[Senate Hearing 115-525]
[From the U.S. Government Publishing Office]


                                                     S. Hrg. 115-525

                  FACTORS IMPACTING GLOBAL OIL PRICES

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

                                HEARING

                               BEFORE THE

                              COMMITTEE ON
                      ENERGY AND NATURAL RESOURCES
                          UNITED STATES SENATE

                     ONE HUNDRED FIFTEENTH CONGRESS

                             SECOND SESSION

                               __________

                             JULY 24, 2018

                               __________
                               
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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                JOE MANCHIN III, West Virginia
CORY GARDNER, Colorado               MARTIN HEINRICH, New Mexico
LAMAR ALEXANDER, Tennessee           MAZIE K. HIRONO, Hawaii
JOHN HOEVEN, North Dakota            ANGUS S. KING, JR., Maine
BILL CASSIDY, Louisiana              TAMMY DUCKWORTH, Illinois
ROB PORTMAN, Ohio                    CATHERINE CORTEZ MASTO, Nevada
SHELLEY MOORE CAPITO, West Virginia  TINA SMITH, Minnesota

                      Brian Hughes, Staff Director
                Patrick J. McCormick III, Chief Counsel
       Suzanne Cunningham, Senior Policy Advisor for Oil and Gas
             Mary Louise Wagner, Democratic Staff Director
                Sam E. Fowler, Democratic Chief Counsel
           Scott McKee, Democratic Professional Staff Member
                           
                           
                           C O N T E N T S

                              ----------                              

                           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.....................................................     3

                               WITNESSES

Sadamori, Keisuke, Director, Energy Markets and Security, 
  International Energy Agency....................................     5
McNally, Robert, President, Rapidan Energy Group.................    12
Braziel, E. Russell ``Rusty'', President and Chief Executive 
  Officer, RBN Energy, LLC.......................................    25
Auers, John R., Executive Vice President, Turner, Mason & Company    34
Bordoff, Jason E., Founding Director, Center on Global Energy 
  Policy, and Professor of Professional Practice in International 
  and Public Affairs, Columbia University School of International 
  and Public Affairs.............................................    42

          ALPHABETICAL LISTING AND APPENDIX MATERIAL SUBMITTED

Auers, John R.:
    Opening Statement............................................    34
    Written Testimony............................................    37
    Responses to Questions for the Record........................   107
Bordoff, Jason E.:
    Opening Statement............................................    42
    Written Testimony............................................    44
    Responses to Questions for the Record........................   109
Braziel, E. Russell ``Rusty'':
    Opening Statement............................................    25
    Written Testimony............................................    27
    Responses to Questions for the Record........................   103
Cantwell, Hon. Maria:
    Opening Statement............................................     3
McNally, Robert:
    Opening Statement............................................    12
    Written Testimony............................................    14
    Responses to Questions for the Record........................    96
Murkowski, Hon. Lisa:
    Opening Statement............................................     1
Sadamori, Keisuke:
    Opening Statement............................................     5
    Written Testimony............................................     7
    Responses to Questions for the Record........................    90

 
                  FACTORS IMPACTING GLOBAL OIL PRICES

                              ----------                              


                         TUESDAY, JULY 24, 2018

                                       U.S. Senate,
                 Committee on Energy and Natural Resources,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 10:03 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, everyone. The Committee will 
come to order.
    We are here this morning for a couple reasons. If and when, 
hopefully it will be shortly, a quorum is present, we will 
proceed with a business meeting to report four of our nominees 
for the Department of Energy. But recognizing that we do not 
yet have 12 members present, I will go ahead with agenda item 
two which is a hearing to examine the factors affecting global 
oil prices.
    This year has been marked by greater volatility, which has 
shown up in the prices being paid at the pump by nearly every 
American family and business. Prices are notably higher than a 
year ago, so the questions we are here to ask include: why is 
that, will it remain this way, and what, if anything, can we do 
about that? Of course, that is what everybody really wants to 
know, where are we going with this?
    When I look at the global markets, I see a number of 
factors that are pushing oil prices up but also a few 
significant factors that are also restraining them.
    On the one hand, global oil prices are the direct result of 
strong economic growth. In some ways, this is almost a 
tradeoff. Prices were a lot lower when our economy was a lot 
weaker, but I do not think that any of us would want to trade 
our remarkable pace of job creation and low unemployment to go 
back to those days.
    Another factor leading to the higher prices is that global 
oil demand is rising, not falling. This is, kind of, Economics 
101, and the driver on this front is not the U.S. but much of 
the rest of the world led by emerging economies such as China 
and India.
    At the same time, we are dealing with the fallout from 
OPEC's strategy of artificially restricting supply from its 
members. There is no question that has reduced inventories and 
pushed prices higher. We are also seeing the effects of supply 
disruptions across the globe, from Libya to Venezuela to 
Canada.
    On the other side of the ledger, there is somewhat of a 
silver lining. We are seeing that while prices are higher, it 
is not as bad as it could have been, and that is largely 
because of significant increases in U.S. production.
    America's Shale Revolution has brought tremendous benefits 
to our country and the global economy. As we produce more, we 
are creating jobs, we are generating revenues and we are 
bringing a degree of stability and confidence to global 
markets. We have also made smart policy decisions like lifting 
the ban on U.S. crude oil exports that are allowing us to 
become a major power on the global stage.
    I think it is complicated enough to understand where we are 
today, but again, I think most folks are interested in figuring 
out what really lies ahead. Where are we headed? Will markets 
loosen up as production in the U.S. and countries like Saudi 
Arabia continues to rise? Are we accounting for strong growth 
in global demand? Where are the geopolitical hotspots where 
substantial supply could disappear from the market at a 
moment's notice?
    Then we have the wildcards that are out there. What will 
happen if we fail to build needed infrastructure in the U.S., 
to ensure that energy can be transported from where it is 
produced to where it is consumed? What will happen if the U.S. 
releases oil from the Strategic Petroleum Reserve, not in 
response to an emergency but to manage tight market conditions? 
What will tariffs mean for the viability of domestic energy 
projects, and our ability to access markets in countries like 
China? What will happen as global spare capacity shrinks, and 
we no longer have a cushion of production that can be brought 
online quickly? Also, what are the looming impacts of 
regulations like the International Maritime Organization's low 
sulfur standards? Then, of course, front and center, front page 
in all the news right now is what will happen with Iran?
    I believe our best course is to continue with our efforts 
to produce more oil here at home, particularly in places like 
Alaska, where we have the will and capacity to do so. That is 
why I believe it was the right move to begin to open the 
Coastal Plain of ANWR to responsible development and why I 
support the new Five Year Program for Offshore Development. I 
think there is no substitute for U.S. production, for as long 
as we need it, even as we seek to diversify away from oil.
    Here to help us understand all of this is a truly 
distinguished panel of witnesses from as far away as the 
International Energy Agency (IEA) in Paris. We have one 
witness, Mr. McNally, who literally wrote the book on crude 
volatility. We have another, Mr. Bordoff, who has come full 
circle since he testified here in 2016 about the impacts of low 
oil prices. We also welcome Mr. Auers and Mr. Braziel, who will 
share their perspectives on the North American market.
    So, counting, we are not quite to 12 yet.
    Senator Cantwell, why don't we turn to you for your opening 
statement, and maybe we can get to the business meeting right 
after that.

               STATEMENT OF HON. MARIA CANTWELL, 
                  U.S. SENATOR FROM WASHINGTON

    Senator Cantwell. Thank you, Madam Chair.
    Thank you for scheduling what is really a very timely 
hearing on global oil prices, because every family and business 
across America is feeling the burden of higher fuel prices 
which is forcing average U.S. households to pay $155 more in 
fuel costs this summer's driving season as compared to last 
year's. Gasoline and diesel prices are currently around $.60 
more than they were at this time last year, and that is the 
highest that we have seen in four years. My constituents are 
particularly aware of the prices at the pump since Washington 
State drivers pay the third highest gas prices in the country. 
I believe even more than in some places in Alaska, which I find 
hard to believe.
    But currently, drivers are shelling out $3.41 per gallon. 
That means that every gas station fill-up costs Washington 
drivers about $8.00 more than it did last summer. That means 
everyone from boaters to people who are moving products that 
are key to getting product to market are paying more and making 
things more expensive which means less take home pay and higher 
retail prices for the goods they transport. Given the profound 
impact higher fuel prices have on family budgets and our 
economy, we need to take aggressive action on all fronts to 
make sure that we are policing these gas prices and markets.
    Not only do we have international cartels artificially 
constraining price, obviously lots of statements in the last 
couple of days are leading to uncertainty in the markets. What 
happens if the Iranians do follow through on their threat to 
shut down the Strait of Hormuz? About a third of the world's 
seaborne petroleum passes through that chokepoint where a 
shipping lane is just three kilometers at its narrowest point. 
So I hope to ask our expert witnesses about that as well.
    We also see, in tight oil markets, the opportunity for 
volatility and potential for manipulation. We must continue to 
find ways to protect consumers on all of these issues and 
continue to make sure that we are breaking monopolies at the 
pump--whether that means continuing to aggressively look for 
alternatives to fuel markets and solutions or making sure that 
we continue to focus on opportunities.
    I would like to learn more about why record level oil 
production here in the U.S. is not providing any relief at the 
pump. Just last week we reached a new production record of 11 
million barrels per day, only slightly behind Russia's 11.4 
million barrels per day.
    Even putting aside the fact that continuing to put that 
level of carbon in the atmosphere is unsustainable, America's 
increase in fossil fuel production seems to be only padding a 
bloated oil economy profit rather than helping the household 
budgets of many consumers. In fact, I read just yesterday that 
this Friday analysts expect Exxon to post a 62 percent increase 
in quarterly profits to $5.45 billion.
    The reality is, even as crude oil prices have doubled over 
the last two years, oil supplies have been relatively flat 
despite the U.S. crude oil production. That is because OPEC and 
other producers like Russia agreed to set market supply quotas 
starting in January 2017. The more we pumped the harder they 
worked to make sure that the prices stayed high.
    It is very hard for us to drill our way out of this 
problem. The effective way to reduce our fuel costs both 
nationally and individually is to beat the OPEC monopoly with 
some good old-fashioned competition at the pump. Americans 
should be able to fill up with homegrown biofuels instead of 
the Saudi-Russian crude, and we should continue to push for 
electric vehicles and lower operating costs for our consumers.
    Members of this Committee have been instrumental in 
increasing fuel economy standards, but now the Administration 
is trying to reverse that progress. Reduced consumption of oil 
in the United States by 2.4 million barrels per day is where we 
were on track for 2030, saving consumers in the United States 
$130 billion.
    Implementing these policies and reducing oil consumption, 
we have learned, has also been creating jobs--it is credited 
for more than 288,000 automobile manufacturing jobs and 1,200 
jobs across the United States. These alternatives are showing 
that we can produce pressure as an alternative to gasoline 
supplies and we need to keep moving forward. Unfortunately, as 
I said, the Trump Administration seems to be adhering to trying 
to tear down these alternatives.
    Today I also want to talk to our witnesses about what else 
the Executive Branch could be doing using its existing 
regulatory and investigative authority to make sure that 
untoward things are not happening in our supply chain. Recent 
steep, one-day changes in price of crude oil have raised 
concerns about the role of speculators with automatic trading 
and algorithms.
    On July 11th, domestic and international oil futures had 
the steepest one-day percentage decline in more than a year and 
the sharpest one-day point drop in over three years. These 
dramatic changes in one day have caused market observers and 
analysts to raise concerns about automated trading. This is 
something I will ask our witnesses about today.
    Madam Chair, obviously all of these tools should be in our 
toolbox to continue to focus on giving the America driving 
public the best opportunity to have low fuel prices.
    I look forward to asking our witnesses about these 
questions.
    The Chairman. Thank you, Senator Cantwell.
    [RECESS FOR BUSINESS MEETING]
    The Chairman. We will now turn to our panel. As I 
mentioned, we have a distinguished panel before us and we will 
begin with you, Mr. Sadamori.
    Mr. Keisuke Sadamori is the Director for Energy Markets and 
Security at the International Energy Agency. We welcome you to 
the Committee.
    Mr. Robert McNally, who I mentioned in my previous 
comments, is the Founder and President of the Rapidan Energy 
Group. Welcome.
    Mr. Rusty--is it Braziel?
    Mr. Braziel. Brazil.
    The Chairman. Braziel. Mr. Braziel is the President and 
Chief Executive Officer of RBN Energy, LLC. Welcome.
    Mr. John Auers is the Executive Vice President of Turner, 
Mason & Company.
    And Mr. Jason Bordoff is the Founding Director of the 
Center of Global Energy Policy at Columbia University.
    We welcome each of you to the Committee this morning. We 
ask that you try to keep your comments to about five minutes. 
Your full statements will be incorporated as part of the 
record. As you can see, we have a great deal of interest from 
the Committee this morning and the words that you have to share 
with us.
    Mr. Sadamori, if you would like to begin. Thank you.

