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ENERGY AS A WEAPON: IMPLICATIONS FOR U.S.

POLICY

JOINT HEARING

BEFORE THE

SUBCOMMITTEE ON ENERGY

AND RESOURCES

AND THE

SUBCOMMITTEE ON NATIONAL SECURITY,

EMERGING THREATS, AND INTERNATIONAL

RELATIONS

OF THE

COMMITTEE ON GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

ONE HUNDRED NINTH CONGRESS

SECOND SESSION

MAY 16, 2006

Serial No. 109–204

Printed for the use of the Committee on Government Reform

(

Available via the World Wide Web: http://www.gpoaccess.gov/congress/index.html

http://www.house.gov/reform

(II)

COMMITTEE ON GOVERNMENT REFORM

TOM DAVIS, Virginia, Chairman

CHRISTOPHER SHAYS, Connecticut

DAN BURTON, Indiana

ILEANA ROS-LEHTINEN, Florida

JOHN M. MCHUGH, New York

JOHN L. MICA, Florida

GIL GUTKNECHT, Minnesota

MARK E. SOUDER, Indiana

STEVEN C. LATOURETTE, Ohio

TODD RUSSELL PLATTS, Pennsylvania

CHRIS CANNON, Utah

JOHN J. DUNCAN, JR., Tennessee

CANDICE S. MILLER, Michigan

MICHAEL R. TURNER, Ohio

DARRELL E. ISSA, California

JON C. PORTER, Nevada

KENNY MARCHANT, Texas

LYNN A. WESTMORELAND, Georgia

PATRICK T. MCHENRY, North Carolina

CHARLES W. DENT, Pennsylvania

VIRGINIA FOXX, North Carolina

JEAN SCHMIDT, Ohio

——— ———

HENRY A. WAXMAN, California

TOM LANTOS, California

MAJOR R. OWENS, New York

EDOLPHUS TOWNS, New York

PAUL E. KANJORSKI, Pennsylvania

CAROLYN B. MALONEY, New York

ELIJAH E. CUMMINGS, Maryland

DENNIS J. KUCINICH, Ohio

DANNY K. DAVIS, Illinois

WM. LACY CLAY, Missouri

DIANE E. WATSON, California

STEPHEN F. LYNCH, Massachusetts

CHRIS VAN HOLLEN, Maryland

LINDA T. SANCHEZ, California

C.A. DUTCH RUPPERSBERGER, Maryland

BRIAN HIGGINS, New York

ELEANOR HOLMES NORTON, District of

Columbia

———

BERNARD SANDERS, Vermont

(Independent)

DAVID MARIN, Staff Director

LAWRENCE HALLORAN, Deputy Staff Director

TERESA AUSTIN, Chief Clerk

PHIL BARNETT, Minority Chief of Staff/Chief Counsel

SUBCOMMITTEE ON ENERGY AND RESOURCES

DARRELL E. ISSA, California, Chairman

LYNN A. WESTMORELAND, Georgia

ILEANA ROS-LEHTINEN, Florida

JOHN M. MCHUGH, New York

PATRICK T. MCHENRY, NORTH CAROLINA

KENNY MARCHANT, Texas

DIANE E. WATSON, California

BRIAN HIGGINS, New York

TOM LANTOS, California

DENNIS J. KUCINICH, Ohio

EX OFFICIO

TOM DAVIS, Virginia HENRY A. WAXMAN, California

LAWRENCE J. BRADY, Staff Director

DAVE SOLAN, PH.D., Professional Staff Member

LORI GAVAGHAN, Clerk

RICHARD BUTCHER, Minority Professional Staff Member

SUBCOMMITTEE ON NATIONAL SECURITY, EMERGING THREATS, AND INTERNATIONAL

RELATIONS

CHRISTOPHER SHAYS, Connecticut, Chairman

KENNY MARCHANT, Texas

DAN BURTON, Indiana

ILEANA ROS-LEHTINEN, Florida

JOHN M. MCHUGH, New York

STEVEN C. LATOURETTE, Ohio

TODD RUSSELL PLATTS, Pennsylvania

JOHN J. DUNCAN, JR., Tennessee

MICHAEL R. TURNER, Ohio

JON C. PORTER, Nevada

CHARLES W. DENT, Pennsylvania

DENNIS J. KUCINICH, Ohio

TOM LANTOS, California

BERNARD SANDERS, Vermont

CAROLYN B. MALONEY, New York

CHRIS VAN HOLLEN, Maryland

LINDA T. SANCHEZ, California

C.A. DUTCH RUPPERSBERGER, Maryland

STEPHEN F. LYNCH, Massachusetts

BRIAN HIGGINS, New York

EX OFFICIO

TOM DAVIS, Virginia HENRY A. WAXMAN, California

R. NICHOLAS PALARINO, PH.D., Staff Director

ROBERT A. BRIGGS, Clerk

ANDREW SU, Minority Professional Staff Member

(III)

(V)

C O N T E N T S

Page

Hearing held on May 16, 2006 ............................................................................... 1

Statement of:

Harbert, Karen, Assistant Secretary for Policy and International Affairs,

U.S. Department of Energy; and Paul Simons, Deputy Assistant Secretary for Energy, Sanctions and Commodities, Bureau of Economic

and Business Affairs, U.S. Department of State ........................................ 12

Harbert, Karen .......................................................................................... 12

Simons, Paul .............................................................................................. 24

Yergin, Daniel, chairman, Cambridge Energy Research Associates; Keith

C. Smith, senior associate, Europe Program, Center for Strategic and

International Studies; and David L. Goldwyn, president, Goldwyn

International Strategies Low-Income Countries ........................................ 53

Goldwyn, David L. ..................................................................................... 92

Smith, Keith C. .......................................................................................... 72

Yergin, Daniel ............................................................................................ 53

Letters, statements, etc., submitted for the record by:

Goldwyn, David L., president, Goldwyn International Strategies LowIncome Countries, prepared statement of ................................................... 97

Harbert, Karen, Assistant Secretary for Policy and International Affairs,

U.S. Department of Energy, prepared statement of .................................. 16

Issa, Hon. Darrell E., a Representative in Congress from the State of

California, prepared statement of ................................................................ 3

Shays, Hon. Christopher, a Representative in Congress from the State

of Connecticut, prepared statement of ........................................................ 9

Simons, Paul, Deputy Assistant Secretary for Energy, Sanctions and

Commodities, Bureau of Economic and Business Affairs, U.S. Department of State, prepared statement of .......................................................... 26

Smith, Keith C., senior associate, Europe Program, Center for Strategic

and International Studies, prepared statement of ..................................... 74

Watson, Hon. Diane E., a Representative in Congress from the State

of California, prepared statement of ........................................................... 130

Yergin, Daniel, chairman, Cambridge Energy Research Associates, prepared statement of ........................................................................................ 57

(1)

ENERGY AS A WEAPON: IMPLICATIONS FOR

U.S. POLICY

TUESDAY, MAY 16, 2006

HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON ENERGY

AND RESOURCES, JOINT WITH THE SUBCOMMITTEE ON

NATIONAL SECURITY, EMERGING THREATS, AND INTERNATIONAL RELATIONS, COMMITTEE ON GOVERNMENT

REFORM,

Washington, DC.

The subcommittees met, pursuant to notice, at 2:07 p.m., in room

2154, Rayburn House Office Building, Hon. Darrell Issa [chairman

of the Subcommittee on Energy and Resources] presiding.

Present from the Subcommittee on Energy and Resources: Representative Issa.

Present from the Subcommittee on National Security, Emerging

Threats, and International Relations: Representatives Shays, Van

Hollen, Ruppersberger, and Lynch.

Also present: Representative Cummings.

Staff present: R. Nicholas Palarino, Ph.D., staff director; Robert

A. Briggs, analyst; Larry Brady, staff director; Lori Gavaghan, legislative clerk; Tom Alexander, counsel; Dave Solan, Ph.D., and Ray

Robbins, professional staff members; Andrew Su, minority professional staff member; and Cecelia Morton, minority office manager.

Mr. ISSA. Thank you all for being here. Noting that a quorum is

present of this joint hearing of the Government Reform Subcommittee on Energy and Resources and Subcommittee on National Security, Emerging Threats, and International Relations, we will come

to order.

Gasoline is over $3 a gallon, and it is a very visible sign of our

energy dependence. But far less visible and perhaps far more serious threat to our economic well-being and the pursuit of our vital

national interest is the increasing constraint producing countries

place on the full range of our foreign and domestic policy options.

As we see these stress points on our ability to make independent

domestic and foreign decisions, this committee has become increasingly concerned that oil is not only a weapon but is a viable weapon of those who have an agenda not in sync with the United States

and perhaps not with the rest of the free world. Some producers

have proven entirely too willing to use energy as a weapon, or as

blackmail, in the words of Vice President Cheney. Others cannot

resist the populist temptation to nationalize energy resources despite history’s lessons that it undermines production over the long

term and acts as a destabilizing force once prices drop.

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At this time, other producers are undermined by emerging

groups seeking to cutoff energy supplies from world markets. Consuming countries are belatedly reassessing their options in a shifting world of geopolitics, and more cooperation must be and should

be absolutely necessary. However, some consumers, such as China,

have naively and seemingly stepped away from the open market

and sought out long-term supplies through state-to-state agreements.

We must address important questions in today’s hearing. Have

we allowed ourselves and our allies to become so boxed in by Iran,

Venezuela, Russia, Nigeria, and Bolivia, that we cannot effectively

counter the use of ‘‘energy as a weapon?’’ We know that the current

energy crisis is demand-driven and not as a result of any abrupt

shock in the oil supply. But what if we did have an abrupt shock

to the oil supply when we have, in fact, no spare production? What

would a supply shock do to our economy and to those of our trading

partners? How are the Departments of State and Energy, represented here today, working to ensure the supply of energy? And

is the Federal Government doing enough to meet the challenges

not just for today, but for tomorrow?

It is my hope that today’s hearing will not only more clearly

identify the ramifications of our oil dependency on the economic

and national security interest, but also begin to identify—and this

is most important—how to deal with those ramifications. Last

week, Chairman Davis and I released a majority staff report entitled, ‘‘Securing America’s Energy Future.’’ The report contains aggressive recommendations for lessening our dependence on foreign

energy supplies.

Today we will hear from some of the best experts in the world

on these issues. On the first panel, we are privileged to have here

today Assistant Secretary of Energy and Policy for International

Affairs Karen Harbert and Deputy Assistant Secretary of State

Paul Simons.

I will introduce the second panel later, and would ask for my

ranking member to make his opening remarks.

[The prepared statement of Hon. Darrell E. Issa follows:]

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Mr. LYNCH. Thank you, Mr. Chairman. I want to thank Chairman Shays and yourself, Chairman Issa, for holding this hearing.

I can think of very few issues that are so prominent, so profound,

and so immediate in the world today.

I would also like to thank both our Secretaries and the collective

witnesses on the second panel for helping our committee with its

work.

Throughout the past year we have witnessed a dramatic 38 percent increase in the price of crude oil and, concurrently, a sharp

rise in the average cost of gasoline to American families. In recent

weeks, crude oil prices have risen to over $70 a barrel and, according to the Energy Information Administration, this week’s average

national price for regular grade gasoline is nearly $3 per gallon, a

nearly 80 percent increase from a year ago. On the East and West

Coast, the average price per gallon is actually over $3.

Among the chief factors that have facilitated recent rises in oil

prices has been increased worldwide consumption and demand as

countries such as China and India have experienced significant economic growth. However, it is the United States that remains the

world’s leading oil consumer, consuming over 20 million barrels of

the roughly 80 million barrels produced worldwide each day, while

producing only about 7 million barrels daily.

Notably, our high oil consumption, coupled with the weakened

reserve position, means that the United States for the most part,

will continue to rely on the world markets for its crude oil supply.

According to the Energy Information Administration’s last International Energy Outlook, 70 percent of U.S. oil consumption is projected to be satisfied by crude oil and petroleum product imports

by the year 2025. Regrettably, our growing dependence on foreign

oil not only poses a substantial risk to our economic security, but

may also serve to compromise the effectiveness of American foreign

policy as high domestic demand leaves the United States susceptible to the threat of hostile oil-related political actions by foreign

governments in oil-producing countries.

Iran, for example, the second-largest producer within the Organization of Petroleum Exporting Countries, has repeatedly issued

thinly veiled supply disruption threats in response to U.S.-led efforts to curb that country’s uranium enrichment program. In addition, Venezuela President Hugo Chavez, whose country is the

United States fifth-largest source of crude imports, has similarly

asserted the possibility of retaliatory oil-related actions stemming

from his opposition to U.S. policy. In April 2004, Hugo Chavez

threatened to stop selling oil to the United States if we did not stop

‘‘intervening in Venezuela’s domestic affairs.’’ And in February

2006, President Chavez again asserted that the U.S. Government

should know that if it crosses the line it will not get Venezuelan

oil.

As evidenced by these examples, America’s addiction to foreign

oil means that our economy and foreign policy is extremely vulnerable to oil-related threats issued by, in some cases, rogue oil-producing states. Accordingly, I welcome the witnesses today, both our

Secretaries in the first panel and we also have a very distinguished

panel to follow. And I am enormously happy that you have been

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willing to help the committee with its work and I look forward to

your testimony.

Thank you, Mr. Chairman.

Mr. ISSA. Thank you. And as you know, this is a joint hearing.

I feel a little guilty, both as a junior member and as the subcommittee chairman for Energy and Resources, sitting on the dais

when in fact National Security Subcommittee chairman, Chris

Shays, has really done the yeoman’s work on the threat to national

security. In many ways, this is less about energy and more about

the threat to national security.

With that, I yield to Chairman Shays.

Mr. SHAYS. I thank the gentleman. I like being just where I am,

and I thank you for initiating this hearing because I think it is one

of the more important hearings I have been involved in all year.

Dependency on foreign-supplied fuels is an emerging threat to

our national security and to the security of the international community. Suppliers understand fuels such as oil or natural gas can

be used to influence or compromise our policies. The U.S. economic

growth is a key force that propels the world economy. Fuels supply

the energy that helps nations increase their standard of living.

Without fuel, obviously, the world would grind to a halt.

In many cases, the supply of these fuels is threatened by individual groups and regimes opposed to U.S. policies, often located in

the more politically unstable parts of the world. The former Primer

Minister of Malaysia Mahathir Mohamad said, ‘‘If we reduce oil

output, prices will rise. Oil can be used as a weapon to protect the

interests of Muslims.’’ I find it interesting he used the word ‘‘Muslims’’ and not just his own folks.

Al Qaeda’s Osama bin Laden and his deputy al-Zawahiri have repeatedly called for attacks on key economic targets, especially energy sources. Ali Larijani, secretary of Iran’s Supreme National

Council, said ‘‘we would not like to use our oil as a weapon. We

would not like to make other countries suffer.’’ Interesting way of

saying, basically, they will.

Regimes and volatile regions also threaten fuel supply, and Latin

America’s state-controlled energy sources limit the growth of global

supplies by undermining or discouraging foreign investment. Russia’s cutoff of natural gas to Ukraine was a successful effort to use

fuel supply as political leverage. In Subsaharan Africa, poor governance and corruption threaten the supply of fuels, making others

who would use it more powerful.

President Bush highlighted the risks of foreign fuel dependency

when he declared ‘‘America is addicted to oil’’ and insisted the

United States ‘‘break this addiction.’’ While recognizing the problem is laudable, little has been done to solve it. We must break this

addiction because suppliers exploit American energy dependency to

influence our policies and terrorists see oil as our Achilles heel.

Frankly, it is our Achilles heel.

We are funding both sides in the war on terrorism, ironically—

U.S. military and, on the other side, energy suppliers who support

Islamic militants. Kicking the habit is an urgent necessity. Congressman Maurice Hinchey, a Democrat from New York, and I introduced the Energy for Our Future Act, which seeks to decrease

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U.S. dependency on foreign oil, protect the environment, build a

market for renewable energy, and promote energy conservation.

Our national security is threatened by our dependency on foreign

countries that share neither our views on democracy nor our commitment to combat radical Islamist terrorists. With less than 3 percent of the world’s oil but 25 percent of its use, we can never drill

our way to energy security. Only by creating a forward-looking energy policy that reduces demand for fuels, especially oil, will we be

able to lower gas prices and ensure a long-term independence.

Today’s hearing highlights the growing use of energy as a weapon and the risks it poses to U.S. national security. Congressman

Issa, this is a good opportunity—frankly, a great opportunity—for

our two committees to examine this important issue that speaks to

the security and well-being of our great Nation, and I propose that

we have a number of hearings on this issue.

I just want to thank you for your efforts and your leadership, and

I want to thank our witnesses for taking the time to appear before

us today. I look forward to their testimony.

Thank you, Mr. Chairman.

[The prepared statement of Hon. Christopher Shays follows:]

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Mr. ISSA. Thank you, sir.

I would ask, before we hear testimony, that the witnesses and

anyone—this is a rule of the full committee—who might be advising our witnesses, please stand to take the oath.

Mr. SHAYS. This is just on the first panel, correct?

Mr. ISSA. Right, just the first panel would probably be fine.

[Witnesses sworn.]

Mr. ISSA. The clerk will report that both answered in the affirmative.

OK, please have your seats and—oh, yes. We normally do 5 minutes. We understand there is no way on a subject like this that 5

minutes is going to work. So even though it will cut into the remaining question time, 10 or so minutes would be ideal. If you are

finished sooner, we will get to questions sooner, but it is up to you.

Ms. Harbert.

STATEMENTS OF KAREN HARBERT, ASSISTANT SECRETARY

FOR POLICY AND INTERNATIONAL AFFAIRS, U.S. DEPARTMENT OF ENERGY; AND PAUL SIMONS, DEPUTY ASSISTANT

SECRETARY FOR ENERGY, SANCTIONS AND COMMODITIES,

BUREAU OF ECONOMIC AND BUSINESS AFFAIRS, U.S. DEPARTMENT OF STATE

STATEMENT OF KAREN HARBERT

Ms. HARBERT. Well, good afternoon, and thank you. Thank you

for indulging us with a few more minutes to deal with this very important and complex subject.

It is a pleasure to be here today to talk about the administration’s efforts to meet the energy challenges facing us today from

both a national security perspective and an economic perspective.

We believe that energy security is inextricably intertwined with

our economic prosperity and our national security. Access to a secure, reliable, affordable supply of energy is fundamental to our national economic security. As such, and as the world’s largest producer and consumer of energy, the United States must play a leading role in addressing the world’s energy challenges and ensuring

a secure energy future for all.

The global nature of energy markets means that supplying adequate, affordable, and reliable energy services is a responsibility we

all share and one that we must address as a global community. Actions taken by any country to misuse or mismanage its energy resources without considering the global implications of its actions

will have a far-reaching, negative impact.

