thank you all.
Secretary Moniz. Certainly.
Senator Cassidy. I yield back.
The Chairman. Senator Stabenow?
Senator Stabenow. Well thank you, Madam Chair.
First, thank you for holding this hearing. I could not
agree with you more in your comments, as well as our Ranking
Member, about the fact that the SPR should be kept for energy
security and infrastructure investments and the idea of doing
one offs for some other bill makes absolutely no sense. So
thank you very much for holding the hearing.
Let me also say that I think this really is a long game. I
think we would all agree with the fact that when we look at
energy security it is about the long game. Whether it is the
Strategic Petroleum Reserve or frankly if it is how we expedite
LNG exports or ending restrictions on U.S. exports of crude
oil, these really are all the long game for us in terms of our
country and where we go.
I just have one comment and I do not know, Mr. Secretary,
if you would want to respond to this. But it seems interesting
to me that we are talking about selling off reserves right now
when prices are so low. It seems like, from a purely financial
standpoint, a taxpayer dollars standpoint, that we would want
to be selling off reserves when prices are high not when they
are low. It seems like even from a financial standpoint this
does not make any sense. I do not know if you have analyzed it
from that standpoint but----
Secretary Moniz. Well I would just observe that with the
2014 test sale, I would say we sold high and we bought low.
[Laughter.]
Senator Stabenow. Yes, my point, Okay.
Let me ask something slightly different on energy security,
but a very, very important piece of this as we look at all of
our infrastructure, and that is something that has impacted
Michigan very directly. The safety of our pipelines and
particularly in the area of oil pipelines we have had, as you
know, a devastating pipeline break back in 2010, the largest
domestic cleanup, $1.2 billion to clean up the Kalamazoo River.
It was just a disaster.
Now we have a situation where we are very, very concerned,
people all over Michigan, the state is concerned, about a 62-
year old pipeline that runs under the Mackinac Straits that
connects Lake Michigan and Lake Huron that if, in fact there
was a break, would devastate the Great Lakes, 20 percent of the
world's fresh water. There have been a number of different
models that have been done of what this would mean, but it is
devastating.
Senator Peters and I introduced legislation to address the
safety concerns around the pipelines that run throughout the
Great Lakes both under the water as well as along the water
line, and I understand that accelerating natural gas pipeline
replacements is one of the 60 actions of the Quadrennial Energy
Review recommendations as it relates to enhancing energy
infrastructure. I know that PHMSA has direct safety oversight
as it relates to oil pipelines, but is there an opportunity for
the Department of Energy to help modernize as well as improve
the safety of oil pipelines because it is going to serve no one
if we have these pipelines breaking whether it is from a safety
standpoint, environmental standpoint or from an energy security
standpoint?
Secretary Moniz. Well Senator Stabenow, I think you've
obviously raised a critical question in terms of the aging of a
lot of our energy infrastructure, gas pipes, oil pipes in this
case, etcetera. So I personally think that we need a national
commitment to really upgrade our infrastructure and while doing
it also make it much more resilient to the kinds of risks that
we are seeing.
Now as far as DOE and the specific area, as you said, PHMSA
has the responsibility and Secretary Fox is certainly very
concerned about this. We do work with PHMSA in providing,
essentially, technical assistance. So our laboratories, for
example, work with them on that. We don't have the regulatory
authority but we do provide technical assistance.
Senator Stabenow. I would just say, Madam Chair, that as we
look at infrastructure, I would hope, as we are talking about
upgrading pipelines and so on, that we include safety, even
though it has a broader jurisdiction across other agencies. The
whole question of what is happening in terms of the lines,
obviously, has very broad implications and again is something
that we are deeply concerned about given what happened back in
2010. In 2010 in Michigan we saw the devastation, and we want
to make sure our pipelines are working and that they are safe.
Thank you.
The Chairman. Thank you, Senator Stabenow.
Senator Portman?
Senator Portman. Thank you, Madam Chair. Thanks for holding
the hearing today on SPR. Dr. Moniz, thanks for appearing
before us and for our conversation last night.
We have talked a lot today about SPR in relation to energy
security and national security. I want to talk to you about
another energy and national security issue, and that is having
a domestic source of enriched uranium.
You have said consistently when you dab a domestic source
for our nuclear navy, for our nuclear arsenal, particularly the
production of tritium which comes from lowly enriched uranium,
also for our commercial power plants and of course, for our
efforts at non-proliferation around the world to be able to
offer a source. I am very concerned, as you know, about the
fact that we seem to be pulling the plug on our ability to have
that enrichment capability.
I am also concerned about the cleanup at the Piketonsite. I
was very concerned when warn notices were given to about 500
employees at the Piketon plant. We also have about 236
employees who are with the new technology, the American
Centrifuge project, who were affected by those warn notices.
They could have been laid off by the end of this month.
When I was at Piketon about 10 days ago I got a chance to
speak to employees there. They are frustrated. They are angry,
understandably, and so am I, particularly by the total surprise
on the American Centrifuge announcement with regard to the new
technology.
For 3 years now we have been requesting two things from the
Administration, two very simple things. One, tell us how much
you need to complete the funding consistent with the
commitments that you all have made. Second, give us a plan, a
long term plan, for the funding of the cleanup. Unfortunately
the Department of Energy has done neither.
In 2008 candidate Obama made specific commitments to
support the plant and cleanup the site quickly. He talked about
the fact when it goes long you increase the costs. It has undue
environmental risk, as he said. I totally agree with him.
In 2009 DOE made a Secretarial commitment to the community
to accelerate the cleanup and complete the work by 2024. That
was a Secretarial commitment made to us. The DOE press release
at the time said the agency was accelerating the cleanup, among
other things, in an effort to jump start the local economy and
create jobs. The community is now being told that the cleanup
will not be completed until 2044 at the earliest. They are
saying between 2044 and 2050.
The Federal Government has a responsibility, obviously, and
a commitment to clean up this site. It has got to be cleaned up
so that the site can be redeveloped, and it has to be cleaned
up for the safety of the community. As the President said in
his comments and, of course, it has to do so to be sure we
would make and keep the commitment to the work force and the
local economy which is already troubled.
Last week Congress passed a spending bill, as you know,
which funded the government until December 11th, 2015. A number
of us worked on this, and we got language in that bill that
includes additional funding authority for the cleanup and for
the American Centrifuge plant for the layoff, to keep the
layoffs from happening while the CR continues in operation.
If you could give me a yes or no answer on these questions
I would appreciate it. First, does DOE intend to use the
funding authority we have in the CR to spend at the FY'15
levels for the D and D work done at the gaseous diffusion plant
to prevent the involuntary layoffs from happening on the
cleanup side?
Secretary Moniz. As we discussed we are getting close to
finalizing a plan where we think we can accomplish the
avoidance of involuntary layoffs on the D and D work, hopefully
for the entire fiscal year, but it does depend upon our
receiving the House mark.
Senator Portman. I am talking about the CR. Are you saying
that between now and December 11th there will not be layoffs?
Secretary Moniz. Well, so the plan that we're finalizing is
to, yes, avoid involuntary layoffs during the CR. It entails
risk for the rest of the year to----
Senator Portman. I am going to get to the rest of the year.
Secretary Moniz. Oh, okay.
Senator Portman. I need a commitment to just yes or no on
using the authority we have given you in the CR.
Secretary Moniz. Again, we're finalizing the plan. We're
getting very close. That is what I am----
Senator Portman. Dr. Moniz, you cannot even give us a
commitment that there will not be layoffs between now and
December 11th?
Secretary Moniz. I feel very confident that we will get
there. I need a little more time to finish the plan and notify
the contractor, but that's what we are working toward, no
involuntary layoffs during the CR for the D and D work.
Senator Portman. Well that is a surprise, because I thought
we had a commitment from you all during the CR at least not to
have any layoffs. We have been given the authority. We worked
hard to get this language in there.
Secretary Moniz. The issue, again, the issue is one of
risk. And that's why we want to be very open with you, as I was
last night, that if we make----
Senator Portman. Last night you were talking about next
steps which is after December 11th. You were not talking about
the CR.
Secretary Moniz. No, they are linked.
Senator Portman. I am concerned about this.
Secretary Moniz. They are linked and----
Senator Portman. Well, obviously we would like to see----
Secretary Moniz. We are----
Senator Portman. I was going to ask you about the
commitment after that, and I appreciate your interest in
suggesting last night that you would, indeed, be willing to put
an anomaly.
Secretary Moniz. Yes, we are----
Senator Portman. For the----
Secretary Moniz. All I am going to say, Senator, again, we
are finalizing the plan that will not have involuntary layoffs
in D and D through the CR with the idea that that will continue
for the rest of the year if we get the House mark. That's the
situation.
Senator Portman. Well, that is of course what we all hope
for.
Secretary Moniz. Right.
Senator Portman. And beyond that we need to have that
commitment that in your budget for next year which you are
already preparing which is going to be here in the House and
Senate right after the first of the year that you will have
adequate funding in there. Last year you underfunded it by
about $80 million.
Can you give us a commitment that you will have in the
President's budget for the next fiscal year, Fiscal Year 1917,
adequate funding for cleanup?
Secretary Moniz. Well I cannot discuss the FY'17 budget at
this stage. That is clear.
We are trying to get adequate funding for all of our
cleanup activities, and right now it's hard to fit everything
into the budget box.
Senator Portman. Your cleanup request in this last Fiscal
Year was $80 million less than what was appropriated by
Congress in FY'15. Again, we are talking about extending the
cleanup even further, more and more layoffs, if you all do not
put in your budget the funding that you have committed to over
time, not just the President, but the Secretarial commitment.
We are talking about just keeping the funding at least level so
there is some certainty and predictability at the site. I do
not think that is too much to ask.
Secretary Moniz. I have every intention, hope, to do
exactly that but I cannot discuss the FY'17 budget until we've
gone through all the tradeoffs and working with, as you know
very well, with OMB on this.