  STATEMENT OF KEISUKE SADAMORI, DIRECTOR, ENERGY MARKETS AND 
             SECURITY, INTERNATIONAL ENERGY AGENCY

    Mr. Sadamori. Thank you, Chairman.
    Chairman Murkowski, Ranking Member Cantwell and 
distinguished members of the Committee, thank you for the 
opportunity to present the International Energy Agency's view 
on the factors affecting the global oil prices.
    Let me start by conveying his best regards from Dr. Fatih 
Birol, the IEA Executive Director, to members of the Committee.
    For more than 40 years since the IEA's establishment, the 
United States has played a critical leadership role in the IEA. 
Thanks to the Shale Revolution in recent years, the U.S. is 
leading global supply growth, both in oil and gas, making 
enormous contributions to global oil and gas supply security.
    The IEA's role has expanded, but analysis of oil markets 
and the oil security system continues to be the core mandate 
for the agency.
    Global crude oil prices are more than 50 percent higher 
than a year ago. This reflects steady oil demand growth and 
overachievement of the Vienna production cuts agreement by OPEC 
and some non-OPEC producers and some supply disruptions in 
other countries.
    Commercial oil stocks in OECD countries declined from more 
than three billion barrels in January 2017 to 2.8 billion 
barrels in May 2018, and they have been below the five-year 
average since March. All this points to a tightening market and 
the rising prices from the low point of less than $28 per 
barrel for Brent in January 2016 to nearly $80 per barrel in 
May 2018.
    So, going forward, the following factors should be 
considered. The global oil demand growth is relatively steady 
at the 1.4 million barrels per day, but there are signs of 
stress in some countries with oil price increase. Many 
developing countries recently reduced or eliminated subsidies 
for the oil products, and so higher global oil prices more 
directly translates to the higher prices at the pump. With the 
stronger U.S. dollar, some countries in their currency terms 
have seen sharp rises in their domestic cost of oil. The 
current trade tensions, if escalated, could adversely impact 
the global economy with a knock-on effect on oil demand.
    There are several major supply uncertainties. The first is 
Iran. At this time, we cannot know how much Iranian oil will be 
removed from the world markets by the U.S. sanction, but the 
recent indications point to the shortfall being significant. 
Second, collapse of oil production in Venezuela is continuing. 
Production currently is only 1.3 million barrels per day and 
could be below 1 million barrels per day at the end of this 
year. In Libya, the recent strike against the oil 
infrastructure resulted in production falling from one million 
barrels per day to about half million barrels per day. The 
situation seems to be improving but we cannot be sure if the 
stability stays there. Disruptions are happening in other 
regions including Iraq, Canada, North Sea and Brazil.
    Under such market conditions, a decision by the signatories 
to the Vienna Agreement to increase the production is welcome 
in supporting the stability of supply to oil markets, but it 
comes at the expense of the global spare capacity cushion.
    The United States is already the single largest contributor 
to the supply increase, growing faster than the global demand 
growth. The IEA, however, sees little scope to revise it 
upwards even with the recent price increase because of the 
constraints in pipeline takeaway capacities. The tight supply 
situation is not helped by the recent low level of investment 
in the upstream oil and gas industry. We should also not forget 
that the production from existing fields is declining by more 
than three million barrels per day, and that's about the size 
of the entire North Sea field each year.
    So we are in a very volatile and challenging period. 
Geopolitical factors, even more than pure fundamentals, are 
important in determining oil price movements. Despite the rapid 
growth of EVs, oil will continue to be the dominant fuel for 
the transport sector as well as important feedstock for the 
petrochemical products in decades to come.
    The emergency oil stock system, managed by the IEA and its 
members, therefore will continue to be critical to be prepared 
for the rainy day and ensure the stable functioning of global 
economic systems.
    For its part, the IEA is engaged in close dialogue with the 
major oil producers and consumers, both inside and outside the 
IEA family, and we are monitoring market developments to be 
prepared to advise on any support that might be needed to 
ensure market stability.
    On behalf of everyone at the IEA, I wish to once again 
thank you for inviting me before this Committee. I'm happy to 
answer any questions.
    Thank you, Chair.
    [The prepared statement of Mr. Sadamori follows:]
    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
    
    The Chairman. Thank you, Mr. Sadamori.
    Mr. McNally, welcome.

                 STATEMENT OF ROBERT McNALLY, 
                PRESIDENT, RAPIDAN ENERGY GROUP

    Mr. McNally. Madam Chairman, Ranking Member Cantwell, 
members of the Committee, I'm honored to be back before you 
today.
    I thought what I'd do in my brief five minutes is focus on 
three things: first, the return to authentic boom-bust oil 
price cycles; second, factors that are pushing oil prices down 
and up in the near term, as the Chairman alluded to; and third, 
an oil issue that's been preoccupying us in the industry for 
years now and, frankly, it's remarkable how little notice it's 
gotten in Washington and that's IMO 2020.
    Before delving into the detail about the up and down, let 
me just step back and note that these haven't been normal oil 
prices in the last 15 years. You just don't see a near 
quintupling in crude oil prices without a war in the Persian 
Gulf in modern times. That doesn't happen. But it happened from 
2004 to 2008. And you just don't see oil prices fall 60 percent 
in half a year as we did in 2014 without a recession or sudden 
supply surge. This is unusual in modern times. We have to ask 
ourselves why?
    Since the beginning of the modern oil market, oil prices 
have exhibited a proneness to wild boom and bust swings. Now, 
when oil was just a lighting fuel in the 1800s, it wasn't so 
much of a problem, but when it became the world's lifeblood in 
the 20th century, it became a problem. This volatility, not 
just for the oil industry, but for you, for governments, for 
industry, for airlines, for everyone who depends on oil which 
is most of us.
    To vanquish oil's wide swings and stabilize prices, 
governments and the industry regulated production, and folks 
forget the United States was the king of OPEC, specifically, 
the State of Texas. The State of Texas exhibited heavy-handed 
intervention in a market that would have made, forgive me, Mao 
Tse-tung blush.
    [Laughter.]
    The Texas Railroad Commission met once a month for 40 years 
and they set quotas well-by-well, field-by-field. When OPEC is 
getting along they meet twice a year and set quotas most of 
them ignore. We were the king of OPEC.
    Now why did the good folks in Texas, who normally want to 
limit government and produce oil, why did they agree to heavy-
handed intervention in the market? To stabilize prices. To 
vanquish that boom-bust that we saw from the '20s and the '30s.
    Now, some folks thought that OPEC took over from us in 1972 
and they lost it in 2008. Now, some folks thought that maybe 
shale oil would be the new swing producer and we saw that 
failed--$28 Brent, $26 WTI in 2016. So that didn't work out too 
well. Others think that this new entity formed by Saudi Arabia 
and Russia will be the new OPEC. I have my doubts, but we can 
discuss that.
    The bottom line is this, and this is very important. It 
comes from history, but we haven't really seen in four 
generations this type of volatility. No swing producer, nobody 
regulating supply, no peace in oil prices.
    Now, turning to the here and now, as the Chairman alluded, 
we have forces pushing prices down. Supply is growing faster 
than demand. The IEA, the EIA, OPEC, we were barrel counters. 
All of us see the market loosening up a little bit as we go 
into next year.
    Strong production growth in the United States, Brazil, now 
Saudi Arabia, other places, even with good demand, kind of, 
pushing prices down. There's a lot of fear in the market right 
now with trade wars and the Fed raising rates and the dollar 
being strong which makes oil more expensive around the world. 
There's fears about demand. That's putting prices down.
    But the concern also is forces pushing prices up and that 
is geopolitical disruption risk. And this gets back to the 
spare production capacity issue.
    When you have a swing producer regulating supply to keep 
prices stable, they usually hold back supply from the market. 
That doesn't happen normally. We call that spare production 
capacity. Now, that spare production capacity acts like a fire 
department in a wooden city. Okay? When you get into a 
disruption or a war, you want to call on the fire department. 
You call on that extra supply that's being held back by 
regulators to come in and douse the fire before it burns down 
the whole city. Right now, spare production capacity is close 
to or near zero. That is dangerous in light of the disruptions 
in Libya, Venezuela, Mr. Sadamori referred to and, of course, 
Iran.
    Iran. Iran exports 2.5 million barrels a day and in a 100-
million-barrel-a-day market, but in the oil market few barrels 
make a difference in price. With zero spare production capacity 
and commercial inventories, kind of, back to normal, the loss 
of 2.5 million barrels a day would be a big problem in terms of 
oil price stability.
    Now, Iran has threatened over the weekend to interrupt the 
19 million barrels a day that flows through the Strait of 
Hormuz, which Senator Cantwell alluded to. That is even a 
bigger problem, really the biggest problem that those at the 
IEA and we in the oil industry prepare for and analyze.
    While our military would clearly prevail over the Iranian 
military in a conflict, I think we ought not be complacent 
about how long that strait, that narrow strait, would be 
closed. It's cleaning up the mines. It's ensuring the insurance 
companies that they can insure those ships to go through. So 
that is a deadly serious issue for the oil market to continue, 
to consider.
    Oops, I'm on to my last minute, Madam Chairman, so I'll 
stop here and perhaps get into IMO in the Q and A.
    A final quick statement. I wish I could confidently predict 
stable, comfortable crude oil prices. That would be optimal.
    In 2012 I had the honor of testifying to your colleagues in 
the House Small Business Committee and noted crude oil prices 
and therefore pump prices had entered a new ``Space Mountain'' 
era of boom-bust price cycles. I maintain that view.
    We went through a bust recently, and eventually we will go 
through a boom. If a new swing producer does not emerge, we 
should all buckle up for a continued roller coaster ride on 
Space Mountain.
    Thank you, Madam Chairman.
    [The prepared statement of Mr. McNally follows:]
    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
    
    The Chairman. Thank you, Mr. McNally.
    Mr. Braziel, welcome.

STATEMENT OF E. RUSSELL ``RUSTY'' BRAZIEL, PRESIDENT AND CHIEF 
               EXECUTIVE OFFICER, RBN ENERGY, LLC

    Mr. Braziel. One of the reasons you have these hearings is 
because you want to get different views. We're going to have a 
different view.
    RBN Energy is a consultancy and market analytics company. 
We're based in Houston. Most of our work involves 
infrastructure analysis, production, transportation, processing 
for both crude oil and gas and natural gas liquids.
    You mentioned a few minutes ago that production is up to 11 
million barrels a day. In 2011, it was 5.5 million barrels a 
day. So we're double, right, over the course of that period of 
time and that's why we called it the Shale Revolution.
    But this morning, instead of focusing on the magnitude of 
that growth, I want to focus on the responsiveness, the 
``swingness,'' if you will, Bob, of U.S. production.
    What happens when prices go up? What happens when they go 
down? It's the nature of this responsiveness that, I think, has 
had such a big impact on global markets, and I'll explain what 
I mean by that in a few minutes, but let's first talk about a 
few fundamentals that, kind of, get me to that point.
    The big driver in all of this has been productivity 
improvement, productivity improvement that has radically 
changed the supply curve for U.S. oil production.
    Today, one rig can bring on anywhere between 5 and 11 times 
the amount of crude oil that one rig could do in 2011. These 
shale wells come on strong. The producers have learned how to 
drill them fast.
    The result has been a dramatic reduction in the per unit 
cost of production, in other words, lower marginal cost. And 
over the course for the past seven years, the U.S. now is 
shoving about 4.5 million barrels a day of this marginal 
production back into the global market and that's precisely why 
OPEC and NOPEC found it necessary to reduce their production 
two years ago in order to support global prices and, in effect, 
make room for U.S. production.
    The geography of this production in the United States has 
been quite concentrated. Eighty-five percent of the growth over 
the last two years since crude oil prices started kicking back 
up, comes from five basins: Bakken, Anadarko, Eagle Ford, 
Niobrara, Permian, with more than half of that growth coming 
from the Permian, by itself. And it's even more concentrated 
than that. Almost all of the growth in those five basins 
actually comes from only 28 counties, a land area of only about 
50,000 square miles, 1.7 percent of the U.S. Lower 48 surface 
area, about the size of Louisiana.
    But that's today. The land area where crude oil production 
is economically viable, what producers call their sweet spots, 
expands and contracts with the price of crude oil. For example, 
higher prices provide higher revenue per well so smaller wells, 
wells that produce lower yields of crude oil, become 
economically viable. So the sweet spots get larger when crude 
oil prices increase. Of course, the inverse is equally true. 
And that's what I mean by responsiveness. It's been a key to 
the growing influence of U.S. production now in global energy 
markets, and it's going to get a lot more responsive.
    Our firm prepares a production forecast several times a 
year for the U.S. We just completed a new update. We did one 
for prices staying at $70 flat for the next five years. Another 
one at $55 flat for the next five years. That $15 difference 
means a three million barrel a day change in the forecast 
between those two scenarios. So a relatively small price 
differential in crude oil prices results in a big change for 
the U.S. production.
    The implication for U.S. production for the U.S. is now 
that we are fully capable of responding in a meaningful way to 
increases and decreases in price, enough to have a substantial 
impact on the global crude oil market. So if prices increase, 
the drilling economics improve, producers drill more wells and 
production increases. If prices fall, drilling economics become 
less favorable, producers produce fewer wells and production 
volumes drop.
    But here's the key in this. The oil in the ground didn't go 
away. When prices are low, production of those barrels are 
simply put on hold, waiting for a price signal in order to 
bring those barrels to market. It takes time, but it's almost 
like those barrels are in a storage tank just waiting for the 
high sign, for a signal to withdraw that oil and move it to 
refineries both in the U.S. and throughout the world. The 
triggering mechanism, of course, is market price, not a 
government edict.
    Of course, that's not to say that oil markets are now free 
from the intervention of governments. Far from it. But that 
power has been at least constrained or limited by U.S. shale 
development and, most likely, that constraint will continue 
further in the years as shale production in the United States 
continues to grow. I think that's a good thing for the U.S. and 
for the world as a whole, for that matter.
    I appreciate the opportunity to speak to you today.
    [The prepared statement of Mr. Braziel follows:]
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    The Chairman. Thank you, Mr. Braziel.
    Mr. Auers, welcome.

