Testimony of General Charles F. Wald, USAF (Ret.)

Former Deputy Commander, United States European Command

Member of the Energy Security Leadership Council

THE GLOBAL OIL BALANCE AND ITS IMPLICATIONS FOR U.S. ECONOMIC AND
NATIONAL SECURITY

Before the Committee on Energy & Natural Resources

United States Senate

January 10, 2007

Chairman Bingaman and Members of the Committee, I thank you for inviting
me to talk to you about the global oil balance and its impact on U.S.
economic and national security. My friend Bob Hormats has done a great
job describing the work of the Energy Security Leadership Council on
which we both serve, and let me say that I agree completely with his
assessment that oil dependence is one of the most serious economic and
national security challenges facing this nation.

Please allow me the opportunity to explain. I retired from the U.S. Air
Force last July after thirty-five years of service. During my career I
flew combat missions over Vietnam, Cambodia, Iraq, and Bosnia, and I
learned a lot about how to use military assets to effectively solve
national security problems. But I also learned that a lot of people
think the military is solely responsible for national security. I like
to call this the "Dial 1-800-The U.S. Military" syndrome, because it
reflects how people assume the military is a "toll-free" resource that
can be called on to perform tasks that no one else has the capability
for or the will to execute. I remember once I was introduced to some oil
company executives in Kazakhstan, and before we began talking one of
them thanked me and the U.S. military for protecting the flow of oil
around the world. He was serious and sincere about this, and I was
seriously concerned. This man's world view included the expectation that
the U.S. military will be there to provide security all over the world
to ensure the free flow of oil without assistance from others. It did
not seem like a good model to me.

And it's not just a matter of cost, though this approach does burden the
military's budgets as well as its personnel and their families. It is
really an issue of recognizing that true national and economic security
must rest on a nation's full strength, not just on the backs of its
military. This is necessary because some threats cannot be mastered
through military means. In the case of the oil dependence problem,
military responses are by no means the only effective security measures,
and in some case are no help at all.

In fact, the single most effective step the U.S. can take to improve its
energy security is to increase transportation efficiency. The
transportation sector is responsible for nearly 70% of all the oil the
country consumes. Within the transportation sector, oil---nearly 13
million barrels per day of it---accounts for 97% of delivered energy.
More than 8 mbd are used to fuel the over 220 million light-duty
vehicles that Americans rely on for mobility. For thirty years, these
vehicles have been subject to government-mandated Corporate Average Fuel
Economy (CAFE) standards enacted in the aftermath of the 1973--1974 Arab
oil embargo. CAFE was instrumental in helping Americans lower oil usage
by the early 1980s, but unfortunately its requirements for cars have
remained essentially unaltered since they were put in place and those
for light trucks have been improved only slightly. As a consequence,
America's light-duty vehicle fleet now has the lowest average fuel
efficiency in the developed world.

America must do better in this area, and that is why the Energy Security
Leadership Council has recommended vehicle efficiency standards that
require 4% annual improvements in miles per gallon performance, but with
regulatory "off-ramps" to protect manufactures and consumers if analysis
by the National Highway Traffic Safety Administration (NHSTA) finds 4%
to be technically infeasible, unsafe, or not cost-effective for a given
year.

Some in the audience may be surprised to hear a former general talk
about fuel efficiency standards, but they shouldn't be. In the military
you learn that force protection isn't just about protecting weak spots,
it's about reducing vulnerabilities before you get into harm's way.
That's why lowering the nation's demand for oil is so important. If we
can lessen the oil intensity of our economy, making each dollar of GDP
less dependent on petroleum, that will mean we're less vulnerable if and
when our enemies do manage to successfully attack elements of the global
oil infrastructure. The best ways to reduce oil intensity are to improve
efficiency and to develop the ability to produce and use realistic
amounts of alternative fuels such as ethanol.

Political forces have often portrayed increased supply and decreased
demand as mutually exclusive ambitions. As I have been saying, the U.S.
needs a comprehensive policy for achieving

genuine energy security. This policy should include increases in
production in places like the Outer Continental Shelf along with strict
new environmental protections. Increased production in the U.S. makes
economic sense, since it will reduce the risk premium that currently
inflates the global price of oil.

Last but not least, they are energy security tasks that must involve the
military, acting either alone or with partners around the globe. I'd now
like to offer a bit of background in that area.

**The Military's Historical Involvement In Energy Security**

The United States protects the global oil trade for the benefit of all
nations. In part, this is because the U.S. has unmatched military
capabilities. But another reason is that other nations know the U.S.
military is out there doing the job.

