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33–869 PDF 2007

S. HRG. 110–6

GEOPOLITICS OF OIL

HEARING

BEFORE THE

COMMITTEE ON 

ENERGY AND NATURAL RESOURCES 

UNITED STATES SENATE

ONE HUNDRED TENTH CONGRESS

FIRST SESSION

TO

RECEIVE TESTIMONY ON THE GEOPOLITICS OF OIL AND ITS 

IMPLICATIONS FOR U.S. ECONOMIC AND NATIONAL SECURITY

JANUARY 10, 2007

(

Printed for the use of the 

Committee on Energy and Natural Resources 

(II)

COMMITTEE ON ENERGY AND NATURAL RESOURCES 

JEFF BINGAMAN, New Mexico, Chairman

DANIEL K. AKAKA, Hawaii 

BYRON L. DORGAN, North Dakota 

RON WYDEN, Oregon 

TIM JOHNSON, South Dakota 

MARY L. LANDRIEU, Louisiana 

MARIA CANTWELL, Washington 

KEN SALAZAR, Colorado 

ROBERT MENENDEZ, New Jersey 

BLANCHE L. LINCOLN, Arkansas 

BERNARD SANDERS, Vermont 

JON TESTER, Montana 

PETE V. DOMENICI, New Mexico 

LARRY E. CRAIG, Idaho 

CRAIG THOMAS, Wyoming 

LISA MURKOWSKI, Alaska 

RICHARD BURR, North Carolina 

JIM DEMINT, South Carolina 

BOB CORKER, Tennessee 

JEFF SESSIONS, Alabama 

GORDON H. SMITH, Oregon 

JIM BUNNING, Kentucky 

MEL MARTINEZ, Florida

ROBERT M. SIMON, Staff Director 

SAM E. FOWLER, Chief Counsel 

FRANK MACCHIAROLA, Republican Staff Director 

JUDITH K. PENSABENE, Republican Chief Counsel 

TARA BILLINGSLEY, Professional Staff Member 

KAREN BILLUPS, Republican Deputy Chief Counsel 

(III)

C O N T E N T S 

TAB NO.

Bingaman, Hon. Jeff, U.S. Senator From New Mexico ........................................ 1

Birol, Dr. Fatih, Chief Economist, Head of the Economic Analysis Division, 

International Energy Agency, Paris, France ..................................................... 6

Domenici, Hon. Pete V., U.S. Senator From New Mexico .................................... 2

Dorgan, Hon. Byron L., U.S. Senator From North Dakota .................................. 5

Hormats, Dr. Robert, Vice Chairman, Goldman Sachs (International) .............. 23

Leverett, Dr. Flynt, Senior Fellow and Director, Geopolitics of Energy Initiative, New America Foundation, Washington, DC .............................................. 39

Salazar, Hon. Ken, U.S. Senator From Colorado .................................................. 6

Sanders, Hon. Bernard, U.S. Senator From Vermont .......................................... 4

Smith, Hon. Gordon H., U.S. Senator From Oregon ............................................ 4

Stuntz, Linda, on behalf of a Council on Foreign Relations Independent 

Task Force ............................................................................................................ 20

Wald, Gen. Charles, U.S. Air Force (Ret.), Former Deputy Commander, U.S. 

European Command, and Member, Energy Security Leadership Council ...... 32

APPENDIX 

Responses to additional questions .......................................................................... 67

(1)

GEOPOLITICS OF OIL 

WEDNESDAY, JANUARY 10, 2007

U.S. SENATE, COMMITTEE ON ENERGY AND NATURAL RESOURCES, Washington, DC. 

The committee met, pursuant to notice, at 9:45 a.m., in room 

SDG–50, Dirksen Senate Office Building, Hon. Jeff Bingaman, 

chairman, presiding. 

OPENING STATEMENT OF HON. JEFF BINGAMAN,

U.S. SENATOR FROM NEW MEXICO 

The CHAIRMAN. Why don’t we go ahead and get started. I thank 

you all very much for coming. The Senate still is in the process of 

getting its organizing resolution done, so Senator Domenici is officially the Chair, but he has allowed me to go ahead today, as we 

had intended when we first thought about this hearing. 

Let me just point out the new members—and I know Senator 

Domenici probably wants to do the same—and welcome them. We 

have three new members on the Democratic side and three new 

members on the Republican side. Senators Lincoln and Sanders 

and Tester are our new members on the Democratic side. We welcome them. Senator Tester is here right now. On the Republican 

side, Senators DeMint, Corker and Sessions. And, of course, we 

welcome them as well. 

Let me just briefly go through an opening statement here and 

then defer to Senator Domenici. 

I think the idea of this hearing was to try to look at the big picture, begin the year with sort of an overview of the geopolitics of 

oil and I hope that that’s a useful thing. There is a quote that my 

staff dug out of the files of the committee, from Scoop Jackson, 

when he chaired this committee back in 1980, and he said, at that 

time, ‘‘The world will witness a growing struggle for secure access 

to oil through the end of this century and into the next. This gathering energy crisis deserves the highest priority in the counsels of 

Government. Few other problems are more complicated, few other 

problems will be more difficult to resolve. Moreover, many of the 

policies we are currently pursuing to deal with the energy crisis are 

only making it worse.’’ So that was Senator Jackson’s view of 

things in 1980. 

I think, today, we still have the struggle for access to oil that he 

referred to. We also, of course, have a competition among consumers that has developed, particularly with the increasing appetite for oil in places like China and India. There are great implications for the United States in all of that, both for our economy and 

2

for our national security and the purpose of this hearing is to get 

some of the people who have thought about these issues to give us 

their views and then give us a chance to ask some questions. 

So let me defer to Senator Domenici for any comments he has. 

STATEMENT OF HON. PETE V. DOMENICI, U.S. SENATOR

FROM NEW MEXICO 

Senator DOMENICI. Thank you very much, Senator Bingaman, 

and thanks to the witnesses for helping us today with their presentations that the Senators were interested in. I think it is most beneficial that we put into perspective who owns access to the oil in 

the world today. It is rather frightening when you get just that picture before you and nothing more, to know how things have 

changed dramatically and how little of the oil of the world is owned 

by the American companies that we are constantly arguing with 

and how little these oil companies of America have access and/or 

control over these oils. 

I have had staff reduce the world’s oil to a chart that shows 

where we are, and there is no question that private investors are 

already at a disadvantage. The rise in national oil companies has 

decreased access to reserves through the use of strategic energy 

agreements between governments. U.S. companies are being 

squeezed out. 

Examples are the Chinese national oil company’s development of 

an energy production agreement in Sudan and Iran, Russia’s reclaiming of oil producing assets from Yukos to form a state oil company and just yesterday, Venezuelan President Hugo Chavez called 

for the end to foreign ownership of crude oil refineries in the Orinoco region. This activity further limits investment opportunities 

for investor-owned companies. 

These trends are doubly concerning, given the many producer nations, political instability, and the lack of a legal system for enforcement of contract rights resulting in only a sufficient capital investment in the infrastructure necessary to sustain existing production, much less new capital on line. 

For example, the recent prediction by one scholar of the extinction of the Iranian oil exports by 2014-2015, will they allow it to 

happen or will it be forestalled by investments from other countries 

that are less than friendly to U.S. interests? 

I’d ask that the remainder of my remarks be made part of the 

record and thank you, Senator Bingaman, for opening the year 

with a bit of realism. Thank you. 

[The prepared statements of Senators Domenici, Smith and 

Sanders follow:]

PREPARED STATEMENT OF HON. PETE V. DOMENICI, U.S. SENATOR

FROM NEW MEXICO

I would like to call this hearing to order. 

No, you are not imagining things—this is the gavel in my hand. 

First, I’d like to congratulate Senator Bingaman on being elected Chairman of the 

Committee. I look forward to continuing to work with him in the fine bipartisan tradition of this Committee. 

Senator Bingaman has a commendable desire to get a running start on the Committee’s work. When we scheduled this hearing, we didn’t realize that he would not 

yet officially be Chairman. 

3

So, for the time being, you get to call me ‘‘Mr. Chairman’’—even though the role 

is strictly ceremonial in this case. 

I do appreciate Senator Bingaman planning this hearing on the Global Oil Balance and Its Implications for U.S. Economic and National Security. In a minute or 

two, I will hand the gavel over to him to preside. But first, I will share a few 

thoughts of my own. 

As I have stated many times before, energy security is a complex issue that cannot be reduced to a ‘‘sound bite.’’ That being said, I will briefly summarize what I 

think are some important issues facing this nation. 

I think it is useful that Chairman Bingaman is holding this hearing first. In this 

area, there is great risk in making decisions based on what we ‘‘know’’ to be true 

from the past—while the reality is that the world has changed. 

Today we will hear about the dangers of our dependence on foreign sources of oil. 

But what may be even more frightening—and difficult to deal with—is the ways in 

which the very structure of oil markets have changed. 

Most Americans, and many politicians, focus on large multinational corporations 

as the face of ‘‘big oil.’’ However, today we will hear that the reality is that National 

Oil Companies—those owned by foreign governments—control some three-quarters 

of the world’s oil reserves. 

Thus, today, we are largely dependent on supplies of oil controlled by governments whose values and priorities are often in conflict with America’s. 

Why do these changes in world oil markets matter with respect to our government’s policy? Because approaches that focus on’ the business practices of large private corporations will have little effect on world oil markets—other than to disadvantage private investment by U.S. companies and harm our consumers. 

Private investors are already at a disadvantage. The rise in National Oil Companies has decreased access to reserves through the use of strategic energy agreements between governments. U.S. companies are being squeezed out. 

Examples are:

• the Chinese national oil companies’ development of energy production agreements in Sudan and Iran; and 

• Russia’s reclaiming of oil producing assets from Yukos to form a new state oil 

company. 

• Just yesterday,Venezuelan President Hugo Chavez called for the end to foreign 

ownership of crude oil refineries in the Orinoco region.

This activity further limits investment opportunities for investor-owned oil companies. 

These trends are doubly concerning. In many producer nations, political instability and a lack of a legal system for the enforcement of contract rights results in 

insufficient capital investment in the infrastructure necessary to sustain existing 

production, much less bring new capacity on line. 

Thus, for example, the recent prediction by one scholar of the ‘‘extinction’’ of Iranian oil exports by 2014-2015. Will this be allowed to happen? Or, will it be forestalled by investment from other states that are less than friendly to U.S. interests? 

One option we don’t have is to simply pretend that these trends will go away by 

themselves. We must take a two-pronged approach: First, we must do what we can 

to work toward U.S. energy security. 

In 2005, we approved a comprehensive energy bill that is already showing results 

in many areas, including:

• the production and use of alternative fuels, and 

• providing for a nuclear renaissance.

Last fall, we passed OCS legislation that will open resource-rich areas of the Gulf 

of Mexico. However, there is more we can do. We must pursue a balance of increased efficiency and increased supply. 

For example, I would like to re-examine CAFE standards and whether we can be 

more forward-leaning on fuel efficiency mandates. Among other things, I continue 

to support authorizing the Administration to increase standards on passenger vehicles. 

While energy self-sufficiency is our ultimate goal, energy is—and will remain—

a world market. We will always be directly impacted by production and consumption 

trends in other nations. Thus, it is appropriate that today we will gather information on how to engage our domestic and foreign policy to deal with the world as it 

is today. 

4

PREPARED STATEMENT OF HON. GORDON H. SMITH, U.S. SENATOR FROM OREGON

The price and availability of oil and natural gas affects every American. That’s 

why it is important that the Energy Committee’s first hearing of the 110th Congress 

is focused on the global oil situation and its implications for U.S. economic and national security interests. As a nation, we now depend on oil imports to meet sixty 

percent of our oil needs. Even modest disruptions in the world supply can result in 

price spikes at the pump, as we have seen in recent years. 

I read the testimony of today’s witnesses with great interest, and noticed that—

despite widely divergent backgrounds—they all had many recurrent themes. First, 

there is little surplus production capacity relative to global demand. Much of the 

current production is controlled by national oil companies that are often making political rather than economic decisions, and are not making the investments needed 

to maintain and expand production capacity. 

Second, much of world’s oil is produced in politically unstable nations such as 

Iraq, Iran, Venezuela and Nigeria. Other nations, such as Russia, are beginning to 

use their vast energy resources to extract political concessions from their customers. 

The European Union has recently warned its members against relying too heavily 

on one supplier for oil or natural gas. 

The global oil market has fundamentally changed as emerging economies such as 

China and India face growing energy demands. China is now the world’s fastest 

growing oil importer, and is seeking long-term supply contracts around the world. 

China and the developing nations in Asia are projected to account for 46 percent 

of the growth in global oil demand by 2030. 

Hurricane Katrina showed how vulnerable the United States is to a domestic supply disruption. It also helped us to understand how geographically concentrated U.S. 

refining capacity has become. All of these factors should lead us to reexamine our 

energy security strategy. We cannot reduce our dependence on oil without aggressively addressing the transportation sector. Transportation accounts for 70 percent 

of our nation’s oil use, and the transportation sector is almost exclusively fueled by 

oil. 

CAFE standards for automobiles have been stagnant for more than a decade. In 

2002, I joined with Senators Kerry and McCain to sponsor an amendment to the 

energy bill to increase CAFE standards to 36 miles per gallon by 2015. We were 

told at the time that this would harm the domestic auto industry and reduce consumer choice. Unfortunately, since that time the domestic auto and auto parts industries have lost over 215,000 jobs. Consumers have not benefited either. They lose 

every time they go to the gas pump. 

We were able to use American ingenuity to put a man on the moon almost 40 

years ago. We need to use that same spirit of innovation to get a family of five from 

Portland, Oregon to Yosemite National Park (approximately 740 miles) on one tank 

of gas. That’s why I joined with several of my colleagues in the 109th Congress to 

introduce the Fuel Economy Reform Act, which sets a target of an annual increase 

of four percent a year for fuel efficiency gains. We intend to reintroduce this bill 

in the near future, and will press for its early consideration. 

I believe that the Energy Policy Act of 2005 provided many necessary incentives 

for the development of renewable energy resources and a new generation of cleaner, 

more-fuel efficient vehicles. We need to enhance these incentives and send signals 

to the investment community about our nation’s long-term commitment to renewable resources and to cleaner, more fuel-efficient vehicles. 

I look forward to hearing from the witnesses today and to working with my colleagues to address these important energy security issues. 

PREPARED STATEMENT OF HON. BERNARD SANDERS, U.S. SENATOR FROM VERMONT

Good morning. I am pleased to be a member of the Energy and Natural Resources 

Committee and look forward to the excellent work that this Committee will be doing 

to ensure a more sane energy policy for our country. Whether it is requiring an increased commitment to renewable sources of energy in the electricity sector or to 

ensuring appropriate royalty payments from drilling on our public lands, this Committee has a tremendous responsibility. 

I sincerely appreciate Chairman Bingaman and Ranking Member Domenici bringing together such an astute panel for the first Energy Committee hearing of the 

110th Congress. The geopolitics of oil is a topic that none of us can afford to ignore 

and while I don’t agree with every idea put forward by today’s witnesses, I thank 

them for their time to address us this morning. 

What is most striking to me is that, in the prepared testimony, each of the witnesses discusses the dire need to increase efficiency in our transportation sector. I 

5

believe—in no uncertain terms—that our failure to increase mileage standards has 

let the American people down. As consumers look to make each and every dollar 

go further, they find that, despite the technology being available, their automobiles 

get the same, or worse—even lower, gas mileage than they did twenty years ago. 

Additionally, as we grapple with global warming, I believe we must do everything 

we can to get the most out of each gallon of fuel because the emissions from our 

cars are simply off the charts. In fact, in Vermont, vehicle emissions are the single 

largest source of greenhouse gas emissions. I hope, with the help of the witnesses, 

that we can begin moving forward by starting with a serious discussion of increasing CAFE standards. 

Chairman Bingaman, Ranking Member Domenici, I look forward to your leadership on this Committee.

The CHAIRMAN. Thank you very much for your comments, and 

your statement will be included, obviously, in the record. 

Senator Dorgan asked to be recognized for a minute, and if other 

Senators want to have a minute, they are certainly entitled to do 

that. This being the first hearing of the year, I do think we need 

to get to the witnesses fairly soon, but go ahead, Senator Dorgan, 

with any comments you have. 

STATEMENT OF HON. BYRON L. DORGAN, U.S. SENATOR

FROM NORTH DAKOTA 

Senator DORGAN. Mr. Chairman, thank you very much. I will be 

brief, but it is an important hearing. I’m really pleased that you’ve 

called it. 

There is an old saying, if you don’t care where you’re going, you’ll 

never be lost. That’s important to think about with respect to this 

country’s energy policy. 

Oil is critically important. We will always use fossil fuels, always 

need oil. We suck about 84 million barrels out of the earth a day. 

Here, in the United States, with our population, we use 1⁄4 of all 

the oil that is sucked out of this earth. 

We are overly dependent on foreign sources of oil, especially 

given the national security implications of that dependency, and 

yet I think we’re baby stepping on these issues. We need much 

more aggressive approaches to reduce that dependency, much more 

aggressive approaches on renewables. 

Let me give you one example. In 1916, we put in place in this 

country tax incentives, robust permanent tax incentives for the exploration and drilling of oil. 1916, permanent. What have we done 

for production tax credit for renewables? Well, we put something 

in place in 1992, short-term. We’ve let it expire three times. We’ve 

extended it five times. We’re baby stepping without major commitments and without a decision about where we want to head and 

how we want to get there. 

When we passed the energy bill of 2005, I was proud of it. It 

moves us down the road, but we need to be much bolder and much, 

much more aggressive, and I think what we will hear today is 

about the national security implications of us not doing the right 

thing and not being bold enough. 

So this is a good start, Mr. Chairman. Thank you for allowing 

me to say a few words and I hope this Congress will give us an 

opportunity to really be bold and be aggressive on these issues. 

The CHAIRMAN. Thank you very much. 

6

Are there other members that wanted to make an opening statement or would you rather go to the witnesses? Anyone else? Senator Salazar. 

STATEMENT OF HON. KEN SALAZAR, U.S. SENATOR

FROM COLORADO 

Senator SALAZAR. Senator Bingaman, Chairman, and to Senator 

Domenici as well, I just wanted to say that I very much look forward to the work of this committee in continuing the bipartisan 

tradition that we worked on for the last 2 years, where we delivered on the 2005 Energy Policy Act and I look forward to working 

with our new colleagues, Senators Tester, Sanders, Lincoln, Corker 

and Sessions. 

I think that the energy issue, at the end of the day, Mr. Chairman, is one of the very most important issues, perhaps one of the 

top two issues that face our world today, and I think that this committee has the jurisdiction to help us move forward with the kind 

of vision and program that Senator Dorgan was talking about. And 

I look forward to working with my colleagues in achieving that vision. 

The CHAIRMAN. All right. Thank you very, very much. 

Let me go ahead with our first witness, Dr. Fatih Birol, who is 

the chief economist and the head of the Economic Analysis Division 

of the IEA, based in Paris. Thank you very much for being here. 

Why don’t you go right ahead. 

STATEMENT OF DR. FATIH BIROL, CHIEF ECONOMIST, HEAD 

OF THE ECONOMIC ANALYSIS DIVISION, INTERNATIONAL 

ENERGY AGENCY, PARIS, FRANCE 

Dr. BIROL. Thank you very much, Mr. Chairman. Good morning, 

ladies and gentlemen. First of all, let me thank you for the kind 

invitation. 

Looking at the next few decades, we think the world is facing 

twin energy-related threats. One is the increasing risk for energy 

security and the second one is the energy-related environmental 

concerns. 

For the sake of this meeting, I will focus on the energy security, 

but I should mention that energy and environmental policies are 

very much linked to each other. When I’m talking about energy security, we think there are two issues here. Not only oil but natural 

gas is also an important issue in terms of energy security and plays 

an important role in the geopolitics of energy as well. But again, 

for the sake of this meeting, I am going to focus on oil. 

We think the oil markets are going through profound changes, 

which would have a set of implications for our economic, for our domestic policies, as well as for our energy security. 

I would like to bring to your attention four aspects of this oil 

market. The first one is the changes in the demand side; second, 

in the supply side; the third one, what are the policy implications 

of these changes; and fourth, what can be done in order to address 

those policy implications. 

On the demand side, first of all, I think the general focus is on 

the supplier issues, but on the demand side, there is a major 

change happening. 

7

First of all, the bulk of the demand growth is coming from the 

developing countries. China and India together are responsible for 

about 50 percent of the oil demand growth in the last few years, 

and looking at the future, we expect China and India will be responsible for more than 2⁄3 of the oil demand growth. 

Why? Very simple. In China today, ladies and gentlemen, 13 persons out of 1,000 persons own a car compared with the United 

States, where 780 persons out of 1,000 own a car. With the increasing income levels in China, one of the first things they do is to buy 

a car, which in turn, fuels the oil demand growth. 

So the oil demand growth, mainly coming from the developing 

countries and—and both in developing countries as well as in the 

OECD countries, will be consumed by the transportation sector—

by cars, trucks and jets. And this is a strategic edge to recognize 

that the bulk of the resources are in OPEC. 

Why is it important to note that the bulk of oil will come from 

the transportation sector? Because in the transportation sector, we 

do not have readily available alternatives to oil products. You cannot put coal into the tank of your car. And the situation is very different, therefore, from the 1970’s and 1980’s, where we were using 

oil for many other purposes, for example, to produce electricity. 

But then we hit the price shocks in the 1970’s and 1980’s. We 

were able to switch from—in terms of electricity, from oil to nuclear or renewables or gas or other things. But in the case of transportation, there is a concentration, and from the consumers’ point 

of view, our room of maneuver is very, very limited. Therefore, I 

do recognize that this is the Achilles’ heel transportation sector of 

our current economic system, the lack of concentration on the demand side. 

On the supply side, we see concentration as well, the number of 

producers and who they are. We do recognize, in the energy article 

of the IEA, that in the next 10 years, none of—the production will 

come to a peak and afterwards will decline. The difference between 

the global oil demand worldwide and the decline in—production 

will need to be made by a very few number of countries where you 

have the reserves. 

Who are those countries? Saudi Arabia, Iran, Iraq—these are 

three countries which have a lot of potential which could bring the 

oil to the markets. They have a lot of reserves and it is very cheap 

to bring that oil to the markets in those countries, and potentially, 

they are the three countries which can bring oil to the markets. 

However, there are very important issues related to this trend. 

First of all, the number of countries are diminishing. Whoever 

these countries are, it is always a bit useful to consumers if there 

is a concentration on the surplus side, that a number of countries 

are diminishing the suppliers, and they work together in certain 

decisionmaking processes. Second, most of those countries—all of 

them—come from a geopolitically unstable region. This is another 

issue that we should look at very carefully. And the third one is 

that the enlistment framework in those countries is completely different than we used to see in the past. In the past, we have seen 

that when the prices went up in the 1970’s and 1980’s, we received 

a lot of volumes, oil coming from the North Sea and the Gulf of 

Mexico, because money went there. The free money went there and 

8

as a result of that, production increased and oil came to the markets. 

But in this case, in Saudi Arabia, for example, the Saudis will 

decide how much oil production will grow and the oil purchase may 

not be the only determinant in their decision how the production 

capacity will grow. 

In the case of Iran, the situation is also similar. Iran desperately 

needs money in order to invest to increase the production capacity, 

but Iran does not have—unlike Saudi Arabia—domestic capital. It 

needs to get money from our side, but the geopolitical context in 

Iran will make the life very difficult for Iran to increase the production capacity. 

So these are the uncertainties, for the consumers: a number of 

supplies are diminishing that are coming geopolitical, the unstable 

region, and the investment market is a very new one. There is not 

free access to capital to those countries. 

What are the implications? I will just briefly mention the implications for this concentration on the demand side, on the transportation sector, and concentration on the supplier side, a very few 

number of countries. First of all, in terms—relative to the process, 

we should be used to—they should be used to seeing that the process will be volatile and maybe more and more determined by the 

producers. The producers say, we have a higher rate in the future 

by looking at this picture. 

The risk for the supplier destruction will increase because of the 

very little number of suppliers, and in addition to that, the leverage of the producers is set to increase with the increase in share. 

I wanted to talk a bit on what to do, Mr. Chairman, but I see 

that I am out of the time. If you allow 2 more minutes, I would 

like to complete—

The CHAIRMAN. Yes, why don’t you go ahead and give us the 

short version of what we need to know. That would be great. 

Dr. BIROL. OK. So I would like to suggest three areas in terms 

of domestically and internationally. The first one is boosting the domestic production, oil production in the country. Of course, looking 

at the sensitivities here and there, increasing the efficiency, especially in the transportation sector, which I recognize as the Achilles’ heel of the system, and the alternative fuels, in terms of the 

transportation sector, such as biofuels, will be very important. 

Internationally, I imagine that the bulk of the oil is in a very few 

number of countries, but globally, we are looking at transparence 

of the reserves data. We are not sure how the reserves data is put 

together, how much reserve is left in which country and what are 

the terms there. I think there is a need to put some light, shed 

some light on the reserves transparency, and finally, perhaps, it 

may not be a bad idea if one would put some efforts in order to 

gain some access to the areas where it is legally bound to foreign 

capital, such as some key Middle East countries, perhaps within 

the context of WTO. So these are some areas that I wanted to highlight. Thank you. 

[The prepared statement of Dr. Birol follows:]

9

1The World Energy Outlook series is the leading source for medium-to long-term energy market analysis and has achieved widespread international recognition. It is the annual flagship 

publication of the International Energy Agency. The latest edition was released on 7 November 

2006. 

PREPARED STATEMENT OF DR FATIH BIROL, CHIEF ECONOMIST, INTERNATIONAL ENERGY AGENCY

Mr Chairman, Members of the Committee, it is a privilege to address this Committee on the critical issue of the oil market outlook and its policy implications. The 

energy future which we are creating is unsustainable. If we continue as before, the 

energy supply to meet the needs of the world economy over the coming years will 

remain too vulnerable to failure arising from sudden supply interruption and will 

cause serious environmental problems. The oil market is a global one so it is important to provide a global context. To that end, this testimony draws upon the World 

Energy Outlook 2006,1 published by the International Energy Agency. 

This testimony will examine in turn the outlooks for Demand, Supply and Investment, followed by a look at the potential impact of Alternative Policies and Measures. I would first like to highlight the following key points:

1. The world is facing twin energy-related threats: that of not having adequate and secure supplies of energy at affordable prices and that of environmental harm caused by its use. The World Energy Outlook 2006 confirms 

that fossil-fuel demand and trade flows, and greenhouse-gas emissions 

would follow their current unsustainable paths through to 2030 in the absence of new government action—the underlying premise of the Reference 

Scenario. It also demonstrates, in an Alternative Policy Scenario, that a 

package of policies and measures that countries around the world are considering would, if implemented, significantly reduce the rate of increase in 

demand and emissions. Importantly, the economic cost of these policies 

would be more than outweighed by the economic benefits that would come 

from using and producing energy more efficiently. 

2. Oil demand grows by 1.3% per year through 2030 in the Reference Scenario, reaching 116 million barrels per day (mb/d) in 2030—up from 84 mb/

d in 2005. The pace of demand growth slackens progressively over the period. More than 70% of the increase in oil demand comes from developing 

countries (notably China and India), which see average annual demand 

growth of 2.5%. 

3. The transport sector absorbs most of the increase in global oil demand.

In the OECD, oil use in other sectors barely increases at all. In developing 

countries too, transport contributes the bulk of the increase in oil demand. 

The lack of cost-effective substitutes for oil-based automotive fuels will 

make oil demand more rigid. 

4. Oil supply is increasingly dominated by a small number of major producers, most of them in the Middle East, where oil resources are concentrated. Non-OPEC production of conventional crude oil is set to peak 

within a decade. OPEC’s share of global supply grows significantly, from 

40% now to 48% by 2030. Iran and Iraq have significant potential to expand 

their production, but Saudi Arabia remains by far the largest producer. The 

need for more transparent and comprehensive data on oil (and gas) reserves 

in all regions is a pressing concern. 5. The oil industry needs to invest a total of $4.3 trillion (in year-2005 dollars) over the period 2005-2030, or $164 billion per year. The upstream sector accounts for the bulk of this. Almost three-quarters of upstream investments will be required to maintain existing capacity. 

6. A critical uncertainty is whether the substantial investments needed in 

the oil production sector in key Middle East countries will, in fact, be forthcoming. These governments could choose deliberately to develop production 

capacity more slowly than we project in our Reference Scenario. Or external 

factors such as capital shortages could prevent producers from investing as 

much in expanding capacity as they would like. As demonstrated by a Deferred Investment Case, slower growth in OPEC oil production drives up 

the international oil price and, with it, the price of gas. 

7. The new policies analysed in the Alternative Policy Scenario halt the 

rise in OECD oil imports by 2015. OECD countries and developing Asia become more dependent on oil imports in 2030 compared to today, but markedly less so than in the Reference Scenario. Global oil demand reaches 103 

mb/d in 2030 in the Alternative Policy Scenario—13 mb/d lower than in the 

Reference Scenario. Additional policy measures to promote improved fuel efVerDate 0ct 09 2002 12:35 Mar 21, 2007 Jkt 110006 PO 33869 Frm 00013 Fmt 6633 Sfmt 6621 P:\DOCS\33869.TXT SENERGY2 PsN: PAULM
10

ficiency of cars and trucks, as well as a greater market share for biofuels, 

therefore have the effect of improving energy security. 

8. Our analysis demonstrates the urgency with which policy action is required. Each year of delay in implementing the policies analysed would 

have a disproportionately larger effect on energy security. Yet there are formidable hurdles to be overcome. It will take considerable political will to 

push through the policies and measures in the Alternative Policy Scenario, 

many of which are likely to encounter resistance from some industry and 

consumer groups. Politicians need to spell out clearly the benefits to the 

economy and to society as a whole of the proposed measures. In most countries, the public is becoming familiar with the energy-security and environmental advantages of action to encourage more efficient energy use and to 

boost the share of renewables. 

DEMAND

Primary oil demand is expected to continue to grow steadily over the projection 

period in the Reference Scenario, at an average annual rate of 1.3%. It reaches 99 

mb/d in 2015 and 116 mb/d in 2030, up from 84 mb/d in 2005 (Table 1). The pace 

of demand growth nonetheless slackens progressively, broadly in line with GDP, 

averaging 1.7% in 2005-2015—only just below the average of the last ten years—

and 1.1% in 2015-2030. Preliminary data for 2005 indicate that global oil demand 

rose by 1.3%—well down on the exceptionally high rate of 4% in 2004.

Table 1.—WORLD PRIMARY OIL DEMAND1

[Million barrels per day] 

1980 2004 2005 2010 2015 2030 2005-

20302

OECD .................. 41.9 47.5 47.7 49.8 52.4 55.1 0.6%

North America ... 21.0 24.8 24.9 26.3 28.2 30.8 0.9%

United 

States ....... 17.4 20.5 20.6 21.6 23.1 25.0 0.8%

Canada ........ 2.1 2.3 2.3 2.5 2.6 2.8 0.8%

Mexico ......... 1.4 2.0 2.1 2.2 2.4 3.1 1.6%

Europe ................ 14.7 14.5 14.4 14.9 15.4 15.4 0.2%

Pacific ................. 6.2 8.2 8.3 8.6 8.8 8.9 0.3%

Transition economies ................. 8.9 4.3 4.3 4.7 5.0 5.7 1.1%

Russia ................. n.a. 2.5 2.5 2.7 2.9 3.2 1.0%

Developing countries ................. 11.4 27.2 28.0 33.0 37.9 51.3 2.5%

Developing Asia 4.4 14.2 14.6 17.7 20.6 29.7 2.9%

China ........... 1.9 6.5 6.6 8.4 10.0 15.3 3.4%

India ............ 0.7 2.6 2.6 3.2 3.7 5.4 3.0%

Indonesia ..... 0.4 1.3 1.3 1.4 1.5 2.3 2.4%

Middle East ........ 2.0 5.5 5.8 7.1 8.1 9.7 2.0%

Africa .................. 1.4 2.6 2.7 3.1 3.5 4.9 2.4%

North Africa 0.5 1.3 1.4 1.6 1.8 2.5 2.4%

Latin America .... 3.5 4.8 4.9 5.1 5.6 7.0 1.5%

Brazil ........... 1.4 2.1 2.1 2.3 2.7 3.5 2.0%

Int. marine 

bunkers ........... 2.2 3.6 3.6 3.8 3.9 4.3 0.6%

World .................. 64.4 82.5 83.6 91.3 99.3 116.3 1.3%

European Union n.a. 13.5 13.5 13.9 14.3 14.1 0.2%

1 Includes stock changes 

2 Average annual growth rate 

* n.a.: not available 

11

* All figures have been retained in committee files. 

2Oil that has been discovered and is expected to be economically producible is called a proven 

reserve. Oil that is thought to exist, and is expected to become economically recoverable, is 

called a resource. Total resources include existing reserves, ‘‘reserves growth’’—increases in the 

estimated size of reserves as fields are developed and produced—and undiscovered resources. 

Comparison of reserves and resource assessments is complicated by differences in estimation 

techniques and assumptions among countries and companies. In particular, assumptions about 

prices and technology have a major impact on how much oil is deemed to be economically recoverable. 3Oil and Gas Journal (19 December 2005). Includes proven oil-sands reserves in Canada. 

Most of the increase in oil demand comes from developing countries, where economic growth—the main driver of oil demand—is highest (Figure 1*). China and the 

rest of developing Asia account for 15 mb/d, or 46%, of the 33-mb/d increase in oil 

use between 2005 and 2030, in line with rapid economic growth. At 3.4% per year 

on average, China’s rate of oil-demand growth is nonetheless below the 5.1% rate 

of 1980-2004. The Middle East, which experiences the fastest rate of demand 

growth, accounts for a further 3.8 mb/d. Higher oil revenues than in the last two 

decades boost economic activity, incomes and, together with subsidies, demand for 

oil. Demand in OECD countries, especially in Europe and the Pacific region, rises 

much more slowly. Nonetheless, the absolute increase in North America—5.9 mb/

d over the Outlook period—is the second-largest of any region, because it is already 

by far the largest consumer. The economies of non-OECD countries will remain considerably more oil-intensive, measured by the amount of oil used per unit of gross 

domestic product (at market exchange rates), than those of OECD countries. 

The transport sector absorbs 63% of the increase in global oil demand in 2004-

2030. In the OECD, oil use in other sectors hardly increases at all, declining in 

power generation and in the residential and services sectors, and growing in industry. Most of the increase in energy demand in non-transport sectors is met by gas, 

coal, renewables and electricity. In non-OECD countries, too, transport is the biggest contributor to oil-demand growth; but other sectors—notably industry—also see 

significant growth. 