 STATEMENT OF JOHN R. AUERS, EXECUTIVE VICE PRESIDENT, TURNER, 
                        MASON & COMPANY

    Mr. Auers. Thank you very much, and I express my thanks to 
all the Senators and Committee members for allowing me to 
present my testimony which will focus on the downstream 
industry in the U.S.
    For decades, the U.S. has set energy independence as a 
goal, but the current Administration has more recently upped 
that to energy dominance. While that might seem like standard 
political posturing, the U.S. refining industry, with support 
from the upstream and midstream, has in fact already 
established dominance in its own sector of the energy business. 
Since 2007, the U.S. has transitioned from being the world's 
largest importer of refined products to being the largest 
exporter by most measures. In that time, the U.S. net product 
balance has moved from a shortage of 2.5 million barrels per 
day to a surplus of well over 3 million barrels per day.
    The U.S. refining industry's ability to become a global 
export powerhouse, and to maintain that position, has and will 
be dependent on both things they have and will do well and also 
on the failures by their competitors around the world. On the 
domestic side of that equation, the free market environment in 
which the U.S. refining industry is allowed to operate, which 
isn't the case in most other countries, has been a key driving 
force. Over the years, market signals have ``thinned the 
herd,'' as uncompetitive refineries were closed and the 
remaining facilities evolved into the most advanced and complex 
set of refineries in the world. This allows U.S. refiners to 
run heavier and more difficult to process crudes, turning them 
into more valuable products, all at higher yields than refiners 
in any other region of the world.
    The U.S. also has the deepest, most talented and 
experienced refinery labor pool in the world, all the way from 
management through the technical ranks and down to the skilled 
and hourly levels. Combined with more flexible employment and 
work rules than exist in many other countries, this allows U.S. 
refiners to run their plants more reliably, safely and at 
higher throughput rates. It also allows them to operate the 
plants, execute capital projects and perform maintenance 
activities at lower costs, despite high wage rates.
    A major boost to the competitiveness of U.S. refineries in 
recent years has been the Shale Revolution. This event, which 
was also facilitated by the free market environment in this 
country, has allowed both oil and gas production to soar. 
Resulting low domestic natural gas prices provide U.S. refiners 
significant operating cost advantages versus many global 
competitors, particularly in Europe and Asia. Even more 
important has been the boom in oil production, which has 
substantively lowered refiner's relative crude costs.
    Further advantaging the U.S. industry has been the 
difficulties experienced by foreign refiners. Building and 
running refineries is a very complex task, requiring not only 
experienced and skilled manpower, but efficient and properly 
incentivized operating, maintenance, project execution and 
planning efforts. Many of those elements have been lacking in 
other parts of the world, in large part due to over-regulated 
market environments.
    The issues our neighbors to the south in Latin America have 
encountered have been particularly helpful to the U.S. 
refiners. Utilization rates in most countries in the region 
average between 50 percent and 70 percent, compared to over 90 
percent in the U.S. Despite growing regional demand, regional 
capacity and throughput has declined over the last decade. This 
hasn't been for a lack of trying, as a significant number of 
expansion and greenfield projects have been planned and 
initiated. Most have either not gotten off the ground or 
encountered significant cost overruns and delays. Much of the 
problems relate to the sponsorship of those projects by 
government-controlled companies, with the accompanying issues 
of confused and conflicted planning, incorrect staffing, 
corruption and, in many cases, simple incompetence. Those same 
issues have negatively impacted the operations at existing 
plants and as a result, U.S. product exports into Latin America 
have grown by almost 2 million barrels per day over the last 
decade.
    The ability to successfully penetrate and grow export 
markets has been a necessity for the health of the U.S. 
refining sector, considering stagnant domestic demand. Even 
with the strong growth experienced over the last three years as 
a result of lower prices, total domestic consumption was still 
over 900,000 barrels per day lower in 2017 than in the peak 
demand year of 2005. Despite this, and while our friends in 
Europe and Japan were shutting down over 3 million barrels per 
day of refining capacity in a similar environment, the U.S. was 
able to increase refining capacity by 1.4 million barrels per 
day.
    The U.S. refining renaissance has benefited the country as 
a whole and consumers of petroleum products at all levels. 
Together with the boom in domestic crude and gas production, 
the refined product surplus has been a major contributor in 
reducing the trade deficit. It has also led to a higher degree 
of supply security, and lower prices versus the previous 
environment where products had to be imported. This is 
particularly important during major supply-disrupting events. A 
prime recent example of this, and a true confirmation of the 
robustness and resiliency of the U.S. refining industry, was 
last year's rapid return of supply after Hurricane Harvey's 
devastation at the U.S. Gulf Coast.
    Looking to the future, the health of the U.S. refining 
industry will be dependent on a variety of factors, including 
market forces, geopolitical developments and changes in the 
regulatory environment, both domestically and globally.
    On the regulatory front, new domestic regulations which 
depress demand, increase costs, or limit market or feedstock 
access all could negatively impact U.S. refining 
competitiveness. More costly environmental rules certainly fall 
in this category, but perhaps the biggest threat to refiners 
and other segments of the petroleum industry could be more 
restrictive trade policies. Tariffs being imposed on steel and 
aluminum would have a very direct and negative impact on 
critical capital projects in all sectors. As just one example, 
three-quarters of the steel used in U.S. pipelines comes from 
overseas due to the lack of availability of the necessary 
grades domestically. More impactful still could be tariffs on 
crude and products themselves, but the biggest threat could be 
the potential of an all-out trade war which leads to slowing or 
declining global and domestic economic growth and product 
demand.
    New regulations and policy initiatives can also be positive 
for the industry and consumers. Certainly, the cut in corporate 
taxes has and will lead to more capital investment in every 
segment as more projects move above the hurdle rate. Also, as 
countries around the world move toward lower sulfur 
transportation fuels and more stringent environmental rules, 
U.S. refiners who have already had to make those investments 
will further their relative advantages. The International 
Maritime Organization mandate to decrease bunker fuel sulfur in 
2020 might be the single biggest event on the horizon and while 
it will advantage many U.S. refiners, especially the most 
complex facilities, it could be a major challenge to others.
    To close out my prepared remarks, let me just say that a 
thriving refining industry is a critical resource for any 
country. It provides not just major benefits to both the 
economy as a whole and consumers, but it is also an important 
national security asset. Nations around the world have targeted 
self-sufficiency in product supply and spent billions in an 
attempt to achieve this goal. But it has been the U.S. whose 
refining system has risen to the top, not through government 
involvement or subsidization, but by being allowed to develop 
and grow in a true free market environment. I believe it is 
incumbent on policymakers to remember this and thoroughly 
examine the impacts on the health of this vital industry and 
the resulting effects on consumers in any legislation that they 
consider.
    Thank you very much.
    [The prepared statement of Mr. Auers follows:]
    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
    
    The Chairman. Thank you, Mr. Auers.
    Mr. Bordoff, welcome.

  STATEMENT OF JASON E. BORDOFF, FOUNDING DIRECTOR, CENTER ON 
GLOBAL ENERGY POLICY, AND PROFESSOR OF PROFESSIONAL PRACTICE IN 
INTERNATIONAL AND PUBLIC AFFAIRS, COLUMBIA UNIVERSITY SCHOOL OF 
                INTERNATIONAL AND PUBLIC AFFAIRS

    Mr. Bordoff. Thank you.
    Chairman Murkowski, Ranking Member Cantwell, members of the 
Committee, thanks for the invitation to appear before you again 
today.
    As the Chairman noted, I was here last in April 2016 to 
testify about low oil prices at a time when prices had 
collapsed from about $115 a barrel in mid-2014 to the high $20s 
in early 2016--and they've since surged back to around $80.
    So let me explain the factors that have driven those swings 
and then offer three observations about the policy implications 
of them. Key factors in the 2014 oil price collapse included 
surging U.S. shale production, which you've heard about, and 
the decision by OPEC countries led by Saudi Arabia not to cut 
production in November 2014, widely condemned by many at the 
time as a war on shale.
    In 2016 after oil prices had fallen below $30 a barrel, 
OPEC, along with several non-OPEC countries, notably Russia, 
came together to cut production and prop up prices, oil prices 
recovered into the mid-$50s for much of 2017 and then they 
began to surge again for several reasons. One, the OPEC cuts 
worked and brought down excess inventories; second, oil demand 
growth has been exceptionally strong, above its 10-year 
average; and then, we've heard from the IEA about Venezuela's 
production collapse in light of its tragic economic situation.
    More recently, several additional factors pushed up prices 
even further. President Trump pulled the U.S. out of the Iran 
Nuclear Agreement, raising concerns about additional oil supply 
loss; Libyan production fell by half due to political unrest; 
there were short-term outages in Canada and elsewhere; and then 
all of this was exacerbated by fears about the historically 
small buffer of spare capacity, as my colleague, Bob McNally, 
has explained so well in his book for our book series at 
Columbia.
    In the last few weeks then prices fell again as OPEC 
countries announced they would put more supply in the market. 
Libyan supply came back online and the Trump Administration did 
three things. First, it signaled a softer approach toward the 
implementation of Iran sanctions; second, it raised more fears 
about the potential for a global economic slow down as a result 
of an escalating trade war; and third, it was reported to be 
considering tapping the SPR.
    So, what does all this mean for policy?
    First, it is impossible to predict future oil prices and 
few policy actions we have at our hands today provide relief at 
the pump in the near term. So I think energy policy decisions, 
whether it's to increase production or reduce consumption or 
anything else, should largely be made independent of today's 
oil price. One policy action that would reduce oil prices, 
possibly, albeit temporarily, could be a release of the SPR. I 
do not believe current conditions warrant that and there are 
better ways to mitigate the potential price impacts of re-
imposing sanctions on Iran. There are a few signs of shortage 
in the oil market today, significant geopolitical risks still 
loom and, as I testified before this Committee before, I think 
Congress should avoid further selling off this important 
national security asset to pay for other priorities.
    Second, the shale revolution has been transformational for 
the U.S. energy outlook delivering enormous economic and 
geopolitical benefits, but gasoline prices are still based on 
oil prices and oil prices are still set in an integrated 
market. And so, that means when global oil prices spike, 
consumers feel it at the pump regardless of how much less 
import dependent we are. Shale can be ramped up and down more 
quickly. I do not think it is true swing supply. Geopolitical 
influence in the global market comes less from how much you 
produce than from that buffer of spare capacity you might 
choose to hold. And so, when oil prices fell below $30 two 
years ago and then soared to $80 this year, shale could not 
stabilize the market. That job fell to OPEC, mainly Saudi 
Arabia which is the only country that chooses to hold a 
meaningful amount of spare capacity.
    Third, the best way to reduce the exposure of consumers to 
inevitable future oil price shocks is to reduce how much oil 
our economy uses in the first place, continuing with planned 
CAFE increases is one good way to do that, not to mention to 
reduce greenhouse gas emissions.
    While increasing production does not insulate consumers for 
higher pump prices, it is important to note that more supply, 
along with the potential for reduced demand, can reduce the 
harm to the economy overall from higher oil prices by lowering 
import dependence because more of the increased consumer 
spending on fuel circulates within the U.S. economy rather than 
flows overseas.
    The converse of that is why the U.S. economy saw much less 
benefit from the oil price collapse of 2014 and '15 than would 
previously have been the case because the consumer savings at 
the pump were offset by reduced oil-related investment which is 
a bigger share of the economy now as a result of the shale 
boom.
    We've heard about the infrastructure bottlenecks. I think 
policymakers can facilitate responsible production by 
efficiently permitting infrastructure without undermining 
needed environmental reviews and by avoiding a trade war that 
threatens to raise material costs like steel or aluminum or 
possibly lead to retaliatory tariffs on U.S. energy exports.
    Members of the Committee, thank you again for inviting me 
here today, and I look forward to your questions.
    [The prepared statement of Mr. Bordoff follows:]
    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
    