Senator Portman. So with regard to the cleanup itself we
cannot even get a commitment on the CR. That concerns me a lot.
But a commitment for you to try to work with us on both the CR
and beyond the CR with regard to having an anomaly in the
longer term budget whether it is an omnibus or a CR or some
combination.
With regard to the new technology, the American Centrifuge
project, again, I was surprised, as were the workers at the
site, to learn that you were planning to pull the plug on the
new technology. This is the only domestic source. You have
testified before this Committee in the past that we need to
have a domestic source of enriched uranium to support our
nuclear weapons program and our nuclear naval reactor program.
Have you changed your mind on that?
Secretary Moniz. Absolutely not. And we are not pulling the
plug on this technology. The program continues. The issue is
that for the last two years operating the pilot facility
without spinning the pilot machines we have learned things of
an operational nature. We were able to resolve a technical
issue with the machines.
But two things led to that and I have to say,
unfortunately, I completely agree for the site a decision
namely No. 1 is that scrubbing really hard on the need for
enriched uranium using American origin technology we were able
to extend the timeframe for that very, very dramatically.
Something I'm happy to come and discuss with you in the days
ahead. Secondly, the technical judgment made is that continuing
to spin the machines will not give us any more technical
knowledge on the technology that we will preserve. We are not
pulling the plug, but right now it's hard to justify to
taxpayer's $50 million for something that we think will have
little to no technical return.
Senator Portman. Mr. Secretary, my time is up.
Just quickly let me make this point very clearly. There are
120 centrifuges spinning. This is a test site, as you say. Its
application, it can go to commercial grade because of that.
You are pulling the plug on that entirely and $6 billion of
taxpayer funding into that. To have to reconstruct that it is
going to be enormously costly. You said you would only do it
after issuing a report that was due to Congress in April. You
never gave us the report.
I received the report last night, last night, after you had
already made your decision two weeks ago without informing us.
We had to hear about it from the press. I think those 326
workers deserve to know what is going on, but also our country
deserves what is going on.
We are not going to have the ability to say that we can
enrich uranium in this country with a domestic source. I think
that is frightening. I think it is bad for our national and
economic security and energy security and certainly consistent
with what we talked about in the SPR today.
Thank you, Madam Chair.
The Chairman. Let's go to Senator Franken.
These are important questions to the Secretary, and I
appreciate that but I will remind colleagues we do have a
second panel as well.
Senator Franken?
Senator Franken. Thank you, Madam Chair.
Thank you, Mr. Secretary for all your service.
As you note in your testimony a continued need for the
Strategic Petroleum Reserve partially stems from continued
reliance on oil for transportation. This suggests that energy
security can also come from diversifying our transportation
fuels portfolio and improving vehicle efficiency. I believe
that the best way to protect our economy from oil supply shocks
may be to reduce the need for that oil in the first place.
Can you talk more about the advantages of alternative fuel
sources as they relate to energy security? Wouldn't an abundant
source of alternative fuels lower the likelihood that we would
have to draw down from the Strategic Petroleum Reserve?
Secretary Moniz. Senator Franken, yes, in fact the G7 plus
EU energy security principles that were updated in 2014
reflected exactly the point that you made that efficiency and
alternatives are part of energy security.
So what we are doing to continue to focus on reducing oil
dependence is three fold. One, both regulation and substantial
technology development for much more efficient vehicles,
automobiles all the way up to Class A trucks. Secondly, the
development of advanced alternative fuels and particularly
liquid fuels, biofuels. Third, electrification of
transportation as three thrusts that can lower our oil
dependence.
Senator Franken. Well, speaking of biofuels, one of the key
motivations for the RFS, the renewable fuel standards, is to
diversify our transportation fuel supply so we are not
dependent on imported oil.
There is a bill that has been proposed in the Senate that
really targets ethanol. Ethanol is something that increases the
octane of gasoline in the mix that helps us replace lead and it
is something that is required.
Do you think that maintaining the RFS target line with the
Energy Independence and Security Act of 2007 helps reduce U.S.
reliance on international oil?
Secretary Moniz. Well I'm not going to get into the issue
of those kinds of standards which, of course, the EPA has
responsibility. But what we will----
Senator Franken. Oh, come on. [Laughter.]
Secretary Moniz. What we will continue to do, however, is
to develop the technologies for advanced biofuels.
Senator Franken. And look at----
Secretary Moniz. And clearly ethanol today is 10 percent of
our gasoline.
Senator Franken. I am conscious of time so I want to make
sure I get in under the five.
What I took from your testimony was basically not so fast
on the SPR. Basically that oil is low now, but what you are
saying is these markets change and there is a reason to have
this there to prevent shocks and that part of that might be, we
do not export oil now, but we export oil products. That if
there is a spike around the world, we cannot let it hurt the
global economy. That we fall victim to shocks, even though we
are now because of the oil and gas revolution here, fracking
etcetera, we are in pretty good shape but that we need this in
order to make sure that we are able to respond to global shocks
and that we are able to help our global partners so that their
economies are strong. That is why we need to keep the
infrastructure and respond to the different--I am summarizing
your testimony.
Secretary Moniz. Mm-hmm.
Senator Franken. I want to thank you for that, and I want
to urge my colleagues to read that very thoroughly.
Thank you.
Secretary Moniz. If I may, just to add a little color to
it. In fact, if you go back----
Senator Franken. I am sorry about my colorless description.
[Laughter.]
Secretary Moniz. Sorry?
Oh, no, no. [Laughter.]
Secretary Moniz. Well that is because you were reading my
testimony. [Laughter.]
Secretary Moniz. But actually there's an interesting event
if you look back to 2000, the Fall of 2000, August/September
time period. That's when Britain was having the trucker's
strikes and slow downs. They were exporting a million barrels a
day of net exporters. It did not protect them from global price
spike which led to all those problems. And then it turned out
somewhat, well, not by accident, that perhaps simultaneously we
used the SPR, not for a sale, but for a swap, a time swap. And
that, let's just say it took a lot of froth out of the market.
Senator Franken. Could you add that color next time to your
written testimony? [Laughter.]
Secretary Moniz. Okay, or I could send you and make like,
do notes.
Senator Franken. No, I am not that particular color.
Secretary Moniz. Oh.
Senator Franken. I am just saying that----
Secretary Moniz. Oh.
Senator Franken. In your written testimony that it be more
interesting.
Secretary Moniz. Okay, alright. I will. [Laughter.]
Senator Franken. I mean it is interesting but in a----
Secretary Moniz. I'm not sure my colleagues would
appreciate that. [Laughter.]
The Chairman. Senator Daines?
Senator Daines. Thank you, Madam Chair.
Speaking of color, going back to, and this is for Senator
Franken as well, 1973 with the oil embargo and then the 1975
ban on oil exports. Senator Franken in 1975 was a new writer
for a brand new show called Saturday Night Live--in 1975 when
the oil export ban was put in place. I was looking at the
stats. Senator Murphy would have been two years old. Senator
Gardner was a year old, and Tom Cotton was not yet born.
[Laughter.]
In 1975, 40 years ago and to think about that, I mean, it
was ABBA, it was Captain and Tennille, it was the Eagles, and I
was in seventh grade. But it was a response to an acute crisis
that we had, certainly. I remember it with what happened there
with the oil embargo.
Secretary Moniz. Gas lines.
Senator Daines. Now as we go back we fast forward here, and
I think, Secretary Moniz, you are a brilliant man. You are a
forward thinker.
I am still somewhat surprised that we have a policy in
place that is 40 years old that served a purpose 40 years ago
but argue is irrelevant today as we move from a scarcity
environment to one of abundance. Now the United States is the
largest producer of oil and liquids in the world, surpassing
both Russia and Saudi Arabia.
My question is now that it looks as if the ban on Iranian
oil exports will be lifted, what countries in the world have a
ban on oil exports?
Secretary Moniz. I don't know the full answer to that
question. Obviously in the United States, we have partial, a
partial ban.
Senator Daines. I want to make sure I have my facts right,
but I do not know of another country that has a ban on oil
exports now that we are going to be lifting the ban on Iranian
exports with----
Secretary Moniz. I just don't know that.
Senator Daines. Right. So why? Why should we have this ban
in place? Why should the United States be the only country in
the world with a ban on most oil exports when we export coal,
natural gas, gasoline? Why not export oil?
Secretary Moniz. Well again, we are, as you just inferred,
we are major exporters of oil products. So we refine the
product----
Senator Daines. But why have the ban on oil?
Secretary Moniz. So again, the, look, again, as I said
earlier, that's obviously a policy decision in the Department
of Commerce. But I go back to the fact that the EIA analysis
certainly shows, certainly in anything like today's and
projected markets, rather small impact of whether that's in
place or not.
Senator Daines. But does it make sense? You think about all
the countries in the world and now the United States is the
leading producer of oil and liquids, No. 1 in the world, and we
have a ban on exports because of a law passed by Congress 40
years ago. Why does that make sense?
Secretary Moniz. Well, I mean, of course, again, just to
repeat. We are also a seven million barrel a day importer of
oil. So we are a huge importer of oil. That's just a fact. So I
think what it still----
Senator Daines. But Senator Barrasso got back to you
though, you know, the forces driving that certainly is the way
of refining capacity is laid out in terms of the heavy verses
light.
But I am looking forward to continuing to work with the
Chair here as well as having a good, vigorous debate on lifting
this ban, allowing the forces here. The jobs that will be
created, the tax revenues created and importantly the topic of
this hearing is back on energy security and the importance
thereof, that I hope we move forward and remove that ban.
Secretary Moniz. Well, it's the law.
Senator Daines. It is and this is the body that makes the
laws and can change the law. I hope we can get the White House
to work with us to remove that ban. I think it will be
tremendous for our national security, global security as well
as for economy.
We have one drilling rig right now operating in Montana.