SUPPLY

Resources and Reserves 

According to the Oil and Gas Journal, the world’s proven reserves2 of oil (crude 

oil, natural gas liquids, condensates and non-conventional oil) amounted to 1293 billion barrels3 at the end of 2005—an increase of 14.8 billion barrels, or 1.2%, over 

the previous year. Reserves are concentrated in the Middle East and North Africa 

(MENA), together accounting for 62% of the world total. Saudi Arabia, with the 

largest reserves of any country, holds a fifth. Of the twenty countries with the largest reserves, seven are in the MENA region (Figure 2). Canada has the least developed reserves, sufficient to sustain current production for more than 200 years. The 

world’s proven reserves, including non-conventional oil, could sustain current production levels for 42 years. 

Proven reserves have grown steadily in recent years in volume terms, but have 

remained broadly flat as a percentage of production. Since 1986, the reserves-to-production, or RIP, ratio has fluctuated within a range of 39 to 43 years. A growing 

share of the additions to reserves has been coming from revisions to estimates of 

the reserves in fields already in production or undergoing appraisal, rather than 

from new discoveries. Some of these revisions have resulted from higher oil-price assumptions, allowing some oil that is known to exist to be reclassified as economically exploitable and, therefore, moved into the proven category. The application of 

new technology has also improved reservoir management and boosted recovery 

rates. The amount of oil discovered in new oilfields has fallen sharply over the past 

four decades, because of reduced exploration activity in regions with the largest reserves and, until recently, a fall in the average size of fields discovered. These factors outweighed an increase in exploration success rates. 

Over the past ten years, drilling has been concentrated in North America, a mature producing region with limited potential for new discoveries. Less than 2% of 

new wildcat wells drilled were in the Middle East, even though the region is 

thought to hold over 30% of the world’s undiscovered crude oil and condensates and 

is where the average size of new fields discovered in the ten years to 2005 have been 

higher than anywhere else (Figure 3). 

There has been a recent increase in the average size of new discoveries for each 

new wildcat well drilled, bucking the trend of much of the period 1965-1998. The 

size of newly discovered fields has continued to decline, largely because exploration 

and appraisal activity has been focused on existing basins. However, the application 

12

of new technology, such as 3D seismic, has increased the discovery success rate per 

wildcat well, particularly since 1998—boosted by rising global oil demand and a resulting increase in exploration and appraisal activity—and, to a lesser extent, since 

1991, with the advent of deep-water exploration (Figure 4). Nonetheless, the average 

size of discoveries per wildcat well—at around 10 million barrels—remains barely 

half that of the period 1965-1979. The reduction almost to zero of Middle East exploration, where discoveries had been largest, was the main reason for the lower average size of discoveries since the 1980s. 

Exploration and appraisal drilling is expected to increase to offset rising decline 

rates at existing fields and the consequent need to develop new reservoirs—particularly in MENA, where some of the greatest potential for finding new fields exists. 

Proven reserves are already larger than the cumulative production needed to meet 

rising demand until at least 2030. But more oil will need to be added to the proven 

category if production is not to peak before then. According to the US Geological 

Survey, undiscovered conventional resources that are expected to be economically 

recoverable could amount to 880 billion barrels (including natural gas liquids, or 

NGLs) in its mean case (USGS, 2000). Together with reserves growth and proven 

reserves, remaining ultimately recoverable resources are put at just under 2300 billion barrels. That is more then twice the volume of oil—1080 billion barrels—that 

has so far been produced. Total non-conventional resources, including oil sands in 

Canada, extra-heavy oil in Venezuela and shale oil in the United States and several 

other countries, are thought to amount to at least 1 trillion barrels (WEC, 2004).

Table 2.—WORLD OIL SUPPLY 

[Million barrels per day] 

1980 2000 2005 2010 2015 2030 2005-

20301

Non-OPEC .......... 35.2 43.9 48.1 53.4 55.0 57.6 0.7%

Crude oil ............. 32.2 38.1 41.6 45.5 45.4 43.4 0.2%

OECD .................. 14.6 17.2 15.2 13.8 12.4 9.7 ¥1.8%

North America ............. 11.8 10.2 9.8 9.4 9.0 7.8 ¥0.9%

United 

States 8.7 5. 8 5.1 5.3 5.0 4.0 ¥1.0%

Canada 1.2 1.4 1.4 1.1 0.9 0.8 ¥2.2%

Mexico .. 1.9 3.0 3.3 3.1 3.1 3.0 ¥0.5%

Pacific .......... 0.5 0.8 0.5 0.7 0.5 0.4 ¥1.2%

Europe ......... 2.4 6.2 4.8 3.8 2.9 1.5 ¥4.5%

Transition economies ................. 11.5 7.7 11.4 13.7 14.5 16.4 1.5%

Russia .......... 10.7 6.3 9.2 10.5 10.6 11.1 0.7%

Other ........... 0.8 1.4 2.2 3.3 3.9 5.3 3.6

Developing countries ................. 6.0 13.2 15.1 17.9 18.5 17.4 0.6%

Developing 

Asia .......... 2.9 5.3 5.9 6.3 6.1 5.0 ¥0.6%

China .... 2.1 3.2 3.6 3.8 3.7 2.8 ¥1.0%

India ..... 0.2 0.6 0.7 0.8 0.8 0.6 ¥0.2%

Other .... 0.6 1.4 1.6 1.7 1.6 1.6 0.0%

Latin America ............. 1.5 3.4 3.8 4.8 5.3 5.9 1.8%

Brazil .... 0.2 1.2 1.6 2.6 3.0 3.5 3.1%

Other .... 1.3 2.2 2.2 2.2 2.3 2.5 0.5%

Africa ........... 1.2 2.6 3.5 5.2 5.5 4.9 1.4%

North 

Africa 0.7 0.8 0.6 0.6 0.6 0.7 0.4%

Other 

Africa 0.5 1.8 2.9 4.6 4.9 4.3 1.6%

Middle East 0.5 2.0 1.9 1.7 1.6 1.4 ¥1.1%

NGLs ................... 2.6 4.9 5.1 5.5 5.8 6.8 1.2%

13

Table 2.—WORLD OIL SUPPLY—Continued

[Million barrels per day] 

1980 2000 2005 2010 2015 2030 2005-

20301

OECD .................. 2.3 3.7 3.7 4.0 4.1 4.4 0.7%

Transition economies ................. 0.2 0.5 0.5 0.4 0.5 0.6 1.2%

Developing countries ................. 0.1 0.7 0.9 1.1 1.3 1.8 2.7%

Non-conventional 

oil ..................... 0.4 0.9 1.4 2.5 3.7 7.4 7.0%

Canada ............... 0.2 0.6 1.0 2.0 3.0 4.8 6.4%

Others ................. 0.2 0.3 0.4 0.5 0.7 2.7 8.2%

OPEC .................. 28.0 30.9 33.6 35.9 42.0 56.3 2.1%

Crude oil ............. 26.2 27.8 29.1 30.2 34.9 45.7 1.8%

Middle East ........ 17.9 19.5 20.7 22.0 25.7 34.5 2.1%

Saudi Arabia 9.4 8.0 9.1 9.7 11.3 14.6 1.9%

Iran .............. 1.5 3.7 3.9 3.9 4.4 5.2 1.1%

Iraq .............. 2.6 2.6 1.8 2.2 2.8 6.0 4.9%

Kuwait ......... 1.3 1.8 2.1 2.2 1.8 4.0 2.5%

United Arab 

Emirates .. 1.8 2.2 2.5 2.7 3.1 3.8 1.8%

Qatar ........... 0.5 0.7 0.8 0.7 0.7 0.5 ¥1.9%

Neutral 

zone2 ........ 0.8 0.6 0.6 0.5 0.5 0.5 ¥0.6%

Non-Middle East 8.3 8.3 8.4 8.2 9.1. 11.2 1.2%

Algeria ......... 0.9 0.8 1.3 1.1 1.1 0.7 ¥2.7%

Libya ............ 1.8 1.4 1.6 1.7 1.9 2.7 2.0%

Nigeria ......... 2.1 2. 0 2.4 2.5 2.7 3.2 1.2%

Indonesia ..... 1.5 1.2 0.9 0.8 0.8 0.8 ¥0.8%

Venezuela .... 2.0 2.9 2.1 2.2 2.8 3.9 2.5%

NGLs ................... 1.8 2.9 4.3 5.4 6.3 9.0 3.0%

Saudi Arabia ...... 0.7 1.0 1.5 1.9 2.0 2.7 2.5%

Iran ..................... 0.0 0.1 0.3 0.4 0.6 1.1 4.8%

UAE .................... 0.4 0.4 0.5 0.7 0.9 1.3 3.6%

Algeria ................ 0.1 0.6 0.8 0.9 0.9 0.7 ¥0.3%

Others ................. 0.6 0.8 1.2 1.5 1.9 3.3 4.1%

Non-conventional 0.0 0.2 0.2 0.3 0.8 1.5 8.8%

Venezuela ........... 0.0 0.1 0.1 0.1 0.2 0.4 5.8%

Others ................. 0.0 0.1 0.1 0.2 0.6 1.2 10.5%

TOTAL WORLD 64.9 76.5 83.6 91.3 99.3 116.3 1.3%

Crude oil ............. 58.3 66.0 70.8 75.7 80.3 89.1 0.9%

NGLs ................... 4.4 7.8 9.3 10.8 12.2 15.8 2.1%

Non-conventional 

oil ..................... 0.4 1.1 1.6 2.8 4.5 9.0 7.2%

Processing gains 1.7 1.7 1.9 2.0 2.3 2.5 1.2%

1 Average annual growth rate 

2 Neutral Zone production is shared by Saudi Arabia and Kuwait. 

Production 

In the Reference Scenario, conventional oil production continues to be dominated 

by a small number of major producers in those countries where oil resources are 

concentrated. The share of production controlled by members of the Organization of 

14

4OPEC is assumed to be willing to meet the portion of global oil demand not met by nonOPEC producers at the prices assumed (see Chapter 1). A special analysis of the effect of lower 

OPEC investment in upstream capacity is presented at the end of this chapter. 5These rates are based on information obtained in consultations with international and national oil companies, oilfield service companies and consultants. Observed decline rates are generally much lower, as they reflect investment to maintain or boost output at existing fields. 6 However, upstream projects under development may result in a marginal reduction in the 

sulphur content and a small increase in the API gravity of installed crude oil production capacity in the next five years, according to the IEA’s Oil Market Report (12 September 2006). 

the Petroleum Exporting Countries, particularly in the Middle East, grows significantly.4 Their collective output of crude oil, NGLs and non-conventional oil grows 

from 34 mb/d in 2005 to 42 mb/d in 2015 and 56 mb/d in 2030, boosting their share 

of world oil supply from 40% now to 48% by the end of the Outlook period. NonOPEC production increases much more slowly, from its current level of 48 mb/d to 

55 mb/d in 2015 and 58 mb/d in 2030 (Table 2). Conventional oil accounts for the 

bulk of the increase in oil supply between 2005 and 2030, but non-conventional resources play an increasingly important role (Figure 5). The projections to 2010 take 

account of current, sanctioned and planned upstream projects. 

Production in OPEC countries, especially in the Middle East, is expected to increase more rapidly than in other regions, because their resources are much larger 

and their production costs are generally lower. Saudi Arabia remains by far the 

largest producer of crude oil and NGLs. Its total output of crude and NGLs grows 

from 10.9 mb/d in 2005, to 13.7 mb/d in 2015 and to 17.6 mb/d in 2030 (including 

Saudi Arabia’s half-share of Neutral Zone production). Most of the rest of the increase in OPEC production comes from Iraq, Iran, Kuwait, the United Arab Emirates, Libya and Venezuela. Other OPEC countries struggle to lift output, with production dropping in Qatar, Algeria and Indonesia. These projections are broadly 

commensurate with proven reserves. OPEC’s price and production policies and national policies on developing reserves are extremely uncertain. 

Outside OPEC, conventional crude oil production in aggregate is projected to peak 

by the middle of the next decade and decline thereafter, though this is partly offset 

by continued growth in output of NGLs (Figure 6). Production in several mature regions, including North America and the North Sea, which has been in steady decline 

in recent years, stabilises or rebounds in the near term. This reflects several factors, 

including the restoration of production capacity lost through hurricanes and other 

technical difficulties, and the impact on increased drilling to boost production in response to recent oil-price increases. But this trend is expected to be short-lived, as 

relatively high decline rates and rising costs soon drive output back down again. In 

the longer term, only Russia, Central Asia, Latin America and sub-Saharan Africa—

including Angola and Congo—achieve any significant increases in conventional oil 

production. 

A lack of reliable information on production decline rates makes it difficult to 

project new gross capacity needs. A high natural decline rate—the speed at which 

output would decline in the absence of any additional investment to sustain production—increases the need to deploy technology at existing fields to raise recovery 

rates, to develop new reserves and to make new discoveries. Our analysis of capacity 

needs is based on estimates of year-on-year natural decline rates averaged over all 

currently producing fields in a given country or region. The rates assumed in our 

analysis vary over time and by location. They range from 2% per year to 11% per 

year, averaging 8% for the world over the projection period.5 Rates are generally 

lowest in regions with the best production prospects and the highest RIP ratios. For 

OPEC, they range from 2% to 7%. They are highest in mature OECD producing 

areas, where they average 11%. 

The average quality of crude oil produced around the. world is expected to become 

heavier (lower API gravity) and more sour (higher sulphur content) over the Outlook 

period.6 This is driven by several factors, including the continuing decline in production from existing sweet (low-sulphur) crude oilfields, increased output of heavier 

crude oils in Russia, the Middle East and North Africa (Figure 7), and the projected 

growth of heavy non-conventional oil output. This trend, together with increasing 

demand for lighter oil products and increasing fuel-quality standards, is expected 

to increase the need for investment in upgrading facilities in refineries. 

INVESTMENT

Cumulative global investment in the oil sector amounts to about $4.3 trillion (in 

year-2005 dollars) over the period 2005-2030, or $164 billion per year, in the Reference Scenario. Investment relative to increases in capacity is highest in OECD 

countries, where unit costs and production decline rates are high compared with 

15

most other regions. Projected oil (and gas) investment needs in this Outlook are 

higher than in previous editions, largely because of the recent unexpected surge in 

the cost of materials, equipment and skilled personnel. Unit costs are assumed to 

fall back somewhat after 2010, as oil-services capacity increases and exploration, development and production technology improves. Upstream investment accounts for 

73% of total oil-industry investment. 

The required rate of capital spending over the projection period is substantially 

higher than actual spending in the first half of the current decade, which averaged 

little more than $100 billion per year. Investment needs increase in each decade of 

the projection period as existing infrastructure becomes obsolete and demand increases. Our analysis of the spending plans of the world’s leading oil and gas companies through to 2010 shows that they expect their spending to be much higher in 

the second half of the current decade than the first. 

Upstream Investment 

Upstream oil spending—more than 90% of which is for field development and the rest for exploration—averages $125 billion per year (Figure 8). Three-quarters of 

this investment is needed to maintain the current level of capacity in the face of 

natural declines in capacity at producing fields as reserves are depleted. This investment goes to drilling new wells, to working over existing wells at currently producing fields or to developing new fields. In fact, investment needs are far more sensitive to changes in natural decline rates than to the rate of growth of demand for 

oil. 

Downstream Investment 

Cumulative investment in oil refining amounts to around $770 billion ($30 billion 

per year) in the Reference Scenario. These projections include the investment needed to meet demand growth and additional spending on conversion capacity so that 

existing refineries are able to meet the changing mix of oil-product demand. Tighter 

fuel-quality standards aimed at mitigating the environmental impact of fuel use are 

also obliging the refining industry to invest in new quality-enhancement capacity. 

The required level of refining capacity, allowing for normal maintenance shutdowns, 

rises from 85 mb/d in 2004 to 117 mb/d in 2030. The largest investments occur in 

the Middle East and developing Asia (Figure 9). Most new refineries will be built 

outside the OECD (see below). 

Although investment in oil tankers and inter-regional pipelines makes up a small 

proportion of total investment needs to 2030, the sum required rises rapidly 

throughout the projection period, because of the need to replace a large share of the 

world’s aging tanker fleet. Total cumulative capital spending amounts to around 

$260 billion. Investment in gas-to-liquids plants in 2005-2030 is expected to amount 

to $100 billion. Most of this investment occurs in the second half of the projection 

period. Investment in commercial coal-to-liquids plants, mostly in China, is projected to total over $30 billion. 

Investment Uncertainties and Challenges 

Over the period to 2010, the total amount of investment that will be made in oil 

and gas infrastructure is known with a reasonable degree of certainty. Investment 

plans may change in response to sudden changes in market conditions and some 

projects may be cancelled, delayed or accelerated for various reasons. But the actual 

gross additions to supply capacity at various points along the oil-supply chain are 

unlikely to depart much from those projected in this Outlook. However, beyond 

2010, there is considerable uncertainty about the prospects for investment, costs and 

the rate of capacity additions. The opportunities and incentives for private and publicly-owned companies to invest are particularly uncertain. Environmental policies 

could increasingly affect opportunities for building upstream and downstream facilities and their cost, especially in OECD countries. In the longer term, technological 

developments could open up new opportunities for investment and help lower costs. 

The availability of capital is unlikely to be a barrier to upstream investment in 

most cases. But opportunities and incentives to invest may be. Most privately-owned 

international oil and gas companies have large cash reserves and are able to borrow 

at good rates from capital markets when necessary for new projects. But those companies may not be able to invest as much as they would like because of restrictions 

on their access to oil and gas reserves in many resource-rich countries. Policies on 

foreign direct investment will be an important factor in determining how much upstream investment occurs and where. 

A large proportion of the world’s reserves of oil are found in countries where there 

are restrictions on foreign investment (Figure 10). Three countries—Kuwait, Mexico 

and Saudi Arabia—remain totally closed to upstream oil investment by foreign companies. Other countries are reasserting state control over the oil industry. Bolivia 

16

7 In mid-2006, Congress was considering a bill to open up 8% of ANWR. 

recently renationalised all its upstream assets. Venezuela effectively renationalised 

565 kb/d of upstream assets in April 2006, when the state-owned oil company, 

PdVSA took over 115 kb/d of private production and took a majority stake in 25 

marginal fields producing 450 kb/d after the government unilaterally switched service agreements from private to mixed public-private companies. The Russian government has tightened its strategic grip on oil and gas production and exports, effectively ruling out foreign ownership of large fields and keeping some companies, including Transneft, Gazprom and Rosneft, in majority state ownership. Several other 

countries, including Iran, Algeria and Qatar, limit investment to buy-back or production-sharing deals, whereby control over the reserves remains with the national 

oil company. 

Even where it is in principle possible for international companies to invest, the 

licensing and fiscal terms or the general business climate may discourage investment. Most resource-rich countries have increased their tax take in the last few 

years as prices have risen. The stability of the upstream regime is an important factor in oil companies’ evaluation of investment opportunities. War or civil conflict 

may also deter companies from investing. No major oil company has yet decided to 

invest in Iraq. Geopolitical tensions in other parts of the Middle East and in other 

regions may discourage or prevent inward investment in upstream developments 

and related LNG and export-pipeline projects. 

National oil companies, especially in OPEC countries, have generally increased 

their capital spending rapidly in recent years in response to dwindling spare capacity and the increased financial incentive from higher international oil prices. But 

there is no guarantee that future investment in those countries will be large enough 

to boost capacity sufficiently to meet the projected call on their oil in the longer 

term. OPEC producers generally are concerned that overinvestment could lead to a 

sharp increase in spare capacity and excessive downward pressure on prices. Sharp 

increases in development costs are adding to the arguments for delaying new upstream projects. For example, two planned GTL plants in Qatar were put on hold 

by the government in 2005 in response to soaring costs and concerns about the longterm sustainability of production from the North field. An over-cautious approach 

to investment would result in shortfalls in capacity expansion. 

Environmental policies and regulations will increasingly affect opportunities for 

investment in, and the cost of, new oil projects. Many countries have placed restrictions on where drilling can take place because of concerns about the harmful effects 

on the environment. In the United States, for example, drilling has not been allowed 

on large swathes of US federal onshore lands—such as the Arctic National Wildlife 

Refuge (ANWR)—and offshore coastal zones for many years.7 Even where drilling 

is allowed, environmental regulations and policies impose restrictions, driving up 

capital costs and causing delays. The likelihood of further changes in environmental 

regulations is a major source of uncertainty for investment. 

Local public resistance to the siting of large-scale, obtrusive facilities, such as oil 

refineries and GTL plants, is a major barrier to investment in many countries, especially in the OECD. The not-in-my-backyard (NIMBY) syndrome makes future investments uncertain. It is all but impossible to obtain planning approval for a new 

refinery in many OECD countries, though capacity expansions at existing sites are 

still possible. The risk of future liabilities related to site remediation and plant 

emissions can also discourage investment in oil facilities. The prospect of public opposition may deter oil companies from embarking on controversial projects. Up to 

now, NIMBY issues have been less of a barrier in the developing world. 

Technological advances offer the prospect of lower finding and production costs for 

oil and gas, and opening up new opportunities for drilling. But operators often prefer to use proven, older technology on expensive projects to limit the risk of technical problems. This can slow the deployment of new technology, so that it can take 

decades for innovative technology to be widely deployed, unless the direct cost savings are clearly worth the risk. This was the case with the rotary steerable motor 

system, which has finally become the norm for drilling oil and gas wells. These systems were initially thought to be less reliable and more expensive, even though they 

could drill at double or even triple the rate of penetration of previous drilling systems. The slow take-up of technology means that there are still many regions where 

application of the most advanced technologies available could make a big impact by 

lowering costs, increasing production and improving recovery factors. For example, 

horizontal drilling, which increases access to and maximises the recovery of hydrocarbons, is rarely used in Russia. 

As well as lowering costs, technology can be used to gain access to reserves in 

ever more remote and hostile environments—such as arctic regions and deep 

17

water—and to increase production and recovery rates. New technology has enabled 

the subsurface recovery of oil from tar sands using steam-assisted gravity drainage 

and closely placed twin horizontal wells, while enhanced oil recovery has been made 

possible by injecting CO2 into oil wells and by using down-hole electrical pumps, to 

allow oil to be produced when the reservoir pressure is insufficient to force the oil 

to the surface. 

Although costs have risen sharply in recent years, much of the world’s remaining 

oil can still be produced at costs well below current oil prices. Most major international oil companies continue to use a crude oil price assumption of $25 to $35 

per barrel in determining the financial viability of new upstream investment. This 

conservative figure by comparison with current high oil prices partly reflects caution 

over the technical risks associated with large-scale projects and the uncertainty associated with long lead times and the regulatory environment. 

The current wave of upstream oil investment is characterised by a heavy focus 

on such projects, involving the development of reserves that were discovered in the 

1990s or earlier. Unless major new discoveries are made in new locations, the average size of large-scale projects and their share in total upstream investment could 

fall after the end of the current decade. That could drive up unit costs and, depending on prices and upstream-taxation policies, constrain capital spending. Capital 

spending may shift towards more technically challenging projects, including those 

in arctic regions and in ultra-deep water. The uncertainties over unit costs and lead 

times of such projects add to the uncertainty about upstream investment in the medium to long term. 

Implications of Deferred Upstream Investment 

In light of the uncertainties described above, we have developed a Deferred Investment Case to analyse how oil markets might evolve if upstream oil investment 

in OPEC countries over the projection period were to increase much more slowly 

than in the Reference Scenario. This could result from government decisions to limit 

budget allocations to national oil companies or other constraints on the industry’s 

ability or willingness to invest in upstream projects. For the purposes of this analysis, it is assumed that upstream oil investment in each OPEC country proportionate to GDP remains broadly constant over the projection period at the estimated 

level of the first half of the current decade of around 1.3%. This yields a reduction 

in cumulative OPEC upstream investment in the Deferred Investment Case vis-a`-

vis the Reference Scenario of $190 billion, or 25%, over 2005-2030. Upstream investment still grows in absolute terms. 

Lower oil investment inevitably results in lower OPEC oil production. This is partially offset by increased non-OPEC production. Higher oil prices encourage this increased investment and production in non-OPEC countries. They also cause oil demand to fall relative to the Reference Scenario. Higher prices for oil and other forms 

of energy also reduce GDP growth marginally, pushing demand down further. In 

2030, the international crude oil price, for which the average IEA import price 

serves as a proxy, is $19 higher in year-2005 dollars and $33 higher in nominal 

terms (assuming annual inflation of 2.3%) than in the Reference Scenario—an increase of about 34%. 

As a result of higher prices and lower GDP growth, the average annual rate of 

global oil-demand growth over 2005-2030 falls from 1.3% in the Reference Scenario 

to 1.1% in the Deferred Investment Case. By 2030, oil demand reaches 109 mb/d—

some 7 mb/d, or 6%, less than in the Reference Scenario (Figure 11). This reduction 

is equal to more than the current oil demand of China. Higher oil prices encourage 

consumers to switch to other fuels, use fewer energy services and reduce waste. 

They encourage faster improvements in end-use efficiency. In the transport sector, 

they also encourage faster deployment of biofuels and other alternative fuels and 

technologies, such as hybrids. The size of these effects varies among regions. It is 

highest in non-OECD countries, because the share of non-transport uses in final demand (which is relatively price-elastic) is higher there than in the OECD and because the share of taxes, which blunt the impact on demand of higher international 

oil prices, is generally lower. 

The drop in world oil demand that results from higher prices is accompanied by 

an equivalent decline in world production in the Deferred Investment Case. 

Unsurprisingly, OPEC oil production falls sharply in response to much lower investment (Figure 12). Including NGLs, OPEC output is just over 11 mb/d lower in 2030 

than in the Reference Scenario, though, at 45 mb/d, it is still nearly 12 mb/d higher 

than in 2005. OPEC’s share of world oil production remains essentially flat at about 

40% over the projection period. In the Reference Scenario, the share rises to 48% 

in 2030. 

18

8 An example for the US would be the implementation of the reform of CAFE standards proposed by the National Highway Traffic Safety Administration. 

The fall in OPEC production is largely offset by higher non-OPEC output, which 

climbs to 64 mb/d—some 4 mb/d higher than in the Reference Scenario and 14 mb/

d higher than in 2005. Higher prices stimulate faster development of conventional 

and non-conventional reserves in all non-OPEC regions, as marginal fields become 

more commercial. About 1 mb/d, or 15%, of the increase in non-OPEC output comes 

from oil-sands in Canada. As a result, the share of non-conventional oil in total 

world supply increases from 2% in 2005 to more than 9% in 2030, compared with 

less than 8% in the Reference Scenario. 

ALTERNATIVE POLICY SCENARIO

The Reference Scenario presents a sobering vision of the next two-and-a-half decades, as the major oil-consuming regions—including the United States—become 

even more reliant on imports, often from distant, unstable parts of the world along 

routes that are vulnerable to disruption. 

In July 2005, G8 leaders, meeting at Gleneagles with the leaders of several major 

developing countries and heads of international organisations, including the IEA, 

recognised that current energy trends are unsustainable and pledged themselves to 

resolute action to combat rising consumption of fossil fuels and related greenhousegas emissions. They called upon the IEA to, ‘‘advise on alternative energy scenarios 

and strategies aimed at a clean, clever, and competitive energy future’’. The Alternative Policy Scenario presented in the World Energy Outlook 2006 is a direct response to that request, which the G8 reaffirmed in July 2006 in St. Petersburg. 

The Alternative Policy Scenario analyses how far policies and measures currently 

under discussion8 can take us in dealing with the grave energy challenges now 

being faced. Information on more than 1,400 proposed policies and measures has 

been collected and analysed. Sectoral and regional effects were also analysed in detail, in order to help identify the actions that can work best, quickest and at least 

cost. 

The results of this analysis are clear: First, implementing the policies and measures that governments are currently considering would lead to significantly slower 

growth in both fossil-fuel demand and CO2 emissions. Second, new policies and 

measures would pay for themselves—the financial savings far exceed the initial 

extra investment cost for consumers. 

Demand in the Alternative Policy Scenario 

In the Alternative Policy Scenario, the implementation of more aggressive policies 

and measures significantly curbs the growth in total primary and final energy demand—a reduction of about 10% relative to the Reference Scenario. That saving is 

roughly equal to the current energy demand of China. Demand still grows, by 37% 

between 2004 and 2030, but more slowly: 1.2% annually against 1.6% in the Reference Scenario. 

The reduction in the use of fossil fuels such as oil is even more marked than the 

reduction in primary energy demand (Figure 13). It results from the introduction 

of more efficient technologies and switching to carbon-free energy sources. Nonetheless, fossil fuels still account for 77% of primary energy demand by 2030 (compared 

with 81% in the Reference Scenario). 

Global demand for oil in the Alternative Policy Scenario grows on average by 0.9% 

per year, reaching 103 mb/d in 2030—an increase of 20 mb/d on 2005 levels, but 

13 mb/d (11%) lower than in the Reference Scenario. In 2030, the share of oil in 

total primary energy demand is 32% in the Alternative Policy Scenario, a drop of 

three percentage points compared to 2004. By 2015, oil demand will be 15% higher 

than in 2004, compared to 21% in the Reference Scenario. Increased fuel efficiency 

in new vehicles, together with the faster introduction of alternative fuels and vehicles, accounts for more than half of the oil savings in the Alternative Policy Scenario. Most of the rest comes from savings in oil use in the industry and building 

sectors. 

These savings are equivalent to the current combined production of Saudi Arabia 

and Iran (Table 3). By 2015, demand reaches 95 mb/d, a reduction of almost 5 mb/

d on the Reference Scenario. Measures in the transport sector—notably those that 

boost the fuel economy of new vehicles—contribute 59% of the savings over the projection period. Increased efficiency in industrial processes accounts for 13%, and fuel 

switching in the power sector and lower demand from other energy-transformation 

activities, such as heat plants and refining, for 9%. More efficient residential and 

commercial oil use makes up the rest.

19

Table 3.—WORLD OIL DEMAND IN THE ALTERNATIVE POLICY SCENARIO1

[mb/d] 

2005 2015 2030 2005¥2030

Difference versus 

Reference Scenario 

in 2030

mb/d %

OECD ............................ 47.7 50.7 49.9 0.2% ¥5.2 ¥9.5%

North America .............. 24.9 27.2 27.7 0.4% ¥3.1 ¥10.2%

United States ......... 20.6 22.4 22.5 0.3% ¥2.5 ¥10.1%

Canada ................... 2.3 2.5 2.5 0.5% ¥0.2 ¥8.2%

Mexico .................... 2.1 2.4 2.7 1.1% ¥0.4 ¥12.7%

Europe ........................... 14.4 14.9 13.9 ¥0.1% ¥1.4 ¥9.3%

Pacific ............................ 8.3 8.5 8.2 0.0% ¥0.7 ¥7.6%

Transition economies ... 4.3 4.7 5.0 0.6% ¥0.7 ¥11.8%

Russia ............................ 2.5 2.7 2.9 0.5% ¥0.4 ¥12.2%

Developing countries .... 28.0 35.6 44.7 1.9% ¥6.6 ¥12.9%

Developing Asia ............ 14.6 19.4 25.8 2.3% ¥3.9 ¥13.2%

China ...................... 6.6 9.4 13.1 2.8% ¥2.2 ¥14.5%

India ....................... 2.6 3.6 4.8 2.5% ¥0.6 ¥11.3%

Indonesia ............... 1.3 1.5 2.2 2.0% ¥0.2 ¥7.5%

Middle East ................... 5.8 7.7 8.8 1.7% ¥0.9 ¥8.9%

Africa ............................. 2.7 3.3 4.2 1.8% ¥0.7 ¥14.4%

Latin America ............... 4.9 5.3 5.9 0.8% ¥1.1 ¥15.8%

Brazil ...................... 2.1 2.5 2.9 1.3% ¥0.6 ¥16.0%

Int. marine bunkers ..... 3.6 3.7 3.8 0.2% ¥0.4 ¥9.8%

World ............................. 83.6 94.8 103.4 0.9% ¥12.9 ¥11.1%

European Union ........... 13.5 13.8 12.8 ¥0.2% ¥1.3 ¥9.5%

1 Includes stock changes. 

2 Average annual growth rate. 

Supply in the Alternative Policy Scenario 

In principle, lower global oil demand in the Alternative Policy Scenario would be 

expected to result in a lower oil price than in the Reference Scenario. Production 

in higher-cost fields mainly located in OECD countries, would be reduced, declining 

even more rapidly after 2010 than in the Reference Scenario. But concerns about 

the security of supply might encourage OECD and other oil-importing countries to 

take action to stimulate development of their own oil resources. For example, the 

UK government is currently considering such policies (DTI, 2006) and the US Congress is considering allowing more offshore oil exploration and giving royalty relief 

for offshore production. For these reasons, we assumed that oil production in OECD 

and other net oil-importing countries—as well as the international crude oil price—

remain at the same levels as in the Reference Scenario. As a result, the call on oil 

supply from the net exporting countries is reduced in the Alternative Policy Scenario. OPEC members and major non-OPEC producing regions, including Russia, 

the Caspian region and west Africa, are most affected (Figure 14). OPEC production 

reaches 38.8 mb/d in 2015 and 45.1 mb/d in 2030. The average growth of 1.2% per 

year is just over half the growth in the Reference Scenario. OPEC’s share of the 

global oil market rises from the current 40% to nearly 44% in 2030, but this is five 

percentage points lower than that in the Reference Scenario. 

Crude oil production outside OPEC is projected to increase from 50 mb/d in 2005 

to 56 mb/d in 2015 and 58.3 mb/d in 2030 (though 1.8 mb/d or 3% lower than in 

the Reference Scenario). The transition economies are expected to account for half 

of this increase. Latin America and West Africa account for most of the remainder. 

Production in OECD countries is expected to decline steadily from 2010 onwards, 

as in the Reference Scenario. The share of non-conventional oil production in this 

scenario in 2030, at 8.7%, is an increase of 7.4 mb/d over current levels. The production of biofuels is also expected to increase substantially, especially in oil importing 

countries. Globally, biofuel production will grow almost 10 times, from 15 Mtoe in 

2004 to 147 Mtoe in 2030. Most of the additional growth, over and above Reference 

Scenario levels, is expected to occur in the United States and the European Union.

20

The CHAIRMAN. Thank you very, very much. 

Linda Stuntz is our next witness. Linda is a partner with Stuntz, 

Davis and Staffier and has been involved previously with the Department of Energy in a high position and, most recently, was part 

of the Council on Foreign Relations Task Force that worked up a 

report on the national security consequences of U.S. oil dependency. Thank you for being here, Linda. 

STATEMENT OF LINDA G. STUNTZ, ON BEHALF OF A COUNCIL 

ON FOREIGN RELATIONS INDEPENDENT TASK FORCE 

Ms. STUNTZ. Thank you, Mr. Chairman and members of the committee. It is an honor to be before you today to discuss the report 

prepared by an independent task force organized by the Council on 

Foreign Relations, released this past October, entitled, as you described, The National Security Consequences of U.S. Oil Dependency. Today, let me highlight four points from this report. 

First, you will not find in this report support for the concept of 

energy independence for this country. As much as I know many of 

you on both sides of the aisle espouse this, it is, in fact, unrealistic. 