    The Chairman. Thank you, Mr. Bordoff.
    And thank you all--very, very interesting testimony this 
morning.
    I want to start off with, again, the subject that everyone 
has been talking about this week and that is Iran. We have 
heard several of you mention the supply disruptions, the global 
disruptions, that we have seen in Venezuela and Libya and 
certainly with the potential for Iran going offline.
    The question, and I think I will direct this to you, Mr. 
Sadamori and Mr. McNally. We have a 100 million barrel per day 
oil market, so where does this supply come from in this short-
term to meet the potential for a shortfall? Then, if I could 
have you both discuss this issue of spare capacity? This is 
something that I have raised over the years, and I am trying to 
get a real handle on what we truly understand to be spare 
capacity right now within OPEC, within the non-OPEC countries.
    Mr. Bordoff, you had mentioned that, really, it is only 
Saudi Arabia that has true spare capacity. You suggested that 
U.S. shale oil is not necessarily spare capacity or that swing 
supply that is needed.
    So can we have a conversation about this? Where do we go if 
we do have this severe disruption that Iran can clearly 
contribute to in addition to what else we have seen, and how 
does the global spare capacity factor in and to what assurance 
do we have that we have enough to take us through?
    Mr. Sadamori.
    Mr. Sadamori. Thank you, Chair.
    So the question about where the additional supply can come 
from in the very short-term. We have to take note of the fact 
that the Vienna Production Cuts Agreement by the OPEC and some 
of the non-OPEC oil-producing countries, they are still 
maintained. And, of course, they are producing a lot less than 
their target and also they are coming from the unintended 
production declines in countries like Venezuela, but the 
fundamental agreement, we understand, in the last June meeting 
was that they would recover the oil, increase the production 
and lower the level of compliance to 100 percent.
    That means that there are some countries in that group who 
are producing less intentionally, a lot less than their 
capacity. The normal expectation is that those additional 
barrels should come from them.
    The Chairman. To what extent should the U.S. increased 
production play?
    Mr. Sadamori. Yes, and also in terms of the numbers, in our 
most recent oil market report, we expect that those, the OPEC 
members along the Gulf Coast, the Saudi, UA and Kuwait, 
together they should have a bit more than 2 million barrels per 
day over spare production capacity. Also the other producer who 
can increase production will be Russia. Indeed, we are already 
seeing that today. I mean, the Saudi and Russia, they already 
started to open taps in June, so the increase is already 
happening. That is about the OPEC and some non-OPEC side, the 
participants to the production cuts agreement.
    On the other hand, in the United States, of course, the 
U.S. is increasing the production at a very fast pace. The 1.7 
million barrels per day, in one year, in 2018 and we expect 
that to continue a bit slower, but still 1.2 million barrels 
per day in 2019.
    But in a sense, we, I mean, the market participants already 
incorporated that very fast production growth in the United 
States. What we are seeing right now is the, as I said, there 
is the pipeline takeaway capacity which is somewhat preventing 
the further growth.
    In the short-term, of course, we understand that many 
projects are going on in regions like Texas and those pipeline 
projects will be completed sometime in 2019, but before that, 
in the very short-term, it is really hard to expect U.S. 
production to grow significantly before the pipeline takeaway 
infrastructure issues are solved.
    The Chairman. Mr. McNally, do you have anything to add to 
that?
    Mr. McNally. Yes, Madam Chairman, this is something I have 
thought about and worked with when I was on the White House 
National Security Council, like my colleague, Jason Bordoff, 
under President Obama, working for President Bush when we 
liberated Iraq and we thought very much about this.
    The problem, the policy problem again is, even though it is 
100 million barrels and we are only talking about a couple-
million-barrel disruption, a small disruption can mean a big 
price spike and a problem for our economy.
    So where do you go for quick supply because you cannot 
bring on an oil field really fast? The first place you want to 
go for something like that, if you suddenly lost 2.5 million 
barrels a day or 3 or 4, you go to spare production capacity 
held by, mainly, Saudi Arabia. We went there in 1990 and '91. 
They were a little late in getting there. Saudi Arabia provided 
that before we liberated Iraq in 2003. That is the first 
resort. That is what the fire department is for. You call the 
fire department. The problem is there is no fire department 
today.
    Mr. Sadamori mentioned the Saudis are going up. I want to 
have a word about defining spare capacity in a second, but 
spare capacity, we all must agree, is at least very tight, if 
not completely absent.
    The next place you go is commercial inventories. Now, back 
in the last two years we had this glut. We had this glut and we 
had extra inventories. If we had to work it off a little 
faster, that would have been okay. We wouldn't have had to have 
higher prices. But commercial inventories, and we could only 
see them in the rich world, now the growing part of the world 
in Asia and Africa, we don't see those inventories. So the rich 
world's inventories are normal. The rest of the world is 
probably a little tight on inventories. If we were to draw down 
commercial inventories right now by that 2.5 million barrels a 
day, it would put upward pressure on prices.
    That leads to our last resort which is strategic stocks, 
held in the United States and in other IEA countries, 
principally Germany and Japan. We, unfortunately, decided to 
sell off our strategic stocks to pay for budgetary expenses so 
our protection is being reduced, but that is where you would 
want to go and frankly, in my view, were we to lose Iran's 2.5 
million barrels a day later this year or next and, certainly, 
were there to be an interruption in the Strait of Hormuz of 19 
million barrels a day, that would constitute a legitimate use 
of strategic stocks.
    Final word on defining spare capacity because folks do 
define it a little differently. The IEA has a higher number for 
spare production capacity. They have, I think it is above 3 
million barrels a day because they count oil that Saudi Arabia 
could bring on but in several months.
    In history and the EIA, we have a little stricter 
definition. It is oil that you can get in weeks, four weeks to 
be exact, and on that definition the EIA has a little lower 
definition of about 1.5 million barrels a day. The way we count 
it, it is even lower than 1 million barrels a day, but however 
you count it, it is really tight and relative to the risk we 
face.
    The Chairman. Thank you. Thank you both.
    Senator Cantwell.
    Senator Cantwell. Thank you, Madam Chair, and thanks to the 
witnesses.
    You have painted, all of you collectively, a picture of 
what the roller coaster looks like for the future. I think that 
is the most challenging thing for us to get our minds around is 
that the roller coaster is going to continue.
    For consumers at home it, obviously, can be very, very 
devastating and so, to me, I think, Mr. Bordoff, you said it 
best that the best thing we can do is diversify off of oil just 
because of that integrated market and now, spare capacity 
issue. That even though we have upped production, we are not 
going to avoid still being wrapped around that global market 
and the challenges of that global market.
    One thing I wanted to ask about, obviously we talked, 
everybody has talked a lot about Iran. When we were focusing on 
high prices a decade ago, one of the issues that people put or 
at least a lot of the oil executives would say there is a 
terrorist premium, a threat of terrorism activity disrupting 
supply. They would say that there is something between a 15 and 
20 percent increase in price just based on that fear factor.
    Do you have some sense of what the Iranian issue might be 
causing in the market today?
    Yes, Mr. Bordoff.
    Mr. Bordoff. It is hard to put a dollar figure on it. We do 
see oil prices move in response to signals from the 
Administration that it will take a harder or softer line toward 
implementing sanctions a few weeks ago when an unnamed State 
Department official was giving an anonymous briefing and said 
there would be no exceptions for significant reductions in 
Iranian oil purchases. So countries had to go to zero by 
November, we saw oil prices spike several dollars a barrel, I 
do not remember how much exactly, and then the Administration 
seemed to walk that back a little bit.
    So I do think that tool is an important one we should 
remember. I think that the Strategic Petroleum Reserve is 
designed to deal with short-term, temporary, severe supply 
disruptions not the potential for a long-term supply loss from 
implementing sanctions against any country, against their oil 
supply.
    The Iran statute was written with a mechanism built into it 
to try to take account of conditions in the global oil market 
and make sure we were imposing pain on Iran without imposing, 
shooting ourselves in the foot at the same time.
    Senator Cantwell. But you are saying both trade wars and 
this issue are causing some level of increase in price.
    Mr. Bordoff. Well, I think recently it has had a little bit 
of the opposite effect because the new sanctions that were 
announced against it, sorry, the new tariffs that were 
announced against Chinese goods, raised fears that the trade 
war could be worse and that might have a negative effect on 
global economic growth. The rate of GDP growth is one very 
important factor in how strong oil demand growth is which could 
push up prices in a tightly-balanced market.
    So there are a lot of geopolitical risks out there. 
Obviously, Iran is one. Libya is another. Venezuela is another 
and there is general potential for increased tensions or 
conflict in the Middle East or elsewhere as we have seen on 
social media and other places in the last few days.
    Senator Cantwell. What did we get out of the $4 billion tax 
break, the new tax break in the tax plan that we gave oil 
companies? What did we get out of that? You know, in the 
context of here we are months later. We gave a $4 billion tax 
break, a new one in addition to the lowering of the corporate 
rate. We gave them additional foreign investors, yet here we 
are paying higher gas prices. So what did we get out of that?
    Mr. Bordoff. Well, it is hard. I do not know that I can 
comment specifically on what was in the tax bill.
    The general point about increased production and to what 
extent it helps consumers at the pump, I think in your opening 
remarks you made the comment about how we have increased 
production, yet prices have still gone up. That's partly 
because prices are set in a global market. There is a limit to 
what shale can do, as extraordinary as doubling oil production 
has been, I mean, this is the largest five-year increase of oil 
production of any country in history. That is a staggering 
turnaround from what the outlook was not long ago. And I think 
it is fair to say that if that had not happened, we would be 
facing a different oil price outlook right now.
    Senator Cantwell. I guess I would say I do not think that 
is a fair use of the taxpayer money to give these oil companies 
a huge tax break and now we are seeing a spike in prices. I 
would have preferred us to think about this issue of what can 
we do on the spare capacity side.
    What more can we do if the SPR has infrastructure issues? 
The Chair and I were both very interested in making sure that 
we worked with Secretary Moniz at the time to increase the SPR 
infrastructure so that it was robust enough.
    What about the way Europeans look at jet fuel? Why not look 
at creating more mechanisms for industry to have more spare 
capacity? They have a reserve as it relates to--we are not at 
that point yet, but definitely the last decade was a huge 
roller coaster for the airline industry because of high fuel 
cost. A lot of people lost their jobs, lost their pensions, 
lost everything because of that spike.
    What can we do now if spare capacity is such a big issue 
that is controlled by somebody else, the Saudis, not us? What 
can we do?
    Mr. Bordoff. We do not have the ability that a company that 
controls its national oil production has to hold back spare 
capacity. The responsiveness of shale and the extent to which 
shale grows is determined by the individual economic decisions 
of thousands of independent actors throughout the United 
States. Companies hold some level of inventory that makes sense 
for them.
    We have government held stocks which, I think, are more 
responsive than privately held stocks, when they are used by 
the government. But that is, again, sort of extraordinary 
circumstances.
    So it raises the question of whether government's role is 
actually to provide oil price stability moving forward and 
whether there are other actions we can take to reduce how 
exposed our economy is because of how dependent we are on oil.
    I will just make one--oh, sorry.
    Senator Cantwell. Go ahead.
    Mr. Bordoff. I was just going to make one other point which 
is we are, sort of, talking about to what extent shale can be a 
swing supply source and ramp up and down quickly and if it can, 
it can, sort of, vanquish the role OPEC or others could have. 
That comes at a cost, and I do not need to tell Senators here 
from oil-producing states, to U.S. communities. I mean, when 
truck drivers are making six figure salaries and then they lose 
their jobs, when the school funding base soars and then 
collapses. The volatility in oil output can be different for 
communities to manage even though it may have a benefit in 
stabilizing global prices.
    Senator Cantwell. My time, I am way over.
    I would just say, yes, I endorse your statement that the 
best thing to do is get us off the roller coaster by 
diversifying off of oil. I endorse that.
    In the meantime though, I do think we should be--I will 
write something for a question for the record, Madam Chair, on 
this issue. But I do think that Europe has looked at jet fuel 
as a specific way of increasing supply, so we will ask that for 
the record.
    Thank you.
    The Chairman. Great.
    Senator Gardner.
    Senator Gardner. Thank you, Madam Chair. Thank you to the 
witnesses for being here today.
    I wanted to talk a little bit about--I think the tax cut 
conversation is a fascinating one because, I think, in the 
context of other energy costs, if you look at utility rates, 
for instance, 101 utilities have cut their rates as a result of 
the tax cut. That is $3 billion in savings to the American 
people as a result of those utility rate cuts. I think it is 
important to talk about all the ways that the economy has grown 
as well as people saving money because of the tax cuts in every 
Congressional district.
    I wanted to ask you, Mr. McNally, a little bit about the 
concerns I have on state policies. There may be some efforts in 
Colorado this year to, once again, try to ban oil and gas 
production. The EIA estimates that in August we could have 
about 611,000 barrels of oil being produced in the State of 
Colorado. This is an incredible number. What happens if you 
were to see success in banning oil production in a state like 
Colorado with that level of production?
    Mr. McNally. Thank you, Senator Gardner.
    What we would do in that case is forgo an opportunity to 
avoid a real problem. If you look back to 2011 and 2012 when 
crude oil prices were $100, gasoline prices were $4.00 a 
gallon, we lost Libya and then we put sanctions on Iran. Spare 
capacity was really tight. The reason we didn't go back to $150 
a barrel in 2012 and '13, like we were just almost at in 2008, 
is because shale oil production, kind of, galloped over the 
hill and started ramping up just in the nick of time.
    Now, even though shale is much more responsive and does act 
more quickly in response to prices, you have to have states 
that are open to the permitting. You have to have openness to 
the resources, to the takeaway capacity. It has to be well-
regulated because shale oil, like all energy production, needs 
social license to operate.
    But you don't want to have across-the-board bans. Had we 