As traditional energy resources become less available and more

difficult to develop, energy security will become an even more critical component of economic security and national security. A few

trends are of particular concern: The world’s energy dependence on

a few countries. Obviously, record-high oil prices. Resources that

are now located in places that are geographically hard to reach,

geologically difficult to develop, politically unstable, and unfriendly

to new investment.

So to cope with this, we have a full range of possible consequences because of these trends. So we must employ forwardVerDate 11-MAY-2000 11:40 Apr 11, 2007 Jkt 000000 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 C:\DOCS\31181.TXT HGOVREF1 PsN: HGOVREF1
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looking policies that proactively address the energy challenges and

maintain a U.S. diverse energy mix.

The U.S. goals to achieve a more diversified world energy market

to improve global security include: First, expanding global production to meet the needs of a growing global economy. We want to

see the global economy continue to grow.

Two, using technology to diversify the types of energy we consume, to improve energy efficiency, and to lessen the environmental burden of energy consumption.

Three, improving investment climates in resource-rich countries

and pursuing market-based pricing.

And four, modernizing and protecting global energy infrastructure.

The United States strongly believes in the power of open markets

to most efficiently determine price, supply, and demand adjudication. However, there are other countries that do not ascribe to our

philosophy. These are countries which do not appear to utilize their

resources for the good of their citizenry and, instead, are showing

increasing and strong tendencies toward using energy as a foreign

policy tool to further their agendas around the world.

So where are these resources? As you have said, the United

States imports about 60 percent of its oil. The top 10 suppliers to

the U.S. market are currently Canada, Mexico, Saudi Arabia, Venezuela, Nigeria, Iraq, Algeria, Angola, Russia, and the United

Kingdom. We import 15 percent of our natural gas, principally

from Canada, Trinidad and Tobago, and Algeria.

Now much of the world’s untapped hydrocarbon resources are

controlled by governments and national oil companies, with limited

access afforded to United States and multinational energy companies. The new resources are concentrated in the Middle East, North

Africa, Russia, and Central Asia. Saudi Arabia is estimated to have

over 260 billion barrels of oil, while in Africa, Nigeria and Libya

have about 75 billion barrels of oil reserves. Other countries with

sizable reserves include Iraq, the United Arab Emirates, and Kuwait. And the EIA estimates that proven oil reserves are between

17 and 44 billion barrels in the Central Asian Caspian region.

As you know, Russia has proven oil reserves and they are conservatively estimated at about 60 billion barrels, and it has tremendous natural gas reserves. However, the true value of these reserves is not known, as they do not release their reserve data publicly. Russia has moved rapidly to consolidate its control over the

energy sector and it has yet to enact a law outlining the terms for

foreign investment. The lack of a predictable legal environment to

attract investment is slowing investment and it is decreasing production.

We can’t forget that our most important energy partner lies right

to our north, and it is Canada. It’s our No. 1 supplier of oil and

it provides more than 85 percent of all of our natural gas. We do

have a very strong and stable relationship with this strategic ally.

Venezuela sends about 60 percent of its oil exports to the United

States, about 1.5 million barrels per day. One of the most important outlets for PDVSA, the Venezuelan state-owned oil company,

lies right here on our shores. However, Venezuela production is

now only 2.5 million barrels a day, and PDVSA production is down

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50 percent from its peak. Venezuela has tremendous reserves, but

it needs a tremendous amount of capital—we’re talking upwards of

$25 billion—and significant technological expertise to tap those resources. With the increased restriction on foreign investment in the

oil sector, we are seeing declining investments, reduced production,

and, certainly, not the available expertise that is needed to unlock

those resources.

So how is energy being manipulated today? Well, we see four recent trends, and these trends, we believe, are self-defeating and

that the nations that employ them will ultimately pay the price,

and not the energy market. The trends are: No. 1, limiting access

to the resources for commercialization and thereby limiting supply.

This ultimately impacts negatively on the economy of the Nation

that is depriving its citizens of the revenue generated by the development of these assets.

No. 2, renegotiating contracts or expropriating assets. This undermines a country’s credibility and reduces incentive for investment in the country more broadly.

No. 3, renationalizing assets. International energy companies

have the needed capital and the needed technology to unlock challenging resources. Most—not all, but most government and national oil companies do not.

Fourth, cutting off supply. This reduces a country’s reliability as

a supplier, deprives its population of needed revenue, and accelerates affected countries’ plans for supplier diversification.

And last, cheap petroleum. Countries that provide reduced price

products or concessionary financing deprive their own economies of

revenue and encourage an unhealthy reliance on non-market-priced

oil, which is not sustainable over the long term.

Many have said China’s growing demand is a threat. Is it? China

has responded to its growing need for energy through domestic

policies such as increasing domestic oil production, increasing energy efficiency, and increasing the use of renewable energy. But, it

has also sought to enhance its energy security by diversifying its

energy supply through imports and acquiring new assets overseas.

This has prompted concerns, as I have said, that their growing demand is a threat. We believe that these will not remove energy resources from the competitive market. We believe that these resources are actually going to be consumed by China, and the effects

of these purchases should be economically neutral.

So what is the real threat? The real threat is lack of investment.

The International Energy Agency estimates that in order to meet

world demand by 2025, $16 trillion of investment will be required.

That investment largely depends on market transparency in producing countries. Complex, capital-intensive projects require stable,

predictable investment climates. With long time horizons, investment is needed now—not tomorrow, but now.

So what is the United States doing to address the situation? We

believe we are increasing our energy security through engagement,

cooperation, and diversity.

We maintain frequent and regular contact with producing and

consuming nations. Greater transparency among nations is necessary to avert surprises and instill confidence in the market. Just

this month, Secretary Bodman met with his counterparts from

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Saudi Arabia and our No. 1 and 2 suppliers of oil, Canada and

Mexico. We also are currently hosting a delegation from China to

improve our cooperation on energy efficiency. We have to address

both the producing and consuming part of this equation.

As the administration engages in a dialog with both producers

and consumers, we stress the need to work constructively to promote the removal of barriers, to encourage investment and trade,

as well as the need for transparency, sanctity of contracts, and the

establishment of clear laws and regulations that are consistent.

I mentioned diversity. The administration has determined that,

over the long term, our best energy strategy is one that is based

on achieving diversity of supply—where we get it from and what

it is. During his State of the Union address, President Bush outlined two new initiatives that are based on the belief that scientific

discovery and technological advancement are the keys to maintaining America’s economic leadership to meeting our future energy

needs.

In order to secure our energy future, we are working to transform how we produce and how we consume our energy resources.

The Advanced Energy Initiative will accelerate investment into

clean energy technologies in order to transform the way we produce

energy in our homes, the way we use energy in our homes, our

businesses, and our transportation sector. The AEI is focused on

technologies that we believe hold the greatest promise for American taxpayers—solar, wind, biofuels, hydrogen, nuclear, and clean

coal technologies.

The second initiative, which was the American Competitiveness

Initiative, the President has proposed to increase Federal investment in critical areas of research to ensure that the United States

continues to lead the world in opportunity and innovation. As

somebody said, we’re not going to drill our way out of this challenge, we’re going to innovate our way out of this challenge. We

have to provide our children, the next generation of leaders, a

strong foundation to carry this challenge forward.

So in conclusion, the administration believes that access to a secure, reliable, and affordable energy is fundamental to national security. We also believe that a strong, stable, and prosperous global

energy market can be created by all countries—those countries who

choose market-based energy policies and the power of private investment.

But moves by some countries to restrict foreign investment and

increase the reach of state-run energy industries limit their ability

to access capital for investment, restricting the development of access to energy supplies and infrastructure. It is a model that may

hold patriotic appeal, but delivers less prosperity to citizens and

less energy to markets.

Thank you for the opportunity to address this and I look forward

to answering all of your questions. Thank you.

[The prepared statement of Ms. Harbert follows:]

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Mr. ISSA. Thank you.

Mr. Simons.

STATEMENT OF PAUL SIMONS

Mr. SIMONS. Thank you, Mr. Chairman.

Chairman Issa, Chairman Shays, Congressman Lynch, it’s a real

pleasure to be here this afternoon to testify on the critical nexus

of energy and national security. Let me ask that my full written

statement be entered into the record and I will provide just a few

short oral remarks.

First of all, let me say that from the State Department perspective we welcome the attention being paid to this issue by the House

and this committee. Mr. Chairman, in particular we appreciate

your interest in this issue, demonstrated by your participation in

the first oil ceremony inaugurating the opening of the Baku-TbilisiCeyhan pipeline in Georgia last year. We also appreciate your active involvement in our energy diplomacy with Kazakhstan. I recall

we were together last September in San Diego for an important

conference.

An important foreign policy success, the BTC pipeline, as you

know, will not only enhance global energy security, but it will also

go a long way toward strengthening the sovereignty and economic

viability of the nations of that region. So by maintaining diversified

sources of supply, as exemplified by the BTC pipeline, nations can

help make their economies more resilient to disruptions in energy

supply. Energy is, after all, a fundamental driver of economic

growth and development around the world.

As you’ve noted, as several of the committee members have

noted, we’re largely in a tight situation today that’s been created

by demand growth and basically global economic growth—which is

a good thing. Greater wealth and prosperity may enhance national

security by providing the underpinnings of more peaceful, democratic, and cooperative relations. But they also bring increasing

pressure on world energy markets, which we’ve seen in the last

couple of years, particularly the markets for oil, on which most of

the world’s transportation depends, and of course, more lately, on

markets for gas as well, on which a growing share of the world’s

electric power production depends.

So whether in relation to these tight market conditions, or an attempt to take advantage of them, we are witnessing, as the President has pointed out and as Secretary Rice has pointed out, we’re

witnessing which do engage in behavior which does undermine

global energy security.

In order to address this challenge, we need to develop a portfolio

of both near-term, medium-term, and long-term measures. As is acknowledged in the very fine report that was submitted by this committee, energy is an issue that requires long lead times. So on a

number of these issues we need to simultaneously pursue a shortterm strategy, a medium-term strategy, as well as a long-term

strategy. And as Assistant Secretary Harbert pointed out, the

President has laid out elements of short-term, medium-term, and

long-term, both in the State of the Union message as well as in his

April 26th speech, where he recognized that the Nation is addicted

to oil.

25

The President did outline a plan in which we can broaden our

energy options, and our mission in the State Department is to play

the critical role to engage our friends and allies around the world

in implementing this vision with us, to basically bring the international community on board for the President’s vision. And we do

this every day, in conjunction and in close cooperation with our colleagues in the Department of Energy as well as other U.S. Government agencies, through a number of different tools. And I think Assistant Secretary Harbert has laid out most of these. I don’t think

I’m going to repeat them in my statement, but I’ll very briefly summarize five general areas which I think correspond closely to the

areas that she has outlined.

First, the promotion of diversified energy supply and transit options, this concept of diversification. Energy through diversification.

And again, we appreciate the committee’s report also made reference to this tactic.

Second, enhancing the investment climate for energy exploration

and development. This is something we work on every day, and we

appreciate, again, the leadership of the chairman on the energy climate issue. And we have had some successes here. As you know,

we work closely with the government of Kazakhstan, the government of Azerbaijan, more recently with the Libyans in the disassembly of our sanctions regime and the very positive announcement yesterday, and also with the government of Saudi Arabia,

which has undertaken a major initiative to expand production. So

we are looking at investment climate improvements across a wide

variety of suppliers.

Third, encouraging a transition to market pricing. This is extremely important, especially in an era when prices are high. We

have to make sure that price signals are appropriately transmitted

to the markets in all of the consuming countries around the world

so we have the proper market response and market behavior. And

this is something that we pursue through our USAID programs,

through the multilateral development banks, and through bilateral

dialogs.

Fourth, advancing research and development of transformational

energy technologies. The Department of Energy has the lead on a

lot of this, but we’ve created some international partnerships, including the Asia-Pacific Partnership, where the State Department

has a very active role on the technology side.

And finally, improving energy efficiency. The President has laid

out some important measures in the State of the Union and in the

April 26th announcement—a plan, for example, to expand the use

of plug-in hybrids and to expand tax benefits for hybrid vehicles.

These are the kinds of steps that we would like to see expanded

also elsewhere in the world.

So let me conclude by saying that energy policy is very much an

important foreign policy priority for this administration. It’s a critical issue in our bilateral relationships with key consuming, producing, and transit countries. We work closely—we have a very good

and strong interagency team that works on this, and we look forward to answering any of your questions.

Thank you.

[The prepared statement of Mr. Simons follows:]

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Mr. ISSA. Thank you. Thank you both for putting as much as you

can into such a short period of time.

Secretary Simons, because you have a short window, we will concentrate on your statement first, limiting ourselves, including myself, to 4 minutes each. And then we will do a second round. So

Secretary Harbert, understand that it is not that all these questions wouldn’t go for you, but I think we are going to try and respect the fact that you are not flying MilAir and it won’t wait.

Secretary Simons, I am going to be very brief in my questions.

You and I have been interested in places in which we can expand

not the quantity but also diversification of delivery and source. I

am particularly concerned that, if I read this correctly, the areas

that are down in production, may be there for a long time. Nigeria

in 2006 appears to be down by 550 thousand barrels a day. Venezuela down by 400 thousand under their new nationalized regime.

Iraq, as you know, is down about 900 thousand. And for a number

of explainable reasons, the U.S. Gulf was down about 325. That puts us about 2 million barrels down. How much of our $3 a gallon and $70 a barrel should we attribute to this group of circumstances versus, quite candidly, other forces in the world?

Mr. SIMONS. Thank you, Mr. Chairman, for that question.

As I think I pointed out in my opening statement, one thing I

think we need to keep in mind is that oil investment has very long

lead times and there are very, very long cycles that are involved.

So the production that’s coming on board today really comes about

as a result of investment decisions that were made back in 1997,

1998. And the price of oil, of course, is very cyclical as well. So we

had low prices in the late 1990’s, throughout the 1990’s, and we

really had a deficit of investment. So we don’t have the volumes

coming onstream right now that take care of the expansion in global economic growth. But a lot of this had to do with the low price

environment back then. Today we have, obviously, a much more robust pricing environment. Companies and countries are investing

much more aggressively. But we do have to consider this lead-time

issue.

But to try to answer your question, I think, clearly, we are in a

position now where we lack spare capacity. And the lack of spare

capacity is contributing to the high price levels. We need to work

very, very hard on a menu of countries that we’ll be working with.

I mentioned before the Azerbaijans, the Kazakhstans, the Nigerias,

the Angolas, the Libyas, the Saudis, the UAE. We need to basically

keep all our cylinders operating, because it is a little bit difficult

to predict exactly where we may have a supply disruption problem.

So I think the main issue and the main reason we have the high

prices today is because of that low investment 10 years ago and

also the fact that we’ve had very, very robust economic growth. I

think if you had asked anyone in the energy industry a couple of

years ago if oil prices had been up to $60 a barrel would we still

have 4 percent global economic growth—which is what the IMF has

predicted for this year—they probably would have said no, we

would have had a slowdown. But in fact, countries are adopting

and adjusting to the energy prices, they’re improving their efficiencies, and to some extent, they’ve kept the global economy moving.

39

So we do need to take steps. We need to take steps in the short

run, the medium term, and the long run. But we also need to recognize that there are lead times and a number of the steps that

we are working on today will probably benefit generations a little

bit further out.

Mr. ISSA. Certainly. Just one followup, because you didn’t mention Russia, and I am particularly concerned. It is estimated that

Americans alone lost over $6 billion in the hostile or manipulated

takeover of Yukos. Needless to say, Americans are not going to be

likely to go back into the next IPO with the level of zeal that they

went in with in the past. Looking ahead as the years go on—in addition to Russia’s manipulation of their natural gas and their using

oil as a weapon—is that absence of investment, world-class investment capability, likely to lead to the Russians’ long-term ability to

exploit their resources being significantly down?

Mr. SIMONS. Well, thank you for that question. As you know, Mr.

Chairman, from your experience in the region, Russia is an extremely important player in the global energy circles. It’s the largest non-OPEC producer of oil, it has the largest gas reserves in the

world, and it has a very important role to play as a reliable supplier to Europe and as a reliable supplier to global markets. So the

way that Russia handles its energy sector is important to us. And

we’ve raised a number of the issues that you cite this afternoon in

our bilateral energy dialog with the Russians. Certainly we believe

it’s important that Russia undertakes the investments that they

need basically to keep up their ability to play this reliable supplier

role, and we’re discussing with them now issues related to that.

Again, I bring up again the issue of lead times, because it may

be for the next couple of years that Russia can maintain levels of

oil production. But if investments start to slow now, we may see

in 5, 6, 8 years that curve start to fall off. These are the kinds of

issues that we have raised with the Russians. The multilateral

International Energy Agency has raised a similar set of issues. We

think it’s important for Russia and other market players to take a

long-range view of their ability to play this leadership role.

Mr. ISSA. Thank you.

Mr. Lynch.

Mr. LYNCH. Thank you, Mr. Chairman.

Mr. Secretary, since you have to leave, I am going to direct my

question principally to you. We have dealt in the past on several

occasions, at least four major instances of having shock, oil shock,

so to speak, and both actual and threatened disruptions of oil supply here in the United States. I think the most serious occasion

was probably in 1973, when we had a concerted effort in the Middle East. But it does appear to me that, given the amount of potential disruption out there—I mean, if we look at right down the list,

Nigeria, Venezuela, Bolivia, Iraq, Iran—given all of the potential

out there for some significant disruption—and given the fact that

our margin is very tight here, between what you call spare capacity

or surplus production capacity that is out there, it is very, very limited. And I understand your opinion that we need to have some

short-term, some medium-term, some long-term solutions.

But when I go over what you have talked about diversification

of supply and transit, enhancing the investment climate, energy efVerDate 11-MAY-2000 11:40 Apr 11, 2007 Jkt 000000 PO 00000 Frm 00045 Fmt 6633 Sfmt 6633 C:\DOCS\31181.TXT HGOVREF1 PsN: HGOVREF1
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ficiency, supporting new technologies—those all seem to be rather

longer-term solutions. Although I agree they are solutions, they are

mostly longer-term.

What do we do? Let’s just use Venezuela, for example. This past

week the administration has said that they are going to ban arms

sales to Venezuela. And President Chavez comes back and says he

is going to sell 21 F–16s to Iran. And we go back and forth here.

What happens if this brinksmanship goes to a point where, say, a

significant supplier like Venezuela cuts off supply? What do we do?