The implicit strategic and tactical demands of protecting the global
trade have been recognized by national security officials for decades,
but it took the Carter Doctrine of 1980, proclaimed in response to the
Soviet Union's invasion of Afghanistan, to formalize this critical
military commitment.

The Carter Doctrine committed the U.S. to defending the Persian Gulf
against aggression by any "outside force." President Reagan built on
this foundation by creating a military command in the Gulf and ordering
the U.S. Navy to protect Kuwaiti oil tankers during the Iran-Iraq War.
The Gulf War of 1991, which saw the United States lead a coalition of
nations in ousting Iraqi leader Saddam Hussein from Kuwait, was an
expression of an implicit corollary of the Carter Doctrine: the U.S.
would not allow Persian Gulf oil to be dominated by a radical
regime---even an 'inside force'---that posed a dangerous threat to the
international order. More recently, the security agenda in the Gulf has
expanded beyond state actor aggression to include concerns about
terrorist attacks on facilities and supply lines.

**Threats Abound**

Since issuing his 1996 "Declaration of War" against the U.S. and its
partners, Osama bin Ladin has warned of attacks on oil installations in
the Persian Gulf. Last year, the world came close to experiencing an oil
supply shock when an Al-Qaeda attack on the Abqaiq facility through
which approximately 60% of Saudi Arabian oil exports pass was barely
foiled. In addition to attacking physical infrastructure, Al Qaeda
operatives have also targeted expatriates in their residential areas, in
particular in Riyadh, Saudi Arabia (October 2002) and in al-Khobar (May
2004).

Iraq is also the scene of persistent insurgent and terrorist attacks on
pipelines and pumping stations, especially in the North of the country.
These attacks have severely limited Iraqi oil exports to the
Mediterranean through Turkey, and they are a major reason why Iraqi oil
production has stubbornly remained below its prewar peak. The lost
output has cost Iraq billions of dollars at a time when it needs every
dollar and while U.S. taxpayers have spent billions on the
reconstruction of the country. But if violence continues, and especially
if it spreads to the south, where most of the oil and export facilities
are located, then all of Iraq's oil production could be at risk. The
implications of this supply cut would be severe.

The danger of attacks on shipping is proven---in October 2002, the
French supertanker *Limburg* was rammed by a small boat packed with
explosives off the coast of Yemen. Most oil shipments have to pass
through a handful of maritime chokepoints. Roughly 80% of Middle East
oil exports pass through the Strait of Hormuz (17 mbd), Bab el Mandeb (3
mbd), or the Suez Canal/Sumed Pipeline (3.8 mbd). Another 11.7 mbd pass
through the Straight of Malacca and 3.1 mbd through the Turkish Straits.
All of these passageways are vulnerable to accidents, piracy, and
terrorism. Since alternative routes are lacking, the effect of a major
blockage at one of these points could be devastating. Even unsuccessful
attacks on tankers are likely to raise insurance rates and thus oil
prices.

**Partnering For Preparedness**

Nearly all of our U.S. military commands handle oil security tasks.
Central Command guards access to oil supplies in the Middle East.
Southern Command defends Columbia's Cano Limon pipeline. Pacific Command
patrols tanker routes in the Indian Ocean, the South China Sea, and the
Western Pacific. European Command is involved in oil security all the
way from the Caspian Sea to West Africa.

I happen to know more about European Command, because, in late 2002, I
was named its Deputy Chief. It was during this period of my service that
I came to realize that I came face to face with the size and scope of
the oil security challenge. The global economy relies on a massive oil
infrastructure that stretches far beyond the Persian Gulf to pipelines
in the Caucasus and offshore drilling rigs in the Gulf of Guinea.
Surveying this situation, I realized that the U.S, military could not
protect this vast infrastructure without partners. And, trust me, there
should be partners out there, because the free flow of oil is in the
best interest of many people all over the world. These interested
parties certainly cannot replicate all the capabilities of the U.S.
military, but their contributions can free up the military for tasks
that only it can complete. That's why I made an effort to train local
populations in the Caspian region to develop effective policing
capabilities. It's also why I work to engage oil industry firms in
protecting their assets. At the end of the day, this improved division
of responsibilities will benefit the U.S., our Allies, and millions
around the world.

**Military Power Has Limits**

The armed forces of the United States have been extraordinarily
successful in fulfilling their energy security missions, and they
continue to carry out their duties with great professionalism and
courage. But, ironically, this very success may have weakened the
nation's strategic posture by allowing America's political leaders and
the American public to believe that energy security can be achieved by
military means alone. We need to change the paradigm, because the U.S.
military is not the best instrument for confronting all of the strategic
dangers emanating from oil dependence. This is particularly true when
oil is used a political weapon.