had anything like that, we not only would have not had the 
cavalry save us in 2011 but maybe double-dipped into a 
recession, but we wouldn't have had the gas boom earlier which 
changed things in the Atlantic and made Russia, a force then, 
to loosen their price and power in Europe and so forth. So 
across-the-board bans would have deprived us of some of the 
biggest wins we've had geopolitically and economically in the 
last 20 years and, going forward, one would hate to think about 
what we would lose by doing something like that.
    Senator Gardner. Thank you.
    Mr. Sadamori, if you could just talk about, perhaps a 
little bit, your take on the Nord Stream 2 pipeline and what 
effect that has on geopolitical security, particularly security 
in Europe, and what it could mean for Ukraine.
    Mr. Sadamori. I think I would like to refrain from making 
comments on the specific projects, but in general terms, we 
think that the gas supply security would be a very crucial 
issue for the European countries.
    The fundamental question is how they can really diversify 
the supply in the real sense. Of course, that also comes to the 
issue of, kind of, transit routes. So whether they can secure 
the, kind of, a diverse supply security in that sense. I 
understand that the various discussions are going on at the 
various levels, so we would like to monitor the development.
    Senator Gardner. Does your organization take a look at the 
concerns that Russia may pose when it comes to energy 
deliveries to Europe and what that could mean for European 
energy security?
    Mr. Sadamori. Well, it may not be appropriate to talk about 
the kind of hypothetical, kind of, the situation but IEA 
recalled that in the G7 Energy Ministers Meeting there was an 
agreement by the Energy Ministers of the leading countries of 
G7 that the energy resources, energy should not be used as a 
weapon. And so, kind of a diverse, secure supply needs to be 
secured. I think that would be a very important issue for the 
global economy as well.
    Senator Gardner. I agree with that.
    Has Russia used their energy as a weapon?
    Mr. Sadamori. So, I'm not talking about the specific 
behavior of a specific country. What I'm talking about is the 
kind of general agreement made by the----
    Senator Gardner. Would you consider shutting off a pipeline 
to a country, perhaps in the middle of winter, shutting down 
that supply, is that utilizing energy as a weapon?
    Mr. Sadamori. Well, the--I don't mean to talk about the 
real, the use of energy as, kind of, a weapon, but the recent 
history, back in, I recall, that was 2008 and '09 and then 
again 2014, that there were serious concerns on the European-
consuming countries about the stable supply of their natural 
gas and that was in the middle of winter.
    The gas was intensively, a lot was used for their purposes 
of heating the buildings and unlike the electricity who has 
other generation sources like the coal or other sources when it 
comes to, kind of, a heating based on the, kind of, 
infrastructure setting, it's really hard to find a replacement 
for other fuels. So in that respect there are, kind of, serious 
concerns on the European side and that led to the, kind of, 
intensive discussions inside Europe about how they can secure 
the gas supply security in the countries.
    Senator Gardner. Well, thank you.
    I'm just--I am out of time, but I am concerned about the 
security of energy and I think we have seen one country use it 
as a weapon. That is Russia. To see Europe become more reliant 
on that is a concern.
    The Chairman. Thank you, Senator Gardner.
    Senator Smith.
    Senator Smith. Thank you, Madam Chair, and thank you to all 
of you for being here today, very interesting testimony.
    As I listened to you it is really clear that we can see 
that production in this country has grown tremendously over the 
last decade and yet, obviously, we are still susceptible to 
rising prices because this is essentially a global market. You 
are talking about the issues around what we can do to effect 
prices on the supply side and then what we can do to effect 
pricing on the demand side.
    Mr. Bordoff, at the end of your testimony, as Senator 
Cantwell remarked, you make a point that I think is really 
important. The best way to reduce our exposure to future oil 
shocks is by reducing our oil consumption in the first place. 
This seems to be such a timely observation given that we are 
wondering what the Trump Administration is going to do, their 
anticipated move to roll back fuel efficiency standards.
    In Minnesota the strong efficiency standards that were put 
in place by the Obama Administration are estimated to have 
saved Minnesota consumers about $650 million. In 2030, if those 
standards are left in place, the average Minnesota household 
will be almost $3,000 richer. So it has a real pocketbook 
impact. Of course, it also creates jobs in Minnesota, because 
our state is a biofuels producer.
    Could you just talk a little bit more, Mr. Bordoff, about 
the role that these vehicle efficiency standards can play in 
our ability to cope with higher prices?
    Mr. Bordoff. Yeah, as I said in my testimony--thank you for 
the question, Senator. The gasoline prices are set in a global 
market so whether, regardless of how much we are producing in 
the United States, consumers are still going to face prices at 
the pump based on what is happening in the global oil market.
    U.S. shale production can help as an additional source of 
supply and putting another 5 million barrels a day on the 
market certainly has. But fundamentally, reducing the energy 
intensity of the economy, I think, is what makes it most 
resilient to oil price shocks which are inevitable. That will 
happen. Bob wrote a whole book about it.
    We are going to see prices go up and down and that is 
difficult for consumers to manage. They do not have the same 
ability to hedge prices the way airlines and large companies 
do. They do not have those tools available and that's 
difficult.
    So I think policies that help reduce the energy intensity 
of the economy and improve energy efficiency are good for those 
reasons, economic reasons, as well as for the problem of 
climate change.
    Senator Smith. Thank you.
    Does anybody else want to comment on that? On that question 
of what else we can do? Thinking about, particularly, the 
opportunities around keeping vehicle efficiency standards in 
place in order to help protect consumers from price increases?
    Mr. Auers. Well, I will say a few things on that.
    I mean, efficiency standards are good, but as I made a 
point in my remarks, the free market and taking leases off of, 
you know, this wonderful thing that is the free market, allows 
them to innovate and increase efficiency. And they will do that 
on their own given the proper price signals.
    The problem with having efficiency standards that are too 
regimented and too fixed, it can cause situations where we are 
not creating the optimal environment to make the most efficient 
decisions on, whether it is on fuel efficiency or anything 
else. So, you know, it is important to keep in mind to provide, 
to allow the market to do its thing.
    I always look at how a football game or a basketball game 
is officiated. You know, government should play the role of an 
official, an official that is not flag happy or calling ticky 
tack fouls, but an official that keeps the game moving and 
allows the teams to become as, you know, let them make the 
decisions, sometimes--and not play the role of coach.
    Senator Smith. I am hearing your point, but I think the 
challenge is that the way the prices are set do not always 
include all of the externalities that are involved in the full 
cost of that price. So in your analogy, the market is not 
including all of those things. At first, this is an issue in 
Minnesota, at first glance, biofuels appear to be higher cost 
than oil, but if you consider the low-carbon fuel standard 
shows that if you look at these, if you account for all of 
those costs, the price is actually competitive. Of course, 
those costs are assigned to the market.
    I don't have too much more time, but I think that is a 
really important point here.
    Mr. Bordoff, I would love to follow up with you on this, I 
mean, what are the benefits to consumers and the environment if 
we adopt a California-style, low-carbon fuel standard in order 
to consider all of those issues?
    Madam Chair, I know I am out of time, but I want to just 
note I am going to be leaving to go to the Agriculture 
Committee where we are going to be discussing how speculation 
is affecting oil prices and what we need to do to take a look 
at that. The Agriculture Committee is holding a hearing right 
now on the nominee of the CFTC Commissioner, and it is going to 
be one of the issues that we are discussing, so I appreciate 
that being raised here as well.
    Thank you.
    The Chairman. Thank you, Senator Smith.
    Senator Cassidy.
    Senator Cassidy. Gentlemen, I just enjoyed your testimony, 
all of you.
    A couple things just for the record.
    In terms of selling the Strategic Petroleum Reserve, one of 
you mentioned that we have already sold off a portion of it. We 
have not sold it yet. Ed Markey and I have an amendment that 
allows the government to time the market to sell at high and 
replenish back low. Theoretically, I think it is 2023 that they 
currently plan to sell, but they can move it up now to take 
advantage of high market prices and kind of, if you will, win-
win. A win for the taxpayer, but also to get the higher price 
now to do the repairs to the infrastructure that Madam Chair 
was able to put in.
    Secondly, I also want to point out that Senator Cantwell 
asked what has the Tax Cut and Jobs Act bill done for this? I 
have been told by folks that companies have accelerated their 
pipeline construction that was planned for the early '20s into 
these current years because of the five-year depreciation. They 
are taking advantage of the Tax Cut and Jobs Act bill just to 
move these projects now, and so midstream is responding to our 
tax bill--so that would be one answer to Senator Cantwell's 
problem.
    The other thing I want to point out is that the delay that 
occurred in the last Administration on the construction of the 
Keystone XL pipeline has definitely created a supply 
constraint. My Gulf Coast refineries use that oil from the 
Canadian tar sands and from the Bakken. The last Administration 
put in constraints, and now we are complaining about higher gas 
prices when it was the previous Administration's policy which 
has contributed to that. I also wish to point that out and we 
would not be talking about midstream constraint had there not 
been some of the strategies of the previous Presidential 
Administration. With all that said, I have used up two minutes.
    Let me just explore something. I will note that when prices 
fell, part of the reason they fell is that overextended shale 
producers had hedged future production. They continued to 
produce even though prices were $30 because they had hedged to 
sell, let's say, at $60. And that, kind of, drove prices down.
    We have now shaken out the production market--knowing that 
you know this, but just for context--we have shaken it out so 
the more efficient, those who had the cash cushion to get 
through the low price period, survived.
    But in a sense, shale will respond as a swing producer 
because now that prices are up more fields will be developed, 
inevitably there will be some who will again hedge, but they 
will bring out--
    Somebody mentioned or I read in my state, Austin Chalk, 
which is coming online and is going to be, at least in the 
near-term an intermediate, a new source of production which 
probably will, maybe, over-produce a little bit.
    Any comments on the role of things like Austin Chalk and 
the OCS and these other fields coming online to lease in the 
intermediate, maybe six months from now, making some impact 
upon these high prices?
    Yes, sir.
    Mr. Braziel. Well, Austin Chalk certainly will and the 
reason why Austin Chalk works is exactly the reason that you 
said is because the economic support in drilling in Austin 
Chalk and support drilling in Eagle Ford and Permian and all 
the other basins that I mentioned a few minutes ago too.
    So, what is happening in the market is, in fact, giving us 
the response that we would expect.
    Now, shale in the United States is not going to be a swing 
supplier getting to your four weeks, whichever one of you guys 
said four weeks has got a hit. Austin Chalk is not going to 
happen in four weeks.
    Senator Cassidy. Well, we really cannot expect relief, 
after say, Labor Day, because not only will the summer driving 
season be over, but the Russians going into winter, I 
understand, have to keep full production or else they freeze 
in. And then, some of these things like Austin Chalk will be, 
perhaps, hitting their stride. Is that a fair statement that we 
can expect after Labor Day some relief from this?
    Mr. Braziel. That is a fair statement.
    And one of the things that has not been mentioned in this 
hearing so far is the forward price of crude oil at West Texas 
Intermediate and in Cushing, Oklahoma. That is the price that 
we have been talking about here, for the most part.
    That price in five years, in 2023, is $55. So going back to 
Senator Cantwell's question a few minutes ago of what's the 
price premium in the market for all these various uncertainties 
that we're seeing right now in the marketplace? I could make an 
argument that all of the uncertainties added up are a $15 
premium because if somebody wants to sell or buy crude oil 
right now in 2023, they will do it at $15. Keep in mind then, 
back to your decision that you have to make about when you want 
to do something with the SPR, I tend to think SPR ought to be 
saved for some real crisis.
    Senator Cassidy. Well, we have only made the commitment to 
sell it. It has just not been sold if the Markey amendment and 
the Cassidy amendment has been adhered to.
    Mr. Braziel. My only point would be the price right now is 
$70. The price in 2023 is $55 on the futures markets.
    Senator Cassidy. So, now----
    Mr. Braziel. I was a trader for 15 years of my career. I 
would sell now.
    Senator Cassidy. You mentioned, Mr. McNally, that we are 
going to always be in boom and bust. On the other hand, 
plausibly, we can say that with the Keystone XL pipeline being 
built, the intermediate being built from the Permian and 
elsewhere, the midstream, and then I am told by the super 
majors that they are going back out into the Outer Continental 
Shelf, that we are going to have significant production supply 
over the next one to four years which may account for the $55 
barrel but we may see some leveling off. Is that a fair 
statement?
    Mr. McNally. Certainly, Senator Cassidy, that is a fair 
statement. I believe the IEA and others believe that the United 
States is going to be half or more of non-OPEC supply growth. 
So we took the lion's share since 2009, and we are going to 
take the lion's share as we build out this midstream 
infrastructure and connect it. Again, as long as we remain open 
to production and permitting, we can expect that to expand.
    But if I may, on the SPR. I was never a trader. I worked 
for a hedge fund for 12 years and I never traded, but I am a 
student of history. In 1996, Congress and President Clinton 
last sold SPR crude for budget expenses in '97. At that time 
oil prices were on the high end of the range. They thought they 
were selling high, about $26 a barrel. I was in the White House 
on the National Security Council after 9/11 and oversaw the 
refilling of the SPR at much higher prices.
    I will predict and I predicted before--I am afraid, sir, 
that we may think we are selling high, but I predict we will 
put those barrels back in. We may have to buy them from the 
Chinese at higher prices after the next Gulf emergency. So I 
agree with Mr. Braziel, I think, not on the selling now. I 
think we should hold it for emergency, with respect.
    Senator Cassidy. Well, again, that decision to sell has 
already been made. It is just a question of timing of the 
market.
    Mr. McNally. Right, right.
    Senator Cassidy. I have more questions but I am way over 
time, and I yield back.
    The Chairman. Yes, some of us did not think that we should 
have sold.
    [Laughter.]
    Senator Manchin.
    Senator Manchin. I agree, Madam Chairman.
    I just want to make it as simple as I can. We are producing 
more oil than we have ever produced in the United States on a 
daily basis and that is an accurate statement, correct? Then 