The Bakken carries over from North Dakota into Montana. We have
one drilling rig currently operating in Montana. I recognize
you have the ups and downs in prices, but I think we have a
tremendous possibility.
Secretary Moniz. But again, Senator, I think the current
global market is one that does not look, it does not seem to
be, in a reality, looking for that oil. That's just a fact. In
fact if you----
Senator Daines. But why not allow the forces of the free
market? Why would we, unilaterally, be the only country in the
world to ban oil exports? Now that Iran's ban is lifted why
would we be the only country to have an oil export ban?
Secretary Moniz. I look forward to your answer. [Laughter.]
Senator Daines. I do not have a good answer. I am looking
forward to your answer, those who oppose lifting the ban.
I am out of time, Madam Chair. Thank you.
The Chairman. Thank you, Senator Daines.
We keep trying to get an answer here about when the
Administration is going to support us in removing this outdated
ban. We will keep working on it.
Senator Warren?
Senator Warren. Thank you, Madam Chair.
Thank you, Mr. Secretary, for being here.
I want to ask about Strategic Petroleum Reserve. I
understand that under certain circumstances drawing down our
emergency oil reserves could make good financial sense, could
make good strategic sense. We should have a conversation about
how large the Strategic Petroleum Reserve needs to be on a
going forward basis.
There have been recent congressional proposals to sell off
a large amount of this emergency supply of oil. I want to focus
on just two features of these bills that have been proposed.
They are not there because anyone has made the case that we
need a smaller reserve nor is there a proposal to sell it off
because anyone thinks this is a great time to sell.
Nope, the reason for the proposed sales of the emergency
oil supply is to fund the government. In fact, the bills would
set the quantities of oil to be sold years in advance with no
flexibility at all. If oil prices are low they could drop to $1
a barrel and under these provisions you would still have to
sell them or if there were good policy reasons not to sell like
we have emergency needs to hold on to the reserve.
Secretary Moniz, is this approach an efficient way to
manage the Strategic Petroleum Reserve?
Secretary Moniz. Well again, I think it's key that I think
we are doing an unprecedented, integrated, strategic study of
this to be ready in May and that this Committee has certainly
encouraged that. So I think, obviously, one would like to have
the results of that analysis before moving forward.
I might say there are even other factors that have not yet
been discussed. For example, there are special authorities to
be able to use 30 million barrels of the reserve only if one
has a base of at least 500. So there are a whole variety of
issues.
As I mentioned earlier, our international obligations are
not based only on imports, they are also based on use and so
because of our responsibilities in the show down, in a draw
down. So I think, clearly, I think our analysis will greatly
inform, I think, this discussion.
Senator Warren. Well, thank you, Mr. Secretary.
I just want to be clear about what is happening with these
current proposals mandating a massive, inefficient and
inflexible sell off of the Strategic Petroleum Reserve years in
advance is just one more bad idea for how to finance
government. Look around. Oil prices are at strategic lows. This
is a high cost gimmick to let some people avoid facing the fact
that loopholes for billionaires and giant corporations are
leaving us with too little money to keep our highways in
working order and to fund essential services like medical
research.
It is time to act like grownups and figure out how we are
going to pay for the critical investments that will help build
a future for everyone. We will never get there if we do not get
serious about making sure that everyone in this country, even
billionaires, even big and powerful corporations, that everyone
is pulling their weight. Selling off our Strategic Petroleum
Reserve is just not a way to do that.
Thank you, Madam Chair.
The Chairman. Senator Capito?
Senator Capito. Thank you, Madam Chair.
Thank you, Mr. Secretary.
Mr. Secretary, during the 2014 test sale a number of
infrastructure concerns were brought to light. You said
repeatedly today and then throughout your testimony the woeful
situation in terms of our infrastructure in moving the product
whether it would be pipeline capacity because of the geographic
shifts in our oil markets, the dock availability, you talked
about the rail as well. Well I share your concern here, and it
has been estimated that $1.5 to $2 billion would be needed to
increase distribution capacity.
Here is my concern. All of our states, I am certain,
certainly my state of West Virginia, have a lot of coal as we
have talked about with Senator Manchin. We also have a lot of
natural gas. Trying to site pipelines through residential,
national forests, certainly throughout all of our states is
getting more and more difficult.
So if the need is as big as $1.5 to $2 billion, what kind
of leadership can we expect from the Administration? It was
already mentioned that the Keystone Pipeline was vetoed. What
kind of leadership can we expect from the Administration to
help meet this challenge of not just making sure existing
pipelines are safe, but creating and building those new
pipelines that we know we are going to need?
Secretary Moniz. Thank you, Senator.
If I may just clarify two things. One is just the
distribution requirements of the petroleum reserve,
particularly the Maritime requirements are about a billion or
1.2 of that total, not----
Senator Capito. Oh.
Secretary Moniz. Because 800, roughly speaking 800 million,
we think, is what we need for the life extension and then 1.2
would be for the Maritime distribution.
Senator Capito. So when you say life extension of existing
pipelines?
Secretary Moniz. No, no, no. So this is up in the petroleum
reserve so----
Senator Capito. Okay.
Secretary Moniz. So it's basically, it's just old.
[Laughter.]
Senator Capito. Right, I get that.
Secretary Moniz. And we need to extend its life for
another----
Senator Capito. So this estimate does not really even
include creation and modernizing the infrastructure?
Secretary Moniz. Pipeline distribution, no, it does not. So
it's----
Senator Capito. So what would your estimate on that be? I
mean, we heard Senator Stabenow talk about safety issues.
Secretary Moniz. I really don't have an answer to that. I
can give you an answer to a slightly different question but to
give you an idea of scale in the QER we estimate that the
modernization, the replacement, the upgrading of natural gas
distribution pipes which are mainly in urban areas, that's in
the hundreds of billions of dollars. So that's the scale of
that----
Senator Capito. So we have the same problem with----
Secretary Moniz. So we have a huge infrastructure issue. We
heard from Senator Stabenow about the pipe protecting the Great
Lakes, etcetera. I don't know how to pay for it, but I think we
need to have an enormous infrastructure renewal program.
Senator Capito. I would agree with that. I think my
question sort of goes to another issue of this we have to have
a leader here who is going to lead the way through this very
difficult permitting issue that we are seeing all across the
country, whether it is, kind of, dragging your heels and not
meeting deadlines, bringing up road blocks when permitting is
almost at the end. Well we have a real problem here with this,
not to mention the money.
Even if you had the money in the best of the world, we are
still not able to move a lot of these projects forward and that
is very frustrating, I think.
Secretary Moniz. I might add, just to add to what you're
saying, it's not only pipelines, but it's also high voltage
transmission lines.
Senator Capito. Right.
Secretary Moniz. Have challenges.
Senator Capito. Windmills. Yes?
Secretary Moniz. Including to bring distant wind.
Senator Capito. Right.
Secretary Moniz. To market, so----
Senator Capito. I am talking about just siting a windmill.
Secretary Moniz. So one thing that--oh, I see, but I'm in
but then you have to do that.
Senator Capito. It is different.
Secretary Moniz. You have to be able to move it.
Senator Capito. Right.
Secretary Moniz. And so, well, I think one thing that we
did and maybe I take some comfort in that I think the
Quadrennial Energy Review that we did, I think, is in fact,
helping get a discussion going, at least, of this. And that's
something that we want to continue.
Senator Capito. Thank you.
Secretary Moniz. Yes.
Senator Capito. Thank you, Madam Chair.
The Chairman. Thank you, Senator Capito.
Senator Risch?
Senator Risch. Mr. Secretary, thank you for coming today.
To go off topic, just slightly, I am sure you have on your
calendar, October 21st which is----
Secretary Moniz. I do have October 21st on my calendar
Senator Risch. Well, actually more than just the date
itself. As you know I appreciate your warm affinity for the
labs. Senator Durbin and I, as you know, are co-chairmen of the
National Lab Caucus and we are going to host that event right
here in this building, the historic Dirksen building on October
21st. Last year on our inaugural event you blessed us with your
presence, and I hope you will do likewise again this year.
Secretary Moniz. Oh that is certainly my intention.
Senator Risch. We appreciate that.
Secretary Moniz. And in fact----
Senator Risch. It is a great, great time to show off the
labs. It amazes me, the lack of understanding that most members
have of the labs, what they do, how many there are and the
important role they play in advancement of certain things that
the private sector cannot advance. I will be looking forward to
seeing you there and showing off the Idaho National Laboratory
again.
Secretary Moniz. Absolutely.
As you know the theme will be on national security this
time. Maybe I will note another October 21st invitation. In the
morning, preceding lab day, we will also have an event that
will celebrate 20 years of science/space stockpile stewardship
which has been an enormous success not only in certifying
reliability of our stockpile, but in literally, inventing new
science and technology to accomplish the job. So I'm always
happy to advertise for the labs.
Senator Risch. I am looking forward to it.
On topic could you talk for just a minute about, from a
30,000 foot level, how our new found ability to produce
petroleum through fracking and otherwise plays into the SPR?
Obviously that is very old, our strategic reserve philosophy
and facilities, but since then we have become a lot better
producers, if you would, than what we had before. So how does
that dovetail together? What does that speak to?
Secretary Moniz. Well I would say there are two distinct
issues. One is let's say at the operational sense. In the
operational sense things like the Bakken, for example and more
Canadian imports have really changed and Eagle Ford and Permian
Basin going to the Gulf, etcetera. A lot of pipeline reversals,
a lot of flow going North to South whereas historically it was
South to North, that plus the sheer volume, increase in volume,
leading to Gulf of Mexico Maritime congestion. Those are the
issues that, in fact, have led us to say that we should really
update the distribution capacity of the SPR. So that's one
effect.
The second, very different kind of effect, is obviously the
impact in terms of U.S. and global markets. Again, even though
we are still major importers, we import a lot less than we
were, especially net with products.