Barring Draconian measures, the United States will depend on imported oil for a significant fraction of its transportation fuel needs 

for the next several decades. Moreover, so long as we consume any 

oil, even if it is produced domestically, we will be affected by what 

happens in the global oil market, just as corn or other markets of 

that nature are affected. We cannot wall ourselves off for that market. Our allies are also dependent on this oil. 

Therefore, you will find support in what the task force focused 

on, reducing our dependence on all oil and on better managing the 

global energy interdependence, which I noted coincidentally, came 

up in some of my colleagues’ testimony on the panel. 

One idea of many suggestions in the report is that the International Energy Agency would work perhaps to expand its membership to include new consumers, such as China, who until the 

early 1990’s, were actually oil exporters. That is one of the many 

changes that has occurred in the global world market. 

Second, the constraints on foreign policy caused by energy require greater integration of foreign policy and energy policy. The 

newspapers this morning and every morning are replete, whether 

in Asia, Africa, South America or even Europe, with incidents of 

energy and foreign policy intermingling, yet the task force was 

unanimous in the view that energy issues have not received sufficient attention in the formulation and implementation of U.S. foreign policy. 

Among other things, the task force recommends that an energy 

directorate be established at the National Security Council, similar 

to those that exist now, for counter-proliferation defense policy and 

international economics. 

Third, and it was highlighted by Senator Domenici in his opening 

speech, one of things that I believe has changed since Senator 

Jackson and I and some of you first began looking at this very difficult challenge of energy security is the increasing role of national 

oil companies. The reality today is that national oil companies control some 3⁄4 of the world’s oil reserves, as best we can tell. 

ExxonMobile, the largest privately owned oil company in the world, 

21

ranks fourteenth, roughly, on the list of proven reserve holders in 

the world. We are only beginning to come to terms, I would submit, 

with this development and what it means for world oil markets. 

Interestingly, with their access to reserves in other countries 

more limited, privately-owned oil companies, such as BP, Shell and 

others, are returning to those areas that remain open to them, including our U.S. Gulf of Mexico and the North Sea. Over time, 

however, given where petroleum reserves are located and by whom 

they are controlled, the world will become increasingly dependent 

on state oil companies to produce the oil that is needed. Some of 

these are highly efficient. They utilize advanced technology and 

they conduct their business in a transparent way on commercial 

terms that we would understand. Many, however, do not, and we 

have to determine how to deal with them and what their effects 

will be on the market. 

Fourth, in order to address the national security consequences of 

U.S. oil dependency, we need a comprehensive approach. And this 

will not be a surprise or news to this committee, but we need it 

all, we cannot focus on one or the other. We need to increase the 

efficiency of oil use, primarily in transportation fuels. We need to 

use alternative fuels. We need to diversify oil supplies, particularly 

outside the Persian Gulf, which includes in the United States. We 

need to make oil and gas infrastructure more efficient and secure. 

And we need to increase the investment in new energy technologies. 

The task force considered—and had a lively debate on—increasing the gasoline tax, increasing CAFE requirements and a tradable 

permit program for gasoline allowances. Again, it will probably be 

no surprise to you that while the task force unanimously believed 

we needed to do one or several of these things, we did not have an 

agreement on which one of these should be pursued. 

With respect to alternative fuels, the task force was enthusiastic, 

in particular, about the possibility of plug-in hybrid electric vehicles using energy generated, in particular, by nuclear power, so 

that it could deal with some of the emissions issues, which, of 

course, are the flip side of all these energy issues. 

The task force also recommended specifically removing the 54 

cents per gallon tariff on imported ethanol so that U.S. consumers 

may have the benefit of biomass-derived fuels from countries such 

as Brazil, where ethanol can be produced at a lower cost than in 

the United States at this time. 

In conclusion, I very much hope that the task force work product 

will be of assistance to the committee as it deals with these important challenges and I look forward to discussing these matters further with you. 

[The prepared statement of Ms. Stuntz follows:]

PREPARED STATEMENT OF LINDA G. STUNTZ, ON BEHALF OF A COUNCIL ON FOREIGN

RELATIONS INDEPENDENT TASK FORCE

Mr. Chairman and Members of the Committee: 

It is an honor to appear before you today to discuss the report, ‘‘National Security 

Consequences of U.S. Oil Dependency,’’ released this past October and authored by 

an independent task force organized by the Council on Foreign Relations. This task 

force was co-chaired by James Schlesinger and John Deutch, no strangers to this 

committee. Members of the task force included experts in foreign policy such as 

Graham Allison, leading economists such as Martin Feldstein, energy experts such 

22

1P. 14. 

2P. 52. 

3P. 57. 

4P. 18. 

5P. 39. 

as J. Robinson West, business leaders such as Norman Augustine and experienced 

energy legislators such as former Senate Energy Committee chairman Bennett 

Johnston. As a veteran of many energy policy battles myself and one who continues 

to believe (nonetheless) that, working together, we can improve our own energy security and that of our children, it was a privilege for me to participate in this effort. 

Every member of the task force has a separate view on what is most important 

in this report. I do not purport to speak for all of them today—the report does that. 

I would highlight four points from this report. 

First, you will not find support in this report for ‘‘Energy Independence.’’ Indeed, 

the first of several ‘‘Myths’’ highlighted by the report is this one. ‘‘Barring draconian 

measures, the United States will depend on imported oil for a significant fraction 

of its transportation fuel needs for at least several decades.’’ 1 Moreover, so long as 

we use ANY oil, we will be subject to world oil market developments and so will 

our allies. We cannot wall ourselves off from the global oil market, much as we 

might wish to. Furthermore, policies that attempt to significantly reduce import dependence could dramatically drive up fuel prices. You will find support for reducing 

our dependence on all oil and on managing better our global energy interdependence, for example, by encouraging the International Energy Agency to work with 

new major energy consumers such as China and India.2

Second, the constraints on foreign policy caused by energy require greater integration of foreign policy and energy policy. Whether in Asia, Africa, South America or 

even Europe, our foreign policy is directly affected by the role of that nation in the 

global energy marketplace. Yet, the task force was unanimous in the view that energy issues have not received sufficient attention in the formulation and implementation of U.S. foreign policy. Among other things, the task force recommends that 

an energy directorate be established at the National Security Council, similar to 

those that exist now for counterproliferation, defense policy and international economics.3

Third, one of the things that has changed most in global oil markets over the past 

two decades is the rise of National Oil Companies. The reality today is that National Oil Companies control some three-quarters of the world’s oil reserves. Exxon 

Mobil, the largest privately owned oil company, ranks only l4th on the list of proven 

reserve owners.4 We are only beginning to come to terms with this development and 

what it means for world oil markets, but with their access to reserves elsewhere increasingly limited, privately owned oil companies are returning to those areas that 

remain open to them, including the U.S. Gulf of Mexico and the North Sea. Over 

time, given where petroleum reserves are located and by whom they are controlled, 

the world will become increasingly dependent on state oil companies to produce the 

oil that is needed. 

Fourth, in order to address the national security consequences of U.S. oil dependency, we need a comprehensive approach that: 1) increases efficiency of oil use, primarily in transportation fuels; 2) uses alternative fuels; 3) diversifies oil supplies, 

particularly outside the Persian Gulf, 4) makes the oil and gas infrastructure more 

efficient and secure; and 5) increases investment in new energy technologies. The 

task force considered an increased gasoline tax, increase in CAFE requirements and 

a tradable permit program for gasoline allowances. While the task force unanimously endorsed the adoption of such measures to slow the growth in petroleum 

consumption, it did not reach agreement on which of these specific measures to employ. With respect to alternative fuels, the task force was enthusiastic about the 

possibility of ‘‘plug in hybrid’’ vehicles, particularly in conjunction with greater use 

of nuclear power. The task force also recommends removing the $0.54 per gallon tariff on imported ethanol so that U.S. consumers may have the benefit of biomassderived fuels from countries such as Brazil, where ethanol can be produced at lower 

cost than in the U.S.5

CONCLUSION

It has been my experience that the energy security debate is one particularly afflicted by misinformation and failure to define the problem being addressed. I commend the Committee for seeking the facts regarding the global oil market, our position in that market, what options are available to us in the near and longer term, 

and what the costs and benefits of those options are. I truly hope that the task force 

23

report can be of assistance to you in this effort and would be pleased to try to answer any questions you may have about the report or the matters it addresses.

The CHAIRMAN. Thank you very much for that testimony. 

Next is Dr. Robert Hormats, who is vice chairman at Goldman 

Sachs (International) and has been a witness before this committee, and several Senate committees that I serve, on numerous 

times. We welcome you back and look forward to your comments. 

STATEMENT OF DR. ROBERT D. HORMATS, VICE CHAIRMAN, 

GOLDMAN SACHS (INTERNATIONAL) 

Dr. HORMATS. Thank you very much, Mr. Chairman and members of the committee. It is a pleasure to be back here. 

Let me make just a few points about the situation we face today. 

First is that we have a history in this country of going through periods of great crisis followed by periods of prolonged complacency 

and that has caused energy policy to be sort of light switch—on/

off. 

I remember my first time coming to this committee. I was economic advisor to Dr. Kissinger in the 1970’s when we had the first 

big oil crisis, with long lines and the Arab oil embargo and high 

prices, and at that point, we thought the country would rally behind a very bold policy. Well, there were some major elements of 

progress in the 1975 Act under President Ford, where we had energy efficiency standards for cars. And after that, a lot of companies moved away from oil to burn other things to generate power 

and we used coal in other things, as opposed to oil, in the industrial part of the economy. 

But then we had other crises that followed, periods of concern, 

periods where people would say, we need bold policy. Then prices 

go down and we relax and forget about it. I think that point Senator Dorgan made a moment ago is that even now, we’re just taking baby steps. These steps are not commensurate with the situation we find ourselves in today. And that is, people say, look, after 

9/11, everything changed. Well, energy policy really has not 

changed very much. We’re fighting a war on terrorism. We are 

spending money, lots of money, for oil. We’re heavily dependent on 

countries that are very unreliable suppliers. A large portion of 

money is spent by us and other importers, and goes to countries 

whose interests are hostile to those of the United States. Some of 

that money finds its way into terrorist hands. We should accept the 

fact that that is the case. 

So what we’re doing now is we’re fighting in a post-9/11 environment with a pre-9/11 energy policy. It is simply not sufficient to 

deal with the national security crisis that we face today. The crisis 

is a geopolitical one and the vulnerability of this country to disruptions—look what is happening in Nigeria today, kidnappings of 

people on these oil rigs. We have Venezuela making very tough 

statements about further nationalization. We have Russia using oil 

as a political lever. We have instability in the Middle East. If Iran 

deteriorates further in the relationship—that will affect oil. It has 

happened before. If Iraq deteriorates further and the civil war increases and other countries start getting involved, then you have 

additional tensions. If you have tensions between the Shiites on 

one side of the Persian Gulf and the Sunni on the other, that’s 

24

going to make transportation of oil all the more vulnerable. And 

therefore, we have to come up with a much bolder set of energy 

policies for national security reasons. 

The thing about it is, it may be difficult to deal with some of 

these situations abroad, of which we have less control. We have it 

within the capability of the United States not to become energy 

independent. I think Linda has made a very good point: energy 

independence, at this point, is not possible, but we can manage our 

vulnerability a lot better than we are doing today and it’s the vulnerability that is the huge problem. 

How do we do that? We have the capability, for instance, by insisting on tougher fuel standards for automobiles, to improve the 

efficiency with which we use oil. And it’s quite possible to do. It’s 

within the realm of technological possibility. Now there may be 

reasons why you can’t go as fast as we would like, but there should 

be the target of much greater energy fuel—oil fuel efficiency standards with off-ramps in case there is an economic reason it can’t be 

done or a technological reason it can’t be done. There ought to be 

some way—exceptions for a period of time, but the goal ought to 

be to reduce the efficiency—to improve the efficiency of the use of 

oil as a transportation fuel because, by and large, in this country, 

oil is a transportation fuel and if we can’t address that issue, we’re 

not going to address the overall vulnerability issue. 

The second part of this is that there are a number of other elements there and the laws that are written and the regulations that 

come out of this Congress, many of them are too short-term. Many 

of the incentives have very narrow windows so companies can’t 

take advantage of them. I’ve listed in my testimony some of these. 

These are, I think, very important. 

Second, some of these structures for the investments that we 

want to come into this sector are limited so that certain kinds of 

investors—individual investors in certain cases, institutional investors in other cases—cannot really put money in because of the 

structure of the law and the way the regulations are written. These 

are additional important points. 

Third, we’ve got to work with other countries, like China and 

other countries that are big consumers and growing consumers, not 

to have a big fight with China over energy, but we ought to try to 

find ways where we can use our ability to develop, for instance, 

clean coal technology to help other countries to utilize their energy 

resources more efficiently and in a way which is environmentally 

sound. 

The last point, generally—and I’ll stop because I’m over my 

time—is we have the technological capability on the supply side. 

I’ve talked about the demand side, greater efficiency in the use of 

oil for automobiles and transportation vehicles. We have the capability, with the entrepreneurialism and the vitality of this country, 

as President Ford said in 1975 when he first talked about this, to 

utilize this capability in this country, to develop new, alternative 

sources of energy. And there was a lot going on. There is a lot more 

that can be done with the right kind of government incentives. 

And we also have to use the conventional sources of energy that 

we have. We have a lot of them. Environmental practices have improved a lot. We can’t do it only by reducing the use of energy. We 

25

can’t do it only by increasing the supply. But when you combine 

the two policies that increase our dependence on our own conventional and non-conventional resources, combined with greater efficiency of the use of oil in particular, we have the ability to reduce 

our vulnerability quite substantially. 

But we need a much bolder policy. It can’t be a pre-9/11 policy, 

it has to be a post-9/11 policy. We’re in a war and oil is one of the 

elements of that. During World War II, the American people were 

called on to buy bonds. There were bond rallies. People asked, what 

can I do? How can I help? Now, what can Americans do? What they 

can do is support bold energy policy. If we are committed to a really tough policy, people ought to be supporting efforts to reduce the 

wasteful use of energy across the board. Thank you. 

[The prepared statement of Dr. Hormats follows:]

PREPARED STATEMENT OF ROBERT D. HORMATS, VICE CHAIRMAN,

GOLDMAN SACHS (INTERNATIONAL) 

Mr. Chairman and Members of the Committee: 

Thank you for your kind invitation to testify on the critically important subject 

of the economic and national security implications of America’s oil dependence. 

I speak to you today as a citizen concerned about our nation’s increasing dependence on potentially unstable supplies of foreign oil. This dependence creates profound economic, political and security vulnerabilities. Also, a portion of the large 

amounts of petrodollars accumulated by a number of suppliers is used in ways that 

threaten American interests. 

By way of background, I was economic advisor to Dr. Henry Kissinger on the National Security Council staff in the mid 1970s when this country experienced its first 

energy crisis after the 1973 Yom Kippur War, and participated in his Middle Eastern shuttle diplomacy during the period that followed. At that time, I had high 

hopes that the Arab oil embargo, the sharp increase in the price of oil, and the longlines at gas stations would produce a bipartisan consensus on energy policy and jolt 

our nation into a bold and effective effort to reduce oil dependence and future vulnerability. Indeed, some progress was made. The Energy Policy Conservation Act of 

1975, championed by our late President Gerald R. Ford, launched a number of bold 

initiatives to achieve this goal. And the country did accomplish significant improvements in the efficiency of oil use through compulsory mileage standards for automobiles and because U.S. industry and power plants shifted dramatically away from 

using oil as a fuel. 

But when prices fell later in the decade, a sense of complacency set in. Then we 

were hit by another crisis that caused oil prices to spike at the end of the 1970s; 

that was triggered by the fall of the Shah of Iran and the Iranian Revolution. Complacency set in once again after that crisis receded and prices fell. Another oil crisis 

occurred in 1990 when Iraq invaded Kuwait, after which the sense of urgency about 

dramatic alterations in energy policy and use faded again. Decade after decade our 

dependence on foreign oil has risen. In the mid-1970s, 35% of this nation’s oil consumption was supplied by imports. Now, three decades later, it is 60%. 

After 9/11, again at the beginning of the current Iraq War in 2003, and again during the large price run-up in and the summer of 2006 the country had excellent opportunities and powerful incentives to confront energy vulnerabilities with a bold 

policy response. The 2005 Energy Policy Act contained a number of positive features—but these measures were not commensurate with the seriousness or the urgency of the energy challenge this country faces. 

American dependence on potentially vulnerable oil supplies continues to grow, 

with little prospect that it will change—despite the fact that we are engaged in a 

War on Terrorism in which oil imports by the U.S. and other nations provide funds 

to nations hostile to the U.S. and countries friendly to us. It is often said that ‘‘9/

11 changed everything!’’ Sadly, in the area of energy policy it hasn’t changed very 

much. American oil vulnerability continues unabated. 

There are several national economic and security consequences of this situation:

• If the situation in Iraq continues to deteriorate and other oil producing nations 

become more involved, the risks increase to oil supplies not only from disruptions in Iraq but also from greater tensions between the Sunni nations on the 

western side of the Persian Gulf and the Shiites on the eastern side, with oil 

26

facilities and shipments becoming increasingly vulnerable. Moreover, added 

western pressures on Iran over its nuclear program could lead to oil disruptions 

or threats thereof; • The American economy remains highly vulnerable to supply disruptions in oil 

exporting nations; these could result from acts or terrorism, political instability, 

efforts to use oil as leverage, or natural calamities; • High oil prices resulting from strong demand from countries such as the U.S. 

and other major importers give countries such as Iran and Venezuela added resources to take actions inimical to American interests; • Oil-dependent friends and allies feel more vulnerable to the pressures and potential use of oil leverage from supplying countries and therefore are reluctant 

to side with the U.S. on key issues affecting those suppliers; • Oil-related tensions and competition are likely to intensify—as countries such 

as China seek to lock up scarce supplies or make political deals to solidify longterm supply relationships, or suppliers such as Russian and Iran use oil as leverage to extract political concessions from consumers.

My concerns about this untenable and dangerous situation led me—together with 

a group of other concerned citizens to join the Energy Security Leadership Council 

in an effort to press for greater and more resolute national action on this matter—

and for an end to the divisive, highly polarized debate that has stymied genuine 

progress on many fundamental issues. The Council, a project of Securing America’s 

Future Energy (SAFE), is a nonpartisan group of business executives and retired 

military leaders. It recently unveiled a report entitled ‘‘Recommendations to the Nation on Reducing U.S. Oil Dependence.’’ (I will discuss a few of these later in my 

testimony, along with a number of recommendations that I believe can also contribute to progress in this area.) The members of the Council believe that America’s 

energy security is in a perilous state. Along with my fellow Council members, I am 

convinced that America’s leaders must move quickly and steadfastly to confront our 

high level of oil dependence as a profound national security challenge. 

ENERGY INTERDEPENDENCE

Calls for ‘‘energy independence’’ offer a false promise to the American people. 

They also suggest a sort of xenophobia that implies that the U.S. can or should attempt to solve its energy problems with little regard for those of other nations. In 

fact, oil is a fungible global commodity, which means that events affecting supply 

or demand anywhere will affect oil consumers everywhere. A country’s exposure to 

world oil prices or oil price shocks is a function of the amount and types of oil it 

consumes; the ratio of ‘‘domestic’’ to ‘‘imported’’ oil is only a portion of the problem. 

Even if the U.S. could substitute domestic energy for all foreign oil—a goal the 

Council believes to be impossible—American economic prosperity would still be 

linked to the health of a global economy dependent on international oil flows. So 

as we work to enhance our own energy security we should also be strengthening 

international cooperation with oil producers and consumers to improve global energy 

security, efficiency, and environmentally responsible production and usage. 

It is also important to make a distinction between dependence and vulnerability. 

There are numerous suppliers of oil that are very reliable and that use the funds 

earned in a constructive fashion. There are others whose facilities are vulnerable 

to disruption and that use funds in ways inimical to U.S. interests. But a large portion of the world’s oil comes from this in the second category, posing a series of economic, political and security risks. 

KEY RECOMMENDATIONS

The Council recommends a goal of cutting U.S. oil intensity the amount of oil it 

takes to produce a given amount of GDP—in half by 2030. There is a favorable 

precedent for this objective. Since the mid-1970s, the U.S. has managed to trim oil 

intensity by 50%, chiefly by raising the fuel efficiency of passenger cars, virtually 

eliminating oil as a fuel for electric power generation, and expanding less energydemanding sectors of the economy, particularly in the area of services. As a consequence, the U.S. now uses half the amount of oil to produce a dollar of GDP, in 

real terms, as it did just thirty years ago. Unfortunately, however, progress in this 

area has slowed in the last ten years. 

One key goal must be to make America’s prosperity less dependent on a commodity the production level of which responds only very slowly to changes in price. 

Combine this price inelastic supply with 1) the vulnerability of oil supplies to various types of disruption, 2) the fact that some countries see oil as a political as well 

as an economic commodity, and 3) the fact that much of the world’s production is 

in the hands of state owned oil companies, many of which use oil revenue for politVerDate 0ct 09 2002 12:35 Mar 21, 2007 Jkt 110006 PO 33869 Frm 00030 Fmt 6633 Sfmt 6621 P:\DOCS\33869.TXT SENERGY2 PsN: PAULM
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ical or social ends rather than reinvest it in new production capacity, and you have 

the recipe for severe energy-related economic disorder. 

As a result of the halving of U.S. oil intensity since the mid-1970s, the high oil 

prices experienced in the summer of 2006 represented a smaller relative cost to the 

economy than in the past. Further reductions in oil intensity would provide a measure of insurance against some of the effects of sudden future oil price shocks or sustained high oil prices. In addition, by boosting the production of alternative sources 

of energy to displace oil, we can create more production capacity at home, keep more 

of our money in this country, create a great number of new, high quality jobs in 

industries that manufacture and utilize new environmentally responsible energy 

production and conservation technologies, and develop new export products that can 

be sold to an energy hungry and environmentally conscious world. 

The Global Energy Challenge 

The global economy is in the midst of a period of extraordinary growth that promises to transform the lives of billions of people, bringing comforts and luxuries to 

regions where humankind has long struggled for subsistence. Creativity and the 

drive for a better life are the engines of this tremendous surge in output, living 

standards and productivity but like all engines they require energy to function. 

By 2020, world energy demand is forecast to jump by 50% over 2000 levels, with 

most of the increase coming in developing countries. The safe and affordable delivery of all this energy is by no means assured. Even if resources turn out to be sufficient in the aggregate, their distribution will not map closely to the topography of 

demand. The resultant uncertainty of supply and upward pricing pressure will exacerbate international tensions stemming from non-energy issues. 

Oil provides only 40% of global energy, but, as the premier transportation fuel, 

it has emerged as the touchstone of the world’s energy outlook. On both economic 

and psychological grounds, oil price spikes threaten the prosperity of many nations, 

including many of the poorest on this planet. They also sow the seeds of tension 

between exporting and importing nations, among consuming nations, and among 

different groups within countries. Indeed, since so much oil is used for personal 

transportation, oil prices have an enormous impact on the pocketbooks of virtually 

every American family. Correspondingly, policy efforts that impact oil’s cost and 

availability must take into account the interests of the average American family and 

quickly become major political issues. 

America’s Clear and Present Dangers 

For much of the last century, surplus domestic oil production reduced U.S. vulnerability to oil disruptions elsewhere in the world. But America’s oil production is now 

dwarfed by current consumption. Thus, while the U.S. remains the third largest oil 

producer in the world, domestic production can satisfy barely 40% of its requirements. 

The U.S. generates 28% of the world’s goods and services while consuming roughly a quarter of its oil production. This may seem like a balanced, even favorable energy equation, but closer inspection reveals a different story. Despite considerable 

progress toward more efficient energy use, America requires substantially more oil 

to create a dollar of Gross Domestic Product (GDP) than is the case in most other 

developed countries. Some of this differential in ‘‘oil intensity’’ can be attributed to 

our nation’s vast size, the dispersion of our population, and less reliance on public 

transportation. Global military obligations, which are inextricably linked to our commitment to secure the flow of oil for the benefit of all nations, further increase 

American consumption. But even with these extenuating factors, there can be little 

doubt that the U.S. can and must use energy far more efficiently. 

America’s long-term supply and demand balance is no more encouraging. U.S. oil 

demand is expected to grow 24% over the next two decades, and even if new discoveries raise its current 3% share of global oil reserves, our nation will almost certainly still require substantial amounts of petroleum imports. Import dependence 

will also define energy security for our key allies and most of the world’s manufacturing nations. Unfortunately, the developed nations that consume most of the 

world’s oil are not in a good position to produce the fuels they need. 

A large portion of the world’s oil reserves are owned by state-owned or controlled 

oil companies in non-O.E.C.D. countries. It is worth underscoring this point—especially because when oil prices were rising last summer there were many accusations, 

misguided in my view, that this was a conspiracy among the big oil majors, when 

in fact the six largest state oil companies have ten times the reserves of the top six 

privately owned companies. Some of these state companies are highly efficient and 

well run, but others are highly politicized and are not able to utilize their profits 

to increase production or modernize capacity. Because of the large state company 

28

role in the world’s oil markets, there is not a ‘‘free market’’ for oil. As a result, a 

substantial portion of production is politically influenced and production decisions 

and practices are frequently economically suboptimal. 

With each passing year, the global oil trends now at work—rising consumption, 

reduced spare production capacity, politicized spending decisions, and potentially 

high levels of instability in key exporting countries—all increase the likelihood of 

an energy crisis. The odds in favor of a crisis are further heightened by the rise of 

terrorist movements bent on targeting critical elements of the world’s vulnerable oil 

production, processing, and delivery infrastructure. 

Given today’s precarious balance between oil supply and demand, taking even a 

small amount of oil off the market could cause prices to rise dramatically. In Oil 

Shockwave, a cabinet-level oil crisis simulation conducted in 2005 by SAFE and the 

National Commission on Energy Policy (NCEP), a 4% global shortfall in daily oil 

supply—only 3.5 million barrels in a 84 million barrel daily market resulted in a 

177% increase in the price of oil, to over $150 per barrel. The simulation was played 

out by men and women who have served in the highest ranks of the U.S. government; Robert M. Gates, our current Secretary of Defense, for example, filled the role 

of National Security Advisor. The hypothetical scenarios put before the participants 

were designed to simulate a decline in world oil production due to regional instability and to terrorism. The incidents were completely plausible, and some, such as 

unrest in Nigeria, have subsequently come to pass. But there was little these skilled 

officials could do to stop a gut-wrenching increase in the price of oil. Indeed, one 

of the major lessons of the simulation was that the Strategic Petroleum Reserve 

(SPR), the emergency supply of federally owned crude oil, offers only very limited 

protection against a major supply disruption. Emergency reserves cannot sustain 

the United States through a prolonged crisis, and it will be extremely difficult to 

reach political consensus on when it is appropriate to begin using them. 

Even under normal conditions, oil dependence has severe economic consequences. In 2005, direct outlays for imported oil accounted for a third of the country’s $800 

billion current account deficit. In 2006 prices, these outlays have gone still higher. 

By diverting funds away from domestic consumption and investment, oil imports 

put a drag on U.S. economic growth and undercut the nation’s long-term competitive 

position. Oil dependence also adds billions to our defense expenditures by making 

overseas protection of oil supplies a high strategic priority. 

China 

Before I turn to a discussion of recommendations, I want to touch upon the rise 

of China and how that impacts U.S. energy security. Some observers have insisted 

that clashes between the U.S. and China over energy are inevitable. Chinese companies are buying oil properties and concluding long-term supply contracts around the 

world. A few of China’s deals are in countries such as Venezuela, Iran and Sudan, 

with which the U.S. has strained or no relations. Also, China’s surge in oil demand 

was seen, incorrectly, by some as a reason for higher prices last summer. And China’s increased coal production concerns U.S. environmentalists. 

But the fact is that the U.S. and China have many common interests in the energy area and thus many reasons to cooperate. Consider these facts:

• The U.S. is the world’s biggest oil importer. China is the world’s fastest growing 

oil importer. High prices and supply instability harm both nations. Price increases in the summer of 2006 primarily reflected the lingering affects of sluggish world investment in production and refining in the previous decade, and 

market perception of high political risk that could disrupt oil deliveries, which 

both nations have an interest in correcting. 

• Chinese, like Americans, are concerned about their environment. China faces 

colossal and urgent environmental problems, as anyone who has visited Beijing 

during the winter has experienced first hand. U.S. companies have great expertise in clean energy technology that could help. 

• The U.S. and China have a similar interest in open sea lanes for oil. 

• Both nations also desire a secure business and legal environment for their energy investments in emerging economies as well as stable and growing supplies 

from world exporters.

When I look at China and the U.S., I see two nations that have an enormous interest in cooperation in pursuit of energy security. Several areas are ripe for a common effort.

• A Joint Business-Government Commission on Clean Coal Technology; this could 

help China develop and utilize its massive amounts of coal in an environmentally responsible way and boost U.S. exports of technology and equipment 

in this area. 

29

• Joint research on alternative fuels, which should also include experts from 

Japan, would draw on the best talent in these three countries. This could lead 

to breakthroughs in, or broader dissemination of, non-carbon based production 

and use technologies. 

• Strengthen U.S.-China cooperation in the context of the International Energy 

Agency. 

• Consultation with one another, and with other regional nations, to maintain 

open sea lanes; that could reassure China that the U.S. will not use its naval 

power to leverage China on oil. 

• Strengthen established regional groups that include China, the U.S., and other 

Pacific nations to address environmental and energy supply issues.

Helping China to increase domestic energy output using state-of-the-art, environmentally responsible, technologies would slow the growth of its oil import dependence, reduce imbalances in global markets, dampen global price pressures, and contain the process of global warming. And cooperation on these broad energy issues 

can strengthen broader U.S.-China ties. The alternative—frequent energy confrontations—benefits neither country. 

There Are No Silver-Bullet Solutions 

Success in improving the nation’s energy security posture will demand significant 

public and private investment—supported by meaningful tax and other non-tax incentives like loan guarantees—over a sustained period. Because of the volatility of 

markets and the strategic role of oil, a considerable amount of government support 

is needed to provide the necessary incentives through a supportive and reliable regulatory, and tax environment if we are able i) to reduce America’s oil vulnerability; 

ii) strengthen this nation’s capacity to produce oil and alternative sources of energy; 

and iii) utilize energy more efficiently and in an environmentally responsible way. 

The U.S. is capable of major breakthroughs if all elements of our society work together. 

The good news is that we Americans have it within our power and our technological and financial capacity to take meaningful steps to reduce oil dependence and 

increase energy security using both proven methods and technologies and our ingenuity and entrepreneurial capacity to develop new breakthroughs.

• Improving efficiency: In the view of the Council, the most important thing the 

U.S. can do to lessen its oil dependence in the near and medium-term is to utilize oil considerably more efficiently. With the goal of once again halving oil intensity—as in the 1980s and 1990s—in the space of two decades, Americans can 

do much to protect the economy against the effects of oil shocks that can be unleashed by forces beyond our control. Improved vehicle fuel efficiency is the single most important avenue for further cutting the nation’s oil intensity. 

• We must face the hard fact that in the U S. oil is primarily a transportation 

fuel; unless we can dramatically curb the use of oil in our cars and trucks, we 

will be unable to reduce our oil dependence. Currently the direction is not positive; through 2030 oil usage by SUVs and light duty trucks is expected to surge 

by roughly 77%. The transportation sector accounts for nearly 70% of all the 

oil the country uses; and oil fuels almost 97% of all transportation. With most 

of the vehicles on the nation’s roads operating at efficiency levels far below what 

is achievable with currently available technologies, there is a clear opportunity 

to realize sizable fuel economy gains without overall loss of safety or functional 

utility. We propose empowering the National Highway Traffic Safety Administration (NHTSA) to mandate annual fuel efficiency increases of 4% while allowing for these increases to be postponed or constrained if economic, technical, or 

safety impediments are demonstrated. 

• Increasing stable supply. As a second means of improving America’s oil risk profile, the Council recommends efforts to increase the production of oil in stable 

regions of the world, including in the U.S., Canada, and Mexico. We must move 

beyond the drill/don’t drill debate for this simple reason: by facilitating the discovery and recovery of conventional oil resources, in conjunction with stricter 

environmental standards, American investment and the capabilities of this nation’s formidable oil experts and oil service companies can ease the tight supply 

conditions that unsettle oil prices and lessen the probability that even modest 

supply shortfalls will trigger an international oil crisis. By the same token, a 

robust nuclear power program also makes great sense. 

• Supplies abroad. Just as significantly, by working to ensure the rule of law, 

sanctity of contracts, and stable investment climates abroad, America can help 

to lower the likelihood of future disruptions. There a great many potential 

projects that can enable the world to diversify the sourcing of oil away from its 

30

present growing concentration on the Middle East. By utilizing groups such as 

the International Energy Forum—a ministerial dialogue among major energy 

producers and consumers established in 2003—the conditions for increased investment in such projects can be enhanced. • Developing alternatives. Third, America can lead the way in expanding the 

availability of alternatives to petroleum-based fuels. Diversifying our transportation fuel supply must be a key part of any comprehensive effort to improve 

U.S. energy security. Without an expanded supply of alternatives, conventional 

petroleum will continue to power nearly all of our motor transport. Such reliance on a single non-substitutable input creates profound economic dangers. To 

date, through the help of federal policies such as the Renewable Fuels Standard, the phase-out of MBTE as an additive, and tax incentives, corn-based ethanol has developed as one of the most successful domestic alternative transportation fuels. Production in the United States rose from 1.4 billion gallons a year 

in 1995 to about 4 billion in 2005. 

Although this growth rate is impressive, it is merely a drop in the bucket 

when compared to this nation’s annual gasoline consumption of 140 billion 

gallons; it is equivalent in terms of energy content to only 2% of our gasoline demand. At a maximum, corn-based ethanol may be able to displace 

10% of our gasoline use before corn demand outstrips supply. Consequently 

if we want to have a significant impact on reducing our consumption of petroleum-based fuels, the federal government must encourage the development and commercialization not only of dedicated energy producing crops 

such as corn and sugar, but also of other potentially large-volume bio-fuels 

like cellulosic ethanol (which are low cost, do not compete with the food 

chain, and provide another revenue stream for farmers) that is generated 

from forest residue and agricultural waste such as wheat straw, switch 

grass, and corn stover. Technologies like cellulosic ethanol are poised to 

dramatically raise bio-fuels production by shifting acreage-to output ratios. 

However, to transform this promise into reality, existing federal policies, 

like the federal loan guarantee program for innovative technologies must be 

fully funded and implemented; and new policies, which encourage and support investment in commercial facilities and related transportation infrastructure must be readily adopted. 

There are two specific policy changes that I believe would enhance the 

development and commercialization of renewable energy. 

The first is for Congress and the Administration to take a longer term perspective in the way tax incentives are structured. For example, with respect 

to the production tax credit (PTC) for renewable energy sources like wind 

and geothermal, the credit is available to projects that are placed in service 

before January 1, 2009. Historically this credit has been renewed only for 

short periods of time and often after great uncertainty and delay. This onagain, off-again process has added significant uncertainty to such projects 

and increased their costs. Therefore a longer-term extension of the PTC, say 

for five years would help to avoid such problems. 