for 40 years we froze our exporting ability of oil from '75 to 
2015. We have opened that up since 2015 with twice the 
production that we have ever had.
    The people back home in West Virginia are asking, how come 
our prices are going up if we are so enriched with all this new 
technology and all this oil and surplus? I have heard all the 
comments today. It is hard to go back home and talk to somebody 
in Maine or West Virginia and explain we are doing better than 
ever, we are producing more. Are we producing more to stabilize 
the global market of oil or are we producing for the benefit of 
the United States' market? Which one do you think is getting 
the best play on this?
    Either one? Both of you all, yes.
    Mr. McNally. Senator, as Jason Bordoff said, our pump 
prices in Montana or West Virginia are all set in a global 
market. So to answer your question, I would say we are 
exporting to stabilize the global oil market so that we may 
stabilize our own market.
    It is all----
    Senator Manchin. We tried to put an amendment on that. I do 
not know if you knew that, Mr. McNally. We tried to put an 
amendment on that that said if the prices spiked in the United 
States, our main customer and our main purpose, our 
constituency, is the United States and West Virginia, Maine, 
all of us here and Alaska too.
    Where would you predict a spike that would concern us that 
the Americans are paying to stabilize the global market, 
Americans are paying a higher price than normal?
    Mr. McNally. Which price spike led----
    Senator Manchin. Yes, I mean is there a ceiling do you 
think we could break?
    Mr. McNally. There is and when I think about the roller 
coaster and Space Mountain we are on, I am very worried about 
how we diagnose the price booms and sometimes the misdiagnoses. 
And I am concerned that if we, when we go back to $4.00 or 
$5.00 a gallon, we will say it's exports, but sir, with 
respect, I believe if we were to close that ban and ban 
exports, I think we would have less production and higher 
prices.
    Senator Manchin. We are not saying ban it. We are saying 
basically when it hits a critical mass that concerns us that 
the Americans are carrying this load.
    Mr. McNally. Right, yes.
    Senator Manchin. And we are producing twice as much. We are 
asking people to accept the new in technology and production 
and more pipelines and everything that is going to benefit our 
economy.
    Mr. McNally. Right.
    Senator Manchin. And they do not see a benefit to them.
    Mr. McNally. Yes, sir.
    Senator Manchin. That is why we get to push back. We are 
very much concerned about that.
    I want to move on to something very quickly on natural gas. 
In West Virginia, I think you know about the Marcellus, Utica, 
and now we have Rogersville that will come on. We have hit some 
pretty good opportunities and we are producing an awful lot of 
liquids. Those liquids are extremely valuable.
    We also know that we are vulnerable down in the Southwest. 
Rick Perry and I were Governors together, and we were talking. 
He said, ``Joe, I have seen a model with a horrific hurricane, 
a class five, moving up the Houston Channel, what it does and 
disrupts the energy chain and energy markets in America.''
    We are trying to get what we call a mid-Atlantic energy 
hub, storage hub, strategically. Do you all know enough about 
that? Have you looked into it enough, Mr. Braziel?
    Mr. Braziel. I have looked at it some, particularly in 
terms of ethane. I am generally familiar with what is going on 
with the ethane side.
    Senator Manchin. Well, do any of you want to comment on 
what it would do to stabilize the energy markets in America, 
because we are very vulnerable and you know that every time we 
have weather hit down in the Southwest--we are not too prone to 
hurricanes in West Virginia, we have been blessed.
    Mr. Braziel. Anything that creates the optionality in the 
transportation system, the ability to go multiple directions 
with any particular hydrocarbon is a good thing. That is what 
the hub is going to do.
    Senator Manchin. Yes, with all the natural liquids that we 
have, if we are able to help with the global supply even, 
because we are exporting that too and there is more and more 
coming on terminals where we can send the liquids out. Is that 
a benefit?
    Mr. Braziel. It is a benefit.
    There is a new pipeline that is being built over in the 
Philly area that they are having a little trouble getting 
finished right now. So you want that pipeline to be finished 
relatively soon.
    Senator Manchin. Yes, but we want to keep some of that 
product in our central states, in West Virginia, Ohio and 
Pennsylvania because we become the back-up, strategically, for 
our national interest and concerns, but also, we can create a 
whole new energy hub in that, chemicals, cracking and all these 
things that need to go in line with downstream.
    Mr. Braziel. It will all be. It will be a good thing.
    Senator Manchin. You all----
    Mr. Braziel. The more storage you have is good and that is 
better----
    Senator Manchin. We have all our eggs in one basket right 
now. Do you all agree that most of our energy eggs are in one 
basket as far as production, refineries, everything down in the 
Southwest?
    Mr. Braziel. Well, no. You are moving a lot of ethane down 
to the Gulf Coast right now on the Enterprise pipeline. So you 
have, that is one basket. You are moving a lot of ethane up to 
Canada right now.
    Senator Manchin. Right.
    Mr. Braziel. So that is another basket.
    You have some supply diversity, some demand diversity, I 
guess you would say.
    Senator Manchin. If you all could, if you would look into 
the storage hub that we have been talking about and see how you 
think it would stabilize the markets and, I think, help the 
resilience of the United States' markets also.
    Thank you, Madam Chair.
    The Chairman. Thank you, Senator Manchin.
    Senator King.
    Senator King. Thank you, Madam Chair, and thank you for 
calling this fascinating hearing and thank you all.
    The most profound observation I ever heard about oil prices 
was back in the '80s from a professor at the University of 
Maine that said, ``Oil prices in the future will always be the 
opposite of what you think today.''
    [Laughter.]
    That has proven true, if you think about it. If we think 
prices will be high then two things happen: we have more 
drilling, and we have more conservation. If we think they will 
be low, we have less drilling and less conservation. People buy 
trucks instead of Priuses and that seems to be the dynamic. I 
remember that from 35 years ago and it has, sort of, carried 
through over the years.
    A couple of very specific questions and we have a limited 
time, just like you did in your statements, so try to be as 
brief as you can.
    One is, what is Saudi Arabia's cost of production? Anybody 
know?
    Mr. McNally. Senator, I believe that would be, the cost of 
production, it would be in the single digits, $5, $10, $12.
    Senator King. So they can sell oil at $30 a barrel and make 
money? They just don't make as much?
    Mr. McNally. Their budget revenues--their budget couldn't 
handle it. Their country would fall apart. They could cover 
their production costs at that, but they couldn't meet their 
social spending at that level.
    Senator King. But their cost of production is a lot lower 
than, for example, shale.
    Mr. McNally. Yes, sir. Yes, sir.
    Senator King. Second question. Is there----
    Mr. Auers. I want to add something to that, though. That is 
true on existing production but on incremental new production, 
it is much higher.
    Senator King. It is higher?
    Mr. Auers. It is totally, you know--yeah, which is not 
different.
    Senator King. Are there estimates? Is there a limit to the 
shale oil production that we have or is it, sort of like, 
producible reserves? Is there any upward limit? Is there a 
finite capacity here?
    Mr. Braziel. Depends on the price.
    Senator King. Okay.
    Mr. Braziel. The higher the price, the more you can 
produce.
    Senator King. The more you can produce because less 
economic wells suddenly are economic.
    Mr. Braziel. That's exactly it.
    And so, if the price does go to $75, we'll produce more 
than if the price stays at $68.
    Senator King. Okay, next one. Mr. Bordoff, maybe you can 
try this one.
    Is taking Iran out of the market through sanctions priced 
into the market today or will it increase prices later on? Is 
the threat already priced in?
    Mr. Bordoff. To some degree, pulling Iranian oil off the 
market, I think, is priced in, but there is a wide range of 
views out there about how severe the impact of re-imposed 
sanctions will be from maybe half a million barrels a day up to 
1.5 or 2 million barrels a day and that's why the signals from 
the Administration about how strict it will be in the 
enforcement of sanctions has an impact on the market.
    Senator King. But the testimony was there is very limited 
spare capacity so 2 million a day out may only be two percent 
of world supply but it would be significant in terms of price. 
Is that correct?
    Mr. Bordoff. If the re-imposed sanctions were to actually 
pull 2 million barrels a day off by the end of this year or 
next year, that would have a very big impact on global oil 
markets.
    Senator King. I think we can all agree that a disruption in 
the Strait of Hormuz would be a catastrophe of the level that 
we are talking about the Strategic Petroleum Reserve being 
important. Is that correct? That is 19 million, I think one of 
you testified.
    Mr. McNally. Yes, Senator.
    If prolonged beyond a few days, it would be a genuine 
catastrophe.
    Senator King. What is the size of the Strategic Petroleum 
Reserve? How many million barrels?
    Mr. McNally. I'm going to look back to smarter colleagues. 
I believe it's, 670 million barrels is the latest, 670 million 
barrels in the U.S. I do believe we have sold off a little bit 
of that over the past few years. We were a little over 700 at 
the top, so we're just down about 670 million barrels.
    Mr. Bordoff. I think it's, yeah, about 650 million in the 
recent GAO study that was commissioned with sales projected to 
bring it down to just over 400 million in a decade.
    Senator King. So Strait of Hormuz, I am just doing the 
arithmetic, would be about a month.
    Mr. McNally. Senator, if we think about that, though, it's 
not the stockpile, it's the flow rate. So Strait of Hormuz is 
19 million barrels a day. We average, DOE says it can flow at 4 
million barrels a day. So there are questions we can do that. 
We can't cover the Strait of Hormuz.
    Senator King. So even the Strategic Petroleum Reserve is 
not instantly fully----
    Mr. McNally. No, no, sir. Not even with the IEA, Japan and 
Germany coming in, we could not cover the Strait of Hormuz. We 
could cover Iran at 2.5 million barrels a day, but not the 
Strait of Hormuz at 19 million barrels a day.
    Mr. Bordoff. And if I may, I would just say that is part of 
the reason the modernization of the SPR for which a little bit 
was sold and funding has been made available is important to 
increase that flow rate.
    Senator King. And the flow rate is a technical constraint?
    Mr. McNally. It is technical, yes. We built the reserve and 
we pointed the pipes north because we thought we would be 
taking oil off. We would be blockaded or embargoed from the 
water, and we would have to feed our refineries.
    Now we need to export that oil mainly and get it out. So we 
have to move the pipes around, but there has also been 
degradation in the logistics and so forth, so that gets into it 
as well.
    Senator King. Now when we are projecting global demand, 
what do we think about electric vehicles and conservation? I 
mean conservation and electric vehicles have moved faster than 
people thought they would. I think, as you mentioned, the 
principle use of petroleum is transportation.
    Mr. McNally. Yes, sir. We have our eggs all in one basket, 
and transportation--it is all about oil.
    Jason Bordoff's Center on Global Energy Policy just came 
out with a fabulous study done by Marianne Kah that looks at 15 
forecasts from government and others about electric vehicle 
penetration and it casts some--I'll let Jason perhaps speak to 
it as well, but there is some skepticism about maybe we are 
being a little too optimistic about how quickly batteries will 
fall and consumers will take them up.
    You know, folks say that if you took a picture in 1910 and 
1912 in Manhattan you would see horses in one and cars in the 
other. Why can't we do that? Well, the reason was we developed 
an energy source and a technology that consumers found 
affordable and took up really quickly and EVs are not there 
yet. They may be, but they are not there yet. So there may be a 
little bit too much optimism in some of our official forecasts. 
We all hope we get there, but I think we should be pragmatic. 
We were on horses for 5,000 years. We may be on oil for a 
little longer than folks think.
    Senator King. Mr. Sadamori?
    Mr. Sadamori. As for the contribution for the EV, the 
central scenario of the World Energy Outlook last year, 2017, 
assumes that the EVs will expand rapidly to 300 million 
vehicles by 2040. But the displacement of oil will be limited 
to 3 million barrels with that per day, with that.
    So we expect a lot more contribution----
    Senator King. Going to 300 million in electric vehicles 
would only result in a diminution of 3 million barrels a day of 
oil?
    Mr. Sadamori. Exactly.
    And also, I need to point out that so, all in all, the 
personal duty, light duty vehicle oil consumption may decline a 
bit, but the heavy-duty trucks, ships, airplanes and also 
petrochemical feedstocks, all in all, we expect that it's 
really hard to see the oil demand peak before 2040. That's the 
conclusion from the real central scenario.
    Senator King. I am out of time, but just one more question.
    What is the proportion of transportation versus 
petrochemical feedstocks in the use of oil today?
    Mr. Sadamori. At this moment, transportation is, by far, 
the largest demand in oil and----
    Senator King. Petrochemical, 70 percent, 80 percent, 60 
percent?
    Mr. Sadamori. Excuse me, I need to go back, but it's 
something like 60 percent in the transportation sector and the 
30 percent also in the petrochemical feedstock. I will get back 
to you the precise number.
    Senator King. Thank you, Madam Chair.
    The Chairman. Thank you.
    Senator Daines.
    Senator Daines. Thank you, Chair Murkowski and Ranking 
Member Cantwell. Thanks for having this hearing.
    In Montana, the average price of fuel is around $2.70, 
$2.80 a gallon which is similar to, probably a little lower, 
than the national average. For most Montanans, fuel prices are 
their main interaction with global oil prices and when you are 
in an ag-rich state like Montana, our number one economic 
driver. We talk with farmers and ranchers about inputs and 
outputs, fuel price is a very important input, not to mention 
impacts on fertilizer and so forth as well.
    For Montanans working at oil fields in the energy sector, 
global oil prices can determine if they are coming to work 
tomorrow or not. So this is an important issue for a state like 
Montana.
    I am very thankful for the work of this Committee and my 
colleagues in the U.S. Senate as we were able to lift the crude 
oil export ban, finally approve leasing area 1002 in Alaska, 
working to reduce some burdensome and only-adding-costs kind of 
regulations, as well as tax reform. All of this has led to an 
important boost in U.S. oil and gas production and this is 
moving us to a very aspirational kind of goal which is not just 
energy independence, but truly, global energy dominance.
    As I travel around the world in the capacity I have today, 
as well as I used to do in the private sector, I really believe 
there are three long-term, competitive differentiators to allow 
the United States to win when we think about competition with 
China, Russia, the EU, and other nations as it relates to 
global economic competition. We win because of the rule of law, 
we win because of freedom, and we win because of energy.
    It is a unique differential we have here where we really 
can be not only self-sufficient, but isn't the world going to 
be a much, much better place if we reduce the dependence on the 
Middle East and reduce the dependence on Russia where we see 30 
percent of their energy needs for Europe coming from Russia, 50 
percent of Germany's?
    The U.S. and our European allies should not be dependent on 
oil from Russia. It is not a good thing that China is dependent 