So now we are part of this global market which again, is a
market that did not exist in the 70's. It is a whole different
focus away from, kind of, national supply to the issue of the
global market functioning and frankly, major disruptions
leading to potential economic shocks that hurt us and the
global economy. It's really those two different aspects, I
would say.
Senator Risch. Okay, it is a good description. Thank you so
much.
Thank you, Madam Chairman.
The Chairman. Thank you, Senator Risch.
Senator Lee?
Senator Lee. Thank you, Madam Chair.
Thank you, Mr. Secretary, for being here today and for your
service for our country.
I wanted to followup on some other questions including some
of the questions that were asked by Senator Warren with regard
to the SPR.
Can you tell me, first of all, do you have any idea as to
when would be the optimal time to sell either all or part of
our Strategic Petroleum Reserve inventory and what factors do
you think Congress should consider before authorizing any
effort to draw down the SPR?
Secretary Moniz. Well, for one thing I think it's, again,
this analysis, that's a rather extensive analysis, a year long
analysis, that we are carrying out which Congress has asked
for. Again, that will be probably in May that we'll have that
analysis. So that's critical.
But then I think it's also connected to the authorities.
Again, we've recommended a reexamination of the authorities
appropriate to current markets. That comes in because, as I
mentioned earlier, there's already in law a threshold for being
able to use certain authorities in terms of likely impacts on
prices. So I think it's a complicated intersection, but
certainly the analysis will be a major, major, hopefully, major
stimulus to our discussion.
Senator Lee. Yes, I certainly hope so. It could have major
implications. For example, if we were to sell 200 million
barrels next year that would generate by most estimates a
little over $17 billion, $17.3 billion, I think. Whereas if we
sold the same 10 years later, 200 billion barrels, it is
estimated that would generate about $22 billion. So there is a
$4.7 billion, almost $5 billion, delta between what that would
yield next year and what it would yield 10 years from now. So I
think we have to be careful about that.
Secretary Moniz. May I just interject?
Senator Lee. Sure, sure, please do.
Secretary Moniz. Just to say that for example, I know you
just picked a number, 200 million barrels. But that's an
example of something that would impact the authorities that are
currently available in law in terms of this threshold. So it's
a big deal.
Second, there are issues of, you know, ultimately the
question we're asking is how do we configure the petroleum
reserve, physically and in terms of regulations and
authorities, to maximize our energy security?
Well one of the things that we discussed earlier is that we
have this analysis from Oak Ridge that investing $2 billion in
life extension and modernization can give us protection at the
tens of billions to potentially $200 billion in one single,
major, global disruption.
So I think those are the things we have to balance and see
how to best use the asset.
Senator Lee. Right, we also have to balance what it is
costing. Having it is not free. I think we have spent $24
billion in putting it together and maintaining it over the
years. We----
Secretary Moniz. Well, it's about $200 million a year of
annual operating costs although we should add to that about $50
million for maintenance, deferred maintenance.
Senator Lee. Right, right, and if you use it only three
times, relatively modest quantities, but----
Secretary Moniz. When I buy my home fire insurance I hope
to use it zero times.
Senator Lee. Sure, sure. [Laughter.]
Senator Lee. But I hope there are things we can do to find
some efficiencies.
Another question I wanted to ask you, and it just relates
to the fact that in order to become a member of the
International Energy Agency (IEA) and it is part of that
organization's agreement on international energy, the U.S. is
required to hold stocks that are equivalent to no less than 90
days of net imports.
Now my understanding is that that can be satisfied either
through a government held reserve like the SPR or through
reserves held by industry. My understanding is also that the
U.S. private industry held stocks as of June 2015 that are
equivalent to 208 days of net imports. Does the industry's
large petroleum reserves obviate or in any way lessen the need
for the government owned, government operated, Strategic
Petroleum Reserve?
Secretary Moniz. Not in my view. Let me comment that again,
I'll spend most of the time on what you asked, but again, our
international obligations are twofold. One is the import
metric, and the other is the oil use metric of 43 and a half
percent of coordinated distribution.
Now going to the first metric, if you like, well today, if
you talk about crude oil we have 99 days. But if you talk about
the net crude oil end products, we have about 137 days, okay.
That's just a fact. Now with regard to the--and again, I'm not
saying that's the right metric, but that's--those are the
facts.
Now if we go to this question of the private stocks. First
of all, today, of course, those stocks are somewhat anomalously
high because of the market conditions and the supply/demand
questions. So those will go up and down. However, when other
countries, let's say European countries, obviously, in the IEA,
use their private stocks it's because they also have statutes
requiring what the private sector does. We don't have that. And
I'm not sure that's the place we want to go or you want to go.
So that's one point.
And the second point is that, obviously, government's
motivation really is the public good. And you know, there can
be in some circumstances mismatches between a private sector
imperative which, after all, their imperative is actually to
minimize inventories consistent with their operating
requirements and you know, etcetera. I mean, that's really what
their job is.
So I just think there's a, certainly in the absence of the
current legislative approach that I mentioned earlier, I just
think that having it in the public hands to respond to a
disruption that affects our entire economy is the place that we
should be.
Senator Lee. Thank you, Mr. Secretary.
Thank you, Madam Chair.
The Chairman. Thank you.
Senator Hoeven?
Senator Hoeven. Thank you, Madam Chairman.
Thank you, Mr. Secretary, for being here today.
Perhaps in a counterintuitive way isn't it very important
that we allow, that we lift the oil export ban in order to
reduce our dependence on the SPR based on studies performed by
the Energy Information Administration, part of the Department
of Energy?
Now what they indicate is that for our industry to expand
and grow in this country, our energy industry, including oil
and gas, it is important that we are able to compete in a
global market. We are disadvantaged by the ban on oil exports.
So if we want our industry, our domestic industry, to continue
to expand and grow, we need to lift the ban on oil export per
the studies the EIA has put forward from your agency;
therefore, that would make us less dependent on the SPR.
Secretary Moniz. I'm not--well, okay----
Senator Hoeven. With a more robust industry----
Secretary Moniz. Two issues.
Senator Hoeven. We are less dependent on the SPR.
Secretary Moniz. One is, one point I'll just make is, okay,
the main point I'll make is that I don't really see that.
First of all, okay, the EIA reference case to 2025 did not
have any material impact in terms of the ban. It's only in the
very high resource case, stretching it and without low price,
that you got some material impact of a few hundred thousand
barrels a day in 2025 but not in the reference case, the
expected case.
Secondly, even if we are producing, okay, a few hundred
thousand barrels a day more that in no way changes our linkage
to the global oil price and the exposure to a price spike. In
fact, if anything, it's both the fact that we are connected to
the crude oil global market and the fact that we are and, I
believe, will continue to be major oil product exporters, we
are exposed, just as in that anecdote I gave about Britain in
2000. We are exposed to the global oil price spike and that's
really the modern issue in terms of what the SPR does for us.
Senator Hoeven. The point being if we are allowed to
compete in the global economy we will have a more robust oil
and gas industry in this country than we will have if we are
not allowed to compete. With a more robust industry we are less
dependent on the SPR.
Secretary Moniz. Well, again, I'm sorry, Senator Hoeven, I
don't----
Senator Hoeven. And it is not only the EIA. The other
studies have shown that by lifting the oil export ban we not
only expand our industry, we also create more jobs and economic
activity in our country. So why wouldn't we want to do that and
in fact make ourselves less dependent on the SPR by having a
more robust industry?
Secretary Moniz. I can't--the reference EIA case in the
recent report does not, does not, predict a big increase in
production at all. It simply does not. And again, and second,
we have a very robust industry right now. And it again, just to
repeat, it does not shield us from the global oil.
Senator Hoeven. So you would argue that even if we are not
able to get the global price, the Brent crude price, and we
have to compete in the global economy, you are saying, that
that would not affect the size and scope of our industry?
Secretary Moniz. Again, if exports were allowed, you know,
it certainly could lead to an increase in production. All I'm
saying is the EIA reference case did not show any material
impact to 2025, only in the high resource case did it show
that. But whatever it----
Senator Hoeven. But it did show an impact.
Secretary Moniz. In the very high resource case, only.
Senator Hoeven. And with what is going on now you would not
assert that that is having a deleterious effect on our industry
when--our ability to compete when our competitors purposely try
to put our companies out of business? You do not think that
impacts industry in this country?
Secretary Moniz. The global oil price obviously is
affecting the industry in our country and everywhere else which
just reinforces the point we are exposed to the global oil
price.
Senator Hoeven. Which you would acknowledge is a function
of how much OPEC and our competitors produce?
Secretary Moniz. It's what everybody produces and consumes.
Senator Hoeven. And they may have objectives----
Secretary Moniz. And in fact on----
Senator Hoeven. To maintain and expand market share at our
expense. Would you acknowledge that?
Secretary Moniz. That's the market.
Senator Hoeven. Nature of competition.
Secretary Moniz. That's the nature of the competition.
Senator Hoeven. Right? You would agree with that?
Secretary Moniz. The market, absolutely.
Senator Hoeven. Let me shift to one other question as I
have limited time here.
In your Quadrennial Energy Review you talk about the
importance of having the energy infrastructure we need to truly
get energy security or energy independence in our country. That
is one of the key points in the Quadrennial Energy Review.
So my question to you is if somebody is going to follow all
the laws, follow all the regulations and invest millions of
dollars and still wait seven years for a siting decision,
whether somebody is trying to produce traditional energy or
renewable energy, what is the message there if they cannot make
the investment and rely on the laws and regulations and still
have to wait for a decision for seven years--how are we going
to get people, companies, to make the investment to build the
energy infrastructure to make this country energy independent,
energy secure?
Secretary Moniz. Well, again, as Senator Capito said, let's
face it, we do have challenges in terms of all kinds of
infrastructure. And it's not only energy infrastructure,
infrastructure in construction in many parts of the country.