The second is to alter the structure of tax incentives to encourage investment from additional categories of investors, including small investors, by 

enabling them to benefit from tax incentives—thereby increasing the availability and lowering the cost of capital for these projects. For example, the 

way the law is now written retail investors and taxpayers paying the alternative minimum tax cannot use the production tax credit for investment in 

wind projects; allowing the use of master limited partnerships for these 

types of projects would broaden the group of investors who could help to 

finance them. 

It is worth noting that many of the new technologies being developed involve high technical risk, significant costs, and regulatory uncertainties—

and that costs of demonstration projects to show that these technologies can 

be deployed on a commercial scale as well as those associated with their 

commercial development are significantly greater than the initial R&D 

costs. Therefore, maximizing the range of investors supplying capital, providing reliable incentives, and creating and funding policies that reduce the 

significant financial risks associated with these projects are critical to advancing the process of proving and commercializing innovative energy alternatives. 

• Managing risks: In the Council’s view, we must manage risk within the interdependent global oil economy. In our dangerous world, threats are one commodity not in short supply. America contributes far more than any other nation 

to protecting this global infrastructure, and the time has come for other nations 

31

to expand their own efforts. All nations have an interest in the stability of the 

global oil infrastructure, and a variety of international efforts could help to ensure the smooth flow of oil. New multilateral accords should play a role, but 

there are also opportunities for expanded reliance on existing organizations 

such as the Gulf Coordination Council, NATO, or ASEAN. A common interest 

in ‘‘oil security maintenance’’ in partnership with producing nations offers real 

potential to improve regional security in areas of rising geopolitical competition 

by creating frameworks for pragmatic international cooperation. Where appropriate, the U.S. should provide exporting countries with diplomatic support as 

well as with counter-terrorism training and other military aid.

I urge you to review the Council’s detailed recommendations, which are contained 

in our published report. We will be glad to provide any further clarifications you 

may require. 

The Capabilities of the American People 

Last week, the nation mourned the passing of our 3 8th President, Gerald R. 

Ford—for whom I had the great privilege of working. President Ford left a legacy 

of honesty, integrity and decisiveness. These aspects of his leadership were particularly evident in his handling of energy security. In his 1975 State of the Union address, President Ford recognized the energy dangers threatening the country. He expressed a ‘‘very deep belief in America’s capabilities,’’—its innovative capacity and 

technological skills to overcome its growing dependence on imported oil. He also rallied support for fuel efficiency standards. I share President Ford’s optimism in the 

capacity of Americans to respond to the challenge of growing energy dependence, 

and his belief that Americans will rally around tougher energy measures, if they 

are given strong leadership. 

America has a long history of pulling together in the face of national security 

challenges. I am currently completing a book entitled The Price of Liberty: How 

America Pays for its Wars. In all the major national security challenges of the twentieth century, Americans demonstrated a remarkable willingness to make patriotic 

wartime sacrifices. During World War I and World War II, American’s not only paid 

dramatically higher taxes but also participated in massive bond drives to mobilize 

billions of dollars to support out troops. Roosevelt’s Secretary of the Treasury Henry 

Morgenthau, when asked about the significance of such drives, said that they were 

launched not only to raise massive amounts of funds, but also to respond to people 

who asked ‘‘What can I do to help.’’ Today, the answer to this question lies not in 

buying more bonds but in buying less gasoline. 

Since 9/11 there have been no major bond drives as in past wars—and only limited steps to reduce our dependence on oil. The time has come to recognize that energy security is central to the national security challenges of twenty-first century, 

and to present the American people with the unvarnished truth regarding how oil 

affects the struggle in which we are engaged. We must meet the threats we face 

in the same spirit as our parents and grandparents during past wars—with farsighted patriotism and willingness to compromise narrow partisan, ideological, philosophical and economic positions in the long-tern national interest. 

There are enormous dangers in facing the challenges of a post-9/11 world with a 

pre-9/11 approach to energy that relies so heavily on oil from some of the most vulnerable areas of the world and sustains price levels that benefit countries such as 

Iran and Venezuela that seek to undermine our interests and threaten our friends. 

American leaders and the American people have rallied the country in past wars; 

the challenge is to do so again, 

I thank you again for this opportunity to testify.

The CHAIRMAN. Thank you very much. 

Next is General Charles Wald, who is the former deputy commander of the U.S. European Command, and he has been very involved with the Energy Security Leadership Council. We very much 

appreciate his being here today to give us his views. 

32

STATEMENT OF GENERAL CHARLES WALD, U.S. AIR FORCE 

[RETIRED], FORMER DEPUTY COMMANDER, U.S. EUROPEAN 

COMMAND, AND MEMBER, ENERGY SECURITY LEADERSHIP 

COUNCIL 

General WALD. Thank you, Mr. Chairman and members of the 

committee, for the opportunity to discuss the global oil balance and 

its impact on U.S. and national security. 

I recently retired from the Air Force after 35 years of service and 

during my career had the opportunity to fly combat over Vietnam, 

Cambodia, Iraq and Bosnia and learned much regarding how to use 

military assets to effectively solve national security problems. 

But I also learned that many believed the U.S. military is solely 

responsible for security. I like to call this the ‘‘Dial 1-800-The-U.S.-

Military’’ syndrome, because it reflects how people assume the U.S. 

military is a toll-free resource that can be called on to perform 

tasks that no one else has either the capability or will to execute. 

I recall a recent meeting with several major global oil company 

executives in Kazakhstan. Before we began our discussion, one of 

the executives thanked me and the U.S. military for protecting the 

free flow of oil around the world. The executive’s world view included the expectation that the U.S. military will be there to provide worldwide security and to ensure the free flow of oil without 

any assistance from others. This struck me, and frankly, does not 

seem like a good model, particularly for the United States. The 

U.S. cannot and should not be everywhere to protect all the vulnerable components of the global oil infrastructure. 

With regard to the oil dependence issue, military response and 

capabilities are by no means the only effective tools available and 

in many cases are not appropriate. In fact, the single most effective 

step the United States can take to improve its energy security is 

to increase transportation efficiency. 

The transportation sector is responsible for nearly 70 percent of 

the oil the United States consumes. CAFE standards legislated in 

1973 during the Arab oil embargo were instrumental in helping 

America lower oil usage by the 1980’s, but there has been little 

progress since the original mileage targets were met. 

As a consequence, America’s light-duty vehicle fleet now has the 

worst average fuel efficiency in the developed world. America must 

do better in this area. That is why, as you mentioned, the Energy 

Security Leadership Council has recommended vehicle efficiency 

standards that require 4 percent annual improvements in mileage 

per gallon performance but with regulatory off-ramps. 

The National Transportation Safety Administration finds the 4-

percent requirement to be technically infeasible, unsafe or not cost 

effective. 

Some may be surprised to hear from a former General talk about 

fuel efficiency standards but they shouldn’t be. In the military, we 

learned that forced protection isn’t only about protecting weak 

spots, it’s also about reducing vulnerabilities before you go into 

harm’s way. That’s why lowering the Nation’s demand for oil is so 

critical. 

Nearly all of our U.S. military commands have some oil security 

tasks and in essence they provide a blanket of security that benefits all nations. Central Command guards access to the oil supplies 

33

in the Middle East; Southern Command defends Colombia’s Cano 

Limon pipeline; Pacific Command patrols the tanker routes in the 

Indian Ocean, the South China Sea and the Western Pacific; and 

my last assignment, as deputy commander of European Command, 

which included, by the way, most of Africa. We patrolled the Mediterranean, provided security in the Caspian Sea and off the West 

Coast of Africa. 

During that assignment, I became more appreciative of the size 

and scope of the oil security challenge. While surveying that challenge, it became apparent that the U.S. military could not protect 

that vast infrastructure without partners—and trust me, there 

should be partners in this mission. The free flow is clearly in the 

best interests of people all over the world. These interested parties 

certainly cannot replicate all the capabilities of the U.S. military, 

but their contributions can free up military tasks that only the U.S. 

military can successfully accomplish. 

That’s why we created a program to train local populations and 

militaries in the Caspian region, to develop effective policing capabilities. That’s also why we worked and engaged international oil 

firms in creating programs for protecting our assets. At the end of 

the day, this cooperative government, industry and military approach is the only realistic way to address the growing vulnerability of our worldwide supply. 

The armed forces of the United States have thus far been successful in fulfilling our energy security mission and they continue 

to carry out their duties professionally and with great courage. As 

a result of this success, many have come to believe—and I believe, 

falsely—that energy security can be achieved solely by military 

means. We need to change this paradigm because the U.S. military 

is not the best instrument for confronting all the strategic dangers 

emanating from oil dependence. The 1973 oil embargo is the most 

famous example of the use of energy as a political strategic weapon. 

Currently, it has been Russia that has shown the most willingness to use oil as a political tool. At the beginning of 2006, Russia 

suspended natural gas exports to the Ukraine, which, in turn, 

withheld natural gas destined for Western Europe. Again, just this 

week, Russia has stopped natural gas exports to Belarus, with 

much the same effect as the 2006 event. 

In an oil-dependent world facing increasingly tight supplies, the 

growing power of oil exporting countries and the shift in strategic 

calculations of other important countries have all added up to lessen U.S. diplomatic leverage. 

Iran, which exports to the United States’ European and Asian allies, has threatened the use of the oil weapon to retaliate against 

efforts to constrain their nuclear program. The European Union relies on Middle Eastern oil, and Russian gas continues to complicate 

U.S. foreign policy efforts, especially when considering our efforts 

to stop Iran from developing nuclear weapons. China, with its rapidly growing dependence on foreign oil also blocks U.S. diplomatic 

initiatives in an effort to strengthen its own ties with oil exporters. 

Given all these factors, it is imperative that the United States 

make energy security a top strategic priority. Toward that end, we 

should mobilize and leverage all of our national security resources, 

34

including our economic power, our investment markets, our technological products and our unsurpassed military strength. 

I’ve mentioned many specific recommendations in my written 

testimony. One recommendation I would like to mention here is to 

call for the U.S. Government to reorganize its bureaucracy to better 

address the needs of a comprehensive international energy strategy 

and I recommend the Department of Defense, as was mentioned 

earlier for the National Security Council, to designate an individual 

as their energy security policy expert and director. 

In sum, we need a comprehensive national security strategy for 

energy security. We must be prepared for sudden supply shocks 

triggered by terrorism or politics. We must promote greater diversity of fuel options while improving the efficiency of our Nation’s 

fleet. Most of all, we must have the courage to shape the future 

rather than to succumb to the paralysis of resignation. It is time 

for America to lead the way in constraining oil consumption and 

boosting stable oil production, to work with other nations to secure 

its production of energy products and to maintain the military resources that will continue to be essential for ensuring energy security. 

These are not easy tasks. Making progress will take enlightened 

and courageous leadership. I thank you all for the opportunity to 

discuss this important issue to our national security. 

[The prepared statement of General Wald follows:]

PREPARED STATEMENT OF GENERAL CHARLES F. WALD, USAF (RET.), FORMER DEPUTY COMMANDER, U.S. EUROPEAN COMMAND, AND MEMBER, ENERGY SECURITY

LEADERSHIP COUNCIL

Chairman Bingaman and Members of the Committee, I thank you for inviting me 

to talk to you about the global oil balance and its impact on U.S. economic and national security. My friend Bob Hormats has done a great job describing the work 

of the Energy Security Leadership Council on which we both serve, and let me say 

that I agree completely with his assessment that oil dependence is one of the most 

serious economic and national security challenges facing this nation. 

Please allow me the opportunity to explain. I retired from the U.S. Air Force last 

July after thirty-five years of service. During my career I flew combat missions over 

Vietnam, Cambodia, Iraq, and Bosnia, and I learned a lot about how to use military 

assets to effectively solve national security problems. But I also learned that a lot 

of people think the military is solely responsible for national security. I like to call 

this the ‘‘Dial 1-800-The U.S. Military’’ syndrome, because it reflects how people assume the military is a ‘‘toll-free’’ resource that can be called on to perform tasks 

that no one else has the capability for or the will to execute. I remember once I was 

introduced to some oil company executives in Kazakhstan, and before we began 

talking one of them thanked me and the U.S. military for protecting the flow of oil 

around the world. He was serious and sincere about this, and I was seriously concerned. This man’s world view included the expectation that the U.S. military will 

be there to provide security all over the world to ensure the free flow of oil without 

assistance from others. It did not seem like a good model to me. 

And it’s not just a matter of cost, though this approach does burden the military’s 

budgets as well as its personnel and their families. It is really an issue of recognizing that true national and economic security must rest on a nation’s full 

strength, not just on the backs of its military. This is necessary because some 

threats cannot be mastered through military means. In the case of the oil dependence problem, military responses are by no means the only effective security measures, and in some case are no help at all. 

In fact, the single most effective step the U.S. can take to improve its energy security is to increase transportation efficiency. The transportation sector is responsible 

for nearly 70% of all the oil the country consumes. Within the transportation sector, 

oil—nearly 13 million barrels per day of it—accounts for 97% of delivered energy. 

More than 8 mb/d are used to fuel the over 220 million light-duty vehicles that 

Americans rely on for mobility. For thirty years, these vehicles have been subject 

35

to government-mandated Corporate Average Fuel Economy (CAFE) standards enacted in the aftermath of the 1973-1974 Arab oil embargo. CAFE was instrumental 

in helping Americans lower oil usage by the early 1980s, but unfortunately its requirements for cars have remained essentially unaltered since they were put in 

place and those for light trucks have been improved only slightly. As a consequence, 

America’s light-duty vehicle fleet now has the lowest average fuel efficiency in the 

developed world. 

America must do better in this area, and that is why the Energy Security Leadership Council has recommended vehicle efficiency standards that require 4% annual 

improvements in miles per gallon performance, but with regulatory ‘‘off-ramps’’ to 

protect manufactures and consumers if analysis by the National Highway Traffic 

Safety Administration (NHSTA) finds 4% to be technically infeasible, unsafe, or not 

cost-effective for a given year. 

Some in the audience may be surprised to hear a former general talk about fuel 

efficiency standards, but they shouldn’t be. In the military you learn that force protection isn’t just about protecting weak spots, it’s about reducing vulnerabilities before you get into harm’s way. That’s why lowering the nation’s demand for oil is 

so important. If we can lessen the oil intensity of our economy, making each dollar 

of GDP less dependent on petroleum, that will mean we’re less vulnerable if and 

when our enemies do manage to successfully attack elements of the global oil infrastructure. The best ways to reduce oil intensity are to improve efficiency and to develop the ability to produce and use realistic amounts of alternative fuels such as 

ethanol. 

Political forces have often portrayed increased supply and decreased demand as 

mutually exclusive ambitions. As I have been saying, the U.S. needs a comprehensive policy for achieving genuine energy security. This policy should include increases in production in places like the Outer Continental Shelf along with strict 

new environmental protections. Increased production in the U.S. makes economic 

sense, since it will reduce the risk premium that currently inflates the global price 

of oil. 

Last but not least, they are energy security tasks that must involve the military, 

acting either alone or with partners around the globe. I’d now like to offer a bit of 

background in that area. 

THE MILITARY’S HISTORICAL INVOLVEMENT IN ENERGY SECURITY

The United States protects the global oil trade for the benefit of all nations. In 

part, this is because the U.S. has unmatched military capabilities. But another reason is that other nations know the U.S. military is out there doing the job. 

The implicit strategic and tactical demands of protecting the global trade have 

been recognized by national security officials for decades, but it took the Carter Doctrine of 1980, proclaimed in response to the Soviet Union’s invasion of Afghanistan, 

to formalize this critical military commitment. 

The Carter Doctrine committed the U.S. to defending the Persian Gulf against aggression by any ‘‘outside force.’’ President Reagan built on this foundation by creating a military command in the Gulf and ordering the U.S. Navy to protect Kuwaiti 

oil tankers during the Iran-Iraq War. The Gulf War of 1991, which saw the United 

States lead a coalition of nations in ousting Iraqi leader Saddam Hussein from Kuwait, was an expression of an implicit corollary of the Carter Doctrine: the U.S. 

would not allow Persian Gulf oil to be dominated by a radical regime—even an ‘inside force’ that posed a dangerous threat to the international order. More recently, 

the security agenda in the Gulf has expanded beyond state actor aggression to include concerns about terrorist attacks on facilities and supply lines. 

THREATS ABOUND

Since issuing his 1996 ‘‘Declaration of War’’ against the U.S. and its partners, 

Osama bin Ladin has warned of attacks on oil installations in the Persian Gulf. 

Last year, the world came close to experiencing an oil supply shock when an AlQaeda attack on the Abqaiq facility through which approximately 60% of Saudi Arabian oil exports pass was barely foiled. In addition to attacking physical infrastructure, Al Qaeda operatives have also targeted expatriates in their residential areas, 

in particular in Riyadh, Saudi Arabia (October 2002) and in al-Khobar (May 2004). 

Iraq is also the scene of persistent insurgent and terrorist attacks on pipelines 

and pumping stations, especially in the North of the country. These attacks have 

severely limited Iraqi oil exports to the Mediterranean through Turkey, and they 

are a major reason why Iraqi oil production has stubbornly remained below its prewar peak. The lost output has cost Iraq billions of dollars at a time when it needs 

every dollar and while U.S. taxpayers have spent billions on the reconstruction of 

36

the country. But if violence continues, and especially if it spreads to the south, 

where most of the oil and export facilities are located, then all of Iraq’s oil production could be at risk. The implications of this supply cut would be severe. 

The danger of attacks on shipping is proven—in October 2002, the French supertanker Limburg was rammed by a small boat packed with explosives off the coast 

of Yemen. Most oil shipments have to pass through a handful of maritime 

chokepoints. Roughly 80% of Middle East oil exports pass through the Strait of 

Hormuz (17 mb/d), Bab el Mandeb (3 mb/d), or the Suez Canal/Sumed Pipeline (3.8 

mb/d). Another 11.7 mb/d pass through the Straight of Malacca and 3.1 mb/d 

through the Turkish Straits. All of these passageways are vulnerable to accidents, 

piracy, and terrorism. Since alternative routes are lacking, the effect of a major 

blockage at one of these points could be devastating. Even unsuccessful attacks on 

tankers are likely to raise insurance rates and thus oil prices. 

PARTNERING FOR PREPAREDNESS

Nearly all of our U.S. military commands handle oil security tasks. Central Command guards access to oil supplies in the Middle East. Southern Command defends 

Colombia’s Cano Limon pipeline. Pacific Command patrols tanker routes in the Indian Ocean, the South China Sea, and the Western Pacific. European Command is 

involved in oil security all the way from the Caspian Sea to West Africa. 

I happen to know more about European Command, because, in late 2002, I was 

named its Deputy Chief. It was during this period of my service that I came to realize that I came face to face with the size and scope of the oil security challenge. 

The global economy relies on a massive oil infrastructure that stretches far beyond 

the Persian Gulf to pipelines in the Caucasus and offshore drilling rigs in the Gulf 

of Guinea. Surveying this situation, I realized that the U.S. military could not protect this vast infrastructure without partners. And, trust me, there should be partners out there, because the free flow of oil is in the best interest of many people 

all over the world. These interested parties certainly cannot replicate all the capabilities of the U.S. military, but their contributions can free up the military for tasks 

that only it can complete. That’s why I made an effort to train local populations in 

the Caspian region to develop effective policing capabilities. It’s also why I work to 

engage oil industry firms in protecting their assets. At the end of the day, this improved division of responsibilities will benefit the U.S. our Allies, and millions 

around the world. 

MILITARY POWER HAS LIMITS

The armed forces of the United States have been extraordinarily successful in fulfilling their energy security missions, and they continue to carry out their duties 

with great professionalism and courage. But, ironically, this very success may have 

weakened the nation’s strategic posture by allowing America’s political leaders and 

the American public to believe that energy security can be achieved by military 

means alone. We need to change the paradigm, because the U.S. military is not the 

best instrument for confronting all of the strategic dangers emanating from oil dependence. This is particularly true when oil is used a political weapon. 

The 1973 Arab embargo is still the most famous example of the use of energy as 

a political strategic weapon. But in recent years, it has been Russia that has shown 

the most willingness to play this dangerous game, as at the beginning of 2006, when 

it stopped natural gas exports to the Ukraine, which in turn withheld the natural 

gas destined for Western Europe. The danger of conflict with a nuclear power like 

Russia should make it abundantly clear that there are limits on how we can use 

military power to guarantee energy flows. But we can take political steps to counter 

Russia’s brandishing oil and natural gas as political weapons. Russia wants to join 

the World Trade Organization (WTO) as a full member. Russia’s entry into this organization must be made contingent on its behavior. Russia must make a commitment to fostering energy security; there should be no reward for sowing insecurity. 

Of course, energy exporting governments don’t need to resort to full-fledged embargoes to hurt the U.S. and other importers. Exporters can manipulate price 

through less drastic production cuts. Tellingly, after oil prices dropped from their 

2006 peak of $78 to about $60 in the U.S. market, OPEC members began to cut 

back on production. Governments in oil-producing countries can also constrain future supply through investment decisions that lead to long-term stagnant or glowing 

growth in production and exports, or even decline. Often enough, future supply destruction is the unintended or accepted consequence of an insistence on government 

control of natural resources. Currently, an estimated 80-90% of global oil reserves 

are controlled by national oil companies (NOCs), which are highly susceptible to 

being constrained by political objectives, even if these undermine long-term supply 

37

1 EIA, ‘‘Country Analysis Brief: Russia,’’ (January 2006), available online at www.eia.doe.gov/

cabs/Russia/Full.html.

growth. With this level of state-control, it’s impossible to speak of a free market for 

oil. 

State-controlled production is frequently inefficient, relying on outdated technology and reserve management techniques. Consider the case of Venezuela. The 

demagoguery of Hugo Chavez led to a strike at that country’s national oil company 

(PDVSA) in the winter of 2002-2003 and then to the dismissal of thousands of welltrained petroleum engineers. Deprived of the services of expert personnel, Venezuela 

may suffer the permanent loss of hundreds of thousands of barrels per day of production. Chavez also worsened the financial terms for international oil companies 

operating in Venezuela, making it even less likely that emerging best practices will 

be employed in the country’s oil fields. 

While major international oil companies and their advanced technology still maintain major stakes in Venezuela’s oil industry, this is not the case in Russia, whose 

government has made it abundantly clear that it wants to maintain near absolute 

control over its energy resources. This power grab has curtailed foreign investment, 

and ultimately limited production as well. 

Russia’s oil industry stands as a testament to the dangers of political meddling 

in oil production. After the collapse of the Soviet Union, Russian production plummeted to only 6 mb/d in the mid-1990s, but then the efforts of private companies 

helped push production back to over 9 mb/d, achieving 10% annual growth rates in 

2003 and 2004.1 However, with the subsequent expropriations of private enterprises 

such as Yukos, the production growth curve has flattened. Government control over 

production in Russia will also adversely impact the massive Shtokman natural gas 

field and Sakhlain-2 oil projects. President Putin has determined that tight government control of resources is more important than the greater revenue that would 

accrue from increased production achieved through cooperation with Western oil 

companies. 

OIL CONSTRAINS U.S. FOREIGN POLICY

In an oil-dependent world facing increasingly tight supplies, the growing power 

of the oil-exporting countries and the shifting strategic calculations of other importing countries have lessened U.S. diplomatic leverage. 

Iran, which exports to the U.S.’s European and Asian allies, has threatened to use 

the ‘‘oil weapon’’ to retaliate against efforts to constrain the country’s nuclear program. Russia’s growing self-assurance and assertiveness cannot be divorced from 

the leverage it enjoys because of its oil and gas resources. 

European Union reliance on Middle Eastern oil and Russian gas continues to complicate U.S. foreign policy efforts, especially as far as efforts to stop Iran from developing nuclear weapons are concerned. China, with its rapidly growing dependence 

on foreign oil, also blocks U.S. diplomatic initiatives in order to strengthen its own 

ties with oil exporters. Chinese opposition has helped thwart U.N. Security Council 

sanctions against Iran and prevented significant intervention in the Darfur region 

of Sudan. 

CONFRONTING DIVERSE DANGERS

Giving all these factors, it is imperative that the U.S. make energy security a top 

strategic priority. Toward that end, we should mobilize all of our national security 

resources, including our economic power, our investment markets, our technology 

prowess, and our unsurpassed military strength. To borrow a metaphor from the energy sector, this broad approach will result in some dry-holes, but it should pay solid 

dividends over time. 

The U.S. can set an example with domestic actions. Curtailing demand is the 

most important security step we can take. But we should also demonstrate a willingness to increase domestic production in an environmentally-responsible fashion. 

The U.S. should also impress upon other major exporting countries that they need 

to more fully develop their oil and gas reserves. To enhance the global market’s ability to respond to price signals and increase the reliability of global production, access to U.S. markets and global trade organizations should be contingent upon the 

granting of reciprocal access to foreign investment in energy production. Such access 

should then be protected by appropriate laws, regulations, and judicial systems that 

preserve the sanctity of contracts. In keeping with this reciprocity requirement, the 

U.S. must not take a protectionist stance when foreign nations seek to invest in U.S. 

oil companies, unless clear national security risks can be demonstrated. 

38

2Patrick Clawson and Simon Henderson, ‘‘Reducing Vulnerability to Middle East Energy 

Shocks: A Key Element in Strengthening U.S. Energy Security,’’ Washington Institute for Near 

East Policy, policy focus #49 (November 2005). 

The U.S. should also encourage greater transparency and private ownership in 

the world’s NOCs. This might mean promoting the creation of national oil companies in countries where oil ministries run energy operations, and promoting private 

majority ownership in those countries where state-run companies already exist. In 

the long-run, such efforts will depoliticize the decision-making process of oil investing and should lead to more exploration of oil in response to market demand. 

Iraq is the oil-exporting nation with which we have the most influence. It is also 

the country that could boost its oil production and exports most significantly in the 

medium and long-term (given some political stability). In fact, Iraq, the least developed OPEC country, has the potential to expand its oil production from the current 

2.2 mb/d to 6-8 mb/d over the next decade. It is also a country that desperately requires, and is eager for, foreign investment in its energy sector. The U.S. should encourage Iraq to take the steps necessary for increasing production. These steps 

should include improved energy infrastructure security efforts, increased capital expenditure in the energy sector, a viable Petroleum Law that will encourage necessary foreign investment, and a reconstituted NOC that more effectively excludes 

political considerations from its operations so as to boost operational efficiency. 

The U.S. government should also work with other governments to minimize the 

likelihood and impact of supply disruptions. In this respect, the U.S. should promote 

greater security of the global oil infrastructure, which includes everything from 

ports and tankers to well and pipelines. The keys to infrastructure security are protection, repair, and redundancy. This mission will require an expansion of contingency planning. Multilateral military and civilian rapid response teams should be 

formed to respond to attacks and repair damage. This will likely involve a good deal 

of American training of other countries’ military and civilian agencies. It will also 

require the stockpiling of expensive spare parts in key strategic locations around the 

world. The U.S. and its allies should consider adding energy infrastructure protection as a role for NATO, for instance. Oil companies also need to be fully engaged 

in such an endeavor with funding and dedicated personnel. 

Arranging for oil-exporting nations to store more oil in or near major consuming 

nations whether in tankers, tanks or petroleum reserves—can serve as a way to 

minimize the impact of a supply disruption. The oil-producing countries could retain 

absolute control over that oil, including deciding when to release it and to keep profits from it. The is not a new idea; the U.S. Government and Saudi Arabia have at 

times raised the idea of storing Saudi oil in the United States, though the details 

were never worked out.2

Among consuming nations, the U.S. should promote the build-up of strategic reserves in key locations across the globe. China and India are making some progress 

in this regard, but only very slowly; indeed, they are planning on building reserve 

capacity for only 15-20 days worth of imports, while the United States Government’s 

Strategic Petroleum Reserve (SPR) now contains 700 million barrels, or the equivalent of about 60 days of imports. But building reserves is only half the task. There 

must be clear decision-making processes for when to use these reserves. These processes must be developed both domestically and internationally. Without clear release procedures, strategic reserves cannot offer maximum protection. 

One final recommendation that merits mention is a call for the U.S. government 

to reorganize its bureaucracy to suit the needs of a comprehensive international energy strategy. For example, in the Department of Defense, which has a salient role 

to play in global oil security, there is no civilian office that is dedicated to coordinating the efforts and needs of the military commands with respect to energy matters. An Office of Energy Security should be formed to do that. 

In sum, a comprehensive national security strategy must address numerous energy security issues. We must be prepared for sudden supply shocks triggered by 

terrorism or political action. We must also be ready to deal with the stagnation of 

global production and the increasing politicization of the global oil market. We must 

promote greater diversity of fuel options while improving the efficiency of our nation’s vehicle fleet. Most of all, we must have the courage to shape the future rather 

to succumb to the paralysis of resignation. It is time for America

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

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

39

3) to maintain the military resources that will continue to be essential 

for ensuring energy security.

I thank you.

The CHAIRMAN. Thank you very much. 

Our final witness this morning is Dr. Flynt Leverett, who is a 

senior fellow and director of the Geopolitics of Energy Initiative at 

the New America Foundation and also a visiting professor of Political Science at MIT. Thank you for being here. 

STATEMENT OF DR. FLYNT LEVERETT, SENIOR FELLOW AND 

DIRECTOR, GEOPOLITICS OF ENERGY INITIATIVE, NEW 

AMERICA FOUNDATION, WASHINGTON, DC 

Dr. LEVERETT. Thank you, Senator Bingaman, Senator Domenici 

and members of the committee, for the chance to speak with you 

this morning. I will try to get to the heart of the topic for this hearing, namely the geopolitics of oil. 

I will start with a very stark assessment and that is, in my view, 

during the next quarter century, the most profound challenges to 

America’s continued global leadership will flow from the strategic 

and political consequences of the structural shifts in global energy 

markets that previous witnesses have been laying out for you. 

And in the time that I have, I’d like to talk with you about what 

I see as those strategic and political consequences of the structural 

shifts in the global oil market and what they mean for American 

interests. 

On both the supply and demand side of the global oil market, we 

have seen strategic and political responses to the kinds of structural shifts that Dr. Birol and others have described for you. 

On the supply side, we’ve seen the rise of what a lot of folks call 

‘‘resource nationalism’’. Resource nationalism is often defined as 

national government with oil and gas resources asserting their 

ownership rights over those resources in ways that work against 

the interests of international energy companies, something like Mr. 

Chavez’s recent declaration about nationalizing projects to develop 

extra heavy crude in the Orinoco region. 

But there is another dimension to resource nationalism that I 

think is very important here and that is the use by energy suppliers of their status as suppliers in a tight market as a source of 

political leverage. Venezuela is a good example in this hemisphere, 

obviously Russia is an important example, but there are many others that you could lay out that are very important for American interests. Saudi Arabia, for example, using its unique status as the 

swing producer in the world oil market to cultivate a kind of alternative strategic partnership with China, as a hedge against a further deterioration in its traditional strategic partnership with the 

United States. This phenomenon, this aspect of resource nationalism will, I think, pose an increasingly serious set of challenges 

to American interests in coming years. 

On the demand side, we see an analogous phenomenon, what I 

describe as ‘‘resource mercantilism’’, namely the reliance of energy 

importing states, China and India being the outstanding examples, 

on national energy companies to secure access to overseas oil and 

gas resources on a more privileged basis than simple supply contracts. 

40

In terms of the significance of this phenomenon, I’m not particularly concerned about Chinese and Indian state-owned energy companies locking up some critical mass of oil and gas reserves and 

keeping them off of international markets. Today, the equity oil 

produced by the Chinese national energy company abroad amounts 

to less than .5 percent of all the oil that is produced in the world 

today. Even with the most optimistic assumptions of how many equity oil deals Chinese energy companies will be able to conclude 

around the world by 2020, you’re still talking about no more than 

2 percent of the oil that is going to be produced in the world. 

It’s not so much the market impact, but it’s really the geopolitical 

impact that is important. As Chinese and Indian state-owned energy companies go about pursuing these deals with the support of 

their governments, it basically puts these countries into competition for geopolitical influence with the United States and puts us 

into competition for influence with these countries in very strategically important regions—the Middle East, central Asia, Sub-Saharan Africa—and if present trends continue unchecked, this is going 

to become an increasingly important source of geopolitical tension 

around the world and an increasingly important source of challenges for U.S. interests. 

Now, resource nationalism and resource mercantilism pose significant challenges to American interests, each in its own way, but 

I would also point out that these two phenomena can intersect in 

some particularly challenging ways for the United States. 

One of the ways in which they intersect is in what I have described as a ‘‘new axis of oil’’, namely a loose coalition of states—

energy-producing states and energy-importing states, loosely organized around a Sino-Russian axis. This axis of oil is bolstering 

Sino-Russian cooperation on a whole host of strategic issues and I 

believe this axis of oil is emerging as the principle counterweight 

to American hegemony in global affairs. 

Let me give you a couple of examples of what I mean. The axis 

of oil, this Sino-Russian axis of oil, has been quite successful over 

the last 2 to 3 years in essentially rolling back the projection of 

U.S. influence into central Asia following the September 11 terrorist attacks. Russia and China have cooperated in standing up 

the Shanghai Cooperation Organization, the world’s largest regional security organization and the only such organization in the 

world in which the United States is not a participant. Working together in the Shanghai Cooperation Organization, Russia and 

China have basically been able to lock us out of central Asia. 

Another example of the way the axis of oil is working against 

American influence is the Iranian nuclear issue. As other witnesses 

have suggested, it is Chinese and Russian collaboration, particularly in the Security Council, but in other arenas as well, that is 

frustrating a very significant segment of U.S. policy objectives on 

the Iranian nuclear issue. 

Let me stick with Iran for a minute because I think that the geopolitical and geo-economic stakes go well beyond the nuclear issue, 

as important as that is. There is, I would argue, a broader strategic 

competition underway between the United States on the one hand 

and Russia and China on the other concerning Iran’s economic and 

political role in the Middle East and global energy markets in comVerDate 0ct 09 2002 12:35 Mar 21, 2007 Jkt 110006 PO 33869 Frm 00044 Fmt 6633 Sfmt 6602 P:\DOCS\33869.TXT SENERGY2 PsN: PAULM
41

ing decades. Essentially, the outcome of this competition hinges on 

which countries will assume leading roles in helping Iran develop 

its hydrocarbon resources. 

Iran’s resource base is truly impressive. If you take its gas reserves—the second largest in the world—convert them into barrels 

of oil equivalent, and add them to their oil reserves—also the 

world’s second largest—you basically have a situation in which the 

aggregate hydrocarbon reserves of Iran and the aggregate hydrocarbon reserves of Saudi Arabia are effectively the same. And each 

of those countries is significantly larger in terms of aggregate hydrocarbon reserves than Russia. 