on oil from Russia and the Middle East when we are able to 
produce it right here in the United States and even in places 
like Montana. This not only will stabilize prices, it makes the 
U.S. and our allies more secure.
    Many of us remember growing up in the early '70s and the 
Arab oil embargo and what that did in shocking our economy, 
shocking the world's economy, to having that insular removal 
from those shocks because of our significant, revolutionary 
increase in oil production. This is a very good thing for our 
economic and our national security.
    This hearing is focusing on the impact of global oil 
prices. As I look at it, I see this as more of a supply and a 
demand issue. We are seeing a robust economy. We are seeing 
more Americans traveling. They are spending more money, and 
that is a good thing. They have more money in their 
pocketbooks. This leads to more demand, and the best way to 
check a rising price is to produce more.
    The U.S. WTI crude price is already lower than the global 
Brent crude price. With increased U.S. production we can 
continue this trend creating lower prices at the pumps for 
Montanans.
    Mr. McNally, I am particularly interested in how the U.S. 
can play a larger, more beneficial role in lower oil prices, as 
well as geopolitical trends. Many oil-producing countries also 
tend to be less stable, more volatile or have ulterior 
political aims, sometimes adversarial aims. This can cause 
dramatic shifts in prices as we saw, as I mentioned earlier, in 
the '70s, in the '80s and even the early 2000s.
    Mr. McNally, do you believe that with a more active U.S. 
production and exporting of oil to our allies the U.S. can play 
a stabilizing role in global oil prices?
    Mr. McNally. Senator, thank you for that question.
    Absolutely. The history shows, again, our windfall in 
natural gas which is where the shale boom first started, 
utterly turned around what we were looking at when I was in the 
White House in 2003, becoming dependent on Qatar, becoming as 
dependent on the Middle East foreign gas as we were oil.
    That changed completely to where now, it is unfortunate 
that the Germans are becoming more and more captive to Russian 
pipeline gas, but at least our gas exports or our refusal of 
those imports and making them available to Europe has weakened 
Moscow's ability to impose prices on Europe and that is 
unambiguously a good thing.
    Lithuania and other countries and the Obama Administration 
were quite powerful on this, and the Bush Administration and 
the Trump Administration seized those geopolitical benefits.
    Same thing with oil. Again, the galloping of shale oil over 
the horizon in 2011-12 prevented a return to $150, in my view, 
because the market was getting really tight and disrupted at 
that point.
    And we can expect those types of things going forward as we 
look at confronting a dangerous actor like Iran or Russia. Our 
allies are more likely to support the United States if they can 
be reassured, not just that we have a strategic stockpile, and 
I hope we do not sell all that off, but that we have and we 
keep open a production ability and export facilities that we 
supply that diversity which is the key of energy security.
    Senator Daines. Thank you.
    I have a quick question for Mr. Braziel.
    In order for the U.S. to meet global demand I believe we 
need to invest more in energy infrastructure, including 
pipelines and refineries. Having spent a career, I studied 
chemical engineering and I have been involved in manufacturing 
and operations most of my life.
    Back to constraints--you are only as good as what the 
constraint is as you look at a supply chain. What do you 
believe we need to do to get these projects up and running and 
relieve any of these bottlenecks that stop us from getting oil 
to markets, both refined and crude?
    Mr. Braziel. Most of the bottlenecks that exist right now 
actually exist for commercial reasons. There certainly are 
regulatory issues that could be addressed, but in fact, what 
really happened is that the crude oil market did not look to be 
nearly as strong as it turned out to be over the last two 
years. Remember, two years ago when we would have had to start 
building those pipelines, crude oil prices were a lot cheaper. 
So, what happened was a lot of producers just did not sign up, 
a lot of shippers did not sign up for those new pipelines. They 
did sign up, those pipelines are now being developed as we sit 
here today, but like in the Permian where the biggest 
constraints exist, it is still going to be about a year or so 
before those pipelines get built and there is very little that 
the federal or the state government can do in order to expedite 
that.
    What we can do in the future is make sure we do not get 
caught in that situation again and make sure that the companies 
involved have the right tax incentives, have the right 
regulatory structure in order to be able to build pipelines as 
fast as possible.
    Senator Daines. Thank you.
    Thank you, Madam Chairman.
    The Chairman. Thank you, Senator Daines.
    Senator Hirono.
    Senator Hirono. Thank you, Madam Chair.
    Earlier in this hearing there were references to the 
positive effects of the huge tax cuts for the richest one 
percent of people and corporations in our country. It was noted 
that most state utilities have cut costs to consumers, but they 
did so because they were required by the regulators to pass on 
the benefits of the tax cuts to their consumers. Whereas in the 
non-regulated entities, i.e., corporations, they have not done 
anything of the sort. They have not raised wages. They have 
bought back their stock, et cetera. I just wanted to make that 
note.
    This is a question for Mr. Bordoff. Hawaii has the highest 
gasoline prices in the country. It is around $3.78 a gallon in 
contrast to what Senator Daines said about the cost in his 
state.
    I am particularly concerned with proposals to stop progress 
on fuel economy standards that can save drivers $8,000 over the 
lifetime of a new 2025 vehicle. However, according to press 
reports, later this week the Trump Administration will propose 
to freeze vehicle fuel economy standards at the 2020 level and 
seek to revoke California's authority to set automobile 
emissions recognized in the 1970 Clean Air Act.
    Mr. Bordoff, what effect would freezing fuel economy 
standards have on consumers in the U.S. and the overall effort 
to find alternatives to our national dependence on oil that you 
called for in your testimony?
    Mr. Bordoff. Thank you for the question, Senator Hirono.
    It would slow those efforts. Rising fuel economy standards, 
I think the evidence to date shows, can be achieved without 
significant economic harm and driving up the price of vehicles 
beyond the benefits, both to consumers and the social benefits 
of reducing oil demand and greenhouse gas emissions. So it 
would slow that transition.
    I also would just observe that I think this is, I do not 
think it is good for consumers, making decisions about long-
term investments in where they live and what kind of car they 
are going to buy. These are things they think about in the 
long-term, not to mention automakers who need to plan for the 
long-term.
    So we are going to move to a position where, potentially, 
we try to remove California's authority. I think 12 or 14 other 
states have joined California. There is going to be a period of 
litigation about the authority to do that. This creates several 
years of uncertainty for consumers----
    Senator Hirono. Yes.
    Mr. Bordoff. ----and for the industry about what these 
standards are likely to be and whether there may be two 
different standards across different parts of the country.
    I think it would be more constructive to bring everyone 
together as the last Administration tried to do and try to find 
some compromise to figure out how, in a cost-effective way, we 
could continue to help reduce the oil intensity of the economy 
and encourage options and alternatives.
    Senator Hirono. So you would say that the Administration's 
proposal to freeze these standards, that's really not getting 
us to where we need to be?
    Mr. Bordoff. I think it is--I don't think it is a 
constructive course forward to roll back the fuel economy 
standards that have been planned.
    Senator Hirono. This is a question for the panel.
    I realize that oil prices are set on the world market so in 
an interview with CNBC, aired on Friday, President Trump stated 
he was willing to place tariffs on all goods imported into the 
United States worth some $505 billion last year. I think that 
you all have recognized the geopolitical effects of these kinds 
of trade decisions.
    But my specific question is, what impacts would such 
tariffs have on the cost of construction in the oil and gas 
industry, the willingness of the industry to make new 
investments in the United States and the price faced by 
consumers at the gas pump? Any of you care to respond?
    Mr. Auers. I mentioned, again, as an example you mentioned 
on the midstream side, three quarters of all of the steel that 
is used comes from overseas, primarily because it is not 
available locally. And the refining industry is the same way, 
if you have a direct negative impact on project viability from 
tariffs on imported steel.
    But the worse thing, as I mentioned, was if this led to a 
world trade war, you know, that carries very negative 
implications for economic growth both domestically and 
internationally and that's the biggest threat. So, yeah, it is 
bad news--to try to do what we can to get others to play fair 
but we have got to be careful on how far we go.
    Senator Hirono. Would the rest of you agree with that--that 
there are unintended consequences to these kinds of comments 
and pronouncements from the President?
    I think what I get from what all of you are saying is that 
we are trying to go for stability here in this market as well 
as what is going on in our own country and that is not really 
what is happening now.
    Thank you very much.
    The Chairman. Thank you, Senator Hirono.
    Mr. McNally, Mr. Braziel, both of you mentioned the IMO 
2020. In fact, Mr. McNally, you said that was a whole section 
of your talking points that you were not able to get to due to 
time constraints. So I will give you that opportunity now.
    I also referenced the IMO, International Maritime 
Organization's, low sulfur standard. This is set to take effect 
in January 2020. The standard will reduce sulfur limits in 
marine fuels, and we certainly look to the environmental 
impacts, the positive impacts on health. But I think the 
concern that is out there is that compliance is not moving 
along at the expected rate which could pose a burden going 
forward.
    Since we are talking about where do we go from here, those 
unknown factors or perhaps those things that are out on the 
horizon that may have some unintended consequences--I would 
like an opportunity to talk a little bit about them this 
morning.
    Can you walk us through the IMO 2020 standards, the options 
for compliance and what it might mean for the middle distillate 
markets? And then whether you share the concern that I have 
raised that we could potentially see some price impacts, 
increases where we, perhaps, might not expect it whether it is 
in my state, for those who rely on diesel for heating or power 
or transportation, or the folks in Pennsylvania that rely on 
home heating fuel. Can we have a discussion about this IMO 
2020?
    Mr. McNally. Thank you, Senator.
    Yes, the oil industry and market has been preoccupied with 
this issue for the last several years. A subject for a whole 
afternoon's discussion, but in January 2020 the limit on sulfur 
emissions, for what we call marine bunkers, so fuel used in 
heavy ocean-going ships, this is across the ocean now, will 
fall from 3.5 to 0.5 percent sulfur, so very, very clean. There 
are two options to comply, really.
    One is to put a scrubber on your ships. So you could still 
use the dirty stuff, but you scrub away the sulfur emissions. 
Folks agree the shipping industry has not nearly installed 
enough scrubbers, and it is too late to put on scrubbers. A 
small fraction of the ships are going to have scrubbers.
    So the most likely compliance option is to get cleaner fuel 
in your ships. We are going to see a scramble away from what 
they call heavy fuel oil, what they have been using now, that 
bottom of the distillation column, that heavy, gunky fuel oil, 
3.5 percent sulfur, 2.5 percent--they are going to stop using 
that and they are going to go and they are going to put 
lighter, much lower sulfur diesel, mainly diesel fuel, in their 
ships to comply. There is no phase-in. There is no credit 
trading. It is overnight. You have just got to comply in 
January 2020.
    There is a concern, and I know the IEA has raised this 
concern in their reports, that the industry is unprepared. We 
have not seen the scrubbers being built and we do not have, at 
the global level, the equipment to make enough low sulfur fuel.
    So part of the solution, unfortunately, will be the 
shippers coming to the folks who are currently using low sulfur 
distillate, home heating oil consumers, road diesel users, 
farmers and their tractor equipment, railroads, airlines--this 
is all the same kind of fuel. We have already gotten that to be 
really clean. And they will say, you know what, we do not have 
enough. We have got to comply. We need to bid it away from you, 
and that will cause price increases.
    I think the IEA has indicated they expect a 20 to 30 
percent increase in the price of distillate next year. Others 
have raised the concern that the actual crude price could go up 
because the refining industry will, sort of, scramble to run 
more crude through the refineries and they are already working 
pretty hard to make more distillate.
    So while the environment will benefit, while human health 
will benefit from getting this sulfur off of these ships, and 
our complex refiners in the Gulf Coast especially, they are 
going to do very well because we specialize at making this high 
quality, low sulfur distillate.
    Some folks are going to do very well. But for consumers, I 
think there is a real risk that for a period of years now the 
lack of preparedness for a January 2020 start date will lead to 
a substantial spike in the price of consumer fuel onshore.
    The Chairman. So potential for 20 to 30 percent increase. 
You factor this on all of the other global uncertainty, the 
potential for disruptions, that is not a very cheery way to end 
this hearing.
    Mr. Braziel or Mr. Sadamori, do you want to comment in 
terms of what we might be able to do to avoid these increases?
    Mr. Braziel. The problem is exactly as Bob mentioned. It is 
the fact that we are going cold turkey on a particular day. If 
this had been phased in, both the shipping industry and the 
refining industry would have been able to accommodate things.
    So I think what has everyone concerned right now is they 
are going to wake up on January 1, 2020, and the rules are all 
going to be changed. If there was some way to be able to 
mitigate that and, frankly I think there probably will be a way 
to mitigate that, there is probably going to be so much non-
compliance that there will have to be some sort of 
accommodation made.
    I think that is likely, and John and I have talked about it 
some. I think John has numbers figured in like 25 percent non-
compliance into the plans that Turner Mason has put together. 
We think the same thing is going to happen.
    Ironically, what it does is it makes light crude, shale 
crude, more valuable and heavy crude, like Canadian crude, less 
valuable. So it is actually a good news story for U.S. 
producers.
    The Chairman. So it helps us in the United States.
    Mr. Braziel. In the United States, for producers, it 
actually helps us.
    The Chairman. Helps the producers?
    Mr. Braziel. Helps the producers.
    The Chairman. Not necessarily helping the consumers.
    Mr. Braziel. If you have folks in your state driving 
diesel, you need to be prepared for what you need to say to 
them because their diesel prices are going up on January the 
first.
    The Chairman. Well, and that is my state. People in Alaska 
would look at this and say, well, wait a minute, this is July 
2018. You guys have plenty of time to figure it out. Figure it 
out.
    Mr. Sadamori?
    Mr. Sadamori. I agree with the other witnesses' views. So 
we also understand that not enough investment is happening on 
the kind of ship, the scrubbers.
    There is another option using LNG as the fuel for the 