And all we can do is we keep pushing on that to go forward. Our
authorities, with regard to international energy, is on LNG
exports, of course, and electricity----
Senator Hoeven. Would you invest millions of dollars in
order to build either a traditional or a renewable project if
you might have to wait seven years to get a decision on whether
you could site the pipeline or the transmission line to move
that energy to market?
Secretary Moniz. Successful companies make decisions under
risk evaluations.
Senator Hoeven. So whether you had to wait seven years, or
10 years, even when you spend millions of dollars, comply with
all the laws and regulations that that would not deter you from
making an investment?
Secretary Moniz. I didn't, I said you--one makes decisions.
That's what CEOs get paid for is to make decisions under risk
and understanding the situation and then----
Senator Hoeven. But you would----
The Chairman. Gentlemen, we're going to interrupt and then
wrap it up.
Senator Hoeven. Wouldn't you favor certainty in terms of
trying to get investors in companies to make the decisions to
invest in energy infrastructure?
Secretary Moniz. I think it's a fair statement that in any
of the dimensions, it's good to have certainty for a long time
horizon. I would especially note that for something like carbon
emissions.
Senator Hoeven. Thanks for coming to our state. I am not
going to have time, but I did want to bring up that subject
since you have been to our state and you understand what we are
doing in CO2.
Secretary Moniz. I do.
Senator Hoeven. Thank you, Mr. Secretary, for being here.
Secretary Moniz. Thank you.
The Chairman. Mr. Secretary, thank you for being here. We
got off on some other issues that clearly relate to our
nation's energy security when we talk about lifting the
outdated oil export ban.
As we think about our emergency stockpiles here around the
country I would remind the Administration and remind colleagues
that up in Alaska we have our Alaska North Slope crude that is
chemically similar to the oils that we have in the Strategic
Petroleum Reserve. We have stored this oil there in the past,
and it is a great resource. We just need more of it.
As we are thinking about these petroleum product reserves
in certain parts of the country, maybe we should consider how,
for instance, in Alaska we continue to supply our West Coast
refineries in the event of severe supply disruptions.
There is a lot more to talk about, and we barely even
scratched the surface. I really wish that we had been able to
have a little greater discussion about how we make sure that,
as we are responding to a SPR release, that we are making
certain that we are adding to the supply and that it is an
incremental gain rather than just filling in what we have moved
out.
There is an awful lot more that, I think, we need to
discuss on this. I think it is imperative that we get this
review so we really understand, when we are talking about
modernization of the Strategic Petroleum Reserve, really what
that does entail. It is my hope that we will be able to defer
those that would tap into the Strategic Petroleum Reserve
before we have better understanding. We have got a lot of work
in front of us. We have a second panel, and we have,
unfortunately, lost Committee members to other issues. We have
a vote that is beginning at one, but as a courtesy to those who
have scheduled their day around this, I am certainly going to
be here to hear your comments and would welcome you to come to
the witness table at this time.
Mr. Secretary, we thank you for being here and we look
forward to continued conversations.
Secretary Moniz. Thank you, Madam Chair. Thank you, Ranking
Member Cantwell.
The Chairman. At this time we will invite the second panel
to move to the table. We have Admiral Dennis Blair, former
Director of National Intelligence and Commander-in-Chief, U.S.
Pacific Command, and also Co-Chair of the Commission on Energy
and Geopolitics for Securing America's Future Energy. We also
have Mr. Kevin Book, who is the Managing Director for ClearView
Energy Partners. We have Mr. Jason Bordoff, who is a Professor
of Professional Practice in International and Public Affairs.
He is a Founding Director for the Center on Global Energy
Policy at Columbia University. Our final panel member will be
Ms. Sarah Ladislaw, who is the Director and Senior Fellow for
Energy and National Security Program at the Center for
Strategic and International Studies.
Thank you for your patience this morning. Hopefully you
have gained good insight from the questions that were posed by
the Committee members to the Secretary and his responses as
well. Again, thank you for your willingness to be before the
Committee. I would just remind you all that your full written
statement will be incorporated as part of the records and would
ask that you please keep your comments to no more than 5
minutes.
Thank you and welcome, Admiral Blair.
STATEMENT OF ADMIRAL DENNIS C. BLAIR, USN (RET.), FORMER
DIRECTOR OF NATIONAL INTELLIGENCE AND COMMANDER-IN-CHIEF, U.S.
PACIFIC COMMAND, AND CO-CHAIR, COMMISSION ON ENERGY AND
GEOPOLITICS, SECURING AMERICA'S FUTURE ENERGY
Admiral Blair. Thank you very much, Madam Chair, Ranking
Member Cantwell. I have the feeling that everything may have
been said, but it hasn't been said by everybody, so we will try
to fill in those.
The Chairman. Thank you for recognizing that. [Laughter.]
Admiral Blair. Those lines.
As we approach this 40th anniversary of the creation of the
Strategic Petroleum Reserve a lot of the landscape, energy
landscape, has changed. But there are three things that are
really just the same. The oil market remains volatile, American
businesses and American families are vulnerable, and the SPR is
really our only short term line of defense against supply
interruptions. It would be foolhardy to draw down the single
immediate weapon that we have to counteract oil supply
disruptions and price spikes.
Madam Chairman, you emphasized that your concern was
national security and that's my background. And I certainly
agree. But economic security and national security are tightly
intertwined.
If geopolitical actions are causing an interruption in the
global supply there's great pressure for military involvement
and military action. When I was the Pacific Commander my
counterparts in the Central Command knew that the free flow of
oil from that swing region was one of their most important
concerns. However when a crisis occurs we need time. We need
time to work with allies, to apply political pressure, to
negotiate before we send in troops. And the SPR is essential to
a smart region of national security response.
Today's low oil prices make it easy to forget that a little
more than a year ago unrest in key oil producing regions was
pushing already high oil prices even higher. As ISIL advanced
in the summer of 2014, it sent oil prices to $115 a barrels on
fears that the three million barrels of oil per day from Iraq
would be knocked offline. Had ISIL disrupted the Southern Iraqi
infrastructure, prices would have soared and a significant SPR
increase would have been necessary to protect the U.S.
economy--and that was only a year ago.
Would any responsible American leader count on continued
stability and steady petroleum supplies from Venezuela, Iraq,
Russia, Libya, Iran, even Saudi Arabia?
Civil unrest, the impact of reduced revenues from current
low prices, product or production manipulation, all of these
are very real possibilities. In this turbulent, geopolitical
landscape why are we even considering reducing our only short
term means of offsetting supply interruptions?
Yes, the dramatic increase in U.S. oil production has
reduced our dependence on oil imports and it has contributed to
a drop in global oil prices, but as the Secretary repeatedly
pointed out, it's a global market. 92 percent of our
transportation sector runs on petroleum, a disruption anywhere,
at fixed prices everywhere at the pump for American consumers,
for American businesses. The SPR protects our economy from
unpredictable violent swings in a global oil market dominated
by outside actors who share neither our values nor our
interests, nor are they particularly fond of us.
So policymakers should take advantage of current low prices
to upgrade and modernize the SPR, as you have recommended so
that it will be ready to respond when disruptions inevitably
occur when price increases, when prices will inevitably rise.
Just having the petroleum in the salt caverns is not enough, as
discussed repeatedly by Secretary Moniz. The equipment at the
SPR itself needs maintenance and modernization. The flows of
both crude oil and petroleum have changed over the last 40
years since the SPR was built, and without modernization the
SPR could not do its job of fully and flexibly offsetting a
large supply disruption. We have to be able to deliver the oil
that it holds at the right place in this extremely complex, oil
refining system that we have in the country.
So I would make five recommendations.
Congress should fully fund and the Department of Energy
should accelerate the completion of deferred maintenance.
The Department of Energy should construct dedicated docks
and loading capacity so SPR oil can be loaded on marine vessels
for delivery to the market as incremental supply without
displacing privately-owned oil on the market.
Congress should update release criteria to clearly allow
for release of oil from the SPR in response to a supply
emergency even if it does not affect domestic production or
imports if, and I think this is a criteria, if the interruption
is likely to affect the price of oil and therefore posing a
substantial risk of severe economic consequences. I share the
sentiments that you described about doing this carefully, but I
think we need that flexibility when a crisis hits.
The White House and Department of Energy should complete
that study that the Secretary mentioned about the appropriate
size of the SPR given the changes in the energy landscape, but
my guess is that when all is said and done an appropriate size
will be not far from what we have today. It feels about right
to me.
After reaching a consensus on the size and the guidelines
for using the SPR, then the Department of Energy should
initiate a long term program to update and upgrade and update
that infrastructure so that it's reliable for decades to come.
In today's uncertain and dangerous political, geopolitical,
environment the SPR is our most immediate defense against oil
supply disruptions and price spikes. It needs to be preserved
and modernized not reduced. However, it's only one part of a
comprehensive energy strategy to reduce America's dependence on
oil. As has been mentioned in the previous panel, we need
increased efficiency. We need fuel diversity in the
transportation sector, and a strong energy policy is imperative
to improving our national security. I think this Committee can
play a key role in forging that comprehensive national energy
security policy.
Thank you.
[The prepared statement of Admiral Blair follows:]
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The Chairman. Thank you, Admiral Blair.
Mr. Book, welcome.
STATEMENT OF KEVIN BOOK, MANAGING DIRECTOR, CLEARVIEW ENERGY
PARTNERS, LLC
Mr. Book. Thank you, Madam Chairman.
I appreciate the work you're doing here to look at the
energy policies of the past in the context of today's
fundamentals including crude oil exports and renewable fuels
and the topics that have come up during the first panel, but I
think there's one policy that's stood the test of time and
that's the SPR. It's been an insurance policy, as you described
it. It's been an asset, as you described it, and I want to make
some comments about its attributes in that regard.
It seems appropriate to ask if we have the right amount of
insurance, whether we're paying a fair price and whether the
policy we have has the right features.