What this means, given Iran’s low rate of production, is that Iran 

is basically the only major energy producing country in the world 

that has the resource potential to increase its production of both 

oil and natural gas by orders of magnitude in coming decades. But 

to do that, Iran is going to have to get a lot of investment and a 

lot of technology transfer. 

U.S. policy bars U.S. energy companies from participating in that 

process. We threaten secondary sanctions against European companies that would consider participating in those projects. And all of 

that, combined with pretty lousy investment policies inside Iran, 

has had an effect. There has been serious under-investment in uranium production capacity. Some have even suggested that given 

the level of under-investment, Iran is going to face a serious crunch 

in terms of its ability to meet its domestic needs and continue exporting in a significant way in coming years. 

But that assumes that Iran doesn’t have an alternative and Iranian officials and energy executives will tell you that, increasingly, 

they think they do have an alternative. It’s a three-pronged alternative. It means taking advantage when there are European companies that are prepared to do deals in Iran. Fine, let them do the 

deals. Second, it involves developing strategic partnerships with—

let me call them generically third-world energy companies. Chinese 

energy companies are at the top of that list and Chinese energy 

companies are increasingly committing to put very, very significant 

sums of investment capital into the development of Iranian oil and 

gas. Then the third prong of this strategy, the most recent prong, 

is cooperation with Russia, particularly to help Iran develop its potential as a gas exporter. In return for that help, Iran has agreed 

to—the phrase that is used is to coordinate the marketing of its gas 

exports to ensure that Iran’s emergence as a major gas exporter 

does not work against Russian interests. This is the strategy that 

the Iranians think will get them out of the box that they are in 

now. The United States and even Europe, to a large extent, are basically irrelevant to that strategy. 

The potential for Russian and Chinese cooperation to develop 

Iran’s hydrocarbon resources, I think, the potential for that cooperation and its impact on American interests goes beyond Iran. 

Such cooperation has the potential, basically, to remake the geopolitics of all Eurasia; to establish Moscow as a leading energy supplier, not just to Europe, but also to Asia; to have Moscow as the 

major influence on energy trade in this part of the world and to 

consolidate the Sino-Russian axis of oil as the leading counterweight to American hegemony in regional and international affairs. 

42

Now, what can we do about this? I will briefly throw out three 

ideas. 

One is, we have to start taking energy seriously as a foreign policy issue and prioritizing energy security relative to other foreign 

policy objectives. Let me give you an example. Does it make sense 

for the United States to push for Ukrainian accession to NATO 

when domestic politics in the Ukraine do not, in the end, support 

that objective? It involves further strategic alienation between the 

United States and Russia. At a time when we’re looking for Russian cooperation on energy, on Iran, on a whole host of other 

issues, does it make sense to go down that road or does it make 

more sense to incorporate energy interests in a broad strategic dialog with Russia and recognize that on some objectives that we have 

regarding Russia, that energy security may be more important 

than those priorities? 

The second point is, I think we need a grand bargain between 

the United States and Iran. 

Senator DOMENICI. What did you say that was, sir? Repeat that. 

Dr. LEVERETT. I think there needs to be a grand bargain between 

the United States and the Islamic Republic of Iran. My criticism 

of the Baker-Hamilton Iraq Study Group recommendations on engaging Iran is not that they go too far, but that they don’t go far 

enough. Unless there is a comprehensive deal between the United 

States and Iran in which all of the major bilateral differences between the U.S. and Iran are resolved in a package, not only will 

there be no diplomatic solution to the nuclear issue, but basically, 

the United States will lose the race for Iran that I described to you 

a few minutes ago. I think it is very important that the United 

States embrace a comprehensive wrap approach with Iran as an 

important foreign policy objective. 

Third, I think it is critical that we take seriously the goal of encouraging the internationalization of Chinese and Indian stateowned energy companies. These companies are, despite their stateowned status, in many ways becoming more market-oriented, more 

profit-focused in their operations, in their strategies, in their planning, and they are increasingly willing, in significant ways, to operate autonomously from their national governments. This is a trend 

that we ought to be encouraging. In that regard, the political response in this country to the possibility that a Chinese energy company, which last year made a serious initiative to buy Unocal, I 

think, sent exactly the wrong message to the Chinese. We need to 

be encouraging the Chinese and the Indians to rely more on the 

market to meet their energy needs and, instead, in many of our political responses to them, we are sending a message that the 

United States will not let the market work in ways that will meet 

their needs, which will only encourage what are, from our perspective, the worst aspects of their current policies. Thank you very 

much. 

[The prepared statement of Dr. Leverett follows:]

43

* Flynt Leverett is Senior Fellow and Director of the Geopolitics of Energy Initiative at the 

New America Foundation. He is also a visiting professor of political science at the Massachusetts Institute of Technology and a principal of Strategic Energy and Global Analysis, LLC. Previously, he served in government as senior director for Middle East affairs at the National Security Council, on the Secretary of State’s Policy Planning Staff, and as senior analyst at the Central Intelligence Agency. 1For more detailed presentations of the ideas offered in this testimony, see Flynt Leverett and 

Jeffrey Bader, ‘‘Managing China-U.S. Energy Competition in the Middle East’’, The Washington 

Quarterly (December 2005); Flynt Leverett and Pierre Noel, ‘‘The New Axis of Oil’’, The National Interest (Summer 2006); and Flynt Leverett, ‘‘The Race for Iran’’, The New York Times, 

June 20, 2006. 

PREPARED STATEMENT OF DR. FLYNT LEVERETT,* SENIOR FELLOW AND DIRECTOR, 

GEOPOLITICS OF ENERGY INITIATIVE, NEW AMERICA FOUNDATION, WASHINGTON, DC 

Mr. Chairman, Senator Domenici, members of the Committee, thank you for the 

opportunity to speak with you about the global oil balance and its implications for 

America’s national security and foreign policy.1 In my view, the most profound challenges to America’s global leadership during the next quarter century are not posed 

by the risk of strategic failure in Iraq, further proliferation of weapons of mass destruction, or the growth and consolidation of extremist forces in the Islamic world. 

Rather, the most profound challenges to U.S. preeminence during the next 25 years 

flow from the strategic and political consequences of ongoing structural shifts in 

global energy markets, especially the global oil market. Most notably, cooperation 

between China and Russia on energy matters is bolstering Sino-Russian cooperation 

on strategic issues, effectively creating a Sino-Russian ‘‘axis of oil’’ as the principal 

counterweight to America’s global hegemony. 

RESOURCE NATIONALISM AND RESOURCE MERCANTILISM

The basic structural shifts in global energy markets I see boil down to two important trends:

• The first is the tightening of margins between global demand for crude oil and 

installed upstream productive capacity. The global oil supply has grown steadily 

in recent years, and there is considerable evidence that it will continue to grow 

for many years to come, given suitable oil prices and appropriate levels of investment. But, in recent years, global demand for crude oil has been growing 

faster than supply—in no small part because of burgeoning energy demand 

from emerging economic powerhouses in Asia, particularly China and India. In 

coming years, demand is likely to continue bumping up against installed productive capacity. 

• The second important structural shift in the global oil market is the progressive 

concentration of the world’s oil reserves under the control of national governments and national oil companies, especially in the Middle East and the former 

Soviet Union.

Taken together, these two trends are generating strategic and political responses 

on both the supply side and the demand side of the global oil market. On the supply 

side, many have noted the rise of ‘‘resource nationalism’’. Resource nationalism is 

often defined as national governments’ assertion of ownership rights over oil and 

gas reserves against the interests of international energy companies. But there is 

another dimension to resource nationalism on which I want to focus—that is, national governments making decisions about the production and marketing of the hydrocarbon reserves under their control not only on the basis of economic factors, but 

also on the basis of strategic and political calculations. 

There are many examples of how resource nationalism can challenge a wide range 

of American interests. These include:

• Russia’s application of energy ‘‘levers’’ to reestablish its hegemonic position in 

the post-Soviet space and bolster its strategic position vis-a`-vis Europe and East 

Asia; 

• Venezuela’s exploitation of its dominant position as a Western hemisphere energy producer and exporter to weaken America’s standing in parts of Latin 

America; and 

• Saudi Arabia using its unique status as the ‘‘swing producer’’ for the global oil 

market to cultivate a deepening strategic relationship with China as a ‘‘hedge’’ 

44

2On this point, see also Flynt Leverett, ‘‘Reengaging Riyadh’’, in Flynt Leverett, ed., The Road 

Ahead: Middle East Policy in the Bush Administration’s Second Term (Washington, DC: The 

Brookings Institution Press, 2005). 3Statist strategies for accessing hydrocarbon resources around the world—with their associated inclination toward corruption, provision of ‘‘soft’’ loans, and offers of investment and aid 

in unrelated projects and sectors—also challenge the rules-based international order for trade 

and investment in energy that the United States has long championed and, in some cases, weaken the leverage that Western governments and international financial institutions can use to 

promote better governance and transparency in oil-producing countries. 

against precipitous deterioration in the Kingdom’s traditional strategic partnership with the United States.2

On the demand side, we are witnessing an analogous phenomenon, which I describe as ‘‘resource mercantilism’’—that is, the reliance of energy importing states 

on national energy companies to secure access to overseas oil and gas resources on 

more privileged bases than simple supply contracts. Resource mercantilist states 

provide various kinds of support to their national oil companies’ efforts to acquire 

hydrocarbon assets abroad and, like resource nationalist states, often seem to base 

their actions in global energy markets on strategic calculations as well as on commercial and economic considerations. 

The outstanding exemplars of resource mercantilism today are, of course, China 

and India, both of which perceive increasingly acute vulnerabilities to their energy 

security stemming from their growing reliance on imported hydrocarbons to fill critical portions of their energy mix. And, there are a growing number of examples of 

how resource mercantilism can work against U.S. interests, although not in the way 

that many observers initially anticipated. In this regard, while increased demand 

from China and other rising Asian economies has had a very direct effect on global 

oil prices, there is little evidence that Chinese and Indian ‘‘equity oil’’ deals are 

keeping or will keep an economically or strategically significant part of the world’s 

oil reserves ‘‘locked up’’ and unavailable to international markets.

• Currently, oil produced from Chinese and Indian overseas equity assets represents less than one percent of the oil produced and traded worldwide. • If the most optimistic projections of Chinese and Indian oil and gas acquisitions 

abroad prove correct, overseas equity oil production by Chinese and Indian national energy companies might represent roughly 2 percent of total worldwide 

production in 2020.

However, statist approaches in the external energy strategies of rising Asian 

economies are becoming a serious source of geopolitical tension.

• In East Asia, competition between Beijing and Tokyo over a variety of specific 

energy deals, a bilateral dispute about sovereignty over possible natural gas reserves in the East China Sea, and jockeying over the ultimate destination of a 

projected Russian oil pipeline to Asia have all contributed to the deterioration 

of Sino-Japanese relations in recent years. • Even more significantly, China’s statist approach to external energy initiatives 

has become a source of geopolitical tension between China and the United 

States. In particular, China’s search for oil is making it a new competitor to the 

United States for influence, especially in the Middle East, Central Asia, and Africa. This, in turn, is creating new foreign policy as well as commercial options 

for energy exporting states at odds with U.S. foreign policy goals, including 

Iran, Sudan, and Syria.3

THE NEW AXIS OF OIL

As separate phenomena, resource nationalism and resource mercantilism are posing increasingly serious challenges to U.S. interests around the world. But the challenge to America’s global leadership becomes far more profound when these phenomena intersect, as they do in what I have called a ‘‘new axis of oil’’ that is acting 

as a counterweight to American hegemony on a widening range of issues. The heart 

of this undeclared but increasingly assertive axis is a growing geopolitical partnership between Russia (a major energy producer) and China (the paradigmatic rising 

consumer) against what both perceive as excessive U.S. unilateralism in world affairs. Sino-Russian collaboration provides the essential frame for a loose and shifting coalition of energy exporting and energy importing states that acts in specific 

ways to challenge U.S. leadership in world affairs. 

The impact of the new axis of oil on American interests has already been felt in 

the largely successful Sino-Russian effort to minimize U.S. influence in Central 

Asia. Sino-Russian cooperation has been critical to the rise of the Shanghai Cooperation Organization, the world’s largest regional security organization (in terms 

45

4 In its December 19, 2005 issues, the Oil and Gas Journal lists Iran’s proven reserves of 

crude oil as roughly 133 billion barrels. The same source lists Canada as holding the world’s 

second-largest oil reserves, roughly 179 billion barrels, putting Iran in third place. However, the 

reserves estimate for Canada includes 175 billion barrels of reserves in oil sands; this justifies 

the statement that Iran holds the world’s second-largest reserves of conventional oil. When one 

converts natural gas reserves into barrels of oil equivalent (boe), Saudi Arabia has 302.5 boe 

in combined reserves of oil and natural gas and Iran has 301.7. By way of comparison, Russia’s 

aggregate hydrocarbon reserves—the world’s third-largest—are 198.3 boe. I am grateful to Bijan 

Khajehpour of Atieh Bahar Consulting for sharing the results of his calculations. 

of the populations and territory of participating states) and the only regional security organization in the world in which the United States does not participate. 

Working through the Shanghai Cooperation Organization, Moscow and Beijing have 

collaborated over the past three years to cap and then roll back the post-9/11 extension of American influence into Central Asia. 

The new axis of oil is also reflected in Sino-Russian cooperation to frustrate a significant segment of U.S. policy objectives regarding the Iranian nuclear issue. Both 

Russia and China have complicated policy agendas toward the Islamic Republic. To 

be sure, neither Moscow nor Beijing sees Iranian acquisition of a nuclear weapons 

capability as a Iran as a desirable turn of events. But both are prepared to tolerate 

a higher-level of Iranian nuclear development than the present U.S. administration. 

Moreover, each has other interests that it wants to pursue with Iran.

• For Russia, these interests include exporting civil nuclear technology and conventional military equipment. For China, they include cultivating Iran as an energy supplier. 

• And, both Moscow and Beijing have interests in collaborating with Tehran in 

Central Asia to manage Sunni extremist threats there and minimize U.S. influence. To these ends, Russia and China have now included the Islamic Republic 

in the Shanghai Cooperation Organization as an observer.

In this context, neither Russia nor China will support multilateral sanctions 

against Iran that would put these various interests at risk. As a result, there is no 

prospect of getting the United Nations Security Council to impose sanctions on the 

Islamic Republic that would be stringent enough to leverage changes in Iranian behavior on the nuclear issue. 

Even more significantly, Russia and China see the controversy over Iran’s nuclear 

activities as an important issue on which to ‘‘draw lines’’ against what both Moscow 

and Beijing consider excessive U.S. unilateralism in international affairs. In this regard, Russian and Chinese leaders considered the Iraq war a dangerous precedent 

and are determined not to see that precedent repeated in Iran. In the end, the 

United States or others may use military force unilaterally to try to delay Iran’s nuclear development, but Moscow and Beijing will use their status as permanent members of the Security Council to ensure that there is no plausible international 

legitimation for such unilateral action. 

THE RACE FOR IRAN

The geopolitical and geoeconomic stakes at play in Iran go well beyond the nuclear controversy. There is now a broader strategic competition underway between 

the United States, on the one hand, and Russia and China, on the other, concerning 

Iran’s economic and political role in the Middle East and global energy markets in 

coming decades. The outcome of this competition hinges in considerable measure on 

which countries will assume leading roles in helping Iran develop its enormous hydrocarbon resources. 

Iran’s resource base is truly impressive. If one converts Iran’s reserves of natural 

gas—the second-largest in the world, after Russia’s—into barrels of oil equivalent 

and adds them to Iran’s proven reserves of conventional oil—the second-largest in 

the world, after Saudi Arabia’s—Iran’s hydrocarbon resources are effectively equal 

to those of Saudi Arabia and significantly greater than those of Russia.4 Moreover, 

Iran’s low rates of production of crude oil and natural gas, relative to its reserves 

base, suggest that the Islamic Republic is perhaps the only major energy-producing 

state with the resource potential to increase production of both oil and gas by orders 

of magnitude over the next decade or so. 

Iran, however, cannot realize this potential without significant infusions of investment capital and transfers of technology from abroad. Since the mid-1990s, U.S. policy has sought to constrain the development of Iran’s hydrocarbon resources by barring U.S. energy companies from doing business there and threatening European 

companies undertaking projects in Iran with secondary sanctions. These policies, 

combined with a problematic investment climate in the Islamic Republic, have limVerDate 0ct 09 2002 12:35 Mar 21, 2007 Jkt 110006 PO 33869 Frm 00049 Fmt 6633 Sfmt 6621 P:\DOCS\33869.TXT SENERGY2 PsN: PAULM
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5 According to both Iranian diplomats and current and former Russian officials, a high-level 

working group has been set up to oversee bilateral energy cooperation. On the Iranian side, the 

working group is headed by the Deputy Oil Minister; on the Russian side, it is headed by the 

chief of Gazprom’s international activities.

ited investment flows and transfers of technology into Iran’s oil and gas sectors. Recently, Iran’s Oil Minister publicly acknowledged this. 

Some have suggested that insufficient investment in new productive capacity, 

along with the combined effects of the depletion of already developed oil and gas 

fields and the growth in its domestic energy demand has put the Islamic Republic’s 

oil and gas exports into a precipitous decline. But, it would be a mistake to assume 

that, absent rapprochement with the United States, these trends will continue unchecked and put the Islamic Republic in an increasingly precarious economic and 

strategic position. 

Over the last several months, Iranian officials and energy executives have told me 

that Iran is developing an alternative strategy for increasing its production and exports of crude oil and natural gas, a strategy that does not rely on substantially improved relations with the United States or the West generally. This strategy has 

three principal elements.

• First, Tehran continues to explore the possibility of energy deals with European 

energy companies that are willing to do business in the Islamic Republic. While 

some significant European energy companies are reducing their involvement in 

Iran, there are still prominent Europe-based international energy companies 

with upstream investments there that are pursuing additional deals. • Second, Iran is developing ties to state-owned energy companies in other Islamic countries (i.e., Petronas in Malaysia) and, more importantly, to national 

energy companies in China and India. Chinese companies, in particular, are 

making commitments to invest substantial amounts of capital in Iran’s oil and 

gas sectors. • Third, Iran is exploring possibilities for cooperation with Russia to develop its 

energy production and export capabilities. In particular, Tehran is now willing 

to ‘‘coordinate’’ the marketing of Iranian gas exports with Moscow to ensure 

that Iran’s emergence as a gas exporter does not work against Russia’s economic or strategic interests. In return, Moscow has agreed to provide financial 

and technical support to help Iran boost its natural gas production.5 In this context, at the most recent summit meeting of the Shanghai Cooperation Organization, Russian President Vladimir Putin and Iranian President Mahmoud 

Ahmadinejad announced that their two countries would explore possibilities for 

cooperating to provide energy exports to Asia. 

Privately, Iranian officials and energy executives acknowledge that this approach 

is not the optimal way to develop their country’s hydrocarbon resources. But, as a 

senior Iranian diplomat put it to me recently, Iran ‘‘cannot wait on the West forever.’’

The significance of Russian and Chinese cooperation to develop Iran’s hydrocarbon 

resources goes far beyond its impact on the rate at which the Islamic Republic’s oil 

and gas exports increase or decline or on the extent of Tehran’s regional and international isolation. Such cooperation has the potential to help Moscow consolidate a 

position as the leading player in supplying energy resources to major markets in 

Asia as well as Europe, with considerable attendant strategic benefits. It also has 

the potential to consolidate a Sino-Russian axis of oil as the principal counterweight 

to U.S. hegemony in regional and international affairs. 

STRATEGIC CHALLENGES AND POLICY RESPONSES

There are other arenas in which structural shifts in the global oil market and 

strategic and political responses to those shifts pose serious challenges to America’s 

leadership in international affairs. For example, how major energy exporting 

states—primarily in the Middle East and Russia—handle their enormous and growing current account surpluses is now as important to the management of global economic imbalances and the future of the dollar as the world’s leading reserve currency as the decisions of China and other major Asian economies. Here, too, there 

is considerable potential for a variant of the axis of oil to develop considerable strategic leverage over the United States. 

Of course, the foregoing analysis poses the critical question: ‘‘What is to be done?’’ 

The intellectually and politically facile answer to this question is to advocate ‘‘energy independence’’ for the United States. Unfortunately, this is not a serious response to the strategic challenges facing our country. Simply put, there is no economically plausible scenario for a strategically meaningful reduction in the dependVerDate 0ct 09 2002 12:35 Mar 21, 2007 Jkt 110006 PO 33869 Frm 00050 Fmt 6633 Sfmt 6621 P:\DOCS\33869.TXT SENERGY2 PsN: PAULM
47

6 I have written elsewhere on the content and feasibility of a U.S. Iranian grand bargain; see 

Flynt Leverett, Dealing With Tehran: Assessing U.S. Diplomatic Options Toward Tehran (New 

York: The Century Foundation, 2006). 

ence of the United States and its allies on imported hydrocarbons during the next 

quarter century. Reducing our dependence on domestically produced and imported 

hydrocarbons has many attractions as a policy goal, but we should have no illusions 

about how rapidly this can be achieved or how soon it can provide meaningful relief 

to the strategic challenges I have described. 

This means, above all, that we must begin to take energy security seriously as 

a foreign policy issue and prioritize energy security as a national security objective 

relative to other foreign policy goals. For example, how important is an abortive 

drive for Ukraine’s accession to NATO to American interests compared to securing 

Russian cooperation with the United States and its allies on energy supplies, as well 

as cooperation on the Iranian nuclear issue and other pressing problems? Reasonable and honorable people can come up with different answers to this question and 

others like it, but to avoid addressing the questions is to avoid the responsibilities 

of political leadership. 

Beyond this general proposition, I would suggest two other concrete policy responses to the strategic challenges growing out of trends in the global oil balance. 

First, it is critical for the United States to pursue a ‘‘grand bargain’’ with the Islamic Republic of Iran—that is, a diplomatic process aimed at resolving all of the 

outstanding bilateral differences between the United States and Iran as a package. 

My criticism of proposals for issue-specific or step-by-step engagement with Iran, 

such as those presented in the Iraq Study Group report, is not that these proposals 

go too far but, rather, that they do not go far enough. By continuing to reject a 

grand bargain with Tehran, the Bush administration has not only foreclosed any 

real chance that Iran will accept meaningful long-term restraints on its nuclear activities; it has also put the United States in a losing position in the longer-term geopolitical and geoeconomic struggle over Iran.6

Second, it is important to induce the leading resource mercantilist states, China 

and India, away from statist approaches in their external energy strategies, so as 

to reduce the chances that they will bolster their strategic commitments to an axis 

of oil as an international counterweight to the United States. In this regard, it is 

critically important to bring China and India into the International Energy Agency, 

the OECD’s established ‘‘club’’ for major energy importing states. Similarly, it is important to encourage the internationalization of Chinese and Indian national energy 

companies. There is considerable evidence, especially in the Chinese case, that these 

companies are becoming more market-oriented and profit-focused in their strategies 

and operations, and are increasingly willing to challenge their national governments 

over external energy initiatives that d not make commercial sense. In many ways, 

these companies are the most promising channels for promoting more market-based 

approaches to external energy policy in China and India.

The CHAIRMAN. Thank you very much. 

Let me ask just a few questions and then I’ll defer to Senator 

Domenici and then we’ll take Senators in the order that they arrived, going back and forth between the two sides. 

Dr. Birol, let me ask you first. You, I think, alluded to the need 

for additional transparency in the resource estimates or calculations that exist in some of these areas that are very important for 

us. My impression is, from your testimony, that there is very little, 

if any, exploration going on by Saudi Aramco at this time in that 

area, and I wonder if that is the case and also whether that indicates anything about the likelihood of them developing some of 

these reserves that they are understood to have. Is it possible also 

that we are misjudging the rates that we’re going to see supplies 

decline from some of those areas? 

Dr. BIROL. Thank you, Mr. Chairman. A reserve transparency is 

needed both for international oil companies and national oil companies. I would definitely suggest the point that some of the international oil companies recently went through difficult times because they didn’t assess their own reserves the right way. But lookVerDate 0ct 09 2002 12:35 Mar 21, 2007 Jkt 110006 PO 33869 Frm 00051 Fmt 6633 Sfmt 6602 P:\DOCS\33869.TXT SENERGY2 PsN: PAULM
48

ing at the key resource holders, especially in the major producers 

in the Middle East, the amount of oil left in those countries, exact 

knowledge about the amount of oil left in those countries is very 

important knowledge for all of us, for everybody who is on this 

planet, as all the numbers show that the bulk of the oil in the future will need to come from those countries. 

Now, Saudi Arabia is a key player and will remain so for several 

years to come and the Saudis have the highest reserves in the 

world. We do believe that Saudi Arabia has enough oil to meet the 

growth in global oil demand. However, there are two important 

points here. One, we would like to be sure, as many people in 

world—I mean, analysts in the world, how much oil is there and 

what are the feet-by-feet production levels in Saudi Arabia so that 

we have an overview of the general picture, which would make everybody feel better and give more confidence to the investor. 

The second issue, which is, I think, even as crucial as this one, 

the growth which will come from Saudi Arabia will not be mainly 

as a function of their reserves but as a function of their willingness 

to increase the production capacity. 

Saudi Arabia has the reserves, Saudi Arabia has the money to 

transform these reserves to production, but whether or not in the 

future Saudi Arabia will increase the production as they did in the 

past, as much as the world demands from them, or they will leave 

their oil for the next generations. And Saudi Arabia is differently—

they will decide what they are going to do. But it is also the consumers’ right to recognize that one day, production from those 

countries in which we do not have excess, free, extra capital, to go 

directly into production, may change their policies and this may 

have serious implications for the consumers. 

The structure of the oil market is changing, Mr. Chairman. In 

the past, the money could have access to many oil deposits in the 

North Sea, the Gulf of Mexico, but in the future, it will not be the 

case. Therefore, how much oil will come will be decided by a very 

few number of national oil companies. And again, market conditions may not be the primary determinant when they are making 

those decisions. So, from that point of view, there are two major 

uncertainties: one, whether or not we will have the reserves and 

the money we’ll need in the future, and two, it would be very good 

to have a more transparency on the reserves in all Middle East 

countries and the rest of the world. 

The CHAIRMAN. Let me ask Dr. Leverett, one of the suggestions 

you had is that we need to encourage—as I think you stated, encourage the internationalization of Chinese and Indian energy companies. Could you be a little more concrete as to what actions we 

have—what leverage does our Government have to actually bring 

that about? And how would you proceed, if you were in a position 

to do so? 

Dr. LEVERETT. It’s a very good and important question, Senator 

Bingaman. You’re right, the leverage of the U.S. Government in 

this area is limited. In the end, if American energy companies decide to pursue joint venture projects upstream, downstream, wherever, with Chinese or Indian state-owned companies, they will ultimately make that decision on commercial grounds. But I think that 

the political climate and the policy framework that is established 

49

can have the effect of encouraging or discouraging this kind of cooperation. 

A couple of examples. I already mentioned the political response 

last year, with regard to the possibility of CNOOC taking over 

Unocal. I’m certainly not going to make a judgment about the relative merits of CNOOC’s offer for Unocal versus Chevron’s offer 

from the standpoint of what was better for Unocal shareholders, 

but the political response in the United States to just the possibility that CNOOC might take over Unocal, I think, essentially 

sent the wrong message to the Chinese, which is—and they are already very deeply suspicious about this—the United States encourages China to rely more on the market to meet its energy needs, 

but the Chinese have very profound doubts that when push comes 

to shove, we will really let the market, as a matter of policy, work 

in a disinterested way where their interests are a concern. And the 

political response to the Sino bid last year, I think, reinforced all 

of those suspicions on their part. 

I would also say, if you look at other countries where international energy companies are based, in many cases, particularly 

in Europe, these companies, with their governments’ encouragement, are actively pursuing possibilities for joint ventures with 

Chinese and Indian companies. It has become an important part of 

the strategy for some European energy majors and there is a policy 

framework in Europe that encourages that. 

In this country, I would say the policy framework is, at best, ambivalent on the issue of how desirable it is for American energy 

companies to be cooperating with Chinese and Indian energy companies and I think it would be in our interests in the long run if 

we looked on those kinds of possibilities more favorably. 

The CHAIRMAN. Thank you very much. 

Senator Domenici. 

Senator DOMENICI. Thank you very much, Senator Bingaman. 

I’m sure that two of the witnesses having to sit and wait and get 

this short time to speak to us is rather boring. But I would like 

to tell you that, at least from my standpoint and I hope from the 

rest of the Senators, that we would conclude the same. This kind 

of hearing is very unusual for us. We don’t usually take testimony 

of this type. We’re usually arguing about who is buying what kind 

of car or what we should do about changing the rules regarding the 

amount of mileage average cars are going to be getting—all very 

important things, but what you’ve told us today is just absolutely 

startling with reference to the future. 

I don’t know what we have to do to convince both ourselves and 

the American people that we must change and do things differently. I just don’t know what we have to do besides listening to 

people like you who are spending your brain power trying to tell 

us what’s going on, that just won’t work for too long. And I want 

to thank you for it and only say that I’m really sorry that we don’t 

have more time. And I commend our chairman for suggesting that 

we open our year this way. But I still don’t think we’re going to 

get it out of one hearing, Mr. Chairman. I don’t know if we should 

pick four or five things that they recommend and say, ‘‘These are 

things that came out of that, why don’t we do something about 

them?’’ I don’t know yet, but I’m very, very concerned. 

50

Dr. Leverett, I’ll invest a couple of minutes with you and then 

I’m going to go over to Linda Stuntz. You know, among all the important issues that you see occurring and accruing out there in the 

world, you came up with discussion of Iran and Russia; is that correct? 

Dr. LEVERETT. Yes. There are obviously a lot of specific issues 

that we could take up under this rhetoric, but I think that the 

question of the possibilities for Russian and Iranian cooperation on 

energy matters is an issue that has potentially very, very profound 

geopolitical and geostrategic implications for the United States. 

Russia and Iran together control almost half of the world’s proven 

reserves of natural gas. If those two countries are cooperating, coordinating in terms of the way they develop and market their gas 

exports, they could be potentially twice as influential in the global 

gas trade as Saudi Arabia is in the global oil trade. And I think 

that within the last 18 months, Russia and Iran have announced 

their intention to begin cooperating in this area. There is a highlevel Russian/Iranian working group set up to do this. A senior official of Gazprom chairs it on the Russian side, the deputy oil minister of Iran chairs it on the Iranian side, and Russia and Iran are 

discussing an increasingly wide array of potential energy initiatives, marketing projects and pipeline projects that would increase 

both Iranian and Russian influence in regional energy markets. 

Senator DOMENICI. Well, let me say, from my standpoint, and 

you can try this on and then if you’d like to comment and critique 

what I’ve said, I’ll ask a question about the nationalization of oil 

as an asset around the world. You and I are talking about Russia 

here and Iran and what they are doing together in their self-interests. Is Russia working as hard as it seems to me to regain its 

international powers in the region, in the large region that might 

be called Sino? Is it working as hard as I think and are they doing 

it with a lot of disregard for the rules because they don’t necessarily want to follow them? 

Dr. LEVERETT. I think the short answer to your question is yes, 

they are working very hard to do this. President Putin has made 

it a cardinal element of his foreign policy to restore Russia to what 

he would see as its rightful status as a great power in world affairs. But in contrast to previous Russian leaders, he sees the economic aspects of power and indicates that Russia, particularly its 

energy resources, has the foundation for establishing—re-establishing Russia’s role as a great power. I think he and his advisors 

are working very hard, very strategically to maximize Russia’s 

international standing and influence. 

Senator DOMENICI. I want to say to my fellow Senators that 

about 7, 8, 9 years ago, until about 2 years ago, it was very easy 

to strike a deal with Russia, the remnants of the Soviet Empire. 

If we just had money to give to them, they’d give us almost anything. 

Dr. LEVERETT. Yes. 

Senator DOMENICI. That’s gone. They have a new kind of identity. You can hardly talk to them about anything. They’re not interested and they act about as affluent as they really are. If you want 

to deal on their terms, fine. If not, go home. And they act just like 

they have plenty of money in the bank, and it turns out, from what 

51

you’ve said, they do. And it’s not from the deal that you’re talking 

about, they’ve already put some together, pre-Iranian, and wait 

until they get it done. 

Linda, could I ask you, would you simply turn that map around 

and show us what’s up there so we Senators can see that? Will you 

put that out for them, too? 

Now, Senators, right here in front of us, if there is anything—

that’s fine, go ahead and put it up where they can see it. If there 

is anything that has startled me in preparation for this hearing 

and in today’s hearing, it’s this chart here, which according to our 

staff, national oil companies control 3⁄4 of the world’s oil reserves. 

Now, national oil companies, the way we’re defining it, kind of gets 

confusing to some of us. Owned by the state is what national 

means. So state-owned oil companies has 3⁄4 of the world’s reserves. 

Looking at this chart, you’re going to see that the bars on the right 

reflect the size of the reserves held by the world’s oil companies. 

National oil companies are in red and pink. Despite the fact that 

some focus on large U.S. corporations as the face of big oil in parentheses, ExxonMobile is the largest non-government-owned company and is at number 14. The relative size of the reserves held 

signified by the length of the bar is also quite striking. 

Well, what I’m trying to tell you is that all this argument here 

in the United States about our oil and gas companies being so big, 

and so gigantic that they’re taking us over, and so gigantic that we 

ought to rule them, and so gigantic that we ought to tax them 

more, well, if you want to come to your senses, just put this chart 

in front of you and it will tell you what’s happening to America—

the idea of companies owning oil and/or gas reserves, to provide 

that to the world in some kind of a capitalistic, free-market approach. Linda, could you tell me—and that’s startling me in terms 

of the future of the world—does that bother you at all, the trend 

that is moving in the direction that that chart seems to show? 

Ms. STUNTZ. It concerns me that we don’t know about this, that 

there is so little awareness of this. National oil companies are not 

new. They have—Saudi Aramco has been around for a long time. 

What is different—and I think many of the themes were picked up 

by Dr. Leverett—is that with the price of oil where it is now and 

where it’s been, they don’t need Western capital in the way that 

they have before. 

Also, I think, particularly here in Washington, there has been 

the notion that they don’t have access to technology, if they don’t 

get it from Western companies. That’s a bit of a myth also. There 

are global technology companies. There are fabulous engineers in 

other places in the world. I’m not going to say maybe it’s quite as 

good, but I think we need to disabuse ourselves of the notion that 

these folks are somehow dependent on us. They’re not, and all of 

the things you’ve heard, really, I think, is a striking agreement 

among the panel that we have to figure out how to deal with them. 

They are quite capable of making alliances with others and what 

that means for us then—I just think we need to get our head 

around that and figure out what that means for policy. So I appreciate your attention to this and I think it is something that needs 

to be more broadly understood. 

Senator DOMENICI. OK, thank you very much. 

52

The CHAIRMAN. Yes, thank you very much. 

Senator Tester is next. 