The 1973 Arab embargo is still the most famous example of the use of
energy as a political strategic weapon. But in recent years, it has been
Russia that has shown the most willingness to play this dangerous game,
as at the beginning of 2006, when it stopped natural gas exports to the
Ukraine, which in turn withheld the natural gas destined for Western
Europe. The danger of conflict with a nuclear power like Russia should
make it abundantly clear that there are limits on how we can use
military power to guarantee energy flows. But we can take political
steps to counter Russia's brandishing oil and natural gas as political
weapons. Russia wants to join the World Trade Organization (WTO) as a
full member. Russia's entry into this organization must be made
contingent on its behavior. Russia must make a commitment to fostering
energy security; there should be no reward for sowing insecurity.

Of course, energy exporting governments don't need to resort to
full-fledged embargoes to hurt the U.S. and other importers. Exporters
can manipulate price through less drastic production cuts. Tellingly,
after oil prices dropped from their 2006 peak of \$78 to about \$60 in
the US market, OPEC members began to cut back on production. Governments
in oil-producing countries can also constrain future supply through
investment decisions that lead to long-term stagnant or glowing growth
in production and exports, or even decline. Often enough, future supply
destruction is the unintended or accepted consequence of an insistence
on government control of natural resources. Currently, an estimated
80-90% of global oil reserves are controlled by national oil companies
(NOCs), which are highly susceptible to being constrained by political
objectives, even if these undermine long-term supply growth. With this
level of state-control, it's impossible to speak of a free market for
oil.

State-controlled production is frequently inefficient, relying on
outdated technology and reserve management techniques. Consider the case
of Venezuela. The demagoguery of Hugo Chavez led to a strike at that
country's national oil company (PDVSA) in the winter of 2002-2003 and
then to the dismissal of thousands of well-trained petroleum engineers.
Deprived of the services of expert personnel, Venezuela may suffer the
permanent loss of hundreds of thousands of barrels per day of
production. Chavez also worsened the financial terms for international
oil companies operating in Venezuela, making it even less likely that
emerging best practices will be employed in the country's oil fields.

While major international oil companies and their advanced technology
still maintain major stakes in Venezuela's oil industry, this is not the
case in Russia, whose government has made it abundantly clear that it
wants to maintain near absolute control over its energy resources. This
power grab has curtailed foreign investment, and ultimately limited
production as well.

Russia's oil industry stands as a testament to the dangers of political
meddling in oil production. After the collapse of the Soviet Union,
Russian production plummeted to only 6 mbd in the mid-1990s, but then
the efforts of private companies helped push production back to over 9
mbd, achieving 10% annual growth rates in 2003 and 2004.[^1] However,
with the subsequent expropriations of private enterprises such as Yukos,
the production growth curve has flattened. Government control over
production in Russia will also adversely impact the massive Shtokman
natural gas field and Sakhlain-2 oil projects. President Putin has
determined that tight government control of resources is more important
than the greater revenue that would accrue from increased production
achieved through cooperation with Western oil companies.

**Oil Constrains U.S. Foreign Policy**

In an oil-dependent world facing increasingly tight supplies, the
growing power of the oil-exporting countries and the shifting strategic
calculations of other importing countries have lessened U.S. diplomatic
leverage.

Iran, which exports to the U.S.'s European and Asian allies, has
threatened to use the "oil weapon" to retaliate against efforts to
constrain the country's nuclear program. Russia's growing self-assurance
and assertiveness cannot be divorced from the leverage it enjoys because
of its oil and gas resources.

European Union reliance on Middle Eastern oil and Russian gas continues
to complicate U.S. foreign policy efforts, especially as far as efforts
to stop Iran from developing nuclear weapons are concerned. China, with
its rapidly growing dependence on foreign oil, also blocks U.S.
diplomatic initiatives in order to strengthen its own ties with oil
exporters. Chinese opposition has helped thwart U.N. Security Council
sanctions against Iran and prevented significant intervention in the
Darfur region of Sudan.

**Confronting Diverse Dangers**

Giving all these factors, it is imperative that the U.S. make energy
security a top strategic priority. Toward that end, we should mobilize
all of our national security resources, including our economic power,
our investment markets, our technology prowess, and our unsurpassed
military strength. To borrow a metaphor from the energy sector, this
broad approach will result in some dry-holes, but it should pay solid
dividends over time.