So with regard to the size of the SPR we know that the IEA
obligation is for 90 days of net petroleum import cover. In
June '05 the SPR had about 54 days, this June the united import
cover exceeded 140. I think someone else mentioned earlier
today that 41 percent of net imports this June came from Canada
and only 16 percent came from Canada, a reliable supplier, in
June of '05. This is good news, but it's relatively recent good
news and timeframe matters.
Let me give an example from my own industry. Early last
year analysts, many of them, thought oil prices would remain
above $100 per barrel for years. That may seem silly now, but
over the last 5 years, through August, real oil prices averaged
about $100 a barrel. Of course, if you go back over the whole
series of oil prices for the last 100 years, they averaged
about $35 a barrel. So which perspective is correct?
It's tempting to think that the future is going to look a
lot like the recent past. And in fact, it probably does look
more like the recent past than the whole history. But recent
oil market lessons remind us it's important to look at the
longer trends.
So I did, in my testimony, a thought experiment. I'll
summarize. Starting with January '85, I calculated monthly
results if the nation sold crude whenever inventories got above
90 days and bought crude whenever they fell below. Now over the
last 60 calendar months the average result is a win, about $1
billion of profit in real dollar terms. Over the whole time
series, it's a loss of about $500 million.
So downsizing the SPR could be a losing bet and it could be
for other reasons too. Today it's been mentioned OPEC producers
are running flat out, so spare capacity is falling. That's not
going to be there to balance the market and the demand
recovery. Demand isn't likely to stay weak forever.
Spare capacity is supposed to come on within 30 days and
stay on for 90. Shale hasn't worked like that, at least not
yet. It didn't turn off quickly on the way down and it may not
turn on quickly on the way back up because job loss, among
other things, can slow it down.
Meanwhile the large SPR has other uses and can be a signal
to OPEC to add supply to a tight market. In essence we can say
to them, either you can do it and you can earn the money or
we'll do it and you won't earn the money.
And finally, insurance tends to be cheaper when the market
perceives lower degrees of risk. If anything, as the Admiral
mentioned, a period of low prices seems like it could be a
better time to expand.
Now is the insurance a good deal? Well, the premium is
about $200 million a year right now, $4 billion over 20. If you
think about that, that's about $576 a barrel in current dollar
terms.
Now what does it get you? It sounds like Oak Ridge is doing
some work. The DOE is too. And you can put a lot of economists
to work on that question. But I'm in the business of back of
the envelope answers, so I'll give you one here today. If you
take what the nation consumes through June this year on a
trailing 12 month basis, 19.34 million barrels, our firm's
short run, Brent model, implies that if you put a million
barrels into the market today prices would drop by about $11
per barrel. That's the market today though and the market
changes a lot. So I'm going to give it that kind of number a
haircut, 75 percent haircut. Let's use 275. Using that number
every one million barrel draw could save the nation about $53
million. Multiply it by the size of the SPR and you get about
$37 billion. So $4 billion in premiums for $37 billion in
coverage sounds like a pretty good deal, and I'm not using any
multiplier numbers. If you were to sell it down to 90 days you
could raise $12.9 billion at $50 dollars a barrel but you'd be
giving up $13.7 billion in coverage by those numbers. Not sure
that's a good deal.
You called it an asset, Madam Chairman, and it is an asset.
It isn't usually a good idea to liquidate long-term assets for
short-term financing purposes.
Another thing that doesn't work very well is buying high
and selling low. I calculate nominal acquisition costs at an
average of about $32 per barrel, but in real dollar terms they
average about $74 per barrel. The Brent forward curve which is
the monthly prices out for future delivery to the end of 2022
doesn't get above about $65 a barrel right now. So you have
some questions about whether or not it's a good time to sell.
Finally in terms of the coverage we have what product
should we pick for product reserve? It's not so easy. If you
look at the 2013 to 2014 propane crisis, right before that
crisis EIA projected that propane inventories would, I quote,
``remain near the middle of the historical range during the
upcoming winter.'' By definition surprises defy prediction even
by capable agencies like the EIA.
Market forces responded, and there was no repeat of the
propane crisis last year, but government emergency product
stockpiles could mute price signals that inform the behaviors
of market participants.
We don't know what will happen with the Northeast gasoline
supply reserve. In fact, right now it has about two days of
supply for New York State in the New York site and about one
day of supply for Massachusetts, Maine, New Hampshire and
Vermont. That's big enough to lower prices if you draw it. It's
also potentially the sort of thing that if you did draw it,
because drivers know it's a finite resource, they might hoard.
Finally, you could tell tankers that might be coming in to
go somewhere else where the price is still higher because the
reserve is there, an unintended consequence.
Looking at the New England home heating oil reserve, the
inventories in PADD 1A, which is the New England part of the
East Coast region the EIA tracks, fell and didn't come back up
after the reserve was created even though they rose back up
toward traditional five year levels in the years that followed.
That's circumstantial and I wouldn't, you can't fly to the moon
on that kind of statistic.
But what I would suggest is that you may have simply
replaced private inventories with government inventories to no
net energy security benefit, and that doesn't seem like a very
good idea.
Thanks for the time to comment. I look forward to any
questions.
[The prepared statement of Mr. Book follows:]
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The Chairman. Thank you.
Mr. Bordoff?
STATEMENT OF JASON BORDOFF, FOUNDING DIRECTOR, CENTER ON GLOBAL
ENERGY POLICY, AND PROFESSOR OF PROFESSIONAL PRACTICE IN
INTERNATIONAL AND PUBLIC AFFAIRS, COLUMBIA UNIVERSITY
Mr. Bordoff. Thank you.
Chairman Murkowski, Ranking Member Cantwell, members of the
Committee, thanks for the invitation to be here today and for
your attention to this important issue. As Admiral Blair said,
I think much has already been said.
So let me just make three brief points with my time.
First, it's my view that the SPR remains an important
national security asset even though the U.S. is a much larger
producer and a much lower importer than we've been in the past.
U.S. oil imports have fallen from about 60 to 20 percent of our
consumption both as a result of more supply and importantly, as
a result of reduced demand. We talked about how the
International Energy Agency requires 90 days of import cover,
so some say that means we need less oil in the SPR.
But in today's oil market as supply disruption anywhere
leads to price increases here at home whether we import or not.
Such price spikes have harmful economic consequences for
consumers and for the overall economy. All but one of the 11
post-war recessions, for example, were associated with oil
price shocks. So the SPR today needs to cushion global supply
disruptions regardless of whether U.S. refineries import from
the specific countries where the disruption occurred. I think
we should be especially cautious about selling the SPR as the
oil market really enters unchartered territory. OPEC has not
only allowed the price to collapse, it's actually boosted its
production leaving almost no spare capacity, extra oil that can
be brought onto the market with little short notice.
So with OPEC abandoning its market balance or role and with
little spare capacity we may be in for sharper ups and downs in
the future, and then any disruption to global supply can have
an outsized impact on price because there's no buffer in the
market left to cushion it. There's still a lot of geopolitical
risk in the world and key oil producers, even more so when low
prices threaten instability in some markets.
A recent study from Columbia Center of Global Energy Policy
looked carefully at the increased risk of political instability
in Venezuela, for example, as a result of the price collapse.
So now is not a time to sell off a strategic asset we've had
for 40 years.
Moreover the SPR, I think, gives us more policy
flexibility. So imagine, for example, that Iran reneged on its
nuclear deal and there was consensus to tighten sanctions on
Iran without a buffer of either spare capacity or strategic
stocks we may well impose a great deal of economic pain on
ourselves at the same time that we're trying to impose it on
Iran.
Second, given how the oil market has changed it, as we
talked about today, absolutely makes good sense to study
whether the size, composition, location or use of the SPR
should be modernized. But the outcome of that analysis about
whether to reduce the size of the SPR and not an imperative to
fill a budget hole, no matter how meritorious the intended use,
it should determine whether we do that. I think that's
especially true when the oil price is at its lowest point in
six years.
Third and finally, there's an urgent need, as we've talked
about, to modernize the SPR's existing infrastructure to ensure
that it can remain effective in the event of an emergency. Any
revenue from selling the SPR, I would argue, should be put
toward that purpose, that really critical need, before any
other.
Since the purpose of the SPR in today's market is to temper
price shocks from global supply disruptions, barrels must add
to the total world supply. So that means that when SPR crude is
delivered to U.S. refineries foreign oil those refineries would
have purchased is freed up to be used elsewhere, but changes in
U.S. production and infrastructure have made that harder to
achieve today for Midwest refineries which have been the
historic destination for SPR crude.
SPR crude now needs to move from the water in the Gulf
Coast to East or West Coast refineries, yet, the oil boom here
in the U.S. over the last several years has left very little
unused capacity at these Gulf Coast marine facilities. That
means that if these docks were used in an emergency to load SPR
crude other commercial stocks would just be displaced, so
investments are needed in marine capacity that would allow the
SPR to add incremental barrels into the global market and this
was confirmed by the DOE's 2014 test sale.
To be clear, this is an issue not of stock, barrels in the
SPR, it's an issue of flow. How much oil is in the SPR is
important, but what's really important is can we get it out at
the intended draw down rate of 4.4 million barrels per day. I
don't think today we'd come anywhere close to that, so
addressing that urgent need is a critical priority.
In short the SPR has served as a critical piece of our
nation's infrastructure and energy security strategy since the
oil crisis of the 1970's. It remains so today. And while it
makes sense to consider various measures to modernize it,
including reducing its size among other reforms, the first
priority should be to ensure that SPR crude can reach the
market and be effective in the event of a supply emergency.
Thank you again for the opportunity to testify today.
[The prepared statement of Mr. Bordoff follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
The Chairman. Thank you, Mr. Bordoff, we appreciate your
comments.
Ms. Ladislaw?
STATEMENT OF SARAH LADISLAW, DIRECTOR AND SENIOR FELLOW, ENERGY
AND NATIONAL SECURITY PROGRAM, CENTER FOR STRATEGIC AND
INTERNATIONAL STUDIES
Ms. Ladislaw. Good afternoon, Chairman Murkowski and
Ranking Member Cantwell. Thank you for the opportunity to be
here today. I too, will shorten my comments to make sure we've
got time for discussion.