Senator TESTER. Thank you, Mr. Chairman. I’ve got a question, 

as long you’re warmed up, Linda. One of the first things you talked 

about was the issue of America’s energy independence and how it 

wasn’t achievable. There are a lot of different perspectives when 

you talk about energy and national security, affordability for regular folks, economic and so on. Is it that? And you talked about 

Draconian measures, as I recall, but it is that America’s energy 

independence is not that important or it is that we don’t have the 

technology to get it done at this point in time, or is it that, from 

your perspective, from a technological standpoint, it’s simply not 

obtainable? 

Ms. STUNTZ. I would say, from an economic standpoint, it’s not 

achievable. We cannot—we could technologically, if we were willing 

to pay an unlimited amount for the price of gasoline, if we were 

willing to waive a lot of environmental requirements, impose speed 

limits and, I mean, a whole host of things which I think would be 

unacceptable to us as a public, we could, over some period of time, 

never import a drop of oil. My point is, that is not going to make 

us independent of what happens, of all these things that you’ve 

been hearing about this morning in global oil markets. It’s not 

going to mean that we don’t need to care about whether or not Russia is a reliable supplier to Europe because that matters to us, too. 

It’s a fungible commodity. 

But we can’t—just one more, quickly. I believe Dr. Hormats was 

right. The key is vulnerability. We need to make ourselves less vulnerable to those vagaries, even though we can never be completely 

independent of them. 

Senator TESTER. OK, thank you. 

Dr. Hormats, you talked about development of alternative 

sources of energy. Just from your perspective, where do you see 

it—because there are a lot of different alternative energy potentials 

out there—where do you see the best opportunity? 

Dr. HORMATS. Well, I think there are a number of ways. I’ll just 

use a couple. Cellulosic ethanol, in my judgment, is one of the very 

interesting alternatives for several reasons. One, it doesn’t compete 

with the food chain. 

The CHAIRMAN. I think maybe you could pull that microphone 

out or turn it on or something. 

Dr. HORMATS. Yes, sorry. Thank you. 

Thank you, Senator. Cellulosic ethanol, I think, is one area that 

is very important for a number of reasons. It doesn’t compete with 

the food chain. It is basically using waste material, corn stalks or 

switch grass or a whole variety of other things. And at this point 

there is not a large, commercially-viable production facility, but 

most experts think that with the proper amount of Government 

support, there will be. 

Also, the conversion rate is very efficient compared to things like 

corn or even sugar, so I think that’s one area where the farm community benefits substantially. We reduce our dependence and it’s 

a very efficient way of doing things, and with the right kind of incentives, I think you could do that. 

53

Wind energy, I think, still has a lot of potential in this country 

as well and there are a couple points that enhance this prospect. 

One is, if you take—let me just use one example with relationship to the production tax credit for renewable energy resources 

like wind or geothermal. Part of the problem is that there is a very 

narrow window for people to get that. If your project is not completed by the time the window is closed, then you don’t get it. And 

the problem is that it’s a very—in some cases, a very short-term 

window. So there are two or three things, or actually several ways 

in which—the way the laws are written and the way the incentives 

are written can be helpful in giving a longer-term time perspective 

to people who are going to invest in these new sources of energy 

and this would be one of them. 

Part of the problem is that when you get the price going down 

again, as it is today, people say, we don’t really need to do this, 

the crisis is over, we can relax. The problem is, we really need a 

longer-term perspective and the way the law—the way the regs are 

written, the way the PTC is written, you should have a broad 

enough window to give people who are committing capital for a 

long period of time the assurance that it’s going to be there when 

their project is complete. Otherwise you get a sort of on-again, offagain process. 

So the answer of cellulosic ethanol is one among several, but it 

is just one that I think happens to have a lot of potential at the 

moment, if we can develop it further and develop the technology 

and develop the regulatory and the tax support to do it. We’ve got 

the capability, because we’ve got a lot of switch grass and corn 

stalks and things, and a lot of States would benefit, not to mention 

national security. 

Senator TESTER. Thank you. Just one last question. I don’t know 

if any of you have had the opportunity to look at energy policy in 

other countries, and I know we’re different than anybody else, but 

if you have, are there—I mean, I’ve heard three components here, 

listed fairly regularly, with the exception of Dr. Leverett’s presentation, and that is, deal with domestic production efficiencies and 

biofuels. Are there any other components to other countries’ energy 

policies that could be of benefit to this country? And it’s open to 

anybody. 

Dr. BIROL. The International Energy Agency, we have 26 member governments and the United States is, of course, the key one. 

All the countries are faced with these twin energy traits: the subject of supply, which we are discussing today, and the second one 

is the environmental challenge, that we discussed a lot today. And 

in many cases, they are very much interrelated and many countries 

do look at—in addition to efficiency increase and the alternative 

fuel, such as biofuels and the wind and hydro, they also look at the 

nuclear power from very different angles. Nuclear power again is 

on the agenda of many countries, even the countries who didn’t, in 

the past, for different reasons, ban nuclear in their system. 

The reason here is twofold: One, natural gas prices are very, very 

high, which makes the electricity production from natural gas very 

expensive, and the second, as we were discussing with Russia, one 

of the signals of what Russia gave with the Ukraine-Russia disputes there, security of the gas supply is a key issue and, as my 

54

colleagues mentioned here, Russia plus Iran makes about 50 percent of the proven gas reserves, two countries in the headlines of 

the newspapers for energy. 

So, therefore, from the security platform, many countries look at 

nuclear very closely. In Europe, in Asia, they are both in development in developing countries. But in most of the countries, there 

is one common denominator—it is the increase of energy efficiency. 

This is, I think, perhaps the most important one that we have to 

put the emphasis on, because it is very, very cost-effective and easier, compared to nuclear and the others, to implement and get the 

support of the public. Thank you. 

Senator TESTER. Thank you, panel. 

Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you very much. 

Senator Martinez. 

Senator MARTINEZ. Mr. Chairman, thank you very much. I want 

to really commend you and the ranking member for calling this 

hearing. I think we always tend to say thank you for calling this 

important hearing, but some hearings are more important than 

others and I happen to think this one is tremendously important 

and timely and I thank the panel for being here today. 

I represent the State of Florida and we are vitally interested in 

developing alternative fuel sources in Florida, particularly, as you 

mentioned, cellulosic ethanol. We view ourselves as a State that 

can be a part of the future in that regard. 

One of the things that I hear is, in order for us to develop a domestic ethanol production capability, that maintaining the tariff on 

importing Brazilian ethanol is a good thing for us. And I know, Ms. 

Stuntz, you suggested that that tariff ought to be removed. Help 

me with those conflicting currents of encouraging domestic development of the industry while at the same time providing a tremendous challenge for that development by taking off the tariff. 

Ms. STUNTZ. Senator, it’s a good question. I think the realty is, 

today, the cost of cellulosic ethanol, according to analyses I’ve seen, 

are about five times the cost of corn-based ethanol and potentially 

even higher than biomass-based ethanol. So it’s a significant cost 

premium today. We’ve got to do work demonstrations and development to bring that cost down because it clearly is the long-term answer. 

Removing the tariff so that low-cost Brazilian ethanol could come 

in and help us at the time, to give us—to me makes sense as a 

bridge, frankly, to give us time to do the work that is necessary to 

bring the cost of that cellulosic ethanol down. Because we’re already seeing in the marketplace, as corn-based ethanol is ramped 

up, corn prices are at about an 11-year high. I was looking for Senator Dorgan, someone who would know better than I do offhand. 

And you’re seeing some pressure, so why not—I don’t believe allowing Brazilian or other sugar-based ethanol to come in would significantly slow the work that needs to be done. I think it would assist 

consumers in the bridge period. 

Senator MARTINEZ. Would it also maybe help us in developing a 

distribution system? Because I know that’s one of the areas in 

which we’re also way behind. 

55

Ms. STUNTZ. Absolutely. I think we have got to get to work on—

again, as that market expands, we are nearing the limit of how far 

we can go with tanker transportation, barge transportation of ethanol. I know that Brazil ships ethanol by dedicated ethanol pipelines. I have been beginning to hear—and perhaps some of these 

in the funding—private sector funding are looking at the possibility 

of dedicated ethanol pipelines in this country. The technical issues 

may turn out to be less problematic than economic ones in terms 

of, ‘‘Do you have a sufficient market to justify and be able to finance that?’’ Perhaps Dr. Hormats could say more about that. 

But I think you’re exactly right. It’s all got to come together, and 

again, doing this in a way that allows that infrastructure to develop would make sense. 

Senator MARTINEZ. Dr. Hormats. 

Dr. HORMATS. Yes, Linda’s point is an interesting and a very 

good one. I think part of the problem is if there is a gathering system, a distribution system for more conventional sources like corn, 

for instance. Corn has been marketed as a very commercial and efficient commercial marketing system. For things like switch grass 

or corn stalks or things like that, there is no efficient gathering 

system and the distribution process is sort of makeshift. There are 

lots of little local plants that will be developed, but we need to find 

a much more efficient way of getting it into the commercial system 

and distributing it in gas pumps and things like that. Therefore, 

the more volume there is, the more the incentive exists to develop 

the kind of things that Linda was talking about, to make a more 

efficient distribution, gathering and marketing system for these 

products. 

Senator MARTINEZ. Shifting to the geopolitical implications of all 

of it, Dr. Leverett, I traveled to Georgia recently and saw firsthand 

not only the influence but the bullying, really, of Russia as it relates to a foreign policy interest merging with the supply of natural 

gas, particularly to that country. I was also intrigued by your recommendation of a very aggressive engagement with Iran. Some 

things come to mind as we look to that. I agree with you that in 

an unfortunate world, that would be a desirable thing. However, 

there seemed to be some very difficult, long-term goals that the Iranian government seems to be pursuing that might be very difficult 

for us to overcome. You say in your remarks that we have rejected 

negotiations with Iran—I’m not sure of the exact language you 

used, but something along those lines. I’m sure there has not been 

anything on the table from Iran for us to reject, and I wonder how 

we would deal with, No. 1, their nuclear ambitions and, No. 2, their 

stated intent of the destruction of the State of Israel. 

Dr. LEVERETT. You’ve asked exactly the right questions about 

U.S. Iran policy, precisely because the problems between the 

United States and Iran are so difficult and there is such an enormous amount of baggage in this relationship on both sides that my 

argument is the only way this problem is going to be resolved is 

if it is resolved comprehensively. My own view is that Iran will not 

agree to strategically meaningful limits on its nuclear activities in 

the absence of what would, in essence, be a security guarantee 

from the United States, basically a commitment by the United 

States not to use force to change the borders or the form of governVerDate 0ct 09 2002 12:35 Mar 21, 2007 Jkt 110006 PO 33869 Frm 00059 Fmt 6633 Sfmt 6602 P:\DOCS\33869.TXT SENERGY2 PsN: PAULM
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ment of the Islamic Republic of Iran. There is no way that an 

American administration can offer that kind of guarantee unless a 

range of other problems that we have with Iran—its support for 

terrorist organizations, its attitude toward the Arab-Israeli conflict 

and so on—are also dealt with. But there is no way that an Iranian 

government is going to deal with those issues unless there are 

things on the table relating to U.S. acknowledgement of an important regional role for Iran, normalization of relations, and lifting of 

U.S. sanctions. At this point, the issues have become so balled up 

with one another that you can’t resolve any of the outstanding differences between the two countries, I think, without resolving all 

of them. 

In fact, in the spring of 2003, the Iranians offered to negotiate 

on the kind of comprehensive basis that I am describing and the 

Bush administration rejected that overture, did not pursue it. The 

United States and Iran did cooperate very, very extensively after 

9/11, with regard to Afghanistan, for a period of almost 2 years, 

with the Iranians playing very constructively in that process. And 

again, it was the United States that terminated this dialog. There 

is much about Iran’s behavior and its rhetoric that we rightfully 

find unacceptable and offensive, but the issue is, how are you going 

to go about changing that behavior and resolving problems? 

My position at this point is that you can’t do it unless you’re prepared to do it comprehensively. I think that the Iranian leadership, 

even with President Mahmoud Ahmadinejad in office, would be 

prepared to engage in a serious process with the United States if 

they believed it was really aimed at the kind of comprehensive resolution I’ve described. I think that would help us on the nuclear 

issue. I think that would help us in terms of the larger war on terror. I think it would help us regionally. And as I tried to indicate 

today, I think it would be enormously beneficial in terms of longterm energy security. 

Senator MARTINEZ. Can I comment on that quickly? 

The CHAIRMAN. Sure. 

Senator MARTINEZ. It will be very quick. 

The CHAIRMAN. Because we need to get some other questions in. 

Senator MARTINEZ. This may be right and we may be able to get 

something if we have a broad dialog with Iran, I don’t know. But 

I want to just go back very briefly to two points. One, we had excellent relations with the Shah. And the Shah, who we put on the 

throne, by the way, turned around during the middle part of the 

1970’s and did a lot of things that were quite harmful to America’s 

energy interests. Point one is good relations with the country may 

be possible, but even the guy we put on the throne was very, very 

unhelpful in the middle part of the 1970’s. 

The second point is, even if we were able to achieve these kinds 

of goals, which I think are noble goals, if we can work out all these 

things—I’m a little skeptical, but you know what? It’s possible. The 

fact is, that shouldn’t deter us one bit from doing the kinds of 

things we’re talking about in this country, to develop new sources 

of energy, new measures of efficiency to reduce our vulnerability, 

should this not occur. So it is perhaps important, and I don’t deny 

that maybe it could happen, but we’ve got a job to do domestically 

quite apart from that and we shouldn’t think that that is an anVerDate 0ct 09 2002 12:35 Mar 21, 2007 Jkt 110006 PO 33869 Frm 00060 Fmt 6633 Sfmt 6602 P:\DOCS\33869.TXT SENERGY2 PsN: PAULM
57

swer to the kinds of broader issues that we have been talking 

about because the best relations with a country in a given situation 

can turn very sour, as was the case in the Iran in the 1970’s, and 

then again, after the fall of the Shah as well. So we shouldn’t be 

complacent about these kinds of things. 

The CHAIRMAN. If we can go on to Senator Cantwell. We’re trying 

to do 7-minute rounds and I think we can do one for each of the 

Senators still here, if we try to stick to that. Go ahead. 

Senator CANTWELL. Thank you, Mr. Chairman. 

I think, Dr. Hormats, that’s a great lead-in to the questioning 

that I’d like to go to. It was kind of brought up by the Chairman 

earlier about technology. 

First, let me just say thank you for all the panelists being here 

and thank you, Dr. Hormats, for talking about the extension of renewable tax credits for longer horizons. I personally believe as long 

as we’re continuing to use oil at the level we are and only giving 

2- or 3-year horizons to the renewables, not only are you only going 

to have limited development, you basically prevent any kind of the 

manufacturing from happening in the United States—so the job 

creation, so thank you, General Wald, for mentioning the efficiency 

standards for automobiles. I hope next week, in the Commerce 

Committee, we’ll have a bipartisan bill that we can start working 

on and look at that. 

But my question goes to—coming from the Northwest, we kind 

of look at China as a market and not as a competitor. That’s because of Microsoft and Boeing and agriculture, and now the Chinese are drinking lots of Starbucks coffee. So we look at—I think 

we even looked at President Hu’s visit a little differently than the 

rest of the country did. But why not, given that China, I think, in 

2009, will become the largest carbon dioxide emitter? A whole decade before, we’d thought we’d have all this pollution. Why not look 

at this technology issue, of technology transfer, Dr. Leverett and 

Dr. Hormats? Even from the Government’s perspective of the energy efficiency technology that we have as intellectual property as 

a way to leverage the relationship with China, beef up the bilateral 

relationship to a substantive level and use that as at least a starting point to move not only a great economic opportunity for the 

United States but move China away from Iran? 

Dr. LEVERETT. I totally agree with you. I think that we need—

I’ve put in my written testimony a number of elements of what I 

call the United States-China Energy Partnership, which could involve Japan or it could involve——

Senator CANTWELL. Or in Asia, the United States-Asia energy 

policy. 

Dr. LEVERETT. On many levels, United States-Asia—and there 

are a variety of reasons. The Chinese are increasingly dependent 

on imported oil and they are making these arrangements with Russia that you’ve described and it’s bringing them closer to Russia 

since Russia is a big supplier. And, of course, the Middle East, they 

are conducting diplomacy, which is not entirely consistent with 

what we believe to be in our interests. 

On the other hand, there are a great many areas where our interests do converge, because they are more and more dependent on 

imported oil and it is important, I think, to get them to think like 

58

a consumer and work with the consumer groups, work with the 

IEA. There is another energy forum that has been developed at a 

ministerial issue. 

Senator CANTWELL. Get them admitted to the IEA. 

Dr. HORMATS. Yes. Part of the problem with the IEA is because 

you have to be a member of the OEC to be a member of the IEA, 

but it seems to me you can find some relationship to bring them 

closer, along with India and others, to work more closely with the 

IEA. And there is another ministerial form that has been developed, separate from the IEA, with producers and consumers. 

But your broader point is absolutely correct. We should look at 

China because of—as an opportunity, as opposed to a threat. They 

have environmental problems. We have developed in this country, 

and are developing now, some very efficient ways of using coal in 

an environmentally responsible way. Clean coal technology is being 

developed here. We have great technological capabilities that we’re 

developing in our country. If we work with China, we would have 

a broader market to sell some of those, which would bring more 

capital to be available, in the first place, to help to develop them. 

And a broader partnership would be important across the board for 

coal, for new technologies, for new ways of developing efficient utilization of existing technologies and the cars that the Chinese are 

building, a large number of the cars are being developed. 

And it’s a jobs argument here. This is the part of the problem 

that I think does not get enough attention. If we really get out in 

front in energy technology, it can be a great source of job creation 

in this country, for new types of energy, which we can use here and 

abroad, and therefore, a partnership at a very high political level. 

I had suggested to the State Department before the last summit, 

President Hu did a lot better in Washington than he did—your 

Washington than he did in this Washington. And the reason was 

because of the cooperative relationship that was developed on a 

commercial basis. That could happen in energy. We need a cabinetlevel committee to do it. We had one with Japan in the 1970’s, we 

can have one with the Chinese and this would be of huge benefit 

to reduce tensions, to avoid the conflicts over Sudan, Iran, Iraq and 

elsewhere, if we do it right. And give it a high level and have someone senior in the NSC do this, which I think is a good idea, and 

also in the State Department. The State Department has this idea, 

I know, because I’ve given it to them, and others have, but they’ve 

really not developed it at a high enough level. 

Senator CANTWELL. Dr. Leverett? 

Dr. LEVERETT. I think you’ve really—you’ve hit on a potential 

win-win initiative. There is tremendous and growing interest in 

China now, both in the official community and the business community, about doing things to improve the demand side management part of their energy security equation. But part of it is, in a 

sense, being behind the curve technologically. And to some degree, 

there are still—I believe they are still are policy restrictions on exporting some of this technology to China. I think this could be an 

area where Congress could very constructively take initiatives that 

would drive policy in a constructive direction because this is part 

of the energy security equation. The Chinese, themselves, want to 

pay more attention, just as a brief indicator of that, and also kind 

59

of responsive to the questions Senator Tester asked, in terms of 

what other countries are doing. China’s fuel efficiency standards 

for vehicles marketed in China are today more rigorous than those 

on the books in the United States. 

Ms. STUNTZ. May I just comment very briefly, as maybe a little 

bit of a dissenting view. I think this is a great goal, but we need 

to go into this with our eyes open. Every 10 days, China is opening 

a coal plant with the capacity to serve a town the size of Dallas 

or San Antonio. Most of those coal plants are not controlled even 

as well as most of the plants in the United States. They don’t even 

have the base technology that we are putting on right now. A fifth 

of them are actually characterized as illegal because they haven’t 

been approved by the Federal Government of China. So there is, 

in part because they can’t control all that’s going on in the provinces. So I think it is a great aspiration, but we need to be clear 

about what is actually happening on the ground in China in terms 

of what’s being built. And if we could just raise them up to even 

the sorts of levels that we’re having here and then move beyond 

that for the future, I think that would be great. 

Dr. HORMATS. I agree with that. They are going to do it anyway. 

We could help them make it more efficient and certainly better 

from an environmental standpoint. 

Ms. STUNTZ. I hope we’re not saying they should follow the same 

route that we have. I would hope that we’re saying that we would 

help them leapfrog that process. I’m well aware, having led a delegation to China in November, and we were all excited because we 

had energy-efficiency technologies in a good form, but I noticed 

right next to us, at the same hotel, in a much larger venue, was 

the mining industry of China. So I know exactly the challenge, but 

to me, if we could help them leapfrog that, isn’t that a great incentive for them to become a better economic interest with the United 

States and helping us? So instead of going to Iran to look for oil, 

they know that we can give them energy efficiency. And I think the 

Chinese do want to be more environmentally sensitive than they 

are today. They know they are going to get a black eye if they don’t 

approach this issue. 

Dr. LEVERETT. There are enormous demonstrations in China, by 

the Chinese, because of the terrible environmental standards. And 

the health problem is horrible in China for that reason. 

The CHAIRMAN. Please make your comment sort of brief. We need 

to get on to some other questions. 

Dr. BIROL. OK, just one comment. We work very closely with 

China and India, especially in the last couple of years, and just to 

let you know, at the last board meeting, we voted Chinese minister 

and Indian minister participants at the IEM meeting, which is very 

unusual for us. We just signed if we want to deal up the relationship with China and India in that format. And the second point, 

very briefly, is that there is already the partnership between 

China, India, the United States and Japan—the Asia-Pacific Partnership—in the technology area that I wanted to bring to your attention. Thank you. 

The CHAIRMAN. All right, thank you very much. 

Senator Smith. 

Senator SMITH. Thank you, Mr. Chairman. 

60

Thanks to each of our witnesses. 

Ms. Stuntz, a question to clarify on the issue of corn-based ethanol and its cost versus cellulosic ethanol. You said that it is more 

expensive; is that the case because it’s inherently more expensive 

to produce into energy or because we don’t have the infrastructure 

and the gathering of the materials in this country? 

Ms. STUNTZ. With the technologies we have now, it is inherently 

more expensive to produce ethanol from the cellulose of these plant 

feedstock materials than the technology that we now have to 

produce it basically from the fermentation of corn. 

Senator SMITH. In a country where they had such technology, is 

it more expensive to produce than corn-based ethanol? In other 

words, if we get it, if we get the infrastructure, what are the costs 

comparisons between corn and cellulosic? 

Ms. STUNTZ. I believe that there are certain types of plant substances—switch grass and so forth—where the efficiency, the conversion efficiency looks like it will actually be better than it is from 

corn, but we just don’t have the technology yet to do that. And I 

agree with Dr. Hormats, the infrastructure issue is actually on top 

of that in terms of what the cost would be. Actually, the ethanol 

infrastructure is still a bit immature also and could be optimized. 

Beyond that is an ability to gather all these sources of waste, 

which sometimes gets ignored. And I think a lot of work needs to 

be done on that, because it will have to be collected, it will have 

to be ordered from long distances. So it’s a ways in the future, but 

I think there is a great deal of interest now, both by the private 

sector, importantly, as well as the Government, and it can happen. 

Senator SMITH. I think everyone on the panel is saying it should 

be pedal to the metal on developing these infrastructures and a 

way to convert this, because that is one of the building blocks for 

how we get closer to energy independence. 

Dr. HORMATS. Could I just say one thing? 

The CHAIRMAN. I think you need to turn on that microphone. 

Dr. HORMATS. Sure, good point. Thanks. 

One difference is, when you’re competing with corn, you’re competing with the food stock of the country, and the price goes up. 

All this other stuff—the switch grass and the cornstalks and a lot 

of this other— wood chips and things, those are essentially waste 

materials, so the starting point is much cheaper. The difference 

also is that there are some commercially-viable plants to do corn 

ethanol already. We haven’t really gotten far enough down the 

chain to develop those commercially viable plants for this other 

stuff. Some are being—but they won’t be quite ready. They’re not 

ready quite yet, and that’s why some greater degree of government 

effort is needed to help them get from the R&D stage to the development stage, because you can get better efficiencies once you get 

the volume. 

Senator SMITH. And your view is that we don’t retard R&D and 

infrastructure development if we take away the protection against 

importing——

Dr. HORMATS. I don’t think so. I haven’t really looked at the economics to that point, but I think that the competition from some 

of this other stuff, if we’re in a country that believes in competition, 

61

that could help. But I would say the primary thing is to really get 

the Government incentives right to provide the capability——

Senator SMITH. And if we do that right, then the protectionism 

that currently exists——

Dr. HORMATS. Then you don’t need it, right. 

Senator SMITH. We don’t need it. And, moreover, it would allow 

the industry to develop in this country in a way that doesn’t create 

an artificial sort of price that is uncompetitive—grows to be uncompetitive with what the world market will ultimately be. 

Dr. HORMATS. Exactly. And it can’t be based just on the movement of prices from month to month because then that creates—

this has to be a long-term strategy, to give the companies the incentive, and once you do get the critical mass, then you’re in a 

much better position to resist this—to stand up to competition. And 

you’re absolutely right, at that point, more and more people start 

using it and the volume enhances the efficiency so you don’t have 

an artificially high price indefinitely. 

Senator SMITH. One of the things that I think really needs to be 

emphasized by this Senate and you all with your voices is that 

American oil industries are not—they are not controlled by the 

Federal Government. They are private, for-profit industries. There 

are competitors in the world. An overwhelming percentage of the 

competitors to Chevron, Exxon, and all the others, now are nationstate oil industries. I guess one of the questions I really have for 

you and your insights is, what are these nation-state oil industries 

that are using energy as a political weapon against their neighbors? What kind of investments are they making for the future in 

terms of exploration, in terms of infrastructure, as opposed to 

American oil companies that don’t have government control? 

Dr. BIROL. They do also make investments and they make investments more or less to nation oil companies and international oil 

companies and the amount of investment they make is more or less 

the same in terms of dollars. But there is a small trick here. We 

just saw this picture, and this picture is a static picture. When we 

look at the future, the contrast will be even sharper because the 

oil companies own the reserves, which are declining. This is the 

point I wanted to say that the national oil companies have young 

fields and rich fields, so the difference between the international oil 

companies and national oil companies will change, and in favor of 

the Nation oil companies because international oil companies are 

losing reserves and they are not able to have major gains to access 

the new reserves. 

So, in coming to the investments, international oil companies are 

making a lot of investments in order to maintain the current production capacity, to replace what they have, because it is declining. 

They have to inject money to slow down the decline. And the national oil companies are making investments to increase the production capacity. So from that point of view, both of them are making investments, but in terms of the production growth, it is coming mainly from the national oil companies. And looking at the future, the picture will change drastically, especially after 5 or 6 

years. 

Senator SMITH. That brings me to my final point, and then I’ll 

turn it back, Mr. Chairman. 

62

This is not a criticism, Dr. Leverett, but I found your testimony 

especially chilling in terms of national security implications for our 

country. It reminded me a little bit that we need to return to Dayton with Russia and others. I’m reminded that in doing that, in 

asking for energy cooperation, we essentially have to admit to their 

spheres of influence and tacitly agree to their conduct toward their 

neighbors. 

See, to me, whether Ukraine becomes a member of NATO is not 

our business. I mean, we get a veto, I suppose. That’s the business 

of Ukrainians. And if they want to be free and they meet the qualifications, our policy is, they get to join. It’s shared values. So to say 

we’re not—we’re going to say to the Ukrainians, you can’t. I don’t 

care—it’s up to them. I don’t really care if they join or not, but 

that’s up to Ukraine, and I don’t want to change the standard just 

because Russia is going to be offended. I don’t know where Russia 

is going. I mean, Mr. Putin has made it very clear to this Senator 

that he wants his empire back. It’s not going to be communist, but 

it’s sort of a capitalist empire that basically is becoming more and 

more dictatorial and following its historic pattern. 

That really worries me. It would worry me if I were an Estonian 

or a Latvian or a Pole or a Ukrainian or a Georgian, and I don’t 

think we can accede to that. I don’t think we can bargain away 

those kinds of values that the United States has for the sake of energy security. So I want to say that is a concern. 

I think our focus needs to be domestically and then just have a 

really good military capacity to deal with this. When it comes to 

Iran, sitting down with them, they made it very clear what they 

would want from us and that is essentially a military domination 

of the Middle East. That is a horrifying prospect. If I was an 

Israeli, I know what that means: I’m gone, I’m exterminated. And 

I don’t think we can accede to that in the name of energy cooperation. So I just wanted to say that. If any of you have a comment 

on that—I mean, those are the stakes and I don’t think we can 

play in that game. 

Dr. LEVERETT. Senator, let me respond just briefly on Russia and 

Iran. First of all, on Iran, I’m not talking about acceding to Iranian 

military domination of the Middle East. First of all, frankly, Iran 

has no capability to project significant levels of conventional military capability much beyond its borders. 

Senator SMITH. They’ll get them. If they get the energy and we 

cooperate, they can reload their treasury with petrodollars. 

Dr. LEVERETT. They are reloading their treasury whether we cooperate with them or not. The issue for me is, in strategic terms, 

are we better off trying to have some influence over the way that 

those petrodollars are accumulated and recycled and invested and 

used, and how countries that have those kinds of sources of influence use those influences, or are we going to basically, as you say, 

not play in that game and let other countries play, and therefore, 

accrue the strategic benefits from that? Those are the trends that 

I see happening right now, with the emergence of the axis of oil. 

We basically cannot accomplish our policy objectives toward Iran, 

because other countries are playing in a game that we’ve essentially taken ourselves out of, and I don’t think that’s going to serve 

American interests in the long run. 

63

On Russia, you’re right. In the cold war with the Soviet Union, 

we accepted the notion of spheres of influence, because basically we 

made a calculation that managing the nuclear balance and preserving international stability was a more important foreign policy 

interest of the United States than a quixotic effort to push the Soviets out of their empire before the natural course of events forced 

them out of their empire. 

I would argue we are in a somewhat analogous situation vis-a`-

vis energy. Russia has this status and leverage as a major energy 

producer. They are using it to accumulate more and more regional 

and international influence. Do we want them to use that influence 

in ways that work against our interests or work in favor of our interests? If we want them to work in ways that support our broader 

policy objectives, we probably are going to have to accord some attention and some legitimacy to things that they care about. That 

is the nature of strategy. That is the nature of diplomacy. 

The CHAIRMAN. Senator Sessions, you’re the clean-up hitter. Go 

right ahead. We’re glad to have you on the committee. 

Senator SESSIONS. Thank you. It is a fascinating subject and I’m 

honored to be with you, and on this committee, and to participate 

with this panel. 

With regard to my friend Gordon Smith’s comments, I was at 

Riga recently and there was sort of an off-the-record discussion 

over the former Soviet Republic being in NATO and one made the 

point that it’s a question of values. Putin had announced that the 

greatest disaster of the 20th century was the collapse of the Soviet 

Union and they thought the best thing that happened in the 20th 

century was the collapse of the Soviet Union. So I guess I’ll say to 

you, there are more matters than just economics. What might seem 

most rationale to us, our nations oftentimes act directly contrary 

to their national economic interests, and how we bring that kind 

of reasoned analysis to it, I don’t know. But I do suggest, Dr. 

Leverett, that you made some very valuable points and it is true 

that we’d all be better off if we could accomplish what you suggested there. But it’s not easy. 

It strikes me now that our national crisis—I think all of you will 

agree and I’ll run down this quickly so we can wrap up—is driven 

by our dependence, is driven by our need for that fuel that goes 

into our mobile vehicles. I believe it was—you said that at the beginning—we’ve got electricity, we’ve got nuclear and coal in large 

amounts. So that’s not a crisis and natural gas also is a player 

there. 

Ms. Stuntz, you suggested—I believe you stated and I think I recall that the Council on Foreign Relations’ report indicated an increased role for nuclear power; is that correct? 

Ms. STUNTZ. That’s correct. We did not spend a lot of time, and 

did not have the ability to spend a lot of time on that but it seems 

to us, to get at our dependence on oil for transportation, we need 

to do all we can on biofuels, but it may not be enough. And if we 

could move to electric vehicles which then recharge at night—and 

we don’t think a plug-in hybrid is as far away maybe as some others and there have been some exciting developments recently that 

we can take advantage of—clean coal and nuclear and fuels like 

64

that—and turn it into the transportation field and give us that 

kind of resiliency in the choices that we have now for electricity. 

Senator SESSIONS. And electricity, unfortunately we’ve gotten in 

the habit, in recent years, when natural gas prices were low, we 

were using a lot of natural gas to generate electricity and we could 

actually—and I think the D.C. busses use natural gas. I mean, natural gas is a possible, a mobile vehicle system. I think you’ll agree. 

I see nods there. And it’s also much cleaner, is it not, Dr. Hormats, 

in terms of global warming gases and carbon? 

Dr. HORMATS. Sure, yes. 

Senator SMITH. So, to me, that would make a nice move, to reduce the natural gas and electricity production and place it more 

in meeting this mobility challenge. Of course, you’re also suggesting, several of you, that when you increase domestic production—I think is something we need to act on. We’re doing it with 

the Gulf Coast. My area of Alabama is supportive of that and it’s 

good for us. Biofuels, cellulosic ethanol is so exciting to me. We 

have the potential to grow a lot of switch grass. It’s something I’ve 

been interested in and Auburn University has done a lot of research on. 

But it’s that—as you suggested, is it a trend? Is the transformation of that cellulosic, dry material into a fuel that’s driving 

the cost—and we’re not quite there yet technologically and that’s 

where we need to invest money, would you agree, Dr. Hormats? 

Dr. HORMATS. Absolutely. We have to invest the money in the 

R&D but also in the development plans, to make it commercially 

viable. Yes, I totally agree. And it’s very doable. The technology is 

there, it just needs to be expanded and commercialized. 

Dr. BIROL. May I just add something on biofuels, why it is very 

important to develop the biofuels and giving incentives? We should 

put into perspective that the share of biofuels is today far from 

being a real alternative to oil products. Today, the share of biofuels 

in the global oil supply is less than 0.8 percent—not even 1 percent. Just a perspective that there is a big room for improvement, 

therefore large incentives, a lot of time. It’s not a very easy solution. 

Senator SMITH. General Wald. 

General WALD. I think, first of all, I didn’t get a chance to speak 

much here, but everything that has been talked about today has 

to happen to make this go away. The interesting thing about Iran 

that was discussed—and I don’t disagree that dialog is a good 

thing, but the assumption is that Iran is going to potentially cooperate in any way. So that would be nice, but we have to plan 

that they won’t. Like Mahmoud Ahmadinejad, the President of 

Iran, today has regulated and, via government subsidies, developed 

in 5 years their entire fleet of automobiles via natural gas in Iran. 

Now that’s a strategic issue to me. And they’re going in a direction 

of their own way on this thing. 

So I think, in a sophisticated way, we’ve been disadvantaged 

with Russia in our negotiations, but I think countries like Azerbaijan, as far as our relationship and vis-a`-vis Iran and our preparation for a consequence with Iran that will not be in our favor, 

needs to be addressed today. Now, if we were, today, to do everything that was mentioned today on this panel, it will still take us 

65

15 to 20 years to get there. So we have a window of vulnerability 

for a decade or more that we have to pay attention. 