Mr. SIMONS. Thank you, Mr. Lynch. It’s a good question. We’ve

given a lot of thought to this inside the administration. And within

the sort of short-term basket of options, I think the option that we

try to keep most available and most ready to use is our coordinated

use of our strategic stocks. And if you recall, during hurricanes

Katrina and Rita last fall, we were able to work with the 26 member nations of the International Energy Agency, and within 24

hours we agreed to release 60 million barrels of oil to meet that

supply disruption that was actually caused by a natural occurrence

here on U.S. shores. And we regularly, within the context of the

IEA, conduct emergency response exercises. And lately, we’ve been

bringing in the Chinese, the Indians, and other non-IEA consuming

countries to participate in those exercises, to get them to understand the value of maintaining and utilizing strategic stocks. All

the IEA member countries are required to keep 90 days of imports

of stocks on hand. And as you know, the President has led the effort to expand the U.S. strategic petroleum reserve, which has been

increased substantially during this administration, so we have a

more comfortable cushion.

So for the very, very short term, we have, I think, a very agile

mechanism available in the release of strategic stocks. We also

have some global spare capacity—not enough, but we are working

to have that get larger. And Saudi Arabia in particular has

launched an aggressive investment program because, as the Saudi

oil minister announced in his recent visit here, Saudi Arabia would

like to see a larger cushion there as well. So a larger cushion is

viewed as in the interests of the producing countries as well as the

consuming countries.

And finally, we do have energy efficiency and some of the targets

the President announced, in particular his initiative to expand the

tax credit on hybrid vehicles, which he announced on April 26th.

So we do have some short-term elements in our tool kit. I really

wouldn’t mean to suggest that it’s all focused on the medium and

long term, but I think we have to keep the notion in mind that we

do have to be moving ahead in all three areas at the same time.

Mr. LYNCH. Just a quick followup. It does concern me, though,

that we dig so deep into our tool box on the first disruption. In

other words, in previous instances of threatened disruption and actual disruption, we were able to replace production capacity by

going to another international neighbor. In this case, you are saying that we may very well have to go to our own reserves immediately, which is sort of a backstop for defense purposes.

Mr. SIMONS. Well, I think that’s correct, but at the same time,

I think we showed back in September that we can move fairly

quickly and that we can have a rather rapid impact on the marVerDate 11-MAY-2000 11:40 Apr 11, 2007 Jkt 000000 PO 00000 Frm 00046 Fmt 6633 Sfmt 6633 C:\DOCS\31181.TXT HGOVREF1 PsN: HGOVREF1
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kets. You may recall, we had a spike up to a little over $70 and

over $3 a gallon, and within a couple of weeks we were back down

by at least $10 a barrel. So—

Mr. LYNCH. That was a 2-day storm, though.

Mr. SIMONS. That’s right, but I think the fact that the markets

recognized that we have the stocks, the stocks can be made available, and that the process itself is agile, it’s not overly bureaucratic, I think that ought to give some comfort.

Mr. LYNCH. Thank you, Mr. Secretary.

Mr. ISSA. That is a great line of questioning, and at some future

hearing we will talk about the shortage of refining capacity that

went on, obviously, beyond the 2 days when the refineries flooded.

Mr. Shays.

Mr. SHAYS. Thank you very much, Mr. Chairman.

I am left with a feeling that we are totally and completely vulnerable. We are vulnerable because there is no way to increase

supply noticeably in the short run and that we then empower each

country—because it is just like if a bill passed by one vote, every

Member can withhold their vote and stop the bill from passing. I

get the feeling that there frankly is nothing that we can do in the

short run. And what I would like to know is if you believe that is

true. And if not true, then I would like you to tell me, in concrete

ways, why it is not true.

Mr. SIMONS. Thank you, Congressman Shays. I believe I responded to Mr. Lynch that we do have the strategic stock option

available. We have a small amount of surge capacity internally.

Mr. SHAYS. And explain—

Mr. SIMONS. We have efficiency.

Mr. SHAYS. How small an amount is that?

Mr. SIMONS. Probably a million to 1.5 million barrels a day.

Mr. SHAYS. So we consume 20 million barrels a day.

Mr. SIMONS. I’m sorry?

Mr. SHAYS. We consume 20 million barrels a day.

Mr. SIMONS. That’s correct.

Mr. SHAYS. Just for transportation needs.

Mr. SIMONS. Well, for transportation I think we’re around 13, if

I’m not mistaken.

Mr. SHAYS. So it is the total—20 million is the total we consume?

Mr. SIMONS. About 22, I think, is our total consumption.

Mr. SHAYS. So we have the capability to maintain a million barrels a day for how long?

Mr. SIMONS. In terms of what we would release from our stocks?

Mr. SHAYS. Yeah, increasing.

Mr. SIMONS. Well, it’s really—we have—the IEA requirement is

90 days worth of imports. We have actually about 115 days of full

imports, which means that if we had a complete shut-down of imports, we lost all 13 million barrels a day, we could go for 115 days.

Now, if we’re looking at—

Mr. SHAYS. Just wait a second, though, just so I am sure. We

have a stockpile, but we have the capacity to just bring about a

million a day?

Mr. SIMONS. In terms of what the physical capacity is—

Mr. SHAYS. Yes.

42

Mr. SIMONS [continuing]. To evacuate the oil? Karen, Assistant

Secretary Harbert, perhaps, can fill that in.

Ms. HARBERT. Just on the technical natures of the SPR itself, it

has a drawdown capacity of closer to 4 million barrels a day operating at full capacity. And of course we’re looking at ways to improve

that.

I think you should not lose sight of one thing. You mentioned the

case of Venezuela, if Venezuela were to cutoff oil to the United

States, it would be going somewhere else. The world oil market

would still be supplied with the same amount of oil unless Venezuela decided to make a very uneconomic decision of—

Mr. SHAYS. No, no, no. I—

Ms. HARBERT [continuing]. Not having that—

Mr. SHAYS. Hold on. Hold on. Oil is fungible. We make assumptions that people think the way we think. And there can be such

anger and hate that they don’t care what it does to themselves if,

in the process, it really screws us. And so all I am asking is the

following: The strategic reserves, we have a capacity to draw down

up to 4 million a day? Is that your testimony?

Nodding heads doesn’t get recorded.

Ms. HARBERT. Yes.

Mr. SHAYS. OK. And we could sustain that for how long?

Ms. HARBERT. As Secretary Simons has said, between what we

hold in the SPR and what industry holds, we have the ability to

replace our imports for close to 115 days.

Mr. SHAYS. OK.

I was listening and I am not hearing the same thing. So are you

saying that we have the capacity for 4 million barrels for 115 days?

Mr. SIMONS. We have a capacity for 13 million barrels a day at

115 days, so 4—I’m just doing the math here—4 million barrels a

day could go about three times that long, more than a year at 4

million barrels a day.

Mr. SHAYS. So our real challenge, then, is our capacity to draw

it down?

Mr. SIMONS. I think that’s correct, but I think you’re also making

the assumption that we, as the United States, would be 4 million

barrels short in the event of a supply disruption.

Mr. SHAYS. No. No, I make an assumption that you could have

something happen in the Persian Gulf that could impact a significant amount of supply. I do make an assumption. I make an assumption because it could happen. I don’t think it is any stranger

than thinking that somebody could bring down the Twin Towers.

I think it is a very real possibility, and I think the honest answer

to my question is we are extremely vulnerable to a drawdown in

the supply of world oil and that our only protection now is our strategic oil reserves to which we have a capacity to draw, at best, 4

million barrels a day. And then my question, which will remain to

let the other Members go, would be so tell me what we are doing

and we will get into that with Ms. Harbert.

Thank you, Mr. Simons.

Mr. ISSA. Thank you. Great round. We are just sorry that you

have to go to Holland so quickly.

Mr. Van Hollen.

43

Mr. VAN HOLLEN. Thank you, Mr. Chairman. Thank you for

holding this hearing. Thank both the witnesses today. And I thank

you for laying out some of the short-term options, middle-term options, and long-term options.

I would agree that our short-term options are pretty constrained.

I do believe that it is a result of failure to have some forward-looking think as a nation many years ago. Our short-term options are

constrained now because we failed to take significant steps early

on. A very simple step we could have taken was to increase the

CAFE standards. I think this Government—and I speak for Congress and the administration both—have been grossly negligent in

not taking action much earlier to raise it above the 27.5 miles per

gallon and closing the SUV loophole. There are things that we

could have done that would at least limit the severity of the price

hikes and reduce our reliance on foreign oil.

I also think, as we talked about, that our dependence on foreign

oil puts certain constraints on our foreign policy options.

But if I can ask you, Mr. Simons, I am not sure I know—part

of your title has to do with sanctions, and I don’t know to what extent that fits in with our efforts with respect to Iran. But whether

it does or does not, my question is this: We have been trying to

work through the UN Security Council and with the permanent

members, to pass some kind of resolution that would allow us to

possibly impose economic sanctions against Iran. Russia and China

have been resistant to doing that for a variety of reasons, but one

reason may well be, at least with respect to China, that it has

these oil contracts with Iran, that it is largely dependent going forward on foreign oil.

In your experience, to what extent does that dependence of China

limit our ability to persuade them to support our efforts in the

international arena in Iran and elsewhere?

Mr. SIMONS. Thank you, Congressman, for that question. I think

it’s a good one.

We have been raising for some time the issue with China of how

they conduct themselves on the world stage and particularly with

respect to energy. Deputy Secretary Zoellick has led this effort inside the State Department and, in a major speech he delivered last

year, challenged the Chinese government to act as a responsible

stakeholder in the international community. And I think this responsible stakeholder concept gets to a lot of what’s behind your

question.

We have been discussing in various dialogs with the Chinese

what it means to be an investor in upstream oil, what responsibilities, what obligations, what approaches China ought to take, based

to some extent on some of our experience over the last few years.

And to some extent, China shares interests with the United States

in working to improve investment climates around the world.

China, for example, is a 40 percent investor in the Occidental Oil

project in Ecuador, that the Ecuadoran government took steps just

yesterday to cancel the contract. So we clearly enjoy a common goal

with China to look for countries that hold oil reserves to take a responsible, an investor-friendly approach to their development.

So I believe we do have some common interests with China.

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ested in energy efficiency. And we have common efforts under way

through this Asia-Pacific Partnership for clean energy, that State

and the Department of Energy lead. We also have an active energy

dialog with the Chinese led by Energy Secretary Bodman. So there

are a lot of areas that we need to work on with the Chinese. One

of them is precisely this, to get them to think more clearly about

how they conduct their upstream investments in ways that don’t

upset some of our key geopolitical interests.

Mr. VAN HOLLEN. Thank you. Mr. Chairman, if I could just have

one quick followup. Is that all right?

Thank you for that, and I think, you know, clearly we have to

work with the Chinese and our other partners. There are a number

of factors, obviously, that go into whether they make decisions to

support our efforts in Iran, but that is one of them.

Just a quick possibility in terms of near-term actions. As we

know, Brazil has been very successful at developing a non-gasolinebased—an ethanol-based fuel, I believe. About 75 percent of their

cars now run on it. We impose a tariff. I think it amounts to about

54 cents per gallon, I believe, on Brazilian ethanol. Why shouldn’t

we lift that tariff to make that fuel more available to try and diversify our energy sources, as you both have said is an important part

of the strategy?

Mr. SIMONS. Thank you, Congressman. I think the issue of ethanol is one that we’re all paying a lot more attention to in the wake

of the State of the Union message, where the President clearly laid

out his vision in particular of cellulosic ethanol growing and replacing a lot of our transport fuels. In fact, we have even laid out a

target of 5 million barrels a day of cellulosic ethanol by the year

2025, which would be very ambitious to reach. But I think there’s

a huge amount of interest in ethanol in the international community as well as here domestically.

With respect to your specific question about Brazil, I believe both

Secretary Bodman as well as the President have said this was

something we ought to take a look at. So it’s timely and I think

it’s something that we ought to begin to analyze and think about

more seriously.

Mr. VAN HOLLEN. Is that something the administration supports,

lifting the tariff?

Ms. HARBERT. Let me tell you that at the moment we get 16 percent of the corn that we have in this country being used for ethanol

right now. And if we look over the long term and we look for solutions that we’re trying to actually make homegrown, we need to

look for ways to actually increase that, and that’s why the President announced the investments we’re making in cellulosic ethanol.

There are tremendous opportunities right now in the ethanol industry here in the United States. We have 35 new projects that are

in various stages of investment and construction. We’re encouraging those investments to take place in this country. We want to

make sure that our domestic industry expands to meet the demand, both with corn and ultimately with other types of feedstock.

We don’t want to do anything that would hamper anybody’s investment plans to expand our domestic production. So we have to keep

that in mind.

45

Mr. VAN HOLLEN. I take that as a no, the administration does

not support lifting the tariff—

Ms. HARBERT. I think that the Secretary and the President have

said all options are on the table. No one is willing to take any option off the table. We have to be very mindful of the fact that we

have created an environment where investments are taking place

in the United States. Let us do nothing that would cause harm to

those investment plans.

Mr. VAN HOLLEN. I understand that. I thought we had a sort of

competition, free-market approach to things.

But thank you, Mr. Chairman.

Mr. ISSA. You are very welcome.

I just have one parting question for Secretary Simons.

You and I look, obviously, at the World Trade Organization as

an important free-market, free-trade organization. Has Russia’s recent use of its pipeline—some might say coercive use of its pipeline—been consistent with WTO membership? Or would you, in reverse, say that clearly their historic actions would be inappropriate

were we to grant them accession to the WTO?

Mr. SIMONS. Mr. Chairman, the issue of Russia and its use of

pipelines is one that we have discussed privately as well as publicly

with the Russians. We think it’s very important for Russia to think

very carefully about its long-developed relationship as a good gas

supplier to Europe and to ponder very carefully what it needs to

do to keep up that reputation.

Mr. ISSA. Thank you very much. I won’t assume a yes or a no

at this point.

Are there others who would like to ask a second round of questions for Secretary Harbert? Chris.

Mr. SHAYS. I am unclear about the ability of a country to lock

in prices and to lock in supply. And I need that explained to me.

I realize that oil is fungible, but I don’t understand why a country

can’t totally and completely lock in supply from one country. It

seems to me they can.

Ms. HARBERT. Let’s go back to the Venezuela example, if you

will. Venezuela produces a very heavy type of oil that needs to be

refined in a certain manner. We possess that capability here, so a

great deal of their exports come to the United States for two reasons—proximity, which reduces cost; and our refining capacity.

Now ultimately, if they decided they didn’t want to ship oil to the

United States, they wanted to ship it somewhere else, if the receiving country—

Mr. SHAYS. Let’s stop it there. I agree with that. They are locked

into us, unfortunately, and we are locked into them. But China is

literally going and trying to lock up contracts. Is that correct?

Ms. HARBERT. They are on an aggressive buying spree. But the

amount of their investments is not overwhelming at the moment,

but they are certainly canvassing a lot of new projects.

Mr. SHAYS. Is what they are doing unique?

Ms. HARBERT. They have, certainly, the capital and the demand

that’s motivating them to do this. Many countries don’t have the

type of government-owned structure and the capital at their fingertips to do and to purchase this. However, they’re not going to be

able to use more than what they need. So even if they own the

46

asset, if it is not something that is required for their domestic economy, it will obviously be returned and put onto the global market.

Mr. SHAYS. They have the capability to lock up more than their

supply and then resell it elsewhere?

Ms. HARBERT. If they were to purchase more or own more assets

than what their domestic consumption would be, then they could

return that to the global marketplace.

Mr. SHAYS. Sell it wherever they wanted? I mean, what I am trying to think through is I do realize that oil is fungible—that I understand. We don’t have a Saudi Arabia that is holding back?

Ms. HARBERT. The spare production capacity right now is between about a million and 1.5 million barrels per day.

Mr. SHAYS. Which is basically at peak production?

Ms. HARBERT. Which means that we’re operating a very razorthin margin.

Mr. SHAYS. Yes. You know, you are parsing your words in a way

that makes me uncomfortable. I am not playing a game with you.

And I know you want to make sure that I totally understand. But

what it seems to me is that when we are done with this hearing,

an honest assessment is that the United States is very vulnerable

and so is the rest of the world. But given that we consume 20 to

25 percent of the world’s energy, we are going to feel the impact

the most. So it seems to me, one, is we are very vulnerable in the

short run; we can use our strategic reserves, which will negate it

somewhat. And the second thing, it seems to me, that I would gain

from this hearing is that we have countries for the first time who

are really aggressively, knowing that we are at peak production,

trying to make sure they are not left out by guaranteeing a supply.

China is doing it in a way that I don’t think we have seen done

before by such a large purchaser. Is that correct?

Ms. HARBERT. Well, I think in the short term, and your conclusion that there is little we can do, we certainly, as you said, have

the strategic petroleum reserve. But we also can’t forget the next

best source of energy is the one that we currently waste. And

there’s a tremendous amount that we can do in energy efficiency

and conservation in the short term. I think that the—

Mr. SHAYS. I understand that, though what concerns me is that

a slight reduction in energy, oil, can mean a huge increase in price.

That is what I am left with. And that the market could really

panic. So I am left feeling very uncomfortable about what Congress, admittedly, and the White House have done to get us into

this position.

Ms. HARBERT. And I think we also have to keep in mind that

there are number of producing nations out there, responsible producing nations, that understand that this high price environment

is not in their interest, just the same as it’s not in our interest.

They don’t want to see demand have a dramatic fall-off, and they

understand that this could have an impact on economic growth.

Saudi Arabia is a perfect example. They’re trying to very rapidly

increase their production ability by almost a third. Canada is doing

the same thing. We’ve asked for, obviously, authorities over the

long term to expand our production—the Arctic and other ways.

As I said in my testimony, and Mr. Simons alluded to the same

thing, these are complex energy projects and the investment is

47

needed now to unlock those resources. Now, that may not satisfy

our short-term demand, but we have to forecast that we are going

to have an increased demand for energy if this type of economic

growth is going to be sustained, which is in our interest. Where are

we going to get the next source of supply? Working with those

countries that it’s in their interest to unlock those, use those revenues, and how can we actually help them do that with very good,

honest capital?

Mr. SHAYS. Just one last point. I have huge regret that after September 11th the administration didn’t come in and basically say we

are going to have a Manhattan Project, a Marshall Plan, you know,

10-years-in-getting-to-the-moon energy plan. Although this didn’t

happen, I think Americans wanted that to happen. And I am waiting to see when the administration is going to say that it is a demand/supply issue and we need to slow the growth of demand significantly by better conservation, better mileage. When is the administration going to weigh in on that side of the equation to say

minivans, SUVs, and trucks need to be getting the same gas mileage as cars and we need to bring cars up significantly? When is

that going to happen?

Ms. HARBERT. I think we’ve been very, very aggressive on the energy conservation, energy efficiency front. We have tremendous incentives out there for consumers to change their behavior. We have

a philosophy of incentivizing change, not mandating change.