maritime, but it takes time and also requires an enormous 
amount of infrastructure investments.
    What will probably happen at the start of this new 
regulation will be, kind of, the industry of the world will 
rush for a limited amount of low sulfur fuel oil and also the 
maritime diesel.
    By the way, this low sulfur fuel oil will probably have to 
depend upon the, kind of, same molecule as the maritime diesel. 
So there will be, kind of, a mismatch in terms of the 
refineries procurement of the certain types of crude.
    There will be--so we expect that even though we have not 
come up with any specific kind of numbers, percentage of oil 
price increase, that we don't do, but we expect that there will 
be a very, kind of, tight supply-demand situation on the very 
specific types of the crude fuel. That is what we are, kind of, 
concerned about and we try to keep track of it.
    Thank you.
    The Chairman. Well, coming from three maritime states here, 
Washington, Maine and Alaska, we will clearly pay close 
attention to this.
    Mr. Auers, did you want to add anything to this? You were 
referenced earlier?
    Mr. Auers. Yeah, I agree with what Rusty said and what the 
other panelists have said. I mean, we are definitely going to 
have a bump in distillate prices. It will cause a bump in crude 
prices, but then there's headwinds that will potentially bring 
those crude prices down. So where crude price is at is 
difficult to say.
    Our view and, you know, it's purely a guesstimate as to 
what's going to happen in 2020. This is really the first, 
global-wide product specification change. We have had low 
sulfur gasoline, low sulfur diesel in the U.S. and Europe and 
other countries in Asia and other places. This is a global-wide 
specification change that is impacting 4 to 5 million barrels a 
day of bunker fuel. And so, it is going to have a huge impact 
on the market and there are provisions for waivers. I do agree 
with what Rusty said that the market will work itself out when 
they see the problems that are going to happen, I think we are 
going to see use of some of that. I mean, the IMO is the one 
that has to, obviously, take action. And we will probably see 
some steps taken by the IMO. And the U.S., as a member of the 
IMO, certainly can have a voice in that, to help provide some 
sort of way of phasing this in because there is going to be a 
disruption unless something is done.
    And some of it is going to come and, our number at 25 
percent reported on non-compliance, that is a guess, you know, 
it could be higher, it could be a bit lower, but it is going to 
be substantial because there is not a real uniform enforcement 
mechanism in the open water.
    The Chairman. Yes.
    Mr. Auers. Every country will need to enforce it on their 
own. It is going to be enforced by the U.S. and Europe, but who 
knows what is going to happen everywhere else.
    So that----
    The Chairman. My time is well over but, Mr. Bordoff, you 
wanted to jump in here real quick?
    Mr. Bordoff. Well, if I may, I was just going to say I 
agree in part. I think there are a few mitigating factors. 
First, we should not forget the significant public health 
benefits that come from reducing SO2 emissions. The increased 
demand for diesel is coming at a time of some headwinds for 
diesel demand globally as cities move away from diesel. And 
third, the industry has known about these rules for many years. 
Some have taken further steps than others to prepare, including 
many U.S. refiners and U.S. shippers. I think injecting an 
element of uncertainty about delaying them now could hurt the 
companies that have taken steps to prepare and just injects an 
element of uncertainty now where people are starting to get 
ready for this and then maybe they should wait and maybe they 
are not sure. That could actually worsen the transition period.
    As Rusty said, if it is not the case and the rules are far 
more disruptive than we think, the IMO has the authority to 
issue waivers in case of lack of availability of low sulfur 
fuels. And, you know, like with new pipelines being built in 
the Permian, it takes a year or two so there will be a period 
of adjustment, but I think history suggests that these often 
resolve themselves in response to price signals more quickly 
than we think they will.
    The Chairman. Hopefully.
    Senator Cortez Masto, we have done a full round and we are 
starting round two, but we can interrupt and go to you.
    Senator Cortez Masto. Thank you, thank you so much, Madam 
Chair and Ranking Member, for this incredible discussion.
    I am bouncing between two hearings, so I appreciate the 
opportunity to read your comments beforehand as well.
    Let me jump back to Mr. McNally. I know there was some 
discussion of this. In your testimony you discuss the energy 
impacts of widespread usage of automated vehicles with 
estimates ranging from a 60 percent decline in energy use to a 
200 percent increase and that largely depends on which fuels 
AVs would use, oil or electricity. Could you elaborate on what 
factors contribute to such a large estimate range, and what 
policy recommendations would you make in this situation to keep 
energy costs on the low end?
    Mr. McNally. Sure and thank you for that question.
    So when we think about, sort of, robo cars or automated 
vehicles showing up, I think in the first instance we have to 
realize this will provide transportation services to people who 
do not have them or do not have them easily. People who are 
housebound who do not want to walk to the bus and so forth. It 
will vastly expand, probably, demand for transportation. Now it 
will be more efficient transportation, it will be wired, but 
there will probably be a big increase in demand.
    So the ease and the convenience and the lower cost of 
travel, remarkable, I do not have it at my fingertips, but 
the--if you ever took a look at a chart of the percent of 
Americans who are of driving age but do not have a driver's 
license--I do not have it off the top of my head, but it is a 
big number. And so, we have to imagine that will be opened up.
    Now the question then becomes, what will fuel these 
vehicles? Will they be electric, which I think most people 
think or hope, in which case we can expect big climate and 
environmental benefits as long as we are producing that 
electricity cleanly. But there is the real risk, and some of 
the researchers at NREL and other government labs and academics 
have looked at this and said, well, it is not a guarantee that 
we will figure out EVs before we figure out AVs. So if that 
robo car, showing up in front of your aunt's house or my aunt's 
house, which she's delighted to get in, is a diesel or a 
gasoline car--remember the oil industry and the car industry is 
always getting more efficient, they are not standing still, 
they are getting more and more efficient--then we could see 
that 200 percent, that explosion in fossil fuel demand. And 
that would, sort of, upend our consensus forecast of the, sort 
of, decline in oil demand and it could actually go like this 
because once again, like back in 1912, we discovered a new 
technology that made the blessing of transportation even 
cheaper and easier for people.
    I would be happy to point some studies your way, and others 
on the panel may have them as well, that go into more detail on 
this.
    Senator Cortez Masto. You have talked a lot, and I think 
all of you have, about the geopolitical risks. To lessen the 
geopolitical risk, is it fair to say that if we were to go down 
the path of electric vehicles more so than anything else, that 
would lessen our dependence and address some of the 
geopolitical risk we are seeing?
    Mr. McNally. I don't think so, near-term. There is not a 
lot we can do in terms of energy transformations near-term, 
meaning the next weeks, months, years, unfortunately, probably 
decades. Energy transitions just take decades, unfortunately.
    So, I think as we, for our lifetimes, in the foreseeable 
future, I think we have to look at other things, strategic 
stocks, removing----
    Senator Cortez Masto. But I am talking long-term. I get 
today.
    Mr. McNally. Oh, long-term.
    Senator Cortez Masto. What we are talking about here is 
long-term.
    Mr. McNally. Long-term, I'm going to bet that we will be 
off of oil. We will have that transformation, like we had from 
1908 to 1915, but it will not be because of government policies 
or a winner that government picked. It will be because 
ingenious inventors will have figured a new energy source. It 
could be hydrogen, which is what we worked on in the Bush 
Administration, it could be electric, it could be biofuels, it 
could be something we have not thought of yet, and a new 
technology that will give us that transportation in a better 
way. When that happens, government will just stand out of the 
way, and it will flower very fast. I am not smart enough to 
know what it is though.
    Senator Cortez Masto. Thank you.
    Thank you, Madam Chair.
    The Chairman. Thank you.
    Senator Cantwell.
    Senator Cantwell. Mr. McNally, did you want to put a date 
to that?
    [Laughter.]
    Mr. McNally. I hope my grandchild sees it, Senator.
    Senator Cantwell. Okay.
    Well, I think the issue for us in Washington, since we are 
paying, I think, $452 million more this year than last year, is 
the roller coaster that you have all described and how we 
continue to diversify from our fuel sources and get off of it.
    So for us, because we have very affordable electricity as 
it is today and a very high percentage of our consumers driving 
electric cars, I think we see the transition in the Northwest, 
some great companies, even in the trucking industry, like 
PACCAR, making great energy efficiency moves. So we are 
definitely going to go as fast as we can.
    I wanted to ask Mr. Bordoff--I asked in my opening 
statement about the high volume of trading that is going on and 
whether that is something we need to take a look at.
    I think the volume of West Texas Intermediate trade has 
dramatically increased over the last five years. I think they 
have seen something like a 276 percent increase in the number 
of trades per minute.
    Is this something that the CFTC should be looking at and 
just making sure that the automatic trading process is not 
creating some spikes in or distorting the market from true 
supply and demand fundamentals?
    Mr. Bordoff. Thank you for the question, Ranking Member 
Cantwell.
    So this is not an issue that we have studied carefully. I 
will caveat with that. It is true that algorithmic trading 
activity has increased significantly in commodity markets, 
commodity derivative markets, since 2008 as in many other 
financial markets. I think the behavior of this type of trader, 
the implications of this type of market participation certainly 
merits further research. I think it has been limited to date, 
in part by poor data transparency. I am not aware of studies on 
this issue.
    Anecdotally, I have heard market participants suggest a 
view that algorithmic trading may lead to sharper commodity 
price swings and volatility. There was a research note from 
City Group just a week or two ago noting that some of the 
recent sharp sell-off in crude the week before seems to have 
stemmed in part, at least in part, by some element of machine 
trading.
    I will note, I think it is important to recognize that even 
if algorithmic trading leads to greater, very short-term price 
swings in traded benchmark crude prices, my colleagues may have 
a view on this too, that does not necessarily mean those price 
moves affect the price of physical barrels paid by refiners 
and, therefore, the price we are paying at the pump. So I think 
that, too, would be a question worthy of further study.
    Senator Cantwell. Well, I was just going to say before Mr. 
Braziel raised his hand, I will bet you he does have something 
to say about this because I think those who have been in the 
business have seen the unbelievable actions of the financial 
markets have grave impacts.
    Mr. Braziel?
    Mr. Braziel. Yes, I mentioned earlier I spent 15 years as a 
trader, so I have kind of been on the other side of this thing.
    More trading volume in a futures market in any kind of 
electronic market is actually a good thing. It is because it 
creates more liquidity in that market, so the market becomes 
more responsive to supply and demand.
    And getting back to what Jason was talking about, you want 
your financial markets to be reflective of what goes on in the 
physical markets. The higher level of volatility, the higher 
level of trading that you have, the more likely that will be. 
The volatility comes from what is going on the supply-demand 
scenario itself that we've been talking about all morning.
    In terms of the electronic trading, the algorithmic 
trading, the changes that happen, happen in seconds. So 
whenever EIA kicks out a new statistic, the price might jump a 
few dollars because of the algorithms getting in there, but 
that impact goes away very quickly. From the CFTC's 
perspective, they certainly may need to look at it; but from a 
market perspective, like what we have been talking about this 
morning, it's pretty much a non-event.
    Senator Cantwell. Okay.
    We will definitely follow up with the CFTC. I know they 
have had one case already where they had a settlement where 
they were concerned about somebody impacting that. I think the 
thing that we have learned is the tighter the markets, the more 
you want to have transparency to make sure that they are not 
affected.
    Madam Chair, thanks for the hearing this morning. I 
definitely think there is a lot to do to continue to focus on 
this issue. We certainly need to make sure that we are having, 
I think, our colleagues have done a good job of bringing up 
these other issues of investment for the future. So I hope that 
we will look at that, maybe as a follow-up hearing.
    The Chairman. I appreciate that, Senator Cantwell.
    Senator King, you had a follow-on?
    Senator King. I wanted to, sort of, bring it back to why we 
are here.
    In Maine, a $1.00 change in oil and gas prices is $1 
billion out of our economy, and we are a relatively small 
state. Those are the kind of numbers that we are talking about 
that are really, really significant, and I just think it is 
important to remember that.
    And I thought it interesting, Senator Daines said if the 
price is going up, the only thing to do is to produce more. No, 
actually there are two things: one is to produce more, the 
other is to use less and that will affect price just as surely 
as an increase in production. So I think that is something we 
need to keep focusing on.
    What worries me is the roller coaster that we started with. 
I am not a great believer in government intervention in these 
things, but I think we do need to think about the policy 
implications and the long-term price implications of the things 
that we do that increase the volatility because that translates 
to people's ability to buy groceries rather than gasoline. I 
just think it is important to continue to ask those kinds of 
questions.
    I thank the witnesses. This has been a very informative and 
important hearing.
    Thank you, Madam Chair.
    The Chairman. I thank you for that add-on, Senator King.
    I think we recognize that there are some things that we can 
control and some things that we cannot control. You cannot 
control some of the volatility that you see with political 
issues in other nations.
    There are some things that are well beyond our control, 
natural disasters that bring about shortages that you could 
never predict, but there are policies within our own government 
that we can look to critically.
    While sometimes we are not able to accurately predict all 
of the consequences that are unforeseen, or unintended 
consequences that are out there, I think that that is part of 
our job to try to reduce the volatility to the extent that it 
is possible. Being cautious and careful and, perhaps, 
thoughtful and moderated in our policies is not a bad approach.
    Gentlemen, thank you for your contributions this morning. I 
think that this has been a very informative hearing. You have 
helped round out our thoughts here as members of the Committee, 
and I appreciate what you are doing in this broader and more 
global discussion that has such immediate impact on our 
constituents, whether from Maine or up to Alaska.
    With that, we thank you.
    The Committee stands adjourned.
    [Whereupon, at 12:07 p.m. the hearing was adjourned.]

                      APPENDIX MATERIAL SUBMITTED

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