Today I'll make three points about the Strategic Petroleum
Reserve as an element of U.S. and global oil supply security
and offer some areas of consideration going forward for the
ongoing deliberations about how to modernize this important
reserve.
First, the U.S. SPR is an important pillar of U.S. and
global oil supply security. The SPR is not only the world's
largest government-owned and managed emergency stockpile of
crude, it's also part of a much larger, globally coordinated
system of emergency petroleum supplies that have been around in
the oil market since the mid 1970's. These strategic stockpiles
are perhaps one of the most invisible and enduring examples of
shared energy security policies around the world and the
world's major energy consumers. The SPR in the United States is
a fundamental pillar of that system and sends an important
signal.
Second, changes to the U.S. domestic production profile
necessitate these changes to the SPR. Greater domestic
production and new pipeline configurations potentially upend
the assumptions on which the SPR logistical distribution system
relies. Assuming that the SPR oil is released, increasing
production of oil in Midwest and Gulf Coast systems and
infrastructure changes to accommodate those production changes
such as certain pipeline flow reversals, may have made it
considerably more difficult to move this product to market.
This in combination with ongoing maintenance needs above and
below ground necessitate this conversation about the SPR
modernization today.
Third, oil markets have changed and will continue to
change. A great deal has changed since the global strategic
stock system and the U.S. SPR were created which further make
an assessment necessary and important.
Oil markets are different and so are the players.
First, oil plays a different role in the global economy
than it did in 1974. Half of oil consumed today is for
transportation compared to 35 percent in the 1970's. And
according to the International Agency, this concentration of
oil uses in transportation can accentuate the potential
economic impact of a supply disruption because of low price
elasticity of transportation fuel and the broad reach of
transportation fuel costs into other sectors of the economy.
Second, while oil trade flows are shifting, the production
surge in North America combined with growing oil demand in Asia
means that oil is increasingly traveling East instead of West
for major production centers. Moreover, the trend toward
refining crude closer to production centers means that global
trade in crude oil is likely to decline in the coming years in
favor of greater product trade flows.
Finally, OPEC now makes up a smaller share of global oil
supply. OPEC produced about half the world's oil in 1974
compared to about 40 percent today. Perhaps more importantly,
the strategies and capabilities of various oil exporting
economies has also shifted over that timeframe.
A strategic review of the SPR should take several issues
into consideration.
First, the nature of future oil supply disruptions and
vulnerabilities. Since the creation of the International Energy
Agency there have been a number of major supply disruptions and
three coordinated strategic stock releases and a number of SPR
exchanges. None of these releases were for the intended purpose
as the same supply disruption in the Middle East, but arguably
each provided economic insulation from geopolitical and natural
disaster related supply disruptions. The severity of a supply
disruption is often measured in terms of oil supply loss in
duration, but the economic impact of that disruption depends on
other factors such as overall market conditions at the time,
the crude qualities, seasonal factors, logistics and spare
production capacity. This means answering a simple question
about what we were guarding against quite complex.
Second, optimal structure and composition of the U.S. SPR
as part of a broader energy security strategy. The SPR is only
one of several policy tools the United States has to provide
resilience in the face of an oil supply disruption. Long term
policies committed to greater vehicle efficiency, multimodal
transportation, infrastructure protection and fuel site source
diversification are also critically important. The SPR plays an
important and complimentary role to these policies. Thus far
the United States has chosen to pursue an almost entirely
crude-based, government-managed stockpile with the notable
exception of the heating oil reserve and gasoline reserve in
the Northeast. This is not the approach taken by many other
countries. It's important to note that many other countries
have a mix of public and privately held stockpiles of both
crude and petroleum products. As the United States considers
modernization of the SPR, a key question to be answered is what
is the most effective composition, size and quality of the U.S.
SPR going forward?
And finally, the adequacy of the global strategic stock
system is a valid question. The U.S. SPR does not exist in
isolation and it is, in fact, used in coordination with certain
members of the international community. The International
Strategic Stock System plays an important role in protecting
the global economy against unforeseen oil supply disruptions.
When created the IEA represented the majority of oil consuming
and import dependent countries. OECD economies were three
quarters of the global oil demand in 1970 compared to 50
percent today. Going forward emerging markets and developing
economies share of global oil demand is expected to grow even
further.
China has since 2001 been in the process of creating its
own strategic oil stockpiles and domestic system for deciding
upon how to release those supplies in the event of a
disruption. India has also signaled its intent to create oil
stockpiles but is less far along. Whether and how these future
stockpiles should be coordinated with OECD strategic stock
system is an important area for policymaking consideration.
In conclusion the last 40 years have proven time and again
that we, as analysts, policymakers and market participants
should be humble about our ability to forecast future oil
market dynamics and take prudent measures to protect against
unanticipated supply disruptions. If my memory serves me
correctly it was about 10 years ago that the U.S. Congress
voted to increase the capacity of the SPR to one billion
barrels of oil.
The strategic review underway at the U.S. Department of
Energy and recommended by this Committee are prudent and
important courses of action. Efforts by other Committees in
Congress to sell portions of the SPR before that important
review is completed are shortsighted, and I recommend that you
wait until the results of the final review before making any of
those decisions.
Thank you very much.
[The prepared statement of Ms. Ladislaw follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
The Chairman. Thank you, Ms. Ladislaw.
Thank you all for your comments here this morning. I
listened to the testimony from each of you after the comments
that we heard from the Secretary, and again, I am just beside
myself as to why we are having this discussion in Congress
right now about how much we are going to sell off from the
Strategic Petroleum Reserve to fund, whether it is the
Transportation bill or anything else out there. Each of you
have mentioned the issue of spare capacity and how it is just
not what it once was. Each of you has mentioned the issues as
they relate to the volatility of the world at large right now,
the geopolitical issues that we are facing.
We have some inherent geographic issues that have not
changed. The fact that you have significant oil coming out of
the Middle East that goes through a choke point that is
inherently dangerous and seemingly more so as the world just
becomes just more tense and more volatile. The fact that you
have all recognized that the Strategic Petroleum Reserve really
is this short term defense to offset the supply disruption.
This is what we have that we can use quickly, but we can
only use this stockpile quickly if it functions as we have set
it up to function. This is where, I think, we have a little
breakdown in communication amongst, perhaps, your policymakers
here, who think that the draw down, our ability to draw down a
certain amount, is all that we need to know. The draw down
needs to be able to work with our distribution ability right
now.
As you have outlined, we have all kinds of changes that
have come about. Whether it is the flow of oil from North to
South now moving from South to North, capacity restraints, the
issues or the limitations within our ports from a maritime
perspective as to how we can move it, I do not think people
understand that while we have got this stuff sitting in the
salt caverns, down primarily in the Gulf area, our ability to
move it out to respond is not what we need it to be unless we
work toward the modernization that you have discussed and that
the Department of Energy has discussed.
We have a situation here in the Congress where we need to
be looking critically at this energy security asset, but the
asset is only as good as its ability to function and this is
where I am more than just a little bit worried.
If there were to be a sale, the first thing that you should
do with those proceeds is to work toward the modernization.
Whether it is the $800 million that needs to go to the
modernization and then the $1.2 or $1 billion that the
Secretary had mentioned about how we provide for the marine
transport aspect of it, we have got to look critically at this.
I do not think that we are having sufficient discussion on that
aspect of our Strategic Petroleum Reserve, and I think it is
absolutely key.
The question that I am going to ask to you, and I am going
to ask you to be quick with your responses, if I may. The
metric that is used here, what is happening here in Congress--I
do not mean to make it sound like it is just basic math--but
you have people who are looking and saying our obligation is a
90-day supply. So all we need to do is look to how many days'
supply we have, back out the 90 and that is what we have
available for sale. Can you please explain in plain English,
very quickly, why that is not the metric that the Congress
should be using when you look at the Strategic Petroleum
Reserve?
Admiral Blair?
Admiral Blair. Well we can go in the same order, I guess.
The Chairman. Okay.
Admiral Blair. My answer would be that it's not the
physical supply that matters. It's the impact on the American
economy and the speed and increasing the amount of time we have
to solve supply interruptions.
So my prescription for the right answer is to look at a
series of scenarios and really think through what we would
actually want to do in each scenario and then take a step back
and choose a good, prudent amount that would allow us to have
that flexibility in most of the cases we can think of;
therefore, when it happens we have the flexibility to work with
it. We're not tied to some mechanical number that probably is
not applicable when an actual event occurs.
The Chairman. Thank you.
Mr. Book?
Mr. Book. Madam Chairman, I think I tried to offer, sort
of, a way of thinking about it which was the insurance payoff
value relative to its premium. I think that would be the right
way to think about it.
The size of the reserve is really a static amount at this
point. That oil, unlike the insurance comparison, where if you
don't pay your premium and you just walk away from the policy,
it's gone. It's here. So we have, actually, a very small
carrying cost. If you think about what the modernization might
involve to keep it working, it's another $2 billion on top of
the $4 billion I gave you over 20 years. So it's $6 billion
into $37 billion in yield. That $37 billion is a really low
number. I took it to be conservative. What we're talking about
is the difference between having oil and not having oil.
Why would you give up this carefully amassed 700 million
barrel stockpile, just try to go out into the market and buy
700 million barrels in a hurry? I was meeting with oil traders
in New York yesterday, and I can tell you that they would be
very, very pleased if you were to bid for that much oil in a
rush.
The Chairman. Thank you.
Mr. Bordoff?
Mr. Bordoff. I'll just briefly make three points in
response to your question.
So the short answer is, in my view, days of import cover is
not the right metric in today's oil market to determine how
much we keep in a strategic stockpile. The market has changed
quite a bit, as we heard, since oil price controls and long
term contracts and oil, globally traded oil market, like we
have today didn't exist 40 years ago.