Mr. SHAYS. Why? Why, why, why? Why would we do that? My

daughter’s life was saved because we mandated seat belts and air

bags. It would not have happened soon enough if the market was

to do it. Why is this administration only looking at the market

without trying to add value to it by getting us to act sooner? Why,

why, why? I don’t understand it.

Ms. HARBERT. We believe in a balance, and there are certain

things we’re willing to mandate and certain things we’re willing to

leave to consumer choice. If you want to choose to buy a hybrid vehicle, you will then receive up to a $3,400 tax benefit. We have

raised CAFE standards on light trucks. We have asked for the authority to reform and revise those standards for passenger vehicles.

I hope we get that authority so that we can do that. There are

things that relate to safety that make sense to mandate, and we

will do that at every given chance.

Things that affect consumer choice, we ought to incentivize that

behavior and not force that behavior. That has worked very well

in the energy markets and we think that’s the way that we employ

our policy here.

Mr. SHAYS. And my last word, I think you put our Nation at risk

by that policy. I think you put our Nation at big risk.

Mr. ISSA. And on that note, Mr. Lynch, you have some followup

time.

Mr. LYNCH. Thank you.

Madam Secretary, let me ask you, $3 a gallon—is that one of

your incentive programs to get people to use less gas? Is that something you see as a way that the market works to curtail gasoline

use?

Ms. HARBERT. Well, I think the President has been very clear

when he has said that he’s very concerned about this high price enVerDate 11-MAY-2000 11:40 Apr 11, 2007 Jkt 000000 PO 00000 Frm 00053 Fmt 6633 Sfmt 6633 C:\DOCS\31181.TXT HGOVREF1 PsN: HGOVREF1
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vironment. The gas prices are going to hurt people’s businesses,

and their wallets. He’s very concerned about that. That’s why just

last month, he unrolled another plan, a four-point plan, of how to

address this. This is not something that is unnoticed.

The problem is—and everybody wants us to have a magic bullet,

a panacea—that we have that we’re not willing to use. We don’t

have it. It takes a long time to get in this situation, as Mr. Van

Hollen pointed out, and it’s going to take us a long time to get out

of it. We need to do everything we can in the short term to be better consumers of energy, and we need to have the foresight to make

the investments now in those technologies that will help us over

the long term to not be energy vulnerable.

Mr. LYNCH. I know I am preaching to the choir here, but this is

so critical. I have to share Mr. Shays’ level of—I would not say

alarm but elevated concern. I think we are not in a crisis, but there

is a looming crisis out there. And I appreciate the fact that it is

in Venezuela’s best interest to work with us to have agreements to

sell oil.

But you are assuming that their leader is working from a rational basis, and I have not really seen that from Mr. Chavez. I know

it is probably in the best interests of Iran to work with us, but in

the case of President Ahmadinejad, I don’t see a lot of rational

thought going on there, either. So I am very concerned.

I want to read you something that—Mr. Yergin is coming up behind you, but there is a great quote in his book from a fellow

named Fritz Schumacher. He talks about the nature of energy, and

he says, ‘‘There is no substitute for energy. The whole edifice of

modern life is built upon it. Although energy can be bought and

sold like any other commodity, it is not just any other commodity

but the precondition of all other commodities, a basic factor with

air, water, and earth.’’ Energy is so central to our way of life here

that it concerns me greatly that we are really walking a very fine

line here between having sufficient oil supplies. It almost looks like

a perfect storm where the margins are so tight and we have so

many wild cards out there right now in terms of Nigeria, Iran,

Iraq, Venezuela, and Bolivia, that any one of them can sort of

nudge us over that line.

I am just very concerned that we do not have a viable plan out

there right now to deal with that. I understand we will go to the

Strategic Petroleum Reserve and we will try to fill in that gap, but

it just could end up a real mess over this issue in a big hurry here

in the United States. People are complaining about $3 a gallon, but

I could see where this thing could go up in a big hurry. And I do

not, frankly, see anything out there in the administration’s plan

book that is going to get those prices any lower any time fast. I see

a whole lot of possibility out there that things could go the other

way. We are looking at $4 or $5 a gallon if we have increased restriction on supply and we have continuing demand.

China alone—China alone—over the last 4 years is responsible

for 40 percent of the increase in global demand. One country. I

guess it is how you look at it. China has a $1,100 a year median

income right now, with over a billion people. This is a lot of potential growth there. They are responsible just in 4 years for 40 percent of global demand increase in oil. Do you see that as a shortVerDate 11-MAY-2000 11:40 Apr 11, 2007 Jkt 000000 PO 00000 Frm 00054 Fmt 6633 Sfmt 6633 C:\DOCS\31181.TXT HGOVREF1 PsN: HGOVREF1
49

term problem? Or do you see that as a long-term problem for energy prices globally?

Ms. HARBERT. I see it as a reality, and it is a reality that must

focus our discussions, and it must focus our investments and it

must focus our policies.

If you look at what is happening with the price of gas right now, $3, that is due to a large number of things that are happening in

the United States all at one time. It is our own little mini perfect

storm. We are transitioning away from MTBE to ethanol. We have

a number of new regulations that are coming into effect. At the

same time, we have refineries that are down for operations and

maintenance that we kept up and running to meet the outages

from the hurricanes. We have a confluence of factors right now that

are causing a very tight environment, which hopefully will ease toward the driving season.

But you point out that we need to have options. That is what we

need. We have an abundant source of coal here in this country. We

need to be able to use it in a clean and sustainable manner. We

need to be able to have more nuclear power. The President has a

nuclear proposal on the table. We need to support the nuclear proposal.

We have aggressive investments in renewables. We are helping

India and China to be more efficient consumers of energy. It is in

our interest if they consume less energy. We need to help them be

more energy efficient. We need to be more energy efficient. We

need to use solar. We need to use wind. There are all kinds of

things that we have to keep on the table and we have to do the

right thing by making those investments now so those technologies

can actually be commercially viable in the medium term.

Mr. LYNCH. I just wanted you to answer that last question. Do

you see the growth in India and China as a short-term problem?

Because that governs the nature of our response. If we see it as a

short-term problem, we deal with it in one way. If we see it as a

long-term problem, then we deal with it in another way. You are

the Secretary. You are here testifying, and I am just asking you.

Do you view that problem as a short-term or a long-term problem?

I know it is reality. But are you dealing with it?

Ms. HARBERT. We certainly do not see the growth abating, and

we certainly hope to see global economic growth sustained. Is that

an opportunity or is it a challenge? Is it a problem? As you said,

it is a reality, and we have to make those adjustments.

We wrote a report that was asked for by Congress in the Energy

Policy Act by Congressman Pombo about whether China’s appetite

is a threat, and we wrote a very lengthy report about that does a

very detailed analysis, and we will be happy to send a copy to your

office.

Mr. LYNCH. I think I have it here. Thank you, Madam Secretary.

Mr. Chairman, also, at the beginning of this hearing, I was supposed to ask that this report be submitted on the record. I would

ask unanimous consent——

Mr. ISSA. Without objection, it will be included along with other

pertinent information we want to include.

Mr. LYNCH. OK. This is the Pacific Institute Research for People

on the Planet, testimony of Peter Glike. Thank you.

50

Mr. ISSA. Mr. Van Hollen, you had one followup question?

Mr. VAN HOLLEN. Thank you, Mr. Chairman. Thank you, Madam

Secretary, for your testimony. I have one question on CAFE standards and then one other brief question.

You mentioned that the administration is seeking authority to

increase CAFE standards, but just for the record, I think it is important to be clear that the administration has proposed sort of a

segmented approach to CAFE standards so that within each vehicle

class you would have different standards. Would you acknowledge

that the administration currently has the authority within the existing framework to increase the CAFE standards subject to a congressional veto?

Ms. HARBERT. We have raised CAFE standards for light trucks.

We do not have the authority to raise CAFE standards for passenger vehicles. We have asked for the authority to do that in conjunction with a way to reform the system, which would allow us

to do it on a fleet-based system, a footprint-based system, just like

we do with light trucks, and we do not have that authority.

Mr. VAN HOLLEN. Well, my understanding is that you do have

authority to do a lot more than you have done subject to congressional veto. We will check that.

Let me ask you about Iran. We face a very tight oil market

today, obviously, and you have talked about ways to try and loosen

it up so it is not quite so tight, both on the supply side but also

diversification of sources. Looking at the situation we are in today

and acknowledging that if Iran was to cut back on its oil supply,

it would obviously have an economic impact on Iran. I believe

about 80 percent of its exports are to the oil market, and it also

imports a fair amount of gasoline itself, refined products.

But putting that aside, if they decided to use oil as a political

weapon—and we have talked today about other countries that have

used oil as a political weapon—and if today they were to significantly reduce their exports of oil, what impact would you see on the

world oil markets and on gasoline prices at the pump here in the

United States?

Ms. HARBERT. You know, the United States is a member of the

International Energy Agency, which is a 26-member body, which in

the case of a severe supply disruption exercises a consolidated approach to meeting the supply disruption. When you take all of the

stocks that all the countries hold together within the IEA, we have

the ability to meet a complete shut-off of Iranian oil for over 4

years. So if that was necessary, that would actually have to be employed.

Mr. VAN HOLLEN. Let me just make sure I understand your answer. You are telling me that if the Iranians today were to cutoff

all exports of oil, there would be no increase of the price at the

pump here in the United States.

Ms. HARBERT. No, the oil market is very volatile, and there

would certainly be some sort of price reaction. What I am talking

about is that we have an ability to respond to a supply disruption

in Iran. The markets are tight. There would certainly be a price reaction. I cannot forecast how much that would be.

Mr. VAN HOLLEN. OK. I mean, you suggested that it would be

fairly minimal, I thought. Is that what you are suggesting?

51

Ms. HARBERT. The industrialized nations—

Mr. VAN HOLLEN. You said we are prepared for a total cutoff of

exports.

Ms. HARBERT. We have the ability to replace the amount of oil

that would be taken off the market for a significant period of time

if that is the position that Iran chose to take. We certainly do not

think that would be responsible. We certainly do not think that is

to the benefit of the Iranian citizens. We do not think it is to the

benefit of the energy market.

Mr. VAN HOLLEN. No, I understand, but putting all that aside,

I am just—

Ms. HARBERT. But the reason we have these oil stocks is to deal

with severe supply disruptions.

Mr. VAN HOLLEN. OK. Thank you, Mr. Chairman.

Mr. ISSA. Thank you, and I will do the quick wrap-up here. You

have been very, very kind with your time.

I want to leave you with a couple of questions to respond to in

writing, if you would, because you have been very generous with

your time. We touched base on the China contracts, and I think

this committee is interested in broadly knowing: Is what they are

doing, potentially what we should all be doing? And I will pose a

rhetorical question to you. If the United States and other consuming nations were to guarantee, hypothetically, 80 percent of their

anticipated exports at a price which used to be considered at the

high end of good. Would $35 a barrel, in fact, be a long-term impetus to investment and, as a result, production to meet those demands?

Now, 80 percent is not magical; $35 a barrel is not magical. If

I had said $35 a barrel when I first took the Chair here, I would

have been drummed out of town as a friend of OPEC. Today, at

half of the prevailing rate, it seems like a good deal.

You are welcome to interject in your answer other base suggestions for how much the U.S. Government or an entity might choose

to commit full faith to, because the United States does have the

ability to commit the full faith and credit of the United States,

even though it is not a country like China.

You are certainly welcome to suggest what the correct incentive

would be. I ask this because this Congress has had a long history

of sometimes a controversial, sometimes a mutually agreed basis in

various tax incentives that effectively create bases for production.

In my home State of California, we obviously have the old Bakersfield and other oil fields that, if they were not bases, they

would have had to shut down. As a matter of fact, at $9 to $18 a

barrel, they were living on cogeneration and somebody agreeing to

pay for the electricity, which did not always get paid for, but that

was what made them viable oil wells. Today, I imagine the people

that bought those things used from the big oil companies look like

geniuses. So I would like you to respond to that.

Last, although we talked about around 100 million barrels a day

of world consumption; about 2 million barrels of potential surge capability; and 20 million barrels of U.S. production. When we dealt

with the delta between the 20 million and the 13 million used for

mobile fuels, we did not deal with where the viable alternatives are

that would allow us to reduce all or part of that 7 million barrels

52

a day. And I would like you to answer, to the best of your ability,

where you believe there should be investments in alternative energy sources; whether it is clean coal—I would like you to avoid

natural gas, if you don’t mind, but nuclear, wind, solar, any of the

other non-petrochemicals that are not in short supply, and how we

would potentially reduce by a million, 2 million, up to the 7 million

our non-transportation use. I think that would be very helpful for

the committee.

And with that, I will have to tell you those are the only two questions that this dais did not ask the panel. If you have any closing

remarks, otherwise, we are finished.

Ms. HARBERT. Mr. Chairman, thank you very much for the opportunity. I think we need to continue to have more dialog about

what is a very important issue. This is clearly on the minds of the

American people. It is on the mind of the President. We are doing

everything we can with what limited ability we have in the short

term, but we aggressively have a long-term strategy that we believe, put in place now, will secure ourselves and have the type of

access to energy resources that our economy demands over the long

term.

Thank you very much for this opportunity, and I look forward to

further exchanges.

Mr. ISSA. Thank you, Madam Secretary, and it has been a very

good exchange, and we look forward to having you back.

I am going to sponsor about just a 2-minute quick break for the

next panel to come up.

[Recess.]

Mr. ISSA. We will come back to order, a quorum still being

present.

I would like to introduce the second panel, which is an extremely

impressive group. For everyone’s well-being, I hope that we have

exhausted some of our questions on the first panel, and I appreciate your remaining patiently through a long dialog.

Dr. Daniel Yergin, chairman of Cambridge Energy Research Associates, who has testified many times before Congress, and we appreciate your being back.

Ambassador Keith Smith, Senior Associate, Center for Strategic

and International Studies.

And Mr. David Goldwyn of Goldwyn International Strategies.

I look forward to hearing from you today, and since I did not

catch you the first time, I have to ask you to please stand for the

oath.

[Witnesses sworn.]

Mr. ISSA. For the record, all nodded yes.

Having made our opening statements and having trimmed down

the dais a little bit, I would like to open at this time with Dr. Daniel Yergin, if you would, please.

53

STATEMENTS OF DANIEL YERGIN, CHAIRMAN, CAMBRIDGE

ENERGY RESEARCH ASSOCIATES; KEITH C. SMITH, SENIOR

ASSOCIATE, EUROPE PROGRAM, CENTER FOR STRATEGIC

AND INTERNATIONAL STUDIES; AND DAVID L. GOLDWYN,

PRESIDENT, GOLDWYN INTERNATIONAL STRATEGIES LOWINCOME COUNTRIES

STATEMENT OF DANIEL YERGIN

Mr. YERGIN. Mr. Chairman, members of the committee, I too am

very honored to be here to have the chance to join this discussion.

As I listened to the previous session, I was very struck by the sense

of urgency in the questions and the issues as you frame them and

remind us that we really are in a somewhat precarious time. It is

very important in such circumstances to try and connect the dots,

and I would like to try and connect a few of the dots in my brief

remarks today.

It is clear from what you were talking about before that energy

security today is not an abstract issue. It is a very real set of considerations. And it is also clear, whether you are talking about the

price at the pump or you are talking about energy security, we are

really talking about America’s position in the world. It is important

to see these issues in a global context.

Energy security has repeatedly been an issue of great and paramount importance to this Nation. It is once again today. I think it

needs to be rethought from what has been the set of ideas that developed and policies and procedures in 1930’s, which are very

sound and are part of the foundation. These are not enough today,

and we need to include new factors.

As part of connecting the dots to see that energy security needs

to be seen within the context of our overall relations with nations

and how they interact with each other, it is really about alliances

and our friends and working with other nations and understanding

their points of view. I think that was very evident, Mr. Chairman,

in the report that was prepared for you and Mr. Davis, which I

think highlights it. We have a study coming out tomorrow called

‘‘The New Paradigm for Energy Security’’ that we did with the

World Economic Forum that tries to outline some of those things.

We have already heard in the first session the number of issues

that have driven this focus on energy security from the tight market to the politics. I think something that has become clear only

in the last 6 to 12 months is in addition to everything else is this

rebirth of a 1970’s style resource nationalism. This is riding on the

crest both of high prices and political calculation, and specifically,

as you have already noted in the previous session, the rising tensions with Iran.

Of course, energy security is not limited to oil. We have had

power blackouts on the West Coast. We have had them on the East

Coast. We have to pay attention to what that message is telling us.

In terms of natural gas, we are about to become part of a world

market, which is something that is new for the United States, new

for North America.

We certainly see a new range of vulnerabilities. Osama bin

Laden has talked about attacking the hinges of the world economy,

and by that he means the infrastructures, including energy. We see

54

energy coming from new areas that need to develop security systems. If we look back at what happened last autumn with the two

hurricanes, we see that we really had the first integrated energy

shock we have ever had in which oil, natural gas, refineries, processing plants, electricity were all down, and I think drove home the

way electricity is fundamental to the whole energy system.

We know the list of events since the beginning of the year that

have focused our attention on energy security, the mounting sense

of it. As I said before, the principles that have governed energy security have been wise, beginning with diversification, but we need

a sense of energy security that reflects the rapid evolution of the

global energy trade, supply chain vulnerabilities, terrorism, and, as

you have been talking the first session, the integration of these

major new economies.

I want to emphasize again and again, because it strikes me that

it gets left out of the discussion, that so much of how we manage

this problem will depend upon how we interact with other countries. We have to see it in the overall context.

So let me briefly try and answer four questions.

One, what do we mean in energy security for the 21st century?

And in the testimony, I try and lay out 10 principles. They are

really there for discussion. You might want to change them and

think about them, but I urge you to at least reflect upon them: diversification; the need for a security margin; realizing that there

really is only one global oil market; the importance of information;

a subject you have already talked about, China and then India and

Brazil and bringing them into the energy security system.

I think it is very important that we understand the point of view

of those countries and that we seek to work with them collaboratively and we keep things in perspective. China’s oil production

is 400,000 barrels a day, which is one-tenth of the production of

one super major oil company. I don’t think China is going to be

able to preempt us in any serious way, and I think it would be

more worrisome to us were the Chinese not investing in developing

new resources with the way their demand is growing.

I have mentioned the importance of protecting infrastructure and

the energy supply chain. That was not something that was really

thought about when the current energy system was created in the

1970’s.

I think one of the lessons to me—and it is a very strong lesson,

which Mr. Lynch cited ‘‘The Prize’’—is the importance of flexible

markets, that markets can respond and help mitigate crises. Everybody, even if they were born after the 1970’s, remembers the gas

lines, it seems. But those gas lines were to a large degree self-inflicted because of allocations and controls.

Energy efficiency and conservation, as you all have emphasized,

is terrifically important. We are 50 percent more efficient as a

country, and we need to keep going on that.