The U.S. can set an example with domestic actions. Curtailing demand is
the most important security step we can take. But we should also
demonstrate a willingness to increase domestic production in an
environmentally-responsible fashion. The U.S. should also impress upon
other major exporting countries that they need to more fully develop
their oil and gas reserves. To enhance the global market's ability to
respond to price signals and increase the reliability of global
production, access to U.S. markets and global trade organizations should
be contingent upon the granting of reciprocal access to foreign
investment in energy production. Such access should then be protected by
appropriate laws, regulations, and judicial systems that preserve the
sanctity of contracts. In keeping with this reciprocity requirement, the
U.S. must not take a protectionist stance when foreign nations seek to
invest in U.S. oil companies, unless clear national security risks can
be demonstrated.

The U.S. should also encourage greater transparency and private
ownership in the world's NOCs. This might mean promoting the creation of
national oil companies in countries where oil ministries run energy
operations, and promoting private majority ownership in those countries
where state-run companies already exist. In the long-run, such efforts
will depoliticize the decision-making process of oil investing and
should lead to more exploration of oil in response to market demand.

Iraq is the oil-exporting nation with which we have the most influence.
It is also the country that could boost its oil production and exports
most significantly in the medium and long-term (given some political
stability). In fact, Iraq, the least developed OPEC country, has the
potential to expand its oil production from the current 2.2 mbd to 6-8
mbd over the next decade. It is also a country that desperately
requires, and is eager for, foreign investment in its energy sector. The
U.S. should encourage Iraq to take the steps necessary for increasing
production. These steps should include improved energy infrastructure
security efforts, increased capital expenditure in the energy sector, a
viable Petroleum Law that will encourage necessary foreign investment,
and a reconstituted NOC that more effectively excludes political
considerations from its operations so as to boost operational
efficiency.

The U.S. government should also work with other governments to minimize
the likelihood and impact of supply disruptions. In this respect, the
U.S. should promote greater security of the global oil infrastructure,
which includes everything from ports and tankers to well and pipelines.
The keys to infrastructure security are protection, repair, and
redundancy. This mission will require an expansion of contingency
planning. Multilateral military and civilian rapid response teams should
be formed to respond to attacks and repair damage. This will likely
involve a good deal of American training of other countries' military
and civilian agencies. It will also require the stockpiling of expensive
spare parts in key strategic locations around the world. The U.S. and
its allies should consider adding energy infrastructure protection as a
role for NATO, for instance. Oil companies also need to be fully engaged
in such an endeavor with funding and dedicated personnel.

Arranging for oil-exporting nations to store more oil in or near major
consuming nations---whether in tankers, tanks or petroleum
reserves---can serve as a way to minimize the impact of a supply
disruption. The oil-producing countries could retain absolute control
over that oil, including deciding when to release it and to keep profits
from it. The is not a new idea; the US Government and Saudi Arabia have
at times raised the idea of storing Saudi oil in the United States,
though the details were never worked out.[^2]

Among consuming nations, the U.S. should promote the build-up of
strategic reserves in key locations across the globe. China and India
are making some progress in this regard, but only very slowly; indeed,
they are planning on building reserve capacity for only 15-20 days worth
of imports, while the United States Government's Strategic Petroleum
Reserve (SPR) now contains 700 million barrels, or the equivalent of
about 60 days of imports. But building reserves is only half the task.
There must be clear decision-making processes for when to use these
reserves. These processes must be developed both domestically and
internationally. Without clear release procedures, strategic reserves
cannot offer maximum protection.

One final recommendation that merits mention is a call for the U.S.
government to reorganize its bureaucracy to suit the needs of a
comprehensive international energy strategy. For example, in the
Department of Defense, which has a salient role to play in global oil
security, there is no civilian office that is dedicated to coordinating
the efforts and needs of the military commands with respect to energy
matters. An Office of Energy Security should be formed to do that.

\*\*\*

In sum, a comprehensive national security strategy must address numerous
energy security issues. We must be prepared for sudden supply shocks
triggered by terrorism or political action. We must also be ready to
deal with the stagnation of global production and the increasing
politicization of the global oil market. We must promote greater
diversity of fuel options while improving the efficiency of our nation's
vehicle fleet. Most of all, we must have the courage to shape the future
rather to succumb to the paralysis of resignation. It is time for
America

1)  to lead the way in constraining oil consumption *and* boosting oil
    production;

2)  to work with other nations to secure the production and flow of all
    energy products; and

3)  to maintain the military resources that will continue to be
    essential for ensuring energy security.

I thank you.

[^1]: EIA, "Country Analysis Brief: Russia," (January 2006), available
    online at www.eia.doe.gov/cabs/Russia/Full.html.

[^2]: Patrick Clawson and Simon Henderson, "Reducing Vulnerability to
    Middle East Energy Shocks: A Key Element in Strengthening U.S.
    Energy Security," Washington Institute for Near East Policy, policy
    focus #49 (November 2005).