The risks that we're guarding against today are adverse
impacts to the macro economy, to consumers, as a result of
price spikes, and that is going to exist whether we're a large
importer or not. We saw during the Gulf War, for example, crude
prices spike. We saw the price of gasoline go up, roughly, the
same amount in the United States and in the UK, even though the
UK was a net exporter at the time and the U.S. was a very large
net importer.
Secondly, I think it's important to remember we've only had
this title of boom for a couple of years. While there's good
reason to think that as prices recover it will continue and
U.S. oil production will continue to grow, U.S. production is
declining. It's down about half a million barrels per day so
far, month on month, from its high point this year. Demand is
up in response to the lower oil price, so there's no guarantee
that our imports will remain as low as they are today. I think
it's likely they, over time, will continue to decline, but you
want to be careful about shedding a 40-year strategic asset in
response to a trend that we've seen for a couple of years.
So the question of how to determine the size, I don't have
a number. But I suspect the study the DOE is working on would
look at things like assessing the impact on the macro economy
of price spikes, trying to estimate the likelihood of supply
disruptions and associated price spikes. And then, assessing
the impact of releasing SPR volumes to mitigate those price
spikes and on the level of spare capacity on the market and
then you compare those benefits to the carrying and opportunity
costs of continuing to hold the SPR.
That's the sort of analysis we should do to answer that
question before, I think, we sell a large chunk of it.
The Chairman. Thank you.
Ms. Ladislaw?
Ms. Ladislaw. Yes, I just want to make, probably, four
points.
First is, as Secretary Moniz stated, that's not the only
international obligation. If we're actually to use the
Strategic Petroleum Reserve, our obligation to how much we draw
down and contribute to that collective draw down is actually a
different number. So there you have to take that into
consideration.
The other is below a certain threshold you don't have the
ability or the flexibility and the authority to do the 30
million barrel a day draw down as well. So you want to be
careful of that.
Then there's a, sort of, unspoken, sort of, a hard to
substantiate element of this which is the size of your reserve
kind of matters and it sends a signal to the global economy
about what you're willing to put in reserve and how much
protection you've got. And so, I think, that given the new
found energy position we have in the United States and what we
think about the future of that, we have to, sort of, reassess
that calculus.
And then fourth is to the extent that you are going to sell
down any portion of the SPR, it sort of seems like the
Department of Energy has dibs. If you're going to sell it down
and the rest of it doesn't work then maybe you haven't invested
that money wisely because you actually shrunk the size, and it
still doesn't work the way that you need it to.
Lastly, the really important part is this international
context. We don't do this alone. In fact our effectiveness is
eroded by the international strategic stock system if that's
increasingly ineffective.
The way in which we care for, maintain and modernize our
SPR actually does send signals to the rest of the international
community about how we would like them to participate in that
system. I think it's really important for us to realize that
ours is a shrinking share of that system, not a growing one.
So I think that all of those things should be taken into
consideration.
The Chairman. All very good points, and straight to what I
raised with Secretary Moniz. It just seems a little crazy that
we would be urging China and India to come into this
collaborative energy security network while we are thinking
about eroding our own. Thank you all for your comments on this.
Senator Cantwell? This is something that we have been
working on together, and I think we are certainly of like
minds.
Senator Cantwell. Thank you.
Mr. Bordoff, so you buy into the modernization of the SPR,
correct? That it needs----
Mr. Bordoff. Bottom line I guess it depends what we mean by
modernization, but I think it's important.
Senator Cantwell. Infrastructure improvement.
Mr. Bordoff. Absolutely. Yes, I think there is an important
need to upgrade infrastructure.
Senator Cantwell. Okay, and would you use SPR sales to do
that?
Mr. Bordoff. I guess I don't have a strong view on that. I
think if the money can be appropriated elsewhere that would
make sense. If it were the only way to find it was to sell a
relatively small amount of SPR crude, I guess would be 40, 50
million barrels, depending on the price, it is an urgent
priority. I think it's important that we do it because whether
there's 700 or 650, if we can't get into the market at the
volume we need it's not going to be effective.
Senator Cantwell. Okay. In general, do you think of the SPR
as a surplus ever or not?
Mr. Bordoff. Well, again, I think we need to, kind of, do
the kind of analysis I just described to figure out, given how
much the market has changed and the different kind of risk
we're protecting against today than we were 40 years ago. Do we
think it can be much smaller and/or in fact should be much
bigger? But I think we need to do that work first before we
decide to sell a large volume for other purposes.
Senator Cantwell. So there could be, today, or someday in
the future, someplace where you might consider that a surplus?
Mr. Bordoff. It's certainly possible that given how the
market has changed we should make a collective decision to
adjust the size, up or down, but I think we should do that work
first.
Senator Cantwell. Okay, thank you.
Mr. Book, I am so glad that you mentioned these private
sector efforts, and Ms. Ladislaw, you mentioned these
international efforts. This has always been a curious subject
for somebody who cares about an aviation industry and how much
they took it on the chin with high fuel prices.
Have you seen European countries or others make jet fuel
reserves work successfully for them?
Mr. Book, would you have any comment on that?
Ms. Ladislaw. I don't really know very much about jet fuel
reserves, in particular, as how they're managed in the European
stock system. I do think that the more you dig away at this
question, the more complicated it gets. There is a lot of
analysis about the European strategic stock system and the way
in which they manage theirs and their own strategic positioning
of their refineries over the next several decades that will be
changing as well. And so I think if you don't take that into
consideration, as you think about the operations of the global
strategic stock system, it's really hard to assess ours
relative to theirs.
Senator Cantwell. How do you think they are doing,
juxtaposed to us, on this challenge in general? Is it your
overall analysis that it is a good idea that they have had
those additional reserves or not?
Ms. Ladislaw. It's really a question of how the political
expediency of being able to manage it given, you know, their
own circumstances. I mean, some countries in Europe actually
don't even manage the stocks within their own country. They
actually have them positioned in other countries.
So it really is, sort of, I think, it's a mixed bag. I
think there's been some criticism about the ability to draw
down on something that our private sector held stocks and the
ability for those actually to be strategic stocks as opposed to
just, sort of, the normal business of those refinery systems.
On the other hand I feel like there's a number of instances
where the global economy has actually benefited from the
release of their product reserves and the efficiency of some of
those systems because they're managed differently relative to
our crude releases. So it really is circumstantially----
Senator Cantwell. So you would not give them a positive
mark for having them, so this is something we have not done? We
have not, well, except for the home heating oil reserve, which
we are going to hear about a little more. But we have not done
refined product reserves. We have not done that.
Is the European or the world market result of that a
positive? Has that been a positive or has it been neutral or
negative?
Ms. Ladislaw. I think in general that the global oil market
has benefited from the fact that some of the global strategic
stocks are, in fact, in product stocks.
Senator Cantwell. Okay.
Ms. Ladislaw. And that's been a benefit.
Senator Cantwell. Okay.
Mr. Book, now tell us about your view on this in general.
Mr. Book. No, I think that there's a reason why they have
private stocks which is worth considering also which is that we
have the best refineries in the world. Their refining system is
in decline, and they have a lot of refinery capacity that, for
them, is really going to pose a strategic question in the next
5 years. Are they going to decide to keep uneconomic facilities
in place or are they going to rely, perhaps, on imported fuels
from our refineries?
We're in a different position, and that enables us to make
a different choice. For that reason it makes a lot more sense
for them to do it than for us.
Senator Cantwell. And your point is that even though we do
have it on home heating oil it really has not helped because
the market has not responded quite the way----
Mr. Book. Well, I don't----
Senator Cantwell. Or it has not had an impact on the market
in a way that you would like to have seen.
Mr. Book. Well, we want to be careful when we say it hasn't
helped. Like to the extent that sending signals that there's a
reassuring supply there can be useful in calming speculation
and hoarding and other negative aspects when it comes to
critical resources, sure.
I think sometimes having an insurance policy in place is
very reassuring to people who might decide that they needed
twice as much heating oil just in case there wasn't enough, but
the possibility that all you have done is taken working capital
that private companies previously put into inventories and gave
them, essentially, a subsidy. Say here guys, go spend it on
something that returns a higher value because the Federal
Government is going to pick it up.
That is a horrifically uneconomic result, because it leaves
you with the same energy security but at greater taxpayer
expense. So that's something you would want to avoid.
Senator Cantwell. Well, I am not sure. Are all the European
models done that way, at government expense?
Mr. Book. Oh, not at all.
Senator Cantwell. They are done the opposite, right?
Mr. Book. They actually roll into the commercial system.
Senator Cantwell. Yes.
Mr. Book. They have a very different--so the strategic
stocks that they have are, in many ways, commingled and
reserved as part of the ongoing capacity in the European
system.
Senator Cantwell. I think it just shows a different way of
looking at things.
I have always been perplexed by our dear colleagues who had
to pay so much on home heating oil.
There are parts of the Northwest, Seattle, North Seattle,
there is still some home heating oil. But for the most part
this is not something that we deal with. When you deal with
certain regions, and we have members of our Committee and have
had members of our Committee, it is a very, very big issue. So
you wonder what we could do to help alleviate some of that very
costly challenges the consumers face on heating oil.
Madam Chair, thank you for this important hearing, and we
will continue to work with you and others and try to figure out
a path forward.
I certainly believe we need to make the investment here to
modernize and to keep the Strategic Petroleum Reserve. I
certainly believe that we need to come up with a resource, as I
mentioned a number today, but I think we have to get that
number and make the investment.
So thank you for the hearing.
The Chairman. Senator Cantwell, thank you.
And to each of you, thank you for being here today and for
giving us a little extra time here this afternoon. We
appreciate the consideration. Thank you.
We stand adjourned.
[Whereupon, at 1:05 p.m. the hearing was adjourned.]
APPENDIX MATERIAL SUBMITTED
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