This question of the investment climate ought to be a very big

question at the G–8 meeting—access, openness, where to encourage

investment, I think that is critical.

And finally, as we know, development and deployment of new

technologies.

55

The second question: Why have oil prices doubled during the past

2 years? And I think what I would say is that through 2004, we

had a demand shock. That demand shock has given way to a supply shock. We call it a slow-motion supply shock, an aggregate disruption, as you have already noted in these hearings, of about 2

million barrels a day.

The third question is: Are we running out? And my answer to

that is that this is actually the fifth time the world has run out

of oil. The first time was in the 1880’s, and the last time was in

the 1970’s, and production increased 60 percent.

But we are moving—and the geographic imagery has gone from

the oil mountain to the peak, but, in fact, we believe that the right

way to see it is really as what we call a plateau, which is farther

out. There will be a much larger role of technology, of non-conventional energy resources, and that the real problems right now and

in the years ahead are not below ground. The real problems are,

as you have already described in the first session, aboveground.

And, finally, I will just say a word about the need to update the

way we see reserves and evaluate them. With the G–8 Summit approaching, one of the things that really struck me, as you talk in

different countries, you find that everybody is more or less in favor

of energy security. But it means very different things to different

countries, and that might be something we can talk about. I think

for a China or an India it is really about energy that they need to

grow their economies to deal with social turbulence. It is not the

same sort of issue.

Russia’s energy security, a lot of that means controlling the commanding heights of the energy industries and controlling the pipelines.

United States, we talk about energy independence, but as we

know, we have gone from a third to 60 percent of our oil being imported, and we are going to be importing a lot of gas.

We are at a historic juncture. This great surplus of extra capacity that was a legacy of the 1980’s is, at least for the time being,

gone. The term ‘‘spare capacity’’ was used in the first session, and

it is on that narrow band of spare capacity that so much of the

drama of the world oil markets is playing out today.

As I said, we like to talk about energy as though we are an island. We are not. We import more oil than any other nation consumes. And as we have heard, the balance between supply and demand is very tight. And as I pointed out, we have the aggregate

disruption. Those numbers have already been quoted with Venezuela, Iraq, Nigeria, and the Gulf of Mexico.

If you say what has made the difference in the last 3 months,

one is the disruption in Nigeria and the uncertainty about what is

going to happen. And second is the ratcheting up of tension about

Iran. Iran was not in the oil price at the end of last year. It is

today, or at least partly.

Third—and that is easing—is the too rapid switch from MTBE

to ethanol; 270 days was too quick to do it, and we had logistical

problems.

We have talked about Iran. We should just note that 18 million

barrels a day of supply passed through the Strait of Hormuz.

56

I mentioned earlier that we are going to widen the definition of

what we mean by oil. Oil sands from Canada, we see the numbers

from Canada going up, gas to liquids. It is also no secret that ethanol is going to be more important in the United States than one

might have assumed even a year ago.

But I think there, too, it is important to keep it in perspective.

We hear that half of Brazil’s motor fuel is ethanol, but that is

equivalent to 3 percent of our gasoline supply. So what we have to

keep in mind is the scale of our more than 20 million barrels a day

of consumption. And while biology cellulosic ethanol may have a

major impact, it is probably several years away. It is not something

that is going to give us a quick fix.

The last topic is that the whole system about how we know how

much oil there is, the system of proven disclosures by the SEC really needs to be modernized. It is unbelievable. It is still based upon

1965 definitions of reserves, proven reserves, and as late as the

1970’s, when the SEC put its system in place, the frontier for deepwater was 600 feet; now it is 12,000 feet. Markets have changed

dramatically. We are much more integrated. The kind of projects

have changed. The complexity of projects has changed. People are

spending billions of dollars on projects where the reserves cannot

be recognized, and so this really gives misleading information to

consumers, to investors, and about energy security.

I would just say that the system that is in place now was put

in place before there were cell phones or personal computers, let

alone the Internet. It is as though you are telling oil companies

today that you have to use invasive surgery, not CAT scans, or that

financial reports to the SEC should be filed only using typewriters

and carbon paper. We need to modernize that system to have a better understanding.

So to tie this all together, as really the sense of this hearing and

what you have defined, energy security is going to be one of the

major challenges for U.S. foreign policy for some years to come—

not only for years but for months, and in the immediate weeks. It

really is front and center for us.

Part of that challenge will be anticipating and assessing the

what-ifs, connecting the dots, thinking not only the unthinkable

but the semi-thinkable. And that requires not only looking around

the corner, but also beyond the ups and downs of cycles to both the

reality of an ever more complex and integrated global energy system, and certainly to the relations among the countries that participate in it.

Thank you.

[The prepared statement of Mr. Yergin follows:]

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Mr. ISSA. Thank you, Doctor.

And since each of the witnesses is touching on Brazil, I might

only note from the dais that when I became chairman of this committee a year and a half ago, one of the topics I was asked to take

a look at was the 54 or so cents of tariff on Brazilian, and other

countries, beyond their quota for ethanol. And now that the price

of gasoline has gone up by $1, I do note it as interesting that it

is still impossible to sell this ethanol even when the price of the

end fuel has risen by over $1. So although I am sympathetic with

the gentleman, Mr. Van Hollen, that I would like to see no tariffs,

I did want to note—and perhaps you will note in your testimony—

that it does not seem like any increase in price ever eliminates the

complaint that a 54-cent tariff is a barrier to entry for competition.

With that, Ambassador Smith.

STATEMENT OF KEITH C. SMITH

Mr. SMITH. Thank you very much, Mr. Chairman. It is a particular delight to be here because I have been writing about this subject for a couple of years, and most of the reaction has been a giant

yawn, including a yawn by my colleagues.

Mr. ISSA. Be it noted that the committee staff has read every bit

of it, and that is how you got to be here.

Mr. SMITH. Thanks. Well, you have seen most of what I have to

say then, and I will just add a few points.

For me, it was kind of interesting to see the reaction—and I am

in Europe a lot—of the Europeans to the January 1st cutoff of natural gas from Russia to Ukraine. One thing to be noted, it is almost universally said that was a cutoff of Russian gas to Ukraine,

but most of the gas that was cutoff was cutoff from Turkmenistan.

So really, Russia cut of Turkmenistan gas to Ukraine, and that is

something to keep in mind as we look at the politics of Russian energy policy. It is something that I think has been ignored in Europe. Unfortunately they have made themselves even more dependent on Russia because there is no concerted energy policy within

the European Union. And there still isn’t. After January, there has

been an attempt by the European Commission to put together an

energy policy, a common energy strategy in dealing with Russia,

and there has been a very nice green paper that has been issued.

But, quite frankly, you are faced in Europe with large countries

who want to deal bilaterally with Russia and don’t want anything

to do with the Director General for Transportation Energy in the

European Commission.

So the chances of a really combined European strategy in dealing

with Russia and energy politics I think is quite low. And, quite

frankly, I haven’t seen any reason to think—I am glad that the

Government witnesses are gone, but that we ourselves are prepared to deal in, I think, a more realistic way with some of the

Russian challenges.

I do not consider myself a Russophobe. I, in fact, have a lot of

very, very close friends in Russia, and some of them who are more

critical of Russian Government energy policy than I am. I think in

the long run it is important that we have very frank dialog with

the Russians, and I think that the Russian Government is not in

a position—or is not willing, I think, to react to any of this dialog

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until we create some realities on the ground, which is we set standards that they have to meet, reciprocity in investment policy, reciprocity as far as transparency. These are the kinds of things that

I think will make Russia react.

Russia is going through a very difficult psychological period right

now. You have a very self-confident Kremlin, one that thinks—one

that sees oil at $70 a barrel. It sees Europe preoccupied with trying

to get energy from whatever source it can. It sees the United States

preoccupied with terrorism and in Iraq. And it believes that it really can kind of call the shots when it comes to energy supply in certain markets.

At the same time in Russia, you have a lot of insecurity. I mean,

for one there is the insecurities that to some extent come from paranoia. They see the Orange Revolutions or the changes of government in Ukraine and in Georgia as threats to Russian security.

After the Orange Revolution in Russia, there was a real feeling in

Russia that Russia was next and that the Western powers, in fact,

were going to try to topple the Russian Government. I mean, this

was a real feeling in Moscow. Part of this was fed by the so-called

political technologists who went from Russia to kind of manipulate

the election in Ukraine in 2004 in support of Mr. Yanukovych.

They lost. They tried to rig the election and they lost in the long

run, and they had to go back to Russia and explain why they lost.

And, of course, the explanation they came up with was, oh, these

wily Americans with their nongovernmental organizations were

able to kind of manipulate the electorate in Ukraine, just like they

had done in Georgia, and we are next.

So I think we are dealing with a very self-confident Russia in

some ways, but a very insecure Russia in others, and it is going

to be a challenge to the policymakers to deal with that.

I think that some of the problems in Eastern Europe are problems self-induced. There has to be a push not just in Russia but

in the receiving countries for more transparency, more business

transparency, to prevent the corrupt elements on both sides from

putting together these deals.

I would also kind of lament to some extent that I think that the

German Government is in a very key position to influence Russia

and Russia’s energy policy, but I think the new German Government, to my disappointment, has kind of carried on the energy policies of Mr. Schroeder, which are kind of independent of the rest of

Europe and the concerns for their Eastern neighbors, and I think

this is—I hope that we have a long-term dialog with the Germans

in which we can kind of help the Central Europeans get past this.

Basically, I think that is about all I have to say beyond what my

remarks were, Mr. Chairman. Thank you.

[The prepared statement of Mr. Smith follows:]

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Mr. ISSA. Thank you, and I would again ask unanimous consent

that all opening statements be included in the record, without objection.

Mr. Goldwyn, please.

STATEMENT OF DAVID GOLDWYN

Mr. GOLDWYN. Thank you, Mr. Chairman, members of the committee, for the honor of testifying today, and thank you for paying

attention to this subject. As a citizen, I think there is no greater

threat to U.S. national security, to our global influence in the

world, and to our future than our energy dependence, that of our

European and Asian allies, and the growing dependence of China

and India. I don’t think anything that we are doing right now is

likely to make a significant impact on our dependency or theirs,

and I think most of the answers lie in how we conduct our foreign

policy as well as how we conduct our domestic energy policy.

I have my own typology of the various kinds of problems, which

are in my written testimony. You have asked me to focus on Latin

America and Africa, which is what I will focus on right now.

Obviously, both of these regions are very important to U.S. energy security. If we are going to have any diversity of supply, it has

to come from someplace other than the Middle East and Central

Asia. So that is Africa and Latin America.

In the hemisphere, the most important countries are Mexico and

Venezuela. There are other producers. In a tight market everybody

is important. But they are the strategic suppliers. In Africa, it is

Angola and Nigeria, followed by Chad and Equatorial Guinea.

These two regions represent two very different kinds of threats.

In Latin America, we are seeing this new rise of state control—not

really a new rise of state control. What we are seeing is another

cycle of political upheaval in Latin America, which tends to correspond with the price of oil. We have seen dictatorship to democracy. We have seen state control to privatization. And so we are

seeing yet another of these cycles.

This has three emerging threats, three consequences for the

United States. First is the loss in shareholder value for those companies who are seeing their asset values cut in half or otherwise.

I think they can take it, but that is a threat. Second, we are seeing

either a flattening or a loss of production growth in both oil and

gas across the hemisphere. This is not new in Mexico because they

have had state control for a long while. But Venezuela’s new model

is not working particularly well for it, and Bolivia and Ecuador are

the same. But the most important consequence, the most emerging

threat, is the loss of U.S. influence in the region, the declining influence the United States has and the rising challenge from Venezuela.

Briefly, on the fiscal terms, you know, we are seeing—this is part

of a worldwide struggle for who gets these windfall profits from the

increase in the price of oil. It impacts us because these new harsh

terms, the increased government take, slows new investment and

deepens instability and poverty in these countries. It is an old and

pretty much a failed model. The only country which has increased

its productive capacity in the last two decades, without the help of

foreign companies, is Saudi Aramco. Nobody else has really been

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able to make this work. And so what we are seeing is energy sector

investment is virtually frozen, despite the high prices. There have

been no new projects under Venezuela’s 1998 hydrocarbons law. No

one is going to invest in Bolivia right now when they don’t know

how big the losses are going to be. Ecuador’s investors are all mulling legal action and suspension of their investments.

And there have been some success stories. Brazil, Colombia, and

Peru have all had very attractive frameworks, but they are not the

majority model. But the real political challenge comes from Venezuela, and there is no question that higher oil prices have enabled

President Chavez to have enough revenue to meet his internal

budget, capital budget for PDVSA, and a very generous program of

assistance in lots of places the United States has not paid attention

to in a while. So he is able to afford fuel assistance for the Caribbean, buying Argentina’s debt bonds, helping Ecuador, even helping communities in the United States with heating oil, and high

revenues enable him to do that. And he has a competing vision

from the United States on a whole range of issues—on free trade,

on Iran, on Iraq, on the very nature of democracy, a Bolivarian

model which is sort of very different from our liberal model of democracy. And we are seeing the popularity of that model combined

with that generosity. That is a political challenge, and that is a

challenge to our foreign policy and how we deal with it.

I don’t think that makes Venezuela a threat or a moral threat

to the United States. I don’t think they are likely to halt oil sales

in general or to the United States despite the rhetoric, because we

are an important customer. They have managed to remain a reliable supplier even while using our money from oil and products

that we buy to finance a campaign which runs counter to all the

major elements of U.S. policy. But withdrawing oil from the market

is going to hurt their friends in new markets also. It is going to

cutoff money for the government, and, frankly, we could easily handle the loss of oil from Venezuela through the Strategic Petroleum

Reserve for years if it was the only disruption to take place. So I

think it is an ideological challenge which we should engage on.

Africa is very different. There we are looking at the results of the

oil curse. Largely, the first threat, I think, is internal unrest, mostly in Nigeria, potential unrest, I would say, in Angola and Equatorial Guinea and Chad. They are pretty stable, all of them, right

now but they are countries to watch. We are seeing China and India’s mercantile approach across Africa where they are trying to

buy assets and lock in supply even at market prices but, as Mr.

Yergin said, and Secretary Harbert, not enough to actually make

a difference.

We are seeing political competition, the ability of non-market

economies to combine a railroad, a regular road, a factory, along

with an oil bloc does two things that are not helpful for the United

States. One is it distorts the competition because neither

ExxonMobil nor the U.S. Government are throwing a railroad along

with bidding for an oil bloc. So it makes the competition for acreage

difficult. But the other thing it does is it undermines our foreign

policy. We are trying to sell transparency to Angola and they can

get a $3 billion loan from China. We are going to have a hard time

exercising any leverage on that country to push more transparency.

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Obviously, in Sudan, we are seeing, you know, a direct opposition

to our efforts to provide regional stability. And we are seeing it in

other countries as well, and I think this is somewhat immaturity

on China’s part in terms of seeing its own long-term interests. But

it is a form of political competition, and I think that part need to

be taken seriously.

So what do we do about it? I think we do different things in different places. Overall, I think the real great challenges in terms of

national security are in other parts of the world. I think Europe’s

dependence on Russia and I think Asia’s dependence on the Middle

East and the undermining of our allies to support our coalitions on

proliferation, on terrorism, on other things, I think that is the core

of the problem. I think those are major-order threats. I think these

are second-tier threats.

But I think we need to do two different things. In Latin America

where there are expropriations, we need to contest them. I think

the State Department’s decision to withdraw a free trade agreement or to exercise any measures we have against Ecuador if they

actually expropriate assets is perfectly appropriate. On the fiscal

terms, I think we need to let the market respond. Oil companies

have been fighting with countries for decades, if not centuries, over

who gets the rent. And miraculously enough, the oil manages to get

produced over time if there is access. And we have to keep it in

context. In Venezuela, there is still access. In Mexico, there is no

access. In Saudi Arabia, there is no access.

So if the companies take shrinks but they still get in, that is a

decision they make. If they can make money, they will stay. If they

can’t make money, they will leave. So I would say let the market

sort that out, and I think while it does impact prices and, therefore, to some extent the U.S. economy, I think foolish economic policy is not a basis for U.S. Government intervention.

What we do need is to fight back in the hemisphere. We have

abandoned this hemisphere for other regions for a while. We have

no positive agenda. We have no recognition of the things that have

not worked with the Washington consensus. We do a free trade

agreement with Colombia which wipes out Bolivia’s soybean market. Do we do anything with Bolivia? Do we acknowledge the problem? No. What does Venezuela do? They say, ‘‘We will buy your

soybeans.’’ Kind of hard to criticize that policy.

The things we need to do is have something which supports our

model. One is to recognize that there are social consequences to

free trade, but we can deal with those. Another is to recognize that

maybe our trade policy doesn’t let these countries sell us the things

that they make, and if we did that, they would have jobs and they

would be bigger believers in free trade.

I think we need to deal with things like migration issues. I think

we deal with military-to-military contacts because in a lot of these

countries, the military is the primary institution, and having them

understand democratic norms is important. Scholarship programs,

training the leaders of the future, letting them come to our schools

here, letting them get visas so they can come here I think is critically important. We have so much capital around the world because

current leaders were educated in our schools, so we have to let

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cation and poverty by working through the World Bank or the

Inter-American Development Bank on things like infrastructure.

We have to recognize there are problems down there, and that is

why people like the other model right now in some of these countries. And the answer is not that our model is no good. The answer

is that we can make it better. And the answer isn’t that we ought

to withdraw and not talk to countries that are looking the other

way. The answer is that we ought to be in there. We ought to have

our programs, and we ought to explain why our model is going to

work better. This is a competition, but this is a competition that

I think we can win.

I hope in the question-and-answer we can talk about Venezuela

because Venezuela is a complicated case. But I think a lot of the

rhetoric has been overheated.

In Africa—I will not run on for too much longer—we also need

a strategic approach to the region. The problems there are both security and poverty, and we need to figure out what we are for, I

say largely better governance and capacity, what we are going to

do to help the current problems, which is have some sort of a program on security; how we are going to do it, which is to commit

a serious amount of money toward improving government capacity

in these countries; and in particular, we need to pay a whole lot

more attention to Nigeria. Every time the Nigerian President

comes to our country or our President meets him, we talk about

Darfur, the Africa Union, all the problems of the world. We hardly

ever talk about Nigeria. You want to increase oil production? How

about 600,000 barrels a day by dealing with the Niger Delta? You

want to increase oil production by a million barrels, you could talk

about security in Iraq as well.

Foreign policy makes a difference in price, makes a difference in

oil supply, and I think we need a combination of things in Nigeria.