Then the last thing I’d like to mention on this, on the security 

aspect, is since 1980, the U.S. Government, through military application, has put about $50 billion to $60 billion a year into the Persian Gulf. That doesn’t count the current Iraq war or the 1990 Iraq 

war. And that’s good for our country, for security interests, but the 

problem is, we’re subsidizing world energy. There is nobody else in 

the world doing this, and really, if you look at how much we’re paying per gallon, me, as a U.S. citizen today, for gasoline, you could 

almost say it’s $7 a gallon, based on the fact that we’re subsidizing 

world security on this issue. So I think none of these things are silver bullets. We have to do all of them. And I would appeal to you, 

as the U.S. leadership and as Senators, to do something comprehensive, across the board, as soon as possible. 

Senator SESSIONS. Well, I think that’s an excellent statement, 

General Wald. If you’re familiar with Tom Freeman’s theory that 

the more wealth these oil countries have, the worse they behave, 

both domestically and in foreign policy; do you agree with that? It 

seems to be true. He even had a little chart, the Freedom Chart, 

I think, that he put with that. 

General WALD. I know Tom and I think his ideas are pretty 

close. I mean, I’m not necessarily sure you can associate the oil 

wealth with bad behavior, because we have a lot too, but I do think 

what it does do is give countries that necessarily don’t agree with 

us the freedom to act like they want to. 

Senator SESSIONS. It gives them the ability to increase benefits 

for that citizen by a small amount and use the extra to invest in 

military ventures and bad behavior, and it seems to be absolutely 

happening. I do agree. And I’m part of, with Senators Joe 

Lieberman and Lindsay Graham and a number of others, a caucus 

that says we should treat the energy question as a matter of national security, and I think some of the comments you’ve made here 

today are real chilling. As Senator Smith said, that drives that 

home, and this panel has made me more convinced that we do need 

to see that. 

Now, Mr. Chairman, I would just say that means a couple of—

means one big thing. I’m a free market conservative. I don’t believe 

in silly policies that drive up the cost to consumers for some vague, 

theoretical, feel-good thing. I’ll just tell you, that’s my view of it. 

However, if it is a matter of national security, then maybe we can 

justify spending more on this issue of transformation and alternative fuels and those kind of things than we would otherwise. 

And, in fact, I think we’re at that point. I’m prepared to think critically as a member of this committee, Mr. Chairman, on how we can 

utilize our resources to enhance both our environment and our economic independence. 

Dr. HORMATS. Can I just add one quick comment? Our group, the 

Energy Security Leadership Council, is putting together people like 

General Wald, financial people, business people, and a number of 

others to try to look at just that element of security. I think all the 

members, General Wald and myself and a number of others, Robbie 

Diamond, who is here, and others stand ready to work with you, 

because the security element is what makes this different from any 

66

other commodity. And it’s not a market environment, so you have 

to come up with solutions where the Government plays a role simply because it is not a free market and is vulnerable to the whims 

of companies and countries whose interests are very much different 

from those of the United States. 

The CHAIRMAN. OK. Thank you very much, Senator Sessions, 

and thank you all again for being here. 

Let me mention two things. First of all, on this issue of biofuels, 

we’ve put out a notice that we’re going to have an all-day conference that the committee is sponsoring, on February 1, to look at 

all the different aspects of the biofuels issue. Many stakeholders 

are already planning to be here. I just wanted to mention that 

again. 

There are quite a few Senators who came and were not able to 

stay and ask questions. If they have questions, we’ve advised them 

that their questions need to be in by the end of business tomorrow. 

Then we would ask, if any of them are directed at specific members 

of the panel, if you could try to respond in a couple of weeks. We 

would appreciate it very much. Thank you again for being here; it 

was a very useful hearing. 

Senator SESSIONS. Thank you, Mr. Chairman. 

[Whereupon, at 12 noon, the hearing was adjourned.] 

(67)

APPENDIX 

RESPONSES TO ADDITIONAL QUESTIONS

[The following questions were sent to the witnesses. When the 

answers are received, they will be retained in the committee files.]

U.S. SENATE, 

COMMITTEE ON ENERGY AND NATURAL RESOURCES, 

Washington, DC, January 17, 2007. 

Dr. FATIH BIROL, 

Chief Economist, Head of the Economic Analysis Division International Energy 

Agency, Paris, France. 

DEAR DR. BIROL: I would like to take this opportunity to thank you for appearing 

before the Senate Committee on Energy and Natural Resources on Wednesday, January 10, 2007 to give testimony regarding the global oil balance and its implications 

for the U.S. economic and national security. 

I am enclosing a list of questions which have been submitted for the record. If 

possible, please respond to these questions by email to Amanda Kelly,

amandalkelly.energy.senate.gov, by Tuesday, February 6, 2007. 

Sincerely, 

JEFF BINGAMAN, 

Chairman. 

[Enclosure.] 

QUESTIONS FROM SENATOR DOMENICI FOR DR. BIROL

1. Your written testimony indicates that your ‘‘Alternative Case,’’ includes savings 

from fuel-switching in the power sector. What types of power did you assume we 

would be switching to? 

2. At the hearing, you suggested that the chart showing the relative size of reserves held by the Nation’s oil companies as a ‘‘static’’ picture, and that a projection 

of future reserves would show an even more dramatic difference between reserves 

held by state-and investor-owned oil companies. We would appreciate any further 

information and data reflecting those projections. 

QUESTIONS FROM SENATOR DOMENICI FOR ALL WITNESSES

1. At the hearing, I heard concerns expressed regarding the lack of investment 

in major oil producing regions, particularly the Middle East, by investor-owned corporations. Even in those areas that have not been closed to private investment, political instability, and a lack of a legal infrastructure for entering into and enforcing 

contracts seem to be major obstacles. How can the U.S. convince other states that 

legal and business models that encourage private investment are in their interest 

as well as ours? 

2. Do you have any suggestions for how investor owned companies can position 

themselves to gain greater access to state-held resources? In the past, these corporations have had expertise that was valuable to the national oil companies. To what 

extent is this still true, and what can 

3. Is it inevitable that investor-owned companies are destined to simply fulfill the 

role of ‘‘service companies’’ to producers of nationally-owned resources’? How does 

that trend affect U.S. energy security’? 

4. The fact that an oil company is nationally-owned does not necessarily exclude 

the benefits of competition and foreign participation. An example is Norway, How 

can we promote that business model in the world’? 

5. Today we heard testimony that, as a result of the lack of access by investorowned oil companies to the world’s oil ‘‘cheapest’’ oil reserves, they are increasingly 

68

forced to pursue opportunities in older and more technologically challenging fields. 

Do you have any information regarding the level of investment on the part of investor-owned companies that will be required for them to maintain their current levels 

of production? How does the cost to those companies required to maintain their current level of production compare to the investment required by the world’s largest 

nationally-owned companies? 

6. Some analysts have suggested that the trend toward privatization occurred 

when prices were low, and governments wanted to spread risk. Now nationalization 

is occurring when prices are high, because governments want to capture the profits. 

There have been proposals in the U.S. to increase taxes on oil companies, which 

seems to be a different path to the same goal. Whether the policy is direct nationalization, or appropriation of profits through new taxes, doesn’t this increase risk to 

investors, reducing the industry’s ability to make new capital investment? 

QUESTIONS FROM SENATOR CANTWELL

QUESTION ONE: IMPACT OF GROWING CHINESE FOSSIL FUEL DEMANDS

The growth of China’s energy economy is absolutely astounding. On a recent trip 

there I learned that they are building roughly 1,000 megawatts of electrical capacity 

per week, most of it using outdated coal-fired technology. In a single year the Chinese are now putting up the equivalent electricity capacity as the entire Spanish 

electrical grid. 

I also learned that while China only became a net oil importer in 1993, with their 

accelerating rush towards private vehicles—by 2010 China is expected to have 90 

times more cars than they did 1990—Chinese exports in 2030 will match those of 

the U.S. today. 

It is also important to note that new projections predict China will overtake the 

United States as the world’s largest carbon dioxide emitter by 2009, a full decade 

earlier than previous projections. 

I share the deep concern of several of our witnesses that if these trends continue, 

the results for both global oil demand and carbon emissions will be disastrous. 

That’s why I believe we must proactively engage and collaborate with China on 

clean energy alternatives for both our nation’s and the world’s benefit. I am proud 

that my home state of Washington already has significant trade ties with China, 

and we view it as a vast potential export market for our homegrown clean energy 

technologies. 

All Witnesses: 

How can the United States constructively engage China as a partner in securing 

a stable global oil economy? 

Senior Chinese officials I met with told they fully recognize the economic, environmental, and security vulnerabilities of their growing fossil fuel dependence, but said 

they saw few alternatives to meeting their country’s incredible demand for energy. 

How can we help get them the clean energy technologies they want and we want 

to sell to them? Could Chinese adoption of these technologies create the economies 

of scale that would drive down the production costs of many renewable energy technologies? 

Are there likely to be other benefits of such energy collaboration with the Chinese 

in terms of other U.S. regional security objectives such as in North Korea, Iran, and 

the former Soviet Republics? For example, China is the number one importer of oil 

and gas from Iran and they are bound by energy deals valued at around $120 billion 

dollars. 

Dr. Leverett, what do you think the U.S. can the United States do to counter the 

Sino-Russian energy axis described in your testimony? 

QUESTION TWO: IMPORTANCE OF REDUCING U.S. OIL DEMAND

IN TRANSPORTATION SECTOR

It is clear that targeting our transportation system’s demand for oil is a key component of improving our nation’s energy security. And in fact most future global oil 

demand is linked to transportation use. If we are going to make any difference in 

our increasingly dire oil addiction, we need a multi-tiered effort that both increases 

our use of alternative fuels and reduces our overall demand for fossil fuels. 

Success of Vehicle Fuel Economy Standards 

According to the 2002 report by the National Academies of Science, gasoline consumption (and oil imports) would be 2.8 million barrels per day higher if CAFE 

standards had not been imposed in the mid 1970s following the Arab Oil Embargo. 

69

Unfortunately, after doubling the average gas mileage of U.S. vehicles CAFE standards stagnated and have not been increased since 1985. 

Next week, I look forward to joining a bipartisan coalition in reintroducing our 

‘‘Ten-in-Ten Fuel Economy Act,’’ which would increase CAFE standards for all passenger vehicles, including light trucks and SUVs, by 10 miles per gallon over 10 

years. This balanced and technically feasible bill would save 25 million barrels of 

oil per day by 2025, the same amount of oil we currently import from the Persian 

Gulf.

All Witnesses: 

• How do you think a reduction in demand of 2.5 million barrels per day would 

help improve our reliance on foreign oil imports? • Do you believe that increasing the demand for more efficient vehicles in the 

largest car market in the world might affect the efficiency of vehicles sold in 

other countries? • A recent analysis by an Energy Department analysis found that increasing 

CAFE standards to a combined fleet average of 35 miles per gallon could save 

as much as 0.5% of our Gross Domestic Product—roughly $60 billion per year 

or $200 per capita per year in the United States. Given this tremendous benefit, 

why do you think it has been so difficult to increase CAFE standards? • Mr. Wald, you testified that increasing transportation efficiency is the single 

most effective step the U.S. can take to improve its energy security. Can you 

expand on why you think, from a military and national security perspective, it 

is critical that we increase the overall efficiency of nation’s transportation fleet? 

• Mr. Wald, I also understand that the Defense Department spends $10.6 billion 

annually on fuel, or 97 percent of the federal government’s use, and almost 2 

percent of the entire country’s use. And that as much of 70 percent of our military convoys in Iraq, which are increasingly at risk from roadside bombs, are 

carrying fuel.

Given these facts, how could the military benefits from more efficient vehicle technology? Would you say such technologies would qualitatively increase our nation’s 

military strength? 

Breakthrough technologies 

• Do any of the witnesses see any groundbreaking or game changing technologies 

that could dramatically change this bleak future oil demand outlook? 

• Plug-in hybrids promise to break the historic wall between. the transportation 

and electricity sector and provide new and diverse alternative energy sources 

to displace gasoline and diesel. 

• What role will biofuels have in replacing world oil demand? 

• Would it be in the national interest to pursue an all out effect in vehicle 

lightweighting technologies such as the use of composites, or better battery 

technologies for vehicles? 

QUESTION THREE: MYSTERY OF HIGH WORLD OIL PRICES

The projected price of oil in competitive world market has been estimated by the 

Energy Department to be in the range of S 15 per barrel. And several sources estimate the most efficient OPEC production, in particular Saudi Arabia where the bulk 

of world oil reserves are, cost as little as $2 to S5 per barrel to produce. Just about 

four years ago OPEC’s target world oil price was between $22 and $28 per barrels. 

Now we seem content with $50 to 60 per barrel oil, and would be happy if it stayed 

there for years to come! 

All Witnesses:

• What caused this dramatic rebaselining in the world oil price? How come $25 

per barrel was okay for everyone a few years ago, now consuming nations would 

be happy to pay double that. 

• What does this target price shift mean in terms of real dollars transferred from 

U.S. consumers to OPEC and other major oil producers? 

• Are there ways we can achieve more stability in the world oil price? Why are 

there no long-term price contracts in the oil business? It would seem be in the 

interest of both producing and consuming nations to know in advance how much 

they would be spending or receiving for a certain amount of oil. 

• As you know, the United States manages a strategic petroleum reserve and IEA 

maintains a shared strategic reserve. Have these proven effective in securing 

reasonable pricing from OPEC? Could larger reserves help stabilize world oil 

prices, or at least prevent volatility or future supply shocks? 

70

• What is the value in increasing domestic oil production in environmentally sensitive US oil fields? Isn’t this just at best a drop in the bucket in terms of global 

oil supply? 

QUESTION FOUR: NEED FOR COLLABORATION AMONG MAJOR OIL CONSUMERS

RATHER THAN MILITARY ACTION

For decades now, ensuring our nation’s oil security has been pursued by both competitive economic means and political-military means. It now seems that the net effect of overt military action has proven to be at most of questionable value and may 

even be counterproductive and contributed to the current destabilization we see in 

the world oil market. 

Several witnesses have described that the geographic distribution of the world’s 

fossil fuel reserves means that OPEC will only gain more leverage in setting future 

world energy prices. This dynamic, combined with the fact that National Oil Companies control 80 to 90 percent of the world’s oil supplies, means to me that maybe 

it would be wiser to focus on collaborative action among major oil consumers, rather 

than continue to rely on military action. 

All Witnesses:

• What do you think the net effect of the Iraq war on the world oil price? 

• What is the prospective effect of a total collapse of the Iraq oil sector? 

• Could an organization of major oil consuming countries useful or feasible as a 

counterweight to OPEC? 

• Could IEA form the nucleus of such an organization? 

• How can we quickly allow China and other major oil consuming countries to 

participate fully in and SEA framework?

Mr. Wald: 

• In addition to being at odds with a collaborative approach to oil conservation 

and carbon emissions reduction, do you believe the use of US military power 

to guarantee oil security feasible in world where OPEC members become nuclear weapons states? How can one or two U.S. carriers project compelling 

power against a nuclear-armed Iran? 

QUESTION FIVE: IRAN’S ROLE IN THE WORLD OIL MARKET

The ‘‘Oil weapon’’

As was mentioned in witness testimony, Iran has threatened to use its oil supply 

as a weapon to achieve its strategic objectives, including building a nuclear energy, 

and probably a nuclear weapons program.

• How realistic is this threat and what can we do to counter it? 

• I understand that while Iran is a major oil exporter, they have a severe refinery 

shortage and must import much of their gasoline. Is this a potential leverage 

point for trade sanctions against Iran? 

Iran’s oil sector evolution 

A recent article by Roger Stern suggests that Iran’s oil export capacity might dry 

up within ten to fifteen years, essentially eliminating a vital government revenue 

source. This is in contrast to the testimony today which shows the potential of expansion to pre Iran-Iraq war levels of over 6 million barrels per day.

• Do you believe the Stern analysis is credible’? Obviously policy implications toward Iran are quite different if they are really not going to be a major oil exporter within a couple years. 

Negotiating with Iran

• Dr Leverett’s testimony suggests that the US needs to strike a ‘‘grand bargain’’ 

with Iran. What would be the terms of such a bargain as you envision them? 

QUESTIONS FROM SENATOR SANDERS

1. For Ms. Stuntz—As I understand it, the National Security Council’s energy 

task force has recommended an automatic 4% yearly increase in CAFE standards. 

I am interested in what factors were considered in making the decision on what the 

specific yearly increase should be. 

2. For All Members of the Panel—Unfortunately, not many of you mentioned climate change in your testimony and it only briefly came up during the hearing. This 

is a major concern for me because the ongoing burning of fossil fuels—most obviVerDate 0ct 09 2002 12:35 Mar 21, 2007 Jkt 110006 PO 33869 Frm 00074 Fmt 6601 Sfmt 6621 P:\DOCS\33869.TXT SENERGY2 PsN: PAULM
71

ously oil—is leading to global warming. Global warming, in turn, is increasing pressure on natural resources across the globe, and many experts are already warning 

that this pressure could lead to increased civil unrest in many parts of the world, 

unrest that could lead to armed conflicts. The ‘‘geopolitics of oil’’ should at the very 

least mention the ‘‘geopolitics of global warming.’’ With this in mind, why is there 

not more emphasis on this important issue in your testimony? 

QUESTION FROM MR. SESSIONS

1. Many commentators have criticized the usage of the phrase ‘‘energy independence,’’ pointing out that it sets up an unrealistic—if not impossible or undesirable—

goal for U.S. energy policy. Given the various priorities that we face when discussing our energy policy, particularly when we consider the issue as a matter of 

national security, how would each member of the panel articulate the over-arching 

goal of our policy? 

U.S. SENATE, 

COMMITTEE ON ENERGY AND NATURAL RESOURCES, 

Washington, DC, January 17, 2007. 

Mr. ROBERT D. HORMATS, 

Vice Chairman, Goldman Sachs (International), New York, NY. 

DEAR MR. HORMATS: I would like to take this opportunity to thank you for appearing before the Senate Committee on Energy and Natural Resources on Wednesday, January 10, 2007 to give testimony regarding the global oil balance and its implications for the U.S. economic and national security. 

I am enclosing a list of questions which have been submitted for the record. If 

possible, please respond to these questions by email to Amanda Kelly,

amandalkelly.energy.senate.gov, by Tuesday, February 6, 2007. 

Sincerely, 

JEFF BINGAMAN, 

Chairman. 

[Enclosure.] 

QUESTIONS FROM SENATOR DOMENICI FOR ALL WITNESSES

1. At the hearing, I heard concerns expressed regarding the lack of investment 

in major oil producing regions, particularly the Middle East, by investor-owned corporations. Even in those areas that have not been closed to private investment, political instability, and a lack of a legal infrastructure for entering into and enforcing 

contracts seem to be major obstacles. How can the U.S. convince other states that 

legal and business models that encourage private investment are in their interest 

as well as ours? 

2. Do you have any suggestions for how investor owned companies can position 

themselves to gain greater access to state-held resources? In the past, these corporations have had expertise that was valuable to the national oil companies. To what 

extent is this still true, and what can 

3. Is it inevitable that investor-owned companies are destined to simply fulfill the 

role of ‘‘service companies’’ to producers of nationally-owned resources? How does 

that trend affect U.S. energy security? 

4. The fact that an oil company is nationally-owned does not necessarily exclude 

the benefits of competition and foreign participation. An example is Norway. How 

can we promote that business model in the world? 

5. Today we heard testimony that, as a result of the lack of access by investorowned oil companies to the world’s oil ‘‘cheapest’’ oil reserves, they are increasingly 

forced to pursue opportunities in older and more technologically challenging fields. 

Do you have any information regarding the level of investment on the part of investor-owned companies that will be required for them to maintain their current levels 

of production? How does the cost to those companies required to maintain their current level of production compare to the investment required by the world’s largest 

nationally-owned companies? 

6. Some analysts have suggested that the trend toward privatization occurred 

when prices were low, and governments wanted to spread risk. Now nationalization 

is occurring when prices are high, because governments want to capture the profits. 

There have been proposals in the U.S. to increase taxes on oil companies, which 

seems to be a different path to the same goal. Whether the policy is direct nationalization, or appropriation of profits through new taxes, doesn’t this increase risk to 

investors, reducing the industry’s ability to make new capital investment? 

72

QUESTIONS FROM SENATOR CANTWELL

QUESTION ONE: IMPACT OF GROWING CHINESE FOSSIL FUEL DEMANDS

The growth of China’s energy economy is absolutely astounding. On a recent trip 

there I learned that they are building roughly 1,400 megawatts of electrical capacity 

per week, most of it using outdated coal-fired technology. in a single year the Chinese are now putting up the equivalent electricity capacity as the entire Spanish 

electrical grid. 

I also learned that while China only became a net oil importer in 1993, with their 

accelerating rush towards private vehicles—by 2010 China is expected to have 90 

times more cars than they did 1990—Chinese exports in 2030 will match those of 

the U.S. today. 

It is also important to note that new projections predict China will overtake the 

United States as the world’s largest carbon dioxide emitter by 2009, a full decade 

earlier than previous projections. 

share the deep concern of several of our witnesses that if these trends continue, 

the results for both global oil demand and carbon emissions will be disastrous. 

That’s why I believe we must proactively engage and collaborate with China on 

clean energy alternatives for both our nation’s and the world’s benefit. I am proud 

that my home state of Washington already has significant trade ties with China, 

and we view it as a vast potential export market for our homegrown clean energy 

technologies. 

All Witnesses: 

How can the United States constructively engage China as a partner in securing 

a stable global oil economy? 

Senior Chinese officials I met with told they fully recognize the economic, environmental, and security vulnerabilities of their growing fossil fuel dependence, but said 

they saw few alternatives to meeting their country’s incredible demand for energy. 

How can we help get them the clean energy technologies they want and we want 

to sell to them? Could Chinese adoption of these technologies create the economies 

of scale that would drive down the production costs of many renewable energy technologies? 

Are there likely to be other benefits of such energy collaboration with the Chinese 

in terms of other U.S. regional security objectives such as in North Korea, Iran, and 

the former Soviet Republics? For example, China is the number one importer of oil 

and gas from Iran and they are bound by energy deals valued at around $120 billion 

dollars. 

Dr. Leverett, what do you think the U.S. can the United States do to counter the 

Sino-Russian energy axis described in your testimony? 

QUESTION TWO: IMPORTANCE OF REDUCING U.S. OIL DEMAND

IN TRANSPORTATION SECTOR

It is clear that targeting our transportation system’s demand for oil is a key component of improving our nation’s energy security. And in fact most future global oil 

demand is linked to transportation use. If we are going to make any difference in 

our increasingly dire oil addiction, we need a multi-tiered effort that both increases 

our use of alternative fuels and reduces our overall demand for fossil fuels. 

Success of Vehicle Fuel Economy Standards 

According to the 2002 report by the National Academies of Science, gasoline consumption (and oil imports) would be 2.8 million barrels per day higher if CAFE 

standards had not been imposed in the mid 1970s following the Arab Oil Embargo. 

Unfortunately, after doubling the average gas mileage of U.S. vehicles, CAFE standards stagnated and have not been increased since 1985. 

Next week, I look forward to joining a bipartisan coalition in reintroducing our 

‘‘Ten-in-Ten Fuel Economy Act,’’ which would increase CAFE standards for all passenger vehicles, including light trucks and SUVs, by 10 miles per gallon over 10 

years. This balanced and technically feasible bill would save 2.5 million barrels of 

oil per day by 2025, the same amount of oil we currently import from the Persian 

Gulf.

All Witnesses: 

• How do you think a reduction in demand of 2.5 million bands per day would 

help improve our reliance on foreign oil imports? 

73

• Do you believe that increasing the demand for more efficient vehicles in the 

largest car market in the world might affect the efficiency of vehicles sold in 

other countries? 

• A recent analysis by an Energy Department analysis found that increasing 

CAFE standards to a combined fleet average of 35 miles per gallon could save 

as much as 0.5% of our Gross Domestic Product—roughly $60 billion per year 

or $200 per capita per year in the United States. Given this tremendous benefit, 

why do you think it has been so difficult to increase CAFE standards? 

• Mr. Wald, you testified that increasing transportation efficiency is the single 

most effective step the U.S. can take to improve its energy security. Can you 

expand on why you think, from a military and national security perspective, it 

is critical that we increase the overall efficiency of nation’s transportation fleet? 

• Mr. Wald, I also understand that the Defense Department spends $10.6 billion 

annually on fuel, or 97 percent of the federal government’s use, and almost 2 

percent of the entire country’s use. And that as much of 70 percent of our military convoys in Iraq, which are increasingly at risk from roadside bombs, are 

carrying fuel.

Given these facts, how could the military benefits from more efficient vehicle technology? Would you say such technologies would qualitatively increase our nation’s 

military strength? 

Breakthrough technologies 

• Do any of the witnesses see any groundbreaking or game changing technologies 

that could dramatically change this bleak future oil demand outlook? 

• Plug-in hybrids promise to break the historic wall between the transportation 

and electricity sector and provide new and diverse alternative energy sources 

to displace gasoline and diesel. 

• What role will biofuels have in replacing world oil demand? 

• Would it be in the national interest to pursue an all out effect in vehicle 

lightweighting technologies such as the use of composites, or better battery 

technologies for vehicles? 

QUESTION THREE: MYSTERY OF HIGH WORLD OIL PRICES

The projected price of oil in competitive world market has been estimated by the 

Energy Department to be in the range of $15 per barrel. And several sources estimate the most efficient OPEC production, in particular Saudi Arabia where the bulk 

of world oil reserves are, cost as little as $2 to $5 per barrel to produce. Just about 

four years ago OPEC’s target world oil price was between $22 and $28 per barrels. 

Now we seem content with $50 to 60 per barrel oil, and would be happy if it stayed 

there for years to come! 

All Witnesses:

• What caused this dramatic rebaselining in the world oil price? How come $25 

per ban-el was okay for everyone a few years ago, now consuming nations would 

be happy to pay double that. 

• What does this target price shift mean in terTns of real dollars transferred from 

U.S. consumers to OPEC and other major oil producers? 

• Are there ways we can achieve more stability in the world oil price? Why are 

there no long-term price contracts in the oil business? It would seem be in the 

interest of both producing and consuming nations to know in advance how much 

they would be spending or receiving for a certain amount of oil. 

• As you know, the United States manages a strategic petroleum reserve and IEA 

maintains a shared strategic reserve. Have these proven effective in securing 

reasonable pricing from OPEC? Could larger reserves help stabilize world oil 

prices, or at least prevent volatility or future supply shocks? 

• What is the value in increasing domestic oil production in environmentally sensitive US oil fields? Isn’t this just at best a drop in the bucket in terms of global 

oil supply? 

QUESTION FOUR: NEED FOR COLLABORATION AMONG MAJOR OIL CONSUMERS

RATHER THAN MILITARY ACTION

For decades now, ensuring our nation’s oil security has been pursued by both competitive economic means and political-military means. It now seems that the net effect of overt military action has proven to be at most of questionable value, and may 

even be counterproductive and contributed to the current destabilization we see in 

the world oil market. 

74

Several witnesses have described that the geographic distribution of the world’s 

fossil fuel reserves means that OPEC will only gain more leverage in setting future 

world energy prices. This dynamic, combined with the fact that National Oil Companies control 80 to 90 percent of the world’s oil supplies, means to me that maybe 

it would be wiser to focus on collaborative action among major oil consumers, rather 

than continue to rely on military action. 

All Witnesses:

• What do you think the net effect of the Iraq war on the world oil price? • What is the prospective effect of a total collapse of the Iraq oil sector? • Could an organization of major oil consuming countries useful or feasible as a 

counterweight to OPEC? • Could IEA form the nucleus of such an organization? • How can we quickly allow China and other major oil consuming countries to 

participate fully in andMA framework?

Mr. Wald: 

• In addition to being at odds with a collaborative approach to oil conservation 

and carbon emissions reduction, do you believe the use of US military power 

to guarantee oil security feasible in world where OPEC members become nuclear weapons states? How can one or two U.S. carriers project compelling 

power against a nuclear-armed Iran? 

QUESTION FIVE: IRAN’S ROLE IN THE WORLD OIL MARKET

The ‘‘Oil weapon’’

As was mentioned in witness testimony, Iran has threatened to use its oil supply 

as a weapon to achieve its strategic objectives, including building a nuclear energy, 

and probably a nuclear weapons program.

• How realistic is this threat and what can we do to counter it? • I understand that while Iran is a major oil exporter, they have a severe refinery 

shortage and must import much of their gasoline. Is this a potential leverage 

point for trade sanctions against -Iran? 

Iran’s oil sector evolution 

A recent article by Roger Stern suggests that Iran’s oil export capacity might dry 

up within ten to fifteen years, essentially eliminating a vital government revenue 

source. This is in contrast to the testimony today which shows the potential of expansion to pre Iran-Iraq war levels of over 6 million barrels per day.

• Do you believe the Stem analysis is credible? Obviously policy implications toward Iran are quite different if they are really not going to be a major oil exporter within a couple years. 

Negotiating with Iran 

• Dr Leverett’s testimony suggests that the US needs to strike a ‘‘grand bargain’’ 

with Iran. What would be the terms of such a bargain as you envision them? 

QUESTIONS FROM SENATOR SANDERS

1. For Ms. Stunt—As I understand it, the National Security Council’s energy task 

force has recommended an automatic 4% yearly increase in CAFE standards. I am 

interested in what factors were considered in making the decision on what the specific yearly increase should be. 

2. For All Members of the Panel—Unfortunately, not many of you mentioned climate change in your testimony and it only briefly came up during the hearing. This 

is a major concern for me because the ongoing burning of fossil fuels—most obviously oil—is leading to global warming. Global warming, in turn, is increasing pressure on natural resources across the globe, and many experts are already warning 

that this pressure could lead to increased civil unrest in many parts of the world, 

unrest that could lead to armed conflicts. The ‘‘geopolitics of oil’’ should at the very 

least mention the ‘‘geopolitics of global warming.’’ With this in mind, why is there 

not more emphasis on this important issue in your testimony? 

QUESTION FROM SENATOR SESSIONS

1. Many commentators have criticized the usage of the phrase ‘‘energy independence,’’ pointing out that it sets up an unrealistic—if not impossible or undesirable—

goal for U.S. energy policy. Given the various priorities that we face when discussing our energy policy, particularly when we consider the issue as a matter of 

75

national security, how would each member of the panel articulate the over-arching 

goal of our policy? 

U.S. SENATE, 

COMMITTEE ON ENERGY AND NATURAL RESOURCES, 

Washington, DC, January 17, 2007. 

Dr. FLYNT LEVERETT, 

Senior Fellow, Director, Geopolitics of Energy Initiative, New America Foundation, 

Washington, DC. 

DEAR DR. LEVERETT: I would like to take this opportunity to thank you for appearing before the Senate Committee on Energy and Natural Resources on Wednesday, January 10, 2007 to give testimony regarding the global oil balance and its implications for the U.S. economic and national security. 

I am enclosing a list of questions which have been submitted for the record. If 

possible, please respond to these questions by email to Amanda Kelly,

amandalkelly.energy.senate.gov, by Tuesday, February 6, 2007. 

Sincerely, 

JEFF BINGAMAN, 

Chairman. 

[Enclosure.] 

QUESTIONS FOR ALL WITNESSES

1. At the hearing, I heard concerns expressed regarding the lack of investment 

in major oil producing regions, particularly the Middle East, by investor-owned corporations. Even in those areas that have not been closed to private investment, political instability, and a lack of a legal infrastructure for entering into and enforcing 

contracts seem to be major obstacles. How can the U.S. convince other states that 

legal and business models that encourage private investment are in their interest 

as well as ours? 

2. Do you have any suggestions for how investor owned companies can position 

themselves to gain greater access to state-held resources? In the past, these corporations have had expertise that was valuable to the national oil companies. To what 

extent is this still true, and what can 

3. is it inevitable that investor-owned companies are destined to simply fulfill the 

role of ‘‘service companies’’ to producers of nationally-owned resources? How does 

that trend affect U.S. energy security? 

4. The fact that an oil company is nationally-owned does not necessarily exclude 

the benefits of competition and foreign participation. An example is Norway. How 

can we promote that business model in the world? 

5. Today we heard testimony that, as a result of the lack of access by investorowned oil companies to the world’s oil ‘‘cheapest’’ oil reserves, they are increasingly 

forced to pursue opportunities in older and more technologically challenging fields. 

Do you have any information regarding the level of investment on the part of investor-owned companies that will be required for them to maintain their current levels 

of production? How does the cost to those companies required to maintain their current level of production compare to the investment required by the world’s largest 

nationally-owned companies? 

6. Some analysts have suggested that the trend toward privatization occurred 

when prices were low, and governments wanted to spread risk. Now nationalization 

is occurring when prices are high, because governments want to capture the profits. 

There have been proposals in the U.S. to increase taxes on oil companies, which 

seems to be a different path to the same goal. Whether the policy is direct nationalization, or appropriation of profits through new taxes, doesn’t this increase risk to 

investors, reducing the industry’s ability to make new capital investment? 

QUESTION FROM SENATOR CANTWELL

QUESTION ONE: IMPACT OF GROWING CHINESE FOSSIL FUEL DEMANDS

The growth of China’s energy economy is absolutely astounding. On a recent trip 

there I learned that they are building roughly 1,000 megawatts of electrical capacity 

per week, most of it using outdated coal-fired technology. in a single year the Chinese are now putting up the equivalent electricity capacity as the entire Spanish 

electrical grid. 

I also learned that while China only became a net oil importer in 1993, with their 

accelerating rush towards private vehicles—by 2010 China is expected to have 90 

76

times more cars than they did 1990—Chinese exports in 2030 will match those of 

the U.S. today. 

It is also important to note that new projections predict China will overtake the 

United States as the world’s largest carbon dioxide emitter by 2009, a full decade 

earlier than previous projections. 

I share the deep concern of several of our witnesses that if these trends continue, 

the results for both global oil demand and carbon emissions will be disastrous. 

That’s why I believe we must proactively engage and collaborate with China on 

clean energy alternatives for both our nation’s and the world’s benefit. I am proud 

that my home state of Washington already has significant trade ties with China, 

and we view it as a vast potential export market for our homegrown clean energy 

technologies. 

All Witnesses: 

How can the United States constructively engage China as a partner in securing 

a stable global oil economy? 

Senior Chinese officials I met with told they fully recognize the economic, environmental, and security vulnerabilities of their growing fossil fuel dependence, but said 

they saw few alternatives to meeting their country’s incredible demand for energy. 

How can we help get them the clean energy technologies they want and we want 

to sell to them? Could Chinese adoption of these technologies create the economies 

of scale that would drive down the production costs of many renewable energy technologies? 

Are there likely to be other benefits of such energy collaboration with the Chinese 

in terms of other U.S. regional security objectives such as in North Korea, Iran, and 

the former Soviet Republics? For example, China is the number one importer of oil 

and gas from Iran and they are bound by energy deals valued at around $120 billion 

dollars. 