We need to deal with security, deal with the right people who are

providing security, because the Nigerian military has had some serious problems, and you don’t want to deal with everybody over

there and give them arms. We need to deal with crude theft, and

we need to deal with conflict resolution. And I think the time and

the patience for waiting for Nigeria alone to deal with this problem

internally is over. I don’t think there is any way that a Nigerian

Government alone can gain the confidence of the rebel groups there

without external supporters and actors, and we should not be forcing anything on the Nigerian Government, but we can help.

Now, the problem isn’t that there isn’t enough money. There is

a huge amount of money flushing around the Delta. But the Governors have it, the Niger Delta Development Corp. has it, everybody has it, and nobody is spending it. They are not spending it

on the right things. So I think this is a time when outsiders can

help, but we can help with security and with conflict resolution.

We need to deal with other countries, too. Europe has a bigger

stake in Africa than we do. President Chavez and President Morales travel a lot through Europe. We want the democratic message

to get to them. We should be working with our European allies on

a common message. We need to bring China and India into the collective energy security system, and there are ways that we can do

that. These regional approaches are really only tactical solutions.

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A final point, I think, and you have all mentioned it here in different ways. The only way we deal with this problem is strategically. It is changing the way oil matters in the global economy. It

is significantly changing how the United States consumes it, how

our allies consume it. It is a change in technology. It takes a long

time, but I think as Congressman Van Hollen said, if we had started it 10 years ago, we would be in a different place right now. If

we want to be in a different place 20 years from now, now is the

time to start.

Thank you.

[The prepared statement of Mr. Goldwyn follows:]

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Mr. ISSA. Thank you. I want to thank all of you for your testimony.

Mr. Goldwyn, I could not agree with you more on a great many

things you said, particularly your analysis of the internal challenges faced both in South America and in Africa and how they relate—or how our foreign policy, even when we are trying to do

something right in one area, can adversely affect it. I think that

was very insightful.

Perhaps because of last night’s speech of the President, I did

focus on one word. You threw in the statement about migration,

but did not say much beyond it. Why is migration an issue—you

were talking about South America—in the oil trade situation?

Mr. GOLDWYN. It is about Mexico. Mexico since its revolution has

had a severe allergy to foreign capital. Mexico’s production has flattened, and their growth looks pretty grim in the future unless they

can muster enough external capital, capital somehow, to develop

what would be very lucrative resources in the Gulf of Mexico on

their side.

The only way you do that in Mexico, I think, is to give Mexicans

confidence that the changes that will come will not undermine

their ability to control their natural resources, their ability to run

the country. And a lot of that has to do with whether they are

scared of us. And so how we deal respectfully with a country like

Mexico, when we sell integration through NAFTA or integration

through gas and electricity, we could sell integration through energy. But they have to believe that we are not going to squash

them by the partnership. You know the expression when the

United States sneezes, Mexico catches cold. And treatment of—one

of the main ways they get remittances, one of the main ways their

citizens are treated is a huge part of the confidence that they have.

And so I think migration is probably—when we talk about what

other countries are interested in, migration is what Mexico is interested in. If we want them to do what we want, we have to deal

with what matters to them the most.

The other thing I would say that would make a difference is convincing the national oil company and the Mexican legislature that

they can control their resources and grow that, too. And that is actually where a Congress-to-Congress dialog might make a big difference, because it does not always work coming from the executive

branch.

Mr. ISSA. I appreciate that, and I did think that was probably

where you were going.

It is interesting for this member that we focus, rightfully so, on

Russia, which has actively used oil and petroleum transportation

as a weapon. There is no question you can see their fingers all over

a number of activities. But in Mexico, where 1 out of 10 people

born in Mexico now lives in the United States, the largest source

of revenue to the Mexican economy are Mexicans living in the

United States sending money home.

It is interesting that, in fact, you would note that there is a potential oil weapon from a country that has benefited by its existing

migration, both legally and illegally. I think that is more than what

we can deal with here today, but it is certainly a thoughtprovoking—

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Mr. GOLDWYN. Mr. Chairman, I didn’t mean to imply that Mexico

would use oil as a weapon. I don’t think that they would, and they

haven’t. But Mexico’s ability to be a much greater supplier to the

U.S. market, to be a much greater contributor to the global market,

would be dramatically enhanced by a better relationship between

our two countries. It is their allergy to foreign capital which is

going to undermine their economy, and to some extent it won’t be

so helpful to us either. I don’t think Mexico under any government

would intend to use oil as a weapon.

Mr. ISSA. I see the difference. I do remember, though, that rather

than take U.S. investment, they flared and continue to flare their

natural gas because they are simply not going to allow their constitution to allow for direct foreign investment. It is interesting,

though, that they changed their constitution to allow American citizens of Mexican ancestry to vote, which I find kind of interesting.

If I were concerned about my sovereignty, I think I would be most

concerned about people who have adopted a new country voting in

the old country. It is sort of the Alamo in reverse.

But before we run out of time, Ambassador, getting back to Russia—a known bad actor in the use of natural resources, particularly

oil and natural gas—do you believe that they are accomplishing

today, particularly with Germany and other Western European allies, the kind of pipeline imperialism that they couldn’t succeed

with in the Soviet era? And is that because, post-Soviet era, the

purchasing became easy to do while, in fact, more or less Russia

is still as evil as the Soviet Union, even if no longer the same empire?

Mr. SMITH. Well, I would say that during the Soviet period, the

pipelines that were all set up—I mean, Russia dominated—it was

the Soviet Union, but it was really Russia that dominated all the

pipelines that went to the former Republics, the 15 Republics. They

dominated the energy markets in the Warsaw Pact countries. It

was just a given that they had control of all of that. We have only

focused on it since the break-up of the Soviet Union, and I think

rightly so.

But beginning in 1990, Russia used the energy weapon, cutting

off supplies to the Baltic States in an attempt to crush Baltic independence. In the winter of 1992, I was there. I had to sleep in my

clothes in first-class hotels in Riga and Tallinn because the energy

was cutoff in an attempt to prevent these countries from forcing

out the remnants of the Russian soldiers.

I have seen this firsthand. When I was the Ambassador in Lithuania Transneft cutoff the supply of oil nine times in 2 years in an

attempt to keep an American company from buying the Mazeikiai

refinery.

Part of why Russia is getting away with these acts is because

Western Europe and the United States haven’t paid attention to

Russia’s decisions. Western Europe didn’t care what happened in

the East, in Central Europe, even though Latvia and Lithuania are

now members of the European Union, and members of NATO. They

are officially members of the European Union. The European Union

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line which goes on to Western Europe that people begin to focus

on this.

They have not paid attention, and the fact that the Germans are

willing to go ahead with this undersea—the Baltic pipeline system

even to the detriment of their allies, their new allies in the EU to

the East, and I think to the detriment of the German consumer in

the long run, I think is a pity. And Russia has a lot of clout. It is

the German industrialist association, the German banks and German industry which, in fact, are pushing these pipeline deals. I

have listened to them tell me why it was all great, and the Northern pipeline system, which they have supported, will cost over

$10.5 billion versus less than $3 billion for a Yamal II pipeline,

which could go through the same route as Yamal I.

Mr. ISSA. OK. I will save the rest of my questions until after the

other Members. Mr. Lynch.

Mr. LYNCH. Thank you, Mr. Chairman.

First of all, thank you for helping the committee with its work.

Dr. Yergin, I am a big fan of ‘‘The Prize,’’ your Pulitzer Prize-winning book. I actually had worked at the Shell Oil Refinery as a

young man, and I have to say that I learned as much from your

book about the oil industry as I did from actually working at a refinery, which says something.

We talked about just the convergence of the whole energy question and foreign policy in a number of countries, and, Mr. Goldwyn,

you mentioned a couple of examples: Angola, where, you know, the

Chinese are going in, the Chinese Government is going in and giving massive loans, and in return I can imagine they are going to

get some type of security in terms of a commitment to supply

China with oil. It is a natural assumption.

We have situations in Nigeria, for instance, where the Nigerian

Government, with all that instability, has been looking to the

United States and U.S. companies to help them develop a depot so

they can export natural gas. They just do not have the infrastructure, they do not have the technology, they do not have the resources to do that.

And it is beyond, as you have said, the capacity of ExxonMobil

to go in there and build a railroad or a huge facility like that. It

just is not going to work. But it is not beyond the U.S. Government

to help that along in a significant way. I know that during the Second World War, Dr. Yergin, you talked about the collaboration between FDR and the Interior Secretary at the time, Harold Ickes,

and they created this Petroleum Reserve Corp., where they actually

envisioned—it was shot down by the industry at that time because

they did not want the Government in the oil industry. But there

was definitely the formation of a Government entity that would

sort of facilitate these massive projects.

Of course, at that time, they were interested in actually getting

into the game and becoming an oil company, the Government, and

that would not fly, and there are obviously some antitrust issues

for a collaboration between multiple oil companies. But isn’t there

a role here where we can facilitate some of these larger projects to

help these countries develop their own natural resources? Naturally, we’re getting commitments to the United States for future

supply contracts, but also to head off what China is doing. They are

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locking up Kazakhstan and they are over there in Angola, as you

have said, and they are in Nigeria. They are building soccer stadiums in the Middle East. They are all over the place, and they are

really making a very aggressive attempt at locking up future energy supply to fuel a very hot economy there.

I can’t help but see this as a zero-sum game, that there are limited reserves, limited new proven reserves coming online, and yet

you have China and the growth there responsible for 40 percent of

the world’s growth in demand for oil. And we have not even mentioned India, which is on a similar track.

I just think there has to be a role here for government to play

to head off what China is doing. I do not see China as hostile, but

I see them as a competitor for a very limited resource. I think we

have to step in here because we cannot rely on ExxonMobil, these

private corporations that owe their allegiance to their shareholder.

I do not believe we can trust these oil companies to put the United

States interests first.

Mr. GOLDWYN. I think there is an appropriate role for the Government. I think the first thing, though, is for the countries to realize that they will realize the greatest return for their acreage when

they put it out for bid. They are likely to get more money for that,

and if they want a road or a railroad or a soccer stadium, they will

get the best price for that by tendering for that project also. And

what they ought to do is not lump them together in a way that is

relatively opaque and probably has them overpaying for what they

are getting. But they ought to be transparent in the management

of their oil sector, and they ought to be transparent in their Government procurement. That is the first lesson. And having the

United States step up with financial resources and rhetorical support for something like the Extractive Industries Transparency Initiative, those corruption efforts which countries like Nigeria are

now trying to implement, would be a first step because the countries will get more money.

The second thing we can do is work through the World Bank to

provide infrastructure loans, and they do a fair amount of that, and

capital so that they could build power plants, distribution lines,

roads and things like that. In order to be eligible for those loans

you would have to clean up your act. I think that is the way to do

it. We need to offer a program to help these countries with infrastructure but that’s conditioned on their conducting their oil sector

in a transparent manner. I think if we do those two things, then

in terms of the bidding the Chinese will have a chance to bid. And

if they want to overpay for those resources, God bless them. As

long as they produce the oil, I don’t think we care. But let’s get

them out of the business and get the countries out of the business

of these opaque combinations of these two deals.

Mr. LYNCH. Dr. Yergin.

Mr. YERGIN. Thank you, and thank you for your kind words

about ‘‘The Prize.’’ I thought the quote that you found from Mr.

Schumacher really did put a framework for this hearing.

I go back to the question you raise about how to approach this

is very central, and I think the approach with the Chinese and others should be to be both prudent but collaborative at the same

time. I think that the companies have the capacity often in partVerDate 11-MAY-2000 11:40 Apr 11, 2007 Jkt 000000 PO 00000 Frm 00117 Fmt 6633 Sfmt 6633 C:\DOCS\31181.TXT HGOVREF1 PsN: HGOVREF1
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nerships to enter into $5, $7, $10, $12, $20 billion projects. A critical thing that the U.S. Government could do is concentrate on the

investment framework, the stability of the investment framework,

because that is where the investment—that is part of the problem

now in Venezuela. Who is going to invest when you do not know

what the rules will be tomorrow?

I have thought a lot about the question, Is it a zero-sum game

with the Chinese? And looking at it, trying to see how they see it,

and recognizing that for our times, one of the biggest questions

that will define the era is: How is a rising China accommodated in

the world economy, in the world political system? And this is at the

very cutting edge of that question.

I think at the end of the day, it will be shaped—the players, the

actors will shape the outcome to that question. I don’t think it

needs to be a zero-sum game because, as David Goldwyn said, the

Chinese are investing, if they are putting their dollars or their

yuan into increasing supply, after all, there is only one world oil

market, we are better off. And I would be a lot more concerned if

this country, with $900 billion of U.S. reserves, was not spending

money on energy development, given where it is going. And I think

in due course we will see these Chinese oil companies, which are

owned both by the Chinese Government and by Americans’ pension

funds, in many cases—and, in fact, joining joint ventures with

other companies, as is the way companies work today. I think the

question of what is happening in Africa is overall—and the question of political influence is part of the question, but is a somewhat

separate question. I think the more investment, the sooner, the

better.

Mr. LYNCH. In conclusion, Ambassador, I do not want to leave

you out here. I think you have offered much in this debate. But I

would like to throw a wrinkle in here, and that is that if we are

talking about strict game theory, I guess I would not say it is a

zero-sum game because the wild card here is technology. If technology can allow us to get shale oil in a productive and cost-effective manner, that makes it different. If we developed an engine

that gets 100 miles per gallon, then technology obviously changes

the rules of the game.

But I do want to ask you, every time we get one of these shocks,

it seems that the standard or the typical response of Government,

if it is on the demand side is—for instance, we just had a proposal

to give everybody $100 because gas went to $3 a gallon. Well, that

is just going to fuel $3 a gallon. That is what that is going to do.

It is just going to allow people to buy more gas at $3 a gallon. So

it really is inflationary in some respects.

Is there a Government policy that you would look at—and I

asked this question to the other two gentlemen—in a different way.

What do you think should be the one thing that perhaps Government is not doing right now to address this problem in the near

term?

Mr. SMITH. You mean the question of Russia or——

Mr. LYNCH. Or intervention, yes, intervention.

Mr. SMITH. Well, I am not an energy expert; obviously these two

gentlemen are more of an expert. But, it is the realities on the

ground that these other governments will react to. We can comVerDate 11-MAY-2000 11:40 Apr 11, 2007 Jkt 000000 PO 00000 Frm 00118 Fmt 6633 Sfmt 6633 C:\DOCS\31181.TXT HGOVREF1 PsN: HGOVREF1
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plain, we can say we are going to do things, but until we take some

action which has an effect on world market prices—there is a very

interesting article, I would recommend. Tom Friedman has written

an article that was in the latest edition of Foreign Policy in which

he includes a very crude graph, where he traces the increase in oil

prices and the increase in authoritarianism around the world. And

I was kind of taken by this graph. It is very good.

But until we adopt measures which reduce the demand or

through technology increase the supply in the United States, the

Russians or Mr. Chavez have every reason to think they have the

upper hand. I lived in Venezuela, I lived in Ecuador and Norway—

three oil-producing countries—and it is natural that they think

that they have the upper hand at the moment, with oil prices the

way they are. And we are not doing much to address that issue.

Once oil prices start coming down, I think we are going to see

much more accommodation on the part of these countries. We may

see Russia suddenly decide, well, maybe we will open up our pipelines to other users. Maybe we will sign the Energy Charter with

the European Union. And maybe we will be a little bit more open

as far as foreign investment—American investment in the Sakhalin

area or the Shtokman field in the Barents Sea. These are things

which will influence their behavior.

Mr. LYNCH. OK. Thank you, Mr. Chairman.

Mr. SHAYS [presiding]. I thank the gentleman.

Mr. Van Hollen.

Mr. VAN HOLLEN. Thank you, Mr. Chairman. Thank you all for

your testimony. I think this is a very important issue and a long

overdue discussion in our country, and I have a question for each

of you gentlemen, and maybe I could just start with Dr. Yergin.

You point out in your testimony the tightness of the international oil market and specifically talk about Iran’s role in global

oil markets and point out that any loss of any significant supply,

including from Iran, would be a very serious concern. In fact, a lot

of people believe that the $70 price for a barrel of oil now already

takes into account certain nervousness about what Iran may or

may not do.

Now, one of the earlier witnesses, Assistant Secretary Harbert,

when I asked her what would be the impact of a total cutoff, hypothetically, in Iranian oil supply, seemed to have a fairly sanguine

view that we were prepared to deal with the price impact. So my

question to you is: Is that a rosy assessment or, in fact, do you

share the view that we are prepared, we have this contingency

plan in place, and it is not going to have much of an impact?

Mr. YERGIN. In January I participated in a simulation at the

World Economic Forum in Switzerland with a disruption of oil and

the price got to $134 a barrel, but somehow the world went on and

the sharing mechanisms worked.

I think there is probably $10 to $15 of security premium in the

price right now. I think we have seen when the Iranian President

issues his statements, the price of oil can move $1 or $2 or $3,

which tells you how tense it is.

Were we to lose another half million barrels a day for any period

of time or a million barrels a day for a short term involving Iran,

Nigeria, or some other part of the world, we would probably be

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looking at $85 or $90-a-barrel oil unless the Strategic Reserves

were used. And my bet is that they would be used pretty quickly

at that level.

It seems to me that it has only been in the last 6 or 8 weeks that

those dots are starting to be connected to the tightness of the oil

market on one side and where Iran is in its nuclear program on

the other side, and where these dots—where these lines are going

to come together in a year.

So, yes, we could deal with it, and I think it is important to recognize it is a two-way street. Iran needs those revenues, too. It

needs its imported gasoline. It has its vulnerabilities. But there is

plenty of room here for misunderstanding in both directions. I

think Iran would pay—Iran does not have the reserves that Russia

has, for instance, that would enable it to withstand it. But things

can happen. Or what could actually cause more problems is not a

cessation but let’s say you lose 500,000 barrels a day. This would

result in smaller interruptions, and the price would ratchet up

without a sense of outright crisis. Then we could be looking at

those higher prices.

So I think we are moving into a dicey period, and the sooner we

have alternative supplies, the sooner we take the pressure off the

market with demand on a global basis, the better we will be. I

think that high oil prices have a high geopolitical cost for the

United States and tie our hands to some degree in terms of our

international relations.

Mr. VAN HOLLEN. Thank you.

Ambassador Smith, you mentioned talk in your testimony that,

‘‘The Ukraine-Russian ’gas war’ in January was only a continuation

of Russia’s petro-politics, that started with the fall of the Soviet

Union in 1990.’’ And then you point out, ‘‘The U.S. and Europe’s

tolerance of these coercive policies and non-transparent business

practices have helped signal to the Kremlin that the West needs

Russian energy exports more than Russia needs the West’s export

revenue, energy financing and technology.’’ And I agree that we

have sent that signal.

I guess the question is: In the context of all the different issues

we are dealing with Russia about, how do we send that signal? In

that context, I would just point out an article about a week ago

that talked about President Bush making a telephone call to Putin,

saying he wants Moscow’s help on an array of issues, including preventing Iran from developing nuclear weapons. It says, ‘‘Putin has

joined Bush in pressuring Tehran but resists U.N. sanctions. Bush

called Putin on Monday’’—this is more than a week ago—‘‘to lobby

him on Iran. But during the call, Putin changed the subject and

pressed Bush to finish negotiations allowing Russia into the World

Trade Organization. Bush vowed to do so ‘soon.’ Aides said there

was no quid pro quo.’’ It goes on.

I guess my question to you is: If we agree with your assessment

that we have failed to send a strong signal, what levers should we

be using, given the whole mix of things we are trying to work with

the Russians on? And to what extent should we use the upcoming

July 15th WTO talks to say very clearly to the Russians on the

issue you talked about, if you don’t have more transparency in the

energy area and in these other areas too bad with the WTO?

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Mr. SMITH. Well, we have to have a little bit more consensus

among the G–7. If we don’t have consensus among the G–7, it is

going to be very difficult to convince Mr. Putin to come along.

One of our problems now is that everybody is going in their own

direction. The United States is a little bit too optimistic about the

arrival of Russian LNG from the Shtokman field in the Barents

Sea. The Europeans are a little too optimistic about the increased

gas production in Russia and what they are going to be able to pull

in.

The question is what we can do. I mean, we have leverage. Russia wants downstream access to American and European resources.

They want to own companies, downstream companies in Europe

and the United States. We should demand that Russia treats our

companies just like we do theirs. They can buy 100 percent of

Getty Petroleum, and yet we cannot buy 100 percent of a Russian

company.

The non-transparency, the whole G–7 should demand, for instance, that Russia stop exercising its coercive policies on

Uzbekistan, Kazakhstan, and Turkmenistan when it comes to gas,

as wel as trying to prevent these countries from selling gas directly

to Western Europe.

For instance, Kazakhstan is trying to purchase the big oil refinery and port facility in Lithuania, a very big facility, the biggest

facility on the Baltic coast. And Kazakhstan had signed an agreement with Transneft, the Russian monopoly supplier of oil. They

had a right to ship oil to the Baltic coast in sufficient numbers to

satisfy the Lithuanians so they could buy that refinery.

When Moscow decided, ‘‘no, we want to buy that refinery, we

don’t want that to get in the hands of the Kazakhs,’’ they broke

that contract. They unilaterally broke that contract. Well, that and

the tying up of pipelines from Central Asia I think is a violation

of the WTO and Russia wants WTO membership. We have a good

reason to want additional Russian energy resources. We just have

to make sure that the Russians understand that there is a quid pro

quo here. It is not open season, and I am afraid the Germans have

given the wrong signals. We are giving the wrong signals when we

talk about how desperate we are to get additional Russian resources. And we give signals to Russia all the time that we are desperate for that LNG to come from the Shtokman field.

Mr. VAN HOLLEN. Thank you for that answer.

Mr. Goldwyn, you mentioned in your testimony that you thought

that there had been overheated rhetoric with respect to Venezuela.

If you could elaborate on that statement, and maybe just flesh out

a little bit more what exactly you think the United States should

be doing with respect to Venezuela, given the important connection

you mentioned between our foreign policy and the whole energy

supply and energy market issues.

Mr. GOLDWYN. Thanks for the opportunity on that.

I think the rhetoric has been overheated on Venezuela in a couple of ways. It has been overheated, frankly, on both sides. The

Chavez government came in following a succession of Venezuelan

governments that were not very democratic, pretty corrupt, and

pretty poor at governing. They set out to do a lot of things that we

would probably support in any other part of the world, which is put

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the government in charge, not the national oil companies, spend

more social spending, which we tell African governments to do all

the time. They set out to change the terms and change the transactions essentially that were structured when oil was $10. That is

the kind of stuff other governments do.

Where I think things went off the rail is that the way those renegotiations were done on the fiscal terms was pretty brutal and

did not treat the companies as partners. It was a bit imperious,

even if they had forecasted it. So that has not helped a lot.

And I think the Chavez government has also been on a winning

streak in terms of its own popularity for lotteries, including pretty

much the collapse of the internal opposition to mount anything.

But then it has taken a number of steps in terms of the press and

in terms of prosecution of the opposition, which have been egregious.

I think what has happened is the United States has basically

stopped talking to Venezuela. We stopped a couple of years ago

when there was a coup we more or less supported for a day, after

decades of supporting democracy in the region. We handed that

government not only some legitimate insecurity, but a bogeyman

that has been enormously helpful.

And I think the first thing we need to do is stop talking in the

media and start talking directly.

The second thing I think we need to do is to talk at a technical

level because we have had a long relationship with Venezuela. It

is going to be there for a long time, and we have some common interests.

The other thing we need to do is we need to talk to both Europeans and countries in the region about the things that we have

in common. We have spent a lot of attention on Venezuela talking

about the fiscal terms and how they are treating the companies

and stuff like that. As a government, that is not our problem. As

a government, our issue is democratic institutions.

Now, if we hold out that if they just go back to the old ways life

would be grand, then we are not going to have any resonance with

anybody who actually lives in Venezuela, because the old guys were

not a whole lot better than the current guys. We need to talk about

things that need to happen and things that are reasonable. We

have to make it clear that we are not in favor of regime change

in Venezuela, that the United States is not about to attack Venezuela so you don’t need to arm everybody with a Kalashnikov in

order to do it. But we have issues. We have issues with China. We

have issues with Russia. We have issues with all kinds of countries. We need to engage.

And that is why I say that our relationship with Venezuela right

now is that we are competitors on the model. We are competitors

over legitimate problems of poverty and social injustice and lack of

infrastructure. So we need to pick up our game on that and stop

demonizing Venezuela. The Venezuelans will have more political

space in the country to debate what is going on there and whether

they like it, rather than focusing the entire debate in Venezuela

about the United States. I don’t think that helps our interests or

theirs.

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Mr. VAN HOLLEN. Thank you. That is important advice, and they

are clearly winning the PR game. I think your advice about some

more quiet discussions probably would go a long way.

Thank you, Mr. Chairman.

Mr. SHAYS. Thank you.

I am really excited to have this opportunity to learn from the

three of you, and I appreciate you being here. I want to first ask

you your reaction to the answers of the first panel regarding

whether we are at a point where we have few margins, and that

we are in fact very vulnerable to supply and demand issues. I

would like to know your reaction. The general sense was we are

not vulnerable really, I read it as we are not vulnerable really because we have—first off, I felt like they did not respond. Why

would I be telling you what my reaction is? I want to know what

your reaction is. Go right down, I mean, you were all three here

on the first panel. And what I request are candid answers.

Mr. YERGIN. I wrote down your comment that your sense is that

we are totally and completely vulnerable. I was mindful of that

when I began my remarks. The oil market today is tighter than it

was on the eve of the 1973 oil shock, so this is a vulnerable market.

We have a series of mechanisms to deal with shocks, and we can

see the potential for new shocks coming in front of our faces. So

I think the risks are higher. We can manage them to a degree. The

strategic reserves are not endless. They might give us, depending

what the problem is, 3 months, 6 months, a year or something like

that. There is a whole other range of measures, demand restraints

and so forth that would come into play if there was a serious crisis.

That is what I was trying to suggest, is a whole framework of

issues about energy security that don’t have to do with whether we

are running out of oil or not, but managing the reality.

I just want to recognize that these things do move in cycles. We

are not going to have, I believe, high prices forever, and that we

will see that markets will respond. We will see a buildup of supply.

We should see demand. And things get more back into balance. The

question is, is that a 2 or 3-year or a 5-year process, and then the

longer term questions that Congressman Issa raised of technology.

But right now, we are in a tight place, and if something else happens or something more happens, it would register in much higher

prices. We don’t have the maneuverability that we would have even

2 or 3 years ago. Let me just say in 2003 Nigeria lost—David will

know the number—but I think it is 800,000 barrels a day, more

than the 550,000, and it didn’t matter. It didn’t have the kind of

impact that kind of loss would have today. So I think it is recognized that there really is a heightened degree of vulnerability. We

have to look at the range of tools that we have to deal with it.

Mr. SHAYS. You said it happened in the past but——

Mr. YERGIN. It happened in 2003, Nigeria had a similar type disruption, and more supplies were lost, 800,000.

Mr. SHAYS. And today it would have impact.

Mr. YERGIN. Today it is 550,000, and it was 800,000, but that

800,000 really was not reflected in the price because there were

other supplies to go to. Today there is nowhere else pretty much

to go to in the short term.

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Mr. GOLDWYN. Mr. Chairman, if I can take that 1 second. I think

there is economic vulnerability and then there is national security

vulnerability. I think in terms of national security we are very vulnerable, and all the trends are that things are getting worse. We

are vulnerable because there are no short-term answers that will

reduce our or anybody else’s dependency. The second reason we are

vulnerable is we don’t have a plan to change that has any serious

impact of making a difference. And it matters in ways that are

really important. It matters on Iran. It mattered before on Iraq. It

matters on Sudan. It matters on things that actually count.

Economically, as Dr. Yergin said—and he wrote the hymnal from

which we all sing—we have tools to deal with economic vulnerability. We are a wealthy enough country, their prices go too high,

we could change LIHEAP to help people at the lowest end of the

economic scale pay for their gasoline. In my view, frankly, $3 gasoline is the greatest national security benefit that we have had in

two decades because as a Government we are incapable of actually

doing anything to promote alternatives in technology or anything

else, and prices having a huge effect.

If you left it up to me—and I would never win a congressional

race anywhere—I wouldn’t let the price of gasoline drop below

$2.75 for the foreseeable future. I would put a floor on it because

the answer is going to be making alternative technologies commercial. There isn’t a check the Government is going to write that is

going to make this work. They have to believe that they can make

money turning something else into fuel, or making a different car

that is going to beat $2.75 in gasoline.

Mr. SHAYS. I happen to agree with you. When I first ran for Congress, I suggested having a 50 cent gasoline tax. I suggested in the

last campaign, in a close race, that we needed to have a gasoline

tax for revenue for infrastructure, but I also saw it having impact

elsewhere.

What surprised me is we as elected officials will sweat a 2 or 3

or 4 or 5-cent increase in the gasoline tax, and yet the public absorbed $1, 100 cents. I mean, I just don’t quite get the disconnects

that are happening.

Mr. YERGIN. I was going to say, so far it has been, to use a Alan

Greenspan term, a conundrum, that we have had these price increases. It has caused a lot of pain for a lot of families. Yet overall,

at least so far, it has caused pain for airlines, other industries, the

delivery business, and yet we are looking at strong GDP. The IMF

is predicting 4.8 percent global economic growth this year. Now,

maybe it is because we could take $50 a barrel in stride because

we are more energy efficient, oil has less leverage over our economy, central bankers are smarter, a whole host of things.

Mr. SHAYS. I don’t understand your point, oil has less——

Mr. YERGIN. Leverage. In other words, we only use half as much

oil for every unit of GDP as we did in the 1970’s.

Mr. SHAYS. Right, OK.

Mr. YERGIN. So that means we have a whole big part of our economy that didn’t exist in the 1970’s, but we still have to see whether

$70, where we are now, whether it has a more negative impact, but

it does go to the overall point that $50 was taken into stride quite

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ness, in all parts of the oil business around the economy for a long

time would have thought.

Mr. GOLDWYN. Europeans are paying $5, Japanese are paying $5

a gallon. Their economies aren’t as strong as ours, but life goes on.

Mr. SMITH. My wife is Norwegian and she says it is fine to pay $7 a gallon in Norway, and she can’t understand why America is

complaining.

The only question I would have—and I am not an energy expert

really—is the question of why would countries like Russia, Venezuela and other producers, Indonesia, why should they want to

produce more energy at $70 a barrel? They can get the existing

high prices without increasing production.

Mr. SHAYS. You say they can get the existing income, not high

price.

Mr. SMITH. Existing income, that is right.

Mr. SHAYS. It is kind of like I couldn’t get any high school kids

to work at my house when I was renovating it, and finally, my

daughter convinced four guys to come. This was about 8 years ago,

and I said I would pay them $12. When they came I said, to want

to keep them all day, I said, ‘‘I will give you $20.’’ And in the middle of the day they left. They said they had earned all they needed.

[Laughter.]

I got the exact opposite result.

Mr. YERGIN. I think you got it, Mr. Shays. That is it. In fact, it

is when prices are lower, it is when countries worry about revenue,

worry about investment, want Western companies, United States

and other companies to come in and invest and increase capacity.

When prices are high, they are looking at the dollar per barrel

rather than the number of barrels, and they are doing fine. Russia

has $200 billion of reserves. It is in a very different position than

it was in 1998, and in fact, cutting production a little bit, letting

it slide, seems to drive the price up, they make more money, just

like those kids.

Mr. SHAYS. Just elaborate—not in any detail—the economic versus the national security issue. You say national security we are

vulnerable, economically we are not. And that is because?

Mr. GOLDWYN. That was my line.

Mr. SHAYS. Do the rest of you agree? That sounds good.

Mr. GOLDWYN. Economically we are not because we can absorb.

We have proved that we can actually absorb these price increases

reasonably well without a major sacrifice in GDP because we have

the financial resources to help the poor if they go higher, but let

the Hummer drivers basically not be subsidized at the same time.

We have tools that can ameliorate some of the price effects of an

oil shock, such as using the SPR and taking some of the bite out

of it. But we don’t have an answer for reducing the national security vulnerability. We don’t have a way to move Russia. We don’t

have a way to move France. We don’t have a way to move Germany

on some of these national security issues, or China while they are

so dependent.

Mr. SHAYS. Is the demand curve basically a straight line, or does

it kind of curl, or what does it look like?

Mr. YERGIN. Well, you look at China, in 2004 Chinese oil demand

grew by 16 percent, almost a million barrels a day. No country’s

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demand had ever grown by that much, except the United States

coming out of recession——

Mr. SHAYS. You don’t mean a million barrels a day?

Mr. YERGIN. Yes, I mean a million barrels a day.

Mr. SHAYS. One year it was——

Mr. YERGIN. From 1 year to the next it grew by a million barrels

a day.

Mr. SHAYS. From 1 year.

Mr. YERGIN. From 1 year. The next year their demand—that

year demand grew 16 percent. The next year Chinese demand grew

by 2 percent, and so I think with these prices, the indications are

that we are seeing that demand is responding to price to some degree around the world.

Overall, as you all observed in the first panel, when you look out

at Chinese per capita income being 10,000 or 12,000, you look at

India and others, you certainly see that the world will need 30 percent or 50 percent more energy. 25 years from now it will probably

use a lot more energy than it does today, but it will not necessarily

move in a straight line.

Mr. SHAYS. When I talk to constituents I say the United States

has less than 3 percent of the world’s oil reserves. Then I say we

thought at one time Saudi Arabia had 25 percent, and Kuwait 10

or 9, and Iraq 10, in those ranges. But then I look at production

capability, and we produced more in 2002 than anyone else. And

then in 2004, Saudi Arabia produced more. What am I to infer

from that? I mean it strikes me that if out of 2.7 percent of the

world’s oil reserve we produce more, we mine more, why can’t Iraq

or whatever just——

Mr. GOLDWYN. OPEC for one. Non-OPEC countries tend to

produce the maximum that they can, and the remainder of the

world’s demand for oil is the call on OPEC. They either supply all

of it, some, at some level, depending on the price level.

Mr. SHAYS. But does OPEC also restrict their future potential for

capacity? In other words, Saudi Arabia has the capacity, at one

time had the capacity to kind of rein it in or go back and forth. But

I guess what I am struck with is why wouldn’t a company want

to—especially the short-term mentality, just want to produce as

much as you could? I realize the argument, they get more money

now so they have their need. But I look at a country and think,

why don’t they do what we do?

Mr. YERGIN. I think what you see in Russia is the government

takes almost all the revenues above $25 a barrel in terms of tax,

so a company operated in Russia really is only looking at up to $25.

Therefore, we can see the investment numbers going down in Russia, and in the first half of this decade, as much as China grew in

demand, Russia grew in output, but now that growth is really

slowed down because the incentives aren’t there.

You are right. For some countries, maybe particularly who cannot influence the market as much, their game ought to be, from

their own point of view, produce every barrel that you can, but you

look at Iraq, and there was the talk before the war that it would

produce 6 million barrels a day. Now it is well below what it even

produced before the war, and it is going to take a long time to recover to get up to that.

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Mr. SHAYS. I have more questions I want to ask, but, Darrell,

why don’t you take some questions.

Mr. ISSA. Thank you. I think I will just try to summarize, and

then hopefully get a universal agreement. I think we have some

consensus, although not everyone in the administration is able to

say yes in those terms, but first of all, that we are vulnerable to

oil producers, and they have leverage on the United States. Even

if technically we can make up for losses out of the strategic reserves, we in fact are vulnerable, and the producers in the world

have leverage. Is that a fair universal statement?

Mr. YERGIN. If you take Russia, for instance, it is others—the

Europeans are the ones who are now really worried about their dependence on Russian gas. I mean I think if you see us as part of

a global energy market, as opposed to their ability to impact us the

right way——

Mr. ISSA. And I do. Obviously, if Kazakhstan remains somewhat

locked, as it is a landlocked country, it is only going to have influence to the extent that a pipeline goes to a particular place. I think

it is fair to say that Canada, unless other produce a lot more LNG,

to a great extent is a major influence to us in natural gas. That’s

just the nature of the transportation lines. But it is fair to say,

both in oil and natural gas, that we have reached that point where

supply is so close to demand and demand is growing at the present

time every bit as fast or faster than the demand is growing, every

bit as fast or faster than supply has historically, that in fact, it is

a supplier’s market.

Mr. GOLDWYN. Mr. Chairman, I am sorry, I couldn’t agree with

that statement the way you have put it for two reasons, and I

think one is, taking gas, for example. I don’t think actually we are

in a situation where any single gas producer other than maybe

Trinidad and Tobago at this point—or Canada—could have a significant impact on——

Mr. ISSA. No. I am talking globally. Everyone has their sources.

But at the present time, leaving LNG out, the United States, for

example, has a net deficit in natural gas forecasts, and the prices

have been rising every bit as fast as oil has.

Mr. YERGIN. I think what we have seen with natural gas is it

was rising, and if we had a cold winter, we would have had a very

difficult situation. Now we see the difference between a market

that is primarily a market, North American gas, and the prices are

down in a market that is dominated where geopolitics are so important, and the prices are up. But I think you summarized it when

you said today it is a supplier’s market.