Dr. Leverett, what do you think the U.S. can the United States do to counter the 

Sino-Russian energy axis described in your testimony? 

QUESTION TWO: IMPORTANCE OF REDUCING U.S. OIL DEMAND

IN TRANSPORTATION SECTOR

It is clear that targeting our transportation system’s demand for oil is a key component of improving our nation’s energy security. And in fact most future global oil 

demand is linked to transportation use. If we are going to make any difference in 

our increasingly dire oil addiction, we need a multi-tiered effort that both increases 

our use of alternative fuels and reduces our overall demand for fossil fuels. 

Success of Vehicle Fuel Economy Standards 

According to the 2002 report by the National Academies of Science, gasoline consumption (and oil imports) would be 28 million barrels per day higher if CAFE 

standards had not been imposed in the mid 1970s following the Arab Oil Embargo. 

Unfortunately, after doubling the average gas mileage of U.S. vehicles, CAFE standards stagnated and have not been increased since 1985. 

Next week, I look forward to joining a bipartisan coalition in reintroducing our 

‘‘Ten-in-Ten Fuel Economy Act,’’ which would increase CAFE standards for all passenger vehicles, including light trucks and SU-Vs, by 10 miles per gallon over 10 

years. This balanced and technically feasible bill would save 2.5 million barrels of 

oil per day by 2025, the same amount of oil we currently import from the Persian 

Gulf.

All Witnesses: 

• How do you think a reduction in demand of 2.5 million barrels per day would 

help improve our reliance on foreign oil imports? 

• Do you believe that increasing the demand for more efficient vehicles in the 

largest car market in the world might affect the efficiency of vehicles sold in 

other countries? 

• A recent analysis by an Energy Department analysis found that increasing 

CAFE standards to a combined fleet average of 35 miles per gallon could save 

as much as 0.5% of our Gross Domestic Product—roughly $60 billion per year 

or $200 per capita per year in the United States. Given this tremendous benefit, 

why do you think it has been so difficult to increase CAFE standards? 

• Mr. Wald, you testified that increasing transportation efficiency is the single 

most effective step the U.S. can take to improve its energy security. Can you 

expand on why you think, from a military and national security perspective, it 

is critical that we increase the overall efficiency of nation’s transportation fleet? 

77

• Mr. Wald, I also understand that the Defense Department spends $10.6 billion 

annually on fuel, or 97 percent of the federal government’s use, and almost 2 

percent of the entire country’s use. And that as much of 70 percent of our military convoys in Iraq, which are increasingly at risk from roadside bombs, are 

carrying fuel.

Given these facts, how could the military benefits from more efficient vehicle technology? Would you say such technologies would qualitatively increase our nation’s 

military strength? 

Breakthrough technologies 

• Do any of the witnesses see any groundbreaking or game changing technologies 

that could dramatically change this bleak future oil demand outlook? • Plug-in hybrids promise to break the historic wall between the transportation 

and electricity sector and provide new and diverse alternative energy sources 

to displace gasoline and diesel. • What role will biofuels have in replacing world oil demand? • Would it be in the national interest to pursue an all out effect in vehicle 

lightweighting technologies such as the use of composites, or better battery 

technologies for vehicles? 

QUESTION THREE: MYSTERY OF HIGH WORLD OIL PRICES

The projected price of oil in competitive world market has been estimated by the Energy Department to be in the range of $15 per barrel. And several sources estimate the most efficient OPEC production, in particular Saudi Arabia where the bulk 

of world oil reserves are, cost as little as $2 to $5 per barrel to produce. Just about 

four years ago OPEC’s target world oil price was between $22 and $28 per barrels. 

Now we seem content with $50 to 60 per barrel oil, and would be happy if it stayed 

there for years to come! 

All Witnesses:

• What caused this dramatic rebaselining in the world oil price? How come $25 

per barrel was okay for everyone a few years ago, now consuming nations would 

be happy to pay double that. • What does this target price shift mean in terms of real dollars transferred from 

U.S. consumers to OPEC and other major oil producers? • Are there ways we can achieve more stability in the world oil price? Why are 

there no long-term price contracts in the oil business? It would seem be in the 

interest of both producing and consuming nations to know in advance how much 

they would be spending or receiving for a certain amount of oil. • As you know, the United States manages a strategic petroleum reserve and IEA 

maintains a shared strategic reserve. Have these proven effective in securing 

reasonable pricing from OPEC? Could larger reserves help stabilize world oil 

prices, or at least prevent volatility or future supply shocks? • What is the value in increasing domestic oil production in environmentally sensitive US oil fields? Isn’t this just at best a drop in the bucket in terms of global 

oil supply? 

QUESTION FOUR: NEED FOR COLLABORATION AMONG MAJOR OIL CONSUMERS

RATHER THAN MILITARY ACTION

For decades now, ensuring our nation’s oil security has been pursued by both competitive economic means and political-military means. It now seems that the net effect of overt military action has proven to be at most of questionable value, and may 

even be counterproductive and contributed to the current destabilization we see in 

the world oil market. 

Several witnesses have described that the geographic distribution of the world’s 

fossil fuel reserves means that OPEC will only gain more leverage in setting future 

world energy prices. This dynamic, combined with the fact that National Oil Companies control 80 to 90 percent of the world’s oil supplies means to me that maybe 

it would be wiser to focus on collaborative action among major oil consumers, rather 

than continue to rely on military action. 

All Witnesses:

• What do you think the net effect of the Iraq war on the world oil price? 

• What is the prospective effect of a total collapse of the Iraq oil sector? 

• Could an organization of major oil consuming countries useful or feasible as a 

counterweight to OPEC? 

• Could IEA form the nucleus of such an organization? 

78

• How can we quickly allow China and other major oil consuming countries to 

participate fully in and IEA framework?

Mr. Wald: 

• In addition to being at odds with a collaborative approach to oil conservation 

and carbon emissions reduction, do you believe the use of US military power 

to guarantee oil security feasible in world where OPEC members become nuclear weapons states? How can one or two U.S. carriers project compelling 

power against a nuclear—-armed Iran? 

QUESTION FIVE: IRAN’S ROLE IN THE WORLD OIL MARKET

The ‘‘Oil weapon’’

As was mentioned in witness testimony, Iran has threatened to use its oil supply 

as a weapon to achieve its strategic objectives including building a nuclear energy, 

and probably a nuclear weapons program.

• How realistic is this threat and what can we do to counter it? 

• I understand that while Iran is a major oil exporter, they have a severe refinery 

shortage arid must import much of their gasoline. Is this a potential leverage 

point for trade sanctions against Iran? 

Iran’s oil sector evolution 

A recent article by Roger Stern suggests that Iran’s oil export capacity might dry 

up within ten to fifteen years, essentially eliminating a vital government revenue 

source. This is in contrast to the testimony today which shows the potential of expansion to pre Iran-Traq war levels of over 6 million barrels per day.

• Do you believe the Stern analysis is credible? Obviously policy implications toward Iran are quite different if they are really not going to be a major oil exporter within a couple years. 

Negotiating with Iran 

• Dr Leverett’s testimony suggests that the US needs to strike a ‘‘grand bargain’’ 

with Iran. What would be the terms of such a bargain as you envision them? 

QUESTIONS FROM SENATOR SANDERS

1. For Ms. Stuntz—As I understand it, the National Security Council’s energy 

task force has recommended an automatic 4% yearly increase in CAFE standards. 

I am interested in what factors were considered in making the decision on what the 

specific yearly increase should be. 

2. For All Members of the Panel—Unfortunately, not many of you mentioned climate change in your testimony and it only briefly came up during the hearing. This 

is a major concern for me because the ongoing burning of fossil fuels—most obviously oil—is leading to global warming. Global warming, in turn, is increasing pressure on natural resources across the globe, and many experts are already warning 

that this pressure could lead to increased civil unrest in many parts of the world, 

unrest that could lead to armed conflicts. The ‘‘geopolitics of oil’’ should at the very 

least mention the ‘‘geopolitics of global warming.’’ With this in mind, why is there 

not more emphasis on this important issue in your testimony? 

QUESTION FROM SENATOR SESSIONS

1. Many commentators have criticized the usage of the phrase ‘‘energy independence,’’ pointing out that it sets up an unrealistic—if not impossible or undesirable—

goal for U.S. energy policy. Given the various priorities that we face when discussing our energy policy, particularly when we consider the issue as a matter of 

national security, how would each member of the panel articulate the over-arching 

goal of our policy? 

U.S. SENATE, 

COMMITTEE ON ENERGY AND NATURAL RESOURCES, 

Washington, DC, January 17, 2007. 

General CHARLES F. WALD, 

USAF (Ret.), Bipartisan Policy Center, Washington, DC. 

DEAR GEN. WALD: I would like to take this opportunity to thank you for appearing 

before the Senate Committee on Energy and Natural Resources on Wednesday, JanVerDate 0ct 09 2002 12:35 Mar 21, 2007 Jkt 110006 PO 33869 Frm 00082 Fmt 6601 Sfmt 6621 P:\DOCS\33869.TXT SENERGY2 PsN: PAULM
79

uary 10, 2007 to give testimony regarding the global oil balance and its implications 

for the U.S. economic and national security. 

I am enclosing a list of questions which have been submitted for the record. If 

possible, please respond to these questions by email to Amanda Kelly,

amandalkelly.energy.senate.gov, by Tuesday, February 6, 2007. 

Sincerely, 

JEFF BINGAMAN, 

Chairman. 

[Enclosure.] 

QUESTIONS FROM SENATOR DOMENICI FOR ALL WITNESSES

1. At the hearing, I heard concerns expressed regarding the lack of investment 

in major oil producing regions, particularly the Middle East, by investor-owned corporations. Even in those areas that have not been closed to private investment, political instability, and a lack of a legal infrastructure for entering into and enforcing 

contracts seem to be major obstacles. How can the U.S. convince other states that 

legal and business models that encourage private investment are in their interest 

as well as ours? 

2. Do you have any suggestions for how investor owned companies can position 

themselves to gain greater access to state-held resources? In the past, these corporations have had expertise that was valuable to the national oil companies. To what 

extent is this still true, and what can 

3. Is it inevitable that investor-owned companies are destined to simply fulfill the 

role of ‘‘service companies’’ to producers of nationally-owned resources’? How does 

that trend affect U.S. energy security’? 

4. The fact that an oil company is nationally-owned does not necessarily exclude 

the benefits of competition and foreign participation. An example is Norway, How 

can we promote that business model in the world’? 

5. Today we heard testimony that, as a result of the lack of access by investorowned oil companies to the world’s oil ‘‘cheapest’’ oil reserves, they are increasingly 

forced to pursue opportunities in older and more technologically challenging fields. 

Do you have any information regarding the level of investment on the part of investor-owned companies that will be required for them to maintain their current levels 

of production? How does the cost to those companies required to maintain their current level of production compare to the investment required by the world’s largest 

nationally-owned companies? 

6. Some analysts have suggested that the trend toward privatization occurred 

when prices were low, and governments wanted to spread risk. Now nationalization 

is occurring when prices are high, because governments want to capture the profits. 

There have been proposals in the U.S. to increase taxes on oil companies, which 

seems to be a different path to the same goal. Whether the policy is direct nationalization, or appropriation of profits through new taxes, doesn’t this increase risk to 

investors, reducing the industry’s ability to make new capital investment? 

QUESTIONS FROM SENATOR CANTWELL

QUESTION ONE: IMPACT OF GROWING CHINESE FOSSIL FUEL DEMANDS

The growth of China’s energy economy is absolutely astounding. On a recent trip 

there I learned that they are building roughly 1,000 megawatts of electrical capacity 

per week, most of it using outdated coal-fired technology. In a single year the Chinese are now putting up the equivalent electricity capacity as the entire Spanish 

electrical grid. 

I also learned that while China only became a net oil importer in 1993, with their 

accelerating rush towards private vehicles—by 2010 China is expected to have 90 

times more cars than they did 1990—Chinese exports in 2030 will match those of 

the U.S. today. 

It is also important to note that new projections predict China will overtake the 

United States as the world’s largest carbon dioxide emitter by 2009, a full decade 

earlier than previous projections. 

I share the deep concern of several of our witnesses that if these trends continue, 

the results for both global oil demand and carbon emissions will be disastrous. 

That’s why I believe we must proactively engage and collaborate with China on 

clean energy alternatives for both our nation’s and the world’s benefit. I am proud 

that my home state of Washington already has significant trade ties with China, 

and we view it as a vast potential export market for our homegrown clean energy 

technologies. 

80

All Witnesses: 

How can the United States constructively engage China as a partner in securing 

a stable global oil economy? 

Senior Chinese officials I met with told they fully recognize the economic, environmental, and security vulnerabilities of their growing fossil fuel dependence, but said 

they saw few alternatives to meeting their country’s incredible demand for energy. 

How can we help get them the clean energy technologies they want and we want 

to sell to them? Could Chinese adoption of these technologies create the economies 

of scale that would drive down the production costs of many renewable energy technologies? 

Are there likely to be other benefits of such energy collaboration with the Chinese 

in terms of other U.S. regional security objectives such as in North Korea, Iran, and 

the former Soviet Republics? For example, China is the number one importer of oil 

and gas from Iran and they are bound by energy deals valued at around $120 billion 

dollars. 

Dr. Leverett, what do you think the U.S. can the United States do to counter the 

Sino-Russian energy axis described in your testimony? 

QUESTION TWO: IMPORTANCE OF REDUCING U.S. OIL DEMAND

IN TRANSPORTATION SECTOR

It is clear that targeting our transportation system’s demand for oil is a key component of improving our nation’s energy security. And in fact most future global oil 

demand is linked to transportation use. If we are going to make any difference in 

our increasingly dire oil addiction, we need a multi-tiered effort that both increases 

our use of alternative fuels and reduces our overall demand for fossil fuels. 

Success of Vehicle Fuel Economy Standards 

According to the 2002 report by the National Academies of Science, gasoline consumption (and oil imports) would be 2.8 million barrels per day higher if CAFE 

standards had not been imposed in the mid 1970s following the Arab Oil Embargo. 

Unfortunately, after doubling the average gas mileage of U.S. vehicles CAFE standards stagnated and have not been increased since 1985. 

Next week, I look forward to joining a bipartisan coalition in reintroducing our 

‘‘Ten-in-Ten Fuel Economy Act,’’ which would increase CAFE standards for all passenger vehicles, including light trucks and SUVs, by 10 miles per gallon over 10 

years. This balanced and technically feasible bill would save 25 million barrels of 

oil per day by 2025, the same amount of oil we currently import from the Persian 

Gulf.

All Witnesses: 

• How do you think a reduction in demand of 2.5 million barrels per day would 

help improve our reliance on foreign oil imports? 

• Do you believe that increasing the demand for more efficient vehicles in the 

largest car market in the world might affect the efficiency of vehicles sold in 

other countries? 

• A recent analysis by an Energy Department analysis found that increasing 

CAFE standards to a combined fleet average of 35 miles per gallon could save 

as much as 0.5% of our Gross Domestic Product—roughly $60 billion per year 

or $200 per capita per year in the United States. Given this tremendous benefit, 

why do you think it has been so difficult to increase CAFE standards? 

• Mr. Wald, you testified that increasing transportation efficiency is the single 

most effective step the U.S. can take to improve its energy security. Can you 

expand on why you think, from a military and national security perspective, it 

is critical that we increase the overall efficiency of nation’s transportation fleet? 

• Mr. Wald, I also understand that the Defense Department spends $10.6 billion 

annually on fuel, or 97 percent of the federal government’s use, and almost 2 

percent of the entire country’s use. And that as much of 70 percent of our military convoys in Iraq, which are increasingly at risk from roadside bombs, are 

carrying fuel.

Given these facts, how could the military benefits from more efficient vehicle technology? Would you say such technologies would qualitatively increase our nation’s 

military strength? 

Breakthrough technologies 

• Do any of the witnesses see any groundbreaking or game changing technologies 

that could dramatically change this bleak future oil demand outlook? 

81

• Plug-in hybrids promise to break the historic wall between. the transportation 

and electricity sector and provide new and diverse alternative energy sources 

to displace gasoline and diesel. 

• What role will biofuels have in replacing world oil demand? 

• Would it be in the national interest to pursue an all out effect in vehicle 

lightweighting technologies such as the use of composites, or better battery 

technologies for vehicles? 

QUESTION THREE: MYSTERY OF HIGH WORLD OIL PRICES

The projected price of oil in competitive world market has been estimated by the 

Energy Department to be in the range of S 15 per barrel. And several sources estimate the most efficient OPEC production, in particular Saudi Arabia where the bulk 

of world oil reserves are, cost as little as $2 to S5 per barrel to produce. Just about 

four years ago OPEC’s target world oil price was between $22 and $28 per barrels. 

Now we seem content with $50 to 60 per barrel oil, and would be happy if it stayed 

there for years to come! 

All Witnesses:

• What caused this dramatic rebaselining in the world oil price? How come $25 

per barrel was okay for everyone a few years ago, now consuming nations would 

be happy to pay double that. 

• What does this target price shift mean in terms of real dollars transferred from 

U.S. consumers to OPEC and other major oil producers? 

• Are there ways we can achieve more stability in the world oil price? Why are 

there no long-term price contracts in the oil business? It would seem be in the 

interest of both producing and consuming nations to know in advance how much 

they would be spending or receiving for a certain amount of oil. 

• As you know, the United States manages a strategic petroleum reserve and IEA 

maintains a shared strategic reserve. Have these proven effective in securing 

reasonable pricing from OPEC? Could larger reserves help stabilize world oil 

prices, or at least prevent volatility or future supply shocks? 

• What is the value in increasing domestic oil production in environmentally sensitive US oil fields? Isn’t this just at best a drop in the bucket in terms of global 

oil supply? 

QUESTION FOUR: NEED FOR COLLABORATION AMONG MAJOR OIL CONSUMERS

RATHER THAN MILITARY ACTION

For decades now, ensuring our nation’s oil security has been pursued by both competitive economic means and political-military means. It now seems that the net effect of overt military action has proven to be at most of questionable value and may 

even be counterproductive and contributed to the current destabilization we see in 

the world oil market. 

Several witnesses have described that the geographic distribution of the world’s 

fossil fuel reserves means that OPEC will only gain more leverage in setting future 

world energy prices. This dynamic, combined with the fact that National Oil Companies control 80 to 90 percent of the world’s oil supplies, means to me that maybe 

it would be wiser to focus on collaborative action among major oil consumers, rather 

than continue to rely on military action. 

All Witnesses:

• What do you think the net effect of the Iraq war on the world oil price? 

• What is the prospective effect of a total collapse of the Iraq oil sector? 

• Could an organization of major oil consuming countries useful or feasible as a 

counterweight to OPEC? 

• Could IEA form the nucleus of such an organization? 

• How can we quickly allow China and other major oil consuming countries to 

participate fully in and SEA framework?

Mr. Wald: 

• In addition to being at odds with a collaborative approach to oil conservation 

and carbon emissions reduction, do you believe the use of US military power 

to guarantee oil security feasible in world where OPEC members become nuclear weapons states? How can one or two U.S. carriers project compelling 

power against a nuclear-armed Iran? 

82

QUESTION FIVE: IRAN’S ROLE IN THE WORLD OIL MARKET

The ‘‘Oil weapon’’

As was mentioned in witness testimony, Iran has threatened to use its oil supply 

as a weapon to achieve its strategic objectives, including building a nuclear energy, 

and probably a nuclear weapons program.

• How realistic is this threat and what can we do to counter it? 

• I understand that while Iran is a major oil exporter, they have a severe refinery 

shortage and must import much of their gasoline. Is this a potential leverage 

point for trade sanctions against Iran? 

Iran’s oil sector evolution 

A recent article by Roger Stern suggests that Iran’s oil export capacity might dry 

up within ten to fifteen years, essentially eliminating a vital government revenue 

source. This is in contrast to the testimony today which shows the potential of expansion to pre Iran-Iraq war levels of over 6 million barrels per day.

• Do you believe the Stern analysis is credible’? Obviously policy implications toward Iran are quite different if they are really not going to be a major oil exporter within a couple years. 

Negotiating with Iran

• Dr Leverett’s testimony suggests that the US needs to strike a ‘‘grand bargain’’ 

with Iran. What would be the terms of such a bargain as you envision them? 

QUESTIONS FROM SENATOR SANDERS

1. For Ms. Stuntz—As I understand it, the National Security Council’s energy 

task force has recommended an automatic 4% yearly increase in CAFE standards. 

I am interested in what factors were considered in making the decision on what the 

specific yearly increase should be. 

2. For All Members of the Panel—Unfortunately, not many of you mentioned climate change in your testimony and it only briefly came up during the hearing. This 

is a major concern for me because the ongoing burning of fossil fuels—most obviously oil—is leading to global warming. Global warming, in turn, is increasing pressure on natural resources across the globe, and many experts are already warning 

that this pressure could lead to increased civil unrest in many parts of the world, 

unrest that could lead to armed conflicts. The ‘‘geopolitics of oil’’ should at the very 

least mention the ‘‘geopolitics of global warming.’’ With this in mind, why is there 

not more emphasis on this important issue in your testimony? 

QUESTION FROM MR. SESSIONS

1. Many commentators have criticized the usage of the phrase ‘‘energy independence,’’ pointing out that it sets up an unrealistic—if not impossible or undesirable—

goal for U.S. energy policy. Given the various priorities that we face when discussing our energy policy, particularly when we consider the issue as a matter of 

national security, how would each member of the panel articulate the over-arching 

goal of our policy? 

U.S. SENATE, 

COMMITTEE ON ENERGY AND NATURAL RESOURCES, 

Washington, DC, January 17, 2007. 

Ms. LINDA G. STUNTZ, 

Partner, Stuntz, Davis & Staffier, PC, Washington, DC. 

DEAR MS. STUNTZ: I would like to take this opportunity to thank you for appearing before the Senate Committee on Energy and Natural Resources on Wednesday, 

January 10, 2007 to give testimony regarding the global oil balance and its implications for the U.S. economic and national security. 

I am enclosing a list of questions which have been submitted for the record. If 

possible, please respond to these questions by email to Amanda Kelly,

amandalkelly.energy.senate.gov, by Tuesday, February 6, 2007. 

Sincerely, 

JEFF BINGAMAN, 

Chairman. 

[Enclosure.] 

83

QUESTION FROM SENATOR DOMENICI FOR MS. STUNTZ

. There has been a great deal of attention paid to the so-called ‘‘ ’98-’99’’ contracts 

for oil produced in the Gulf of Mexico. These contracts did not contain price ceilings 

for royalty relief. This was clearly an expensive mistake, but the language is in 

valid contracts with multiple oil companies, some of which are owned by foreign entities. Some in the other body have proposals that would attempt to alter these contracts, contrary to our contract law. Do we run the risk of setting a bad example 

for other countries if we don’t respect the sanctity of our own government’s contracts? 

QUESTIONS FROM SENATOR DOMENICI FOR ALL WITNESSES

1. At the hearing, I heard concerns expressed regarding the lack of investment 

in major oil producing regions, particularly the Middle East, by investor-owned corporations. Even in those areas that have not been closed to private investment, political instability, and a lack of a legal infrastructure for entering into and enforcing 

contracts seem to be major obstacles. How can the U.S. convince other states that 

legal and business models that encourage private investment are in their interest 

as well as ours? 

2. Do you have any suggestions for how investor owned companies can position 

themselves to gain greater access to state-held resources? In the past, these corporations have had expertise that was valuable to the national oil companies. To what 

extent is this still true, and what can 

3. Is it inevitable that investor-owned companies are destined to simply fulfill the 

role of ‘‘service companies’’ to producers of nationally-owned resources’? How does 

that trend affect U.S. energy security’? 

4. The fact that an oil company is nationally-owned does not necessarily exclude 

the benefits of competition and foreign participation. An example is Norway, How 

can we promote that business model in the world’? 

5. Today we heard testimony that, as a result of the lack of access by investorowned oil companies to the world’s oil ‘‘cheapest’’ oil reserves, they are increasingly 

forced to pursue opportunities in older and more technologically challenging fields. 

Do you have any information regarding the level of investment on the part of investor-owned companies that will be required for them to maintain their current levels 

of production? How does the cost to those companies required to maintain their current level of production compare to the investment required by the world’s largest 

nationally-owned companies? 

6. Some analysts have suggested that the trend toward privatization occurred 

when prices were low, and governments wanted to spread risk. Now nationalization 

is occurring when prices are high, because governments want to capture the profits. 

There have been proposals in the U.S. to increase taxes on oil companies, which 

seems to be a different path to the same goal. Whether the policy is direct nationalization, or appropriation of profits through new taxes, doesn’t this increase risk to 

investors, reducing the industry’s ability to make new capital investment? 

QUESTIONS FROM SENATOR CANTWELL

QUESTION ONE: IMPACT OF GROWING CHINESE FOSSIL FUEL DEMANDS

The growth of China’s energy economy is absolutely astounding. On a recent trip 

there I learned that they are building roughly 1,000 megawatts of electrical capacity 

per week, most of it using outdated coal-fired technology. In a single year the Chinese are now putting up the equivalent electricity capacity as the entire Spanish 

electrical grid. 

I also learned that while China only became a net oil importer in 1993, with their 

accelerating rush towards private vehicles—by 2010 China is expected to have 90 

times more cars than they did 1990—Chinese exports in 2030 will match those of 

the U.S. today. 

It is also important to note that new projections predict China will overtake the 

United States as the world’s largest carbon dioxide emitter by 2009, a full decade 

earlier than previous projections. 

I share the deep concern of several of our witnesses that if these trends continue, 

the results for both global oil demand and carbon emissions will be disastrous. 

That’s why I believe we must proactively engage and collaborate with China on 

clean energy alternatives for both our nation’s and the world’s benefit. I am proud 

that my home state of Washington already has significant trade ties with China, 

and we view it as a vast potential export market for our homegrown clean energy 

technologies. 

84

All Witnesses: 

How can the United States constructively engage China as a partner in securing 

a stable global oil economy? 

Senior Chinese officials I met with told they fully recognize the economic, environmental, and security vulnerabilities of their growing fossil fuel dependence, but said 

they saw few alternatives to meeting their country’s incredible demand for energy. 

How can we help get them the clean energy technologies they want and we want 

to sell to them? Could Chinese adoption of these technologies create the economies 

of scale that would drive down the production costs of many renewable energy technologies? 

Are there likely to be other benefits of such energy collaboration with the Chinese 

in terms of other U.S. regional security objectives such as in North Korea, Iran, and 

the former Soviet Republics? For example, China is the number one importer of oil 

and gas from Iran and they are bound by energy deals valued at around $120 billion 

dollars. 

Dr. Leverett, what do you think the U.S. can the United States do to counter the 

Sino-Russian energy axis described in your testimony? 

QUESTION TWO: IMPORTANCE OF REDUCING U.S. OIL DEMAND

IN TRANSPORTATION SECTOR

It is clear that targeting our transportation system’s demand for oil is a key component of improving our nation’s energy security. And in fact most future global oil 

demand is linked to transportation use. If we are going to make any difference in 

our increasingly dire oil addiction, we need a multi-tiered effort that both increases 

our use of alternative fuels and reduces our overall demand for fossil fuels. 

Success of Vehicle Fuel Economy Standards 

According to the 2002 report by the National Academies of Science, gasoline consumption (and oil imports) would be 2.8 million barrels per day higher if CAFE 

standards had not been imposed in the mid 1970s following the Arab Oil Embargo. 

Unfortunately, after doubling the average gas mileage of U.S. vehicles CAFE standards stagnated and have not been increased since 1985. 

Next week, I look forward to joining a bipartisan coalition in reintroducing our 

‘‘Ten-in-Ten Fuel Economy Act,’’ which would increase CAFE standards for all passenger vehicles, including light trucks and SUVs, by 10 miles per gallon over 10 

years. This balanced and technically feasible bill would save 25 million barrels of 

oil per day by 2025, the same amount of oil we currently import from the Persian 

Gulf.

All Witnesses: 

• How do you think a reduction in demand of 2.5 million barrels per day would 

help improve our reliance on foreign oil imports? 

• Do you believe that increasing the demand for more efficient vehicles in the 

largest car market in the world might affect the efficiency of vehicles sold in 

other countries? 

• A recent analysis by an Energy Department analysis found that increasing 

CAFE standards to a combined fleet average of 35 miles per gallon could save 

as much as 0.5% of our Gross Domestic Product—roughly $60 billion per year 

or $200 per capita per year in the United States. Given this tremendous benefit, 

why do you think it has been so difficult to increase CAFE standards? 

• Mr. Wald, you testified that increasing transportation efficiency is the single 

most effective step the U.S. can take to improve its energy security. Can you 

expand on why you think, from a military and national security perspective, it 

is critical that we increase the overall efficiency of nation’s transportation fleet? 

• Mr. Wald, I also understand that the Defense Department spends $10.6 billion 

annually on fuel, or 97 percent of the federal government’s use, and almost 2 

percent of the entire country’s use. And that as much of 70 percent of our military convoys in Iraq, which are increasingly at risk from roadside bombs, are 

carrying fuel.

Given these facts, how could the military benefits from more efficient vehicle technology? Would you say such technologies would qualitatively increase our nation’s 

military strength? 

Breakthrough technologies 

• Do any of the witnesses see any groundbreaking or game changing technologies 

that could dramatically change this bleak future oil demand outlook? 

85

• Plug-in hybrids promise to break the historic wall between. the transportation 

and electricity sector and provide new and diverse alternative energy sources 

to displace gasoline and diesel. 

• What role will biofuels have in replacing world oil demand? 

• Would it be in the national interest to pursue an all out effect in vehicle 

lightweighting technologies such as the use of composites, or better battery 

technologies for vehicles? 

QUESTION THREE: MYSTERY OF HIGH WORLD OIL PRICES

The projected price of oil in competitive world market has been estimated by the 

Energy Department to be in the range of S 15 per barrel. And several sources estimate the most efficient OPEC production, in particular Saudi Arabia where the bulk 

of world oil reserves are, cost as little as $2 to S5 per barrel to produce. Just about 

four years ago OPEC’s target world oil price was between $22 and $28 per barrels. 

Now we seem content with $50 to 60 per barrel oil, and would be happy if it stayed 

there for years to come! 

All Witnesses:

• What caused this dramatic rebaselining in the world oil price? How come $25 

per barrel was okay for everyone a few years ago, now consuming nations would 

be happy to pay double that. 

• What does this target price shift mean in terms of real dollars transferred from 

U.S. consumers to OPEC and other major oil producers? 

• Are there ways we can achieve more stability in the world oil price? Why are 

there no long-term price contracts in the oil business? It would seem be in the 

interest of both producing and consuming nations to know in advance how much 

they would be spending or receiving for a certain amount of oil. 

• As you know, the United States manages a strategic petroleum reserve and IEA 

maintains a shared strategic reserve. Have these proven effective in securing 

reasonable pricing from OPEC? Could larger reserves help stabilize world oil 

prices, or at least prevent volatility or future supply shocks? 

• What is the value in increasing domestic oil production in environmentally sensitive US oil fields? Isn’t this just at best a drop in the bucket in terms of global 

oil supply? 

QUESTION FOUR: NEED FOR COLLABORATION AMONG MAJOR OIL CONSUMERS

RATHER THAN MILITARY ACTION

For decades now, ensuring our nation’s oil security has been pursued by both competitive economic means and political-military means. It now seems that the net effect of overt military action has proven to be at most of questionable value and may 

even be counterproductive and contributed to the current destabilization we see in 

the world oil market. 

Several witnesses have described that the geographic distribution of the world’s 

fossil fuel reserves means that OPEC will only gain more leverage in setting future 

world energy prices. This dynamic, combined with the fact that National Oil Companies control 80 to 90 percent of the world’s oil supplies, means to me that maybe 

it would be wiser to focus on collaborative action among major oil consumers, rather 

than continue to rely on military action. 

All Witnesses:

• What do you think the net effect of the Iraq war on the world oil price? 

• What is the prospective effect of a total collapse of the Iraq oil sector? 

• Could an organization of major oil consuming countries useful or feasible as a 

counterweight to OPEC? 

• Could IEA form the nucleus of such an organization? 

• How can we quickly allow China and other major oil consuming countries to 

participate fully in and SEA framework?

Mr. Wald: 

• In addition to being at odds with a collaborative approach to oil conservation 

and carbon emissions reduction, do you believe the use of US military power 

to guarantee oil security feasible in world where OPEC members become nuclear weapons states? How can one or two U.S. carriers project compelling 

power against a nuclear-armed Iran? 

86

QUESTION FIVE: IRAN’S ROLE IN THE WORLD OIL MARKET

The ‘‘Oil weapon’’

As was mentioned in witness testimony, Iran has threatened to use its oil supply 

as a weapon to achieve its strategic objectives, including building a nuclear energy, 

and probably a nuclear weapons program.

• How realistic is this threat and what can we do to counter it? 

• I understand that while Iran is a major oil exporter, they have a severe refinery 

shortage and must import much of their gasoline. Is this a potential leverage 

point for trade sanctions against Iran? 

Iran’s oil sector evolution 

A recent article by Roger Stern suggests that Iran’s oil export capacity might dry 

up within ten to fifteen years, essentially eliminating a vital government revenue 

source. This is in contrast to the testimony today which shows the potential of expansion to pre Iran-Iraq war levels of over 6 million barrels per day.

• Do you believe the Stern analysis is credible’? Obviously policy implications toward Iran are quite different if they are really not going to be a major oil exporter within a couple years. 

Negotiating with Iran

• Dr Leverett’s testimony suggests that the US needs to strike a ‘‘grand bargain’’ 

with Iran. What would be the terms of such a bargain as you envision them? 

QUESTIONS FROM SENATOR SANDERS

1. For Ms. Stuntz—As I understand it, the National Security Council’s energy 

task force has recommended an automatic 4% yearly increase in CAFE standards. 

I am interested in what factors were considered in making the decision on what the 

specific yearly increase should be. 

2. For All Members of the Panel—Unfortunately, not many of you mentioned climate change in your testimony and it only briefly came up during the hearing. This 

is a major concern for me because the ongoing burning of fossil fuels—most obviously oil—is leading to global warming. Global warming, in turn, is increasing pressure on natural resources across the globe, and many experts are already warning 

that this pressure could lead to increased civil unrest in many parts of the world, 

unrest that could lead to armed conflicts. The ‘‘geopolitics of oil’’ should at the very 

least mention the ‘‘geopolitics of global warming.’’ With this in mind, why is there 

not more emphasis on this important issue in your testimony? 

QUESTION FROM MR. SESSIONS

1. Many commentators have criticized the usage of the phrase ‘‘energy independence,’’ pointing out that it sets up an unrealistic—if not impossible or undesirable—

goal for U.S. energy policy. Given the various priorities that we face when discussing our energy policy, particularly when we consider the issue as a matter of 

national security, how would each member of the panel articulate the over-arching 

goal of our policy?

Æ