Mr. ISSA. Clearly, if we are to get in the short and long run away

from $3 gasoline or higher, we are to get away from shortages that

could occur if any significant supplier becomes unable to deliver to

the world market. We are going to have to—and this is the summary that I am hoping I can get all of the elements—we are going

to have to look at alternatives which include greater use of nuclear

power, greater use of clean coal—and I emphasize clean coal—a

continued investment in ethanol and other renewable resources;

better use of emerging technologies in the way of renewables such

as wind and solar, and in the case of our transportation industry;

and we are going to have to look at either a mandated or an

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incentivized increase in CAFE standards. Would you say as a panel

that all of those must be explored or we will continue to be more

or less at the mercy of suppliers?

Mr. GOLDWYN. I would expand that list considerably. I think

most of those are important elements for electricity. Only a few of

those are important elements for oil, and that list for oil is not sufficient actually to make an impact, but you need to do all of those

things. So I would say all those things are important for——

Mr. ISSA. I concentrated on the fact that in the neighborhood of

7 million barrels a day goes to non-transportation, and quite a bit

of it to home heating, which obviously, we know we can heat homes

with electricity.

Mr. GOLDWYN. All those things will be important elements of an

energy security policy I would say.

Mr. ISSA. Ambassador Smith.

Mr. SMITH. I agree with that, and I agree with the list, but there

are some political things which do affect the price. Monopoly practices in the energy industry, not everybody is necessarily talking

about the U.S. energy industry, but I look at the Russian energy

industry, I look at the European energy industry, there are companies and countries in Europe which resist in fact putting in interconnectors between countries because they don’t want the domestic

competition. I think these are the kinds of things which do influence the market.

The fact that Russia has the pipelines monopolies and refuses to

sign the Energy Charter, particularly the transport section of the

Energy Charter, that influences the price of energy in Europe,

which influences the price of energy worldwide.

There are a lot of issues like that. By locking up and preventing

direct pipeline control from Kazakhstan to Europe, through Russia

or through other countries, and fighting it through alternative

routes effects the price of natural gas, and possibly oil in the long

run.

Now, those are maybe marginal, but I think they are important

additions that I would put to this list.

Mr. YERGIN. Can I just add?

Mr. ISSA. Yes, Mr. Yergin.

Mr. YERGIN. I think that is a very reasonable broad energy list.

You remember that book called ‘‘The End of History?’’ There is a

sort of view out there of the end of technology, and I don’t see any

reason why technology is over, and in fact, I think we are seeing

an enormous bubbling of technology along the energy spectrum.

I would add to that promoting an open investment framework to

the degree we can with countries around the world is important.

The only other thing I would add to that is respecting the flexibility of markets, which was a great lesson of Katrina. I think that

we need diversification of sources, and that is what you are talking

about.

Mr. ISSA. Thank you.

And with that, Mr. Chairman, if you will finish your questioning

and close.

Mr. SHAYS. Thank you. I will be happy to.

As you were talking with Darrell, I was just wondering about

this issue. The implication is if you can buildup reserves, why

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would a country use its energy as a weapon, when in fact it would

hurt itself? What you have really made an argument for, whether

you intended to or not, is that when the price is so high they are

getting the revenue and building reserves, is there a point where

they can buildup so many reserves that they don’t care what happens to the market for a while? And therefore, is there an incentive

for them to truly use energy to change public policy?

Mr. YERGIN. I think David Goldwyn sketched out Latin America,

it is not directly against us, but I saw today President Chavez said

the North American empire is a paper tiger, and that he is using

his energy prowess to pursue his Bolivarian revolution. So I think

when prices are a certain level, and the people around you say,

‘‘Oh, those prices are going to remain high forever,’’ sir, you tend

to believe it, and then you act on that.

Mr. SHAYS. But I wasn’t even saying that the prices would remain high forever. What I was talking about was the fact that basically you all have made an argument—or at least you didn’t disagree with each other—that contrary to what I thought—more dollars, you know, let’s really exploit our oil—you are saying, heck,

they can work a half day and make as much as they made in a

full day, so let’s just relax.

Mr. YERGIN. But then it runs out, and there is a timeframe, so

you have to sort of think out 5 years. Mr. Gorbachev and Mr.

Yeltsin’s bad luck with oil prices has been Mr. Putin’s really good

luck for oil prices and he is going to be able to ride on that current

of prices through the end of his term because he will have built up

the reserves.

Mr. SHAYS. Right. And what strikes me is he can buildup tremendous reserves and not sweat what happens to the marketplace.

Mr. YERGIN. At least for a few years, but it catches up. A question is when will it catch up? I mean to hear President Chavez, he

feels he will have these high cards forever.

Mr. GOLDWYN. You talk about reserves, but there is also production as a calculation.

Mr. YERGIN. You mean financial reserves, don’t you?

Mr. SHAYS. Yes, that is right. I mean financial reserves. You

have built up such a body of wealth that you can absorb. I view

oil reserves as just money in the bank ready to be utilized.

Mr. GOLDWYN. Well, they are not, or not quickly, is the problem.

That is why when you are talking about oil reserves and production, countries and OPEC definitely calculate. There is a level

where more production means lower prices and less revenue, and

so restraining production makes a lot of sense.

Mr. SHAYS. Right. I understand that.

Mr. GOLDWYN. And having a reserve——

Mr. SHAYS. But we are not in that market.

Mr. GOLDWYN. Sorry?

Mr. SHAYS. We are not in that market.

Mr. YERGIN. OPEC basically isn’t functioning because everybody

is producing flat out.

Mr. SHAYS. That is my basic assumption, that we are flat out,

so we are at the edge. That is why I wanted to know what the demand curve looked like.

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Mr. YERGIN. So it is a question of whether you are flat out now

with everything you can sell, but you don’t worry as much about

investing for the future as you might have if you thought prices

were going to be lower sometime.

Mr. SHAYS. Mr. Smith, your expertise is extensive. I would think

that what Russia did with Ukraine was send a very chilling message to the entire world. But tell me this, did Ukraine just basically make a bad deal or did they make the best deal they can

make?

Mr. SMITH. That is a hard one to decide, but if I had to come

down on it, I would say they made a very bad deal.

Mr. SHAYS. They panicked?

Mr. SMITH. They made a bad deal.

Mr. SHAYS. No, but did they panic?

Mr. SMITH. There are a lot of explanations. There is a tremendous lack of transparency of how that deal was put together. There

is a lack of transparency on the company that actually was

named—Ros-UkrEnergo, which was named to be the monopoly supplier of gas to Ukraine. In the long run, if that deal is executed,

Russia will accomplish what the basic purpose was. That was is to

get control of the Ukraine’s gas pipeline system, which is the major

pipeline which takes gas from Russia to Europe. This has been a

pattern that Russia has engaged in over the last several years, of

getting control of these pipelines, often by pricing the energy going

into that pipeline at a price that they know in the long run the

country can’t pay, so they accumulate enormous debts. Then in the

end, Russia says, ‘‘OK, we understand you cannot pay the debt, so

we’ll take it in kind, and the kind will be your energy facilities and

your pipeline system.’’

That is exactly what they are doing right now. They are putting

pressure on Belarus to turn over their pipeline system. They have

just gained control of the pipeline system in Moldova. They have

gotten the pipeline system in Armenia.

Mr. SHAYS. This is what I don’t understand. I intuitively think

a pipeline goes from Russia, through a country, and it ultimately

goes to Europe. So I would think Ukraine would have something

over Russia.

Mr. SMITH. That is correct, and that is why Russia wants to stop

that, and to prevent Ukraine from having that clout. They want to

prevent that by controlling the pipeline system.

Mr. SHAYS. But wanting to doesn’t tell me how you logically can

do it.

Mr. SMITH. I am sorry?

Mr. SHAYS. Wanting to do it doesn’t tell me how you can do it.

Is it because Ukraine needs the energy that Russia is giving them?

Mr. SMITH. Ukraine needs the energy. The energy has been

priced at a higher level than the Ukrainians can pay it. They have

a very inefficient national energy company, a company that runs

into debt month after month, and yet the head of it just bought a

$200,000 Mercedes. I think all of this is that they are accumulating

more and more debt to Gazprom, and in the end Gazprom will say,

‘‘We want the pipeline system.’’

Just right now Russia controls three-quarters of the oil refining

capacity of Ukraine. If the present system was implemented, inVerDate 11-MAY-2000 11:40 Apr 11, 2007 Jkt 000000 PO 00000 Frm 00130 Fmt 6633 Sfmt 6633 C:\DOCS\31181.TXT HGOVREF1 PsN: HGOVREF1
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cluding all these protocols that were part of the January 4th agreement, Gazprom will have control over the internal market in

Ukraine, and probably within the next year, end up in control of

a pipeline system.

Mr. SHAYS. How soon will we see some excess supply in the market? When do we think we will see that?

Mr. YERGIN. It is hard to separate it from the politics because it

goes to the question what is the picture of how things will look

with Iran in a year, a year and a half. If you look at it primarily

from an economic point of view, we would expect to see next year,

if there are not more disruptions, the spare capacity number, which

is that crucial number where the action is growing to maybe about

21⁄2 million barrels a day. When we do our numbers on a field-byfield basis we see a buildup of supply that is quite substantial coming down the road, but it takes time for that to unfold.

On the other half of the question is, what do these prices do to

demand? If it is just a pure market or primarily a market, then I

think this picture would improve, but we are in a very difficult and

vulnerable straits right now.

Mr. SHAYS. Mr. Smith.

Mr. GOLDWYN. I would be more pessimistic. I would say it might

be 5 years at least before we see excess capacity more than 21⁄2 million barrels a day, because I foresee that the instability in Latin

America and the slowness in production will continue. When it

picks up it is still going to be 5 to 7 years before we see the results.

I see basically the situation in Nigeria in particular, and in other

places, also deteriorating. I don’t see signs of greater stability. I see

signs of more supply interruptions. This piece in Iraq would probably be the greatest big bump in global oil supply, but I don’t see

that happening, frankly, for the next 3 years or so either. In places

like Libya, which has just opened, where you can have enhanced

oil recovery and you can get near-term real increases in supply, I

don’t see a great leap forward there producing oil for at least 3

years. So all those are pretty negative on the supply side.

On the demand side, absent a major act of terrorism collapsing

demand someplace, I see the growth of China, the growth of India,

progress that we want in developing Asia, and that locking in demand pretty high, and the technology factor which might change

the way that we are consuming not really being able to kick in

even if we changed our policies in the right way also for 3 to 5

years. So I don’t see anywhere in the equation, absent a disaster,

where we get excess capacity for——

Mr. YERGIN. Can I round it out? Following from David Goldwyn’s

comments, certainly many of the trends in the Middle East are adverse, and those larger trends will affect what happens. I have

given what we would use as our base scenario, but one thing

maybe to counter a little bit, is what is happening to cost in developing new oil and gas fields. Costs are up 68 percent since 2000.

So there are shortages of people and equipment too that if what I

laid out doesn’t happen—that will be also one of the factors that

would retard it.

Mr. SHAYS. But this isn’t like where I lived in Stamford, CT

where they determined they needed a hotel, and three people built

a hotel, three different companies so you had three hotels, and the

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market just crashed. The same thing with the paper industry, they

all built these large mills, and they only needed one, but like three

did it or four or five, and the market crashed. You are not going

to see that kind of issue in——

Mr. YERGIN. I think that there is little expectation that at least in the next period of time that you could see another period of $10

oil like we had in 1986 and 1998, not so long ago. And there is kind

of, if you look at people’s investment plans and what numbers they

are using, they seem to assume that oil, that the floor now would

be maybe around $35 a barrel, rather than $20 a barrel, which was

a planning assumption a couple of years ago. If there were enough

people and enough equipment and enough open doors around the

world, you probably would get the hotel phenomenon, but there are

enough blockages in the way that maybe we will end up with 11⁄2

hotels.

Mr. SHAYS. I turned off to the first panel because I just felt there

wasn’t an honest dialog. I felt like there was a statement of the position of an administration, and what I feel like is that we are

walking on thin ice, that you could fall through at any time. It

wouldn’t take a significant disruption to cause a huge impact on

our energy, higher prices and shortages. Is there anything that

should dissuade me from feeling that way? I would like all three

of you to answer. Should I have sympathy for the response to the

first panel?

Mr. SMITH. This really is beyond my competence, but as a diplomat, I have never stopped that from making a comment.

Mr. SHAYS. Why don’t we just say that you have a tremendous

amount of knowledge, but just not a lot of expertise. [Laughter.]

Mr. SMITH. OK. I don’t really know the answer to the question,

but how do we create incentives to increase production? I don’t see

any incentives to increase production or allow foreign energy companies into Russia, into Venezuela, into Bolivia, Indonesian markets, until the prices goes down. How do we get the price down?

It is going to come down only when we create certain realities in

our own countries which will bring the price down. With stateowned companies increasingly in control, the private energy sector

is a smaller and smaller sector of the whole exploration and development area.

Mr. SHAYS. I just have to tell you how I would react to this. I

almost feel like someone is playing a game with me, because it is

like my saying the greater the demand, the lower the price. It

seems like a contradiction in terms to me, because intuitively, I

would say OK, you get more money, you work to increase supply.

I mean that is basically what I am hearing.

And you are saying to me in essence, that the more money they

have, countries aren’t inviting folks who could really increase capacity, and they are going to bring people to come and increase capacity when they get lesser price.

It is logical, but it is weird.

Mr. YERGIN. Yes. It is that they feel they don’t need foreign investment, they feel they don’t need foreign technology.

Mr. SHAYS. They got enough money.

Mr. YERGIN. Yes, they got enough money, and they are fine,

thank you. And the future will be like the present.

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I think in answer to your question I would say that a market

that is this tight with the kind of geopolitical risks that are staring

us in the face, is a crisis-prone market, and how big the crisis will

be, whether it occurs, we don’t know. That is why it really behooves

us to ask what are the mechanisms we have in the short term and

thereafter to cushion it and deal with it, and perhaps to get ourselves through this difficult period.

Mr. SHAYS. Do you all agree with that answer?

Mr. SMITH. Yes.

Mr. GOLDWYN. Yes.

Mr. SHAYS. Well, I will tell you how this politician thinks when

I hear this. I think September 11th. I think Enron and WorldCom.

I think Katrina. I think Iraq. And I say, no, thank you, I don’t

want any more crises. So it would strike me that we would be

working our butts off to try to minimize the possibility of a crisis,

and if nothing else, be able to demonstrate politically that we at

least tried, I am not seeing a Marshall Plan, I am not seeing a

Manhattan Project, and it just strikes me that you are going to

have to——

Mr. GOLDWYN. If I could just offer this. People say energy policy

is like the movie ‘‘Groundhog Day’’, you keep waking up and having

the same nightmare over and over again. It is because we tend to

characterize the crisis, as you put it, in terms of price. The fact is,

in terms of price, we are not actually in a crisis, and we could absorb a little bit more. Where we are in a crisis is in national security, and we are heading for more of a crisis in national security.

You need to frame the debate in terms of national security, not in

terms of prices and shortages, because I think that is where U.S.

vulnerability is greatest, and that is where the response needs to

be.

Mr. SHAYS. I am going to let you go in just a second here, but

what I don’t fully grasp is how you define a national security crisis.

Mr. GOLDWYN. A national security crisis is Iran getting a nuclear

weapon because we cannot persuade any of our allies that they

need that security more than they need their oil.

Mr. SHAYS. Because they have oil.

Mr. GOLDWYN. Right.

Mr. SHAYS. But it is not a security crisis because of lack of oil?

Mr. GOLDWYN. No.

Mr. SMITH. I agree with that, Mr. Chairman. It is not the price

of oil. In fact, your original suggestion to your constituents of putting in the 50-cent additional energy tax or gasoline tax on, I think

is a good idea. The question is, how do you sell it in America because an additional, say, $1 a gallon, would reduce the demand in

the United States, and I think that has national security implications for us in the positive sense.

Mr. SHAYS. The way I would have sold it if I were President of

the United States, I would have said, after September 11th we are

never going to be totally independent of foreign sources of energy,

but we are going to be a hell of a lot less dependent. Therefore, we

are going to not sweat bullets with what happens in the Middle

East or anywhere else, because they don’t have a noose on us.

When I travel in the Middle East, I feel like they feel like they

have the upper hand. That is kind of how I feel.

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Mr. YERGIN. I think there is a price where the economic effects

hit us hard, and perhaps cause panic in financial markets. If you

had a disruption, things could unfold in ways that we don’t expect.

So I think in a sense it is looking at it in both ways. Part of the

reason the whole energy security machinery was set up in the

1970’s was really to protect GDP. It goes back to what I tried to

emphasize, the importance of seeing this in terms of our overall

foreign relations. And I think part of the message of your remarks,

Mr. Chairman, is the importance of connecting the dots, and the

dots bringing these things together.

I think I have seen enough of these cycles—I ran a task force in

the Department of Energy in the 1990’s on energy R&D—we go up

and down and up and down, and you know, there is a limit. It is

not like you could just throw billions and billions and billions of

dollars and get results, but you do need to put billions of dollars

into it on a consistent basis and stick with it. The two biggest

things we did in the 1970’s were that we saved 2 million barrels

a day with fuel efficiency standards, and we gained 2 million barrels a day with the Alaska pipeline. It isn’t an either/or between

supply and demand. They are both important. In the short term,

there is probably a lot more that can be accomplished in demand.

Mr. SHAYS. If a President talked about energy independence and

he said, you are all going to get something you want and you are

going to all have to give on something you don’t want, we will ultimately get what we all want, a really substantial policy that moves

us in a way that we are less dependent. The environmental movement, for example, doesn’t particularly want nuclear power plants

in the United States. I think you would see that. If CAFE standards go up, I think a President can put together a package like

that.

I have just one last issue, and that is whether it is conceivable

that a country can lock up energy supply so that they have a guaranteed source of energy ad infinitum because they have locked into

long-term contracts?

Mr. YERGIN. Of course, the LNG industry is really based upon

25, 30 year contracts, so gas goes from a field in Indonesia to a

Japanese utility. There is a whole chain of investment that supports it.

Mr. SHAYS. But not with oil.

Mr. YERGIN. Not with oil. I come back to the Japanese and others thought that they could buy supply positions——

Mr. SHAYS. I just was wondering if you could corner the silver

market, is kind of what I am asking.

Mr. YERGIN. Yes. I think that if the oil market is too big and too

diverse and too many players, that you are not going to be able to

have somebody preempt us. As I say, the way I turn it around is

I would rather see the Chinese investing more money rather than

less.

Mr. SHAYS. Anything that you all think we should just put on the

record before we go? Is there any question that we should have

asked that we didn’t that we just need to put on the record?

[No response.]

Mr. SHAYS. Thank you all for your patience. Thank you.

This hearing is adjourned.

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[Whereupon, at 5:25 p.m., the subcommittee was adjourned.]

[The prepared statement of Hon. Diane E. Watson and additional

information submitted for the hearing record follow:]

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