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[Senate Hearing 109-857]
[From the U.S. Government Publishing Office]

                                                        S. Hrg. 109-857
 
                    ENERGY SECURITY IN LATIN AMERICA

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

                                HEARING

                               BEFORE THE

                     COMMITTEE ON FOREIGN RELATIONS
                          UNITED STATES SENATE

                       ONE HUNDRED NINTH CONGRESS

                             SECOND SESSION

                               __________

                             JUNE 22, 2006

                               __________

       Printed for the use of the Committee on Foreign Relations

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                     COMMITTEE ON FOREIGN RELATIONS

                  RICHARD G. LUGAR, Indiana, Chairman

CHUCK HAGEL, Nebraska                JOSEPH R. BIDEN, Jr., Delaware
LINCOLN CHAFEE, Rhode Island         PAUL S. SARBANES, Maryland
GEORGE ALLEN, Virginia               CHRISTOPHER J. DODD, Connecticut
NORM COLEMAN, Minnesota              JOHN F. KERRY, Massachusetts
GEORGE V. VOINOVICH, Ohio            RUSSELL D. FEINGOLD, Wisconsin
LAMAR ALEXANDER, Tennessee           BARBARA BOXER, California
JOHN E. SUNUNU, New Hampshire        BILL NELSON, Florida
LISA MURKOWSKI, Alaska               BARACK OBAMA, Illinois
MEL MARTINEZ, Florida
                 Kenneth A. Myers, Jr., Staff Director
              Antony J. Blinken, Democratic Staff Director

                                  (ii)

                            C O N T E N T S

                              ----------                              
                                                                   Page

Biden, Hon. Joseph R., Jr., U.S. Senator from Delaware...........    40
Craig, Hon. Larry E., U.S. Senator from Idaho....................     1
    Prepared statement...........................................     3
Cavallo, Hon. Domingo, chairman and CEO, DFC Associates, LLC, and 
  former Minister of Economy for Argentina.......................    12
    Prepared statement...........................................    14
 de Carvalho, Eduardo Pereira, president, Brazilian Association 
  of Sugar Cane and Ethanol Producers, Sao Paulo, Brazil.........    26
    Prepared statement...........................................    28
Giusti, Luis E., senior advisor, Center for Strategic and 
  International Studies, Washington, DC..........................    18
    Prepared statement...........................................    21
Goldwyn, Hon. David L., president, Goldwyn International 
  Strategies, LLC, Washington, DC................................    30
    Prepared statement...........................................    33
Lugar, Hon. Richard G., U.S. Senator from Indiana................     1
Martinez, Hon. Mel, U.S. Senator from Florida....................     7
Nelson, Hon. Bill, U.S. Senator from Florida.....................     8
Salazar, Hon. Ken, U.S. Senator from Colorado....................     4
     Prepared statement..........................................     6

              Additional Material Submitted for the Record

Farnsworth, Eric, vice president, Council of the Americas, 
  prepared statement.............................................    56
Johnson, Stephen C., senior policy analyst for Latin America, The 
  Kathryn and Shelby Cullom Davis Institute for International 
  Studies, The Heritage Foundation, prepared statement...........    58
Mendelson-Forman, Johanna, Ph.D., senior associate, Center for 
  Strategic and International Studies, Washington, DC............    62

                                 (iii)

  

                    ENERGY SECURITY IN LATIN AMERICA

                              ----------                              

                        THURSDAY, JUNE 22, 2006

                                       U.S. Senate,
                            Committee on Foreign Relations,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 9:40 a.m., in 
room SD-419, Dirksen Senate Office Building, Hon. Richard G. 
Lugar (chairman of the committee) presiding.
    Present: Senators Lugar, Chafee, Coleman, Martinez, Biden, 
and Nelson.
    Also present: Senators Craig and Salazar.

 OPENING STATEMENT OF HON. RICHARD G. LUGAR, U.S. SENATOR FROM 
                            INDIANA

    The Chairman. This hearing of the Senate Foreign Relations 
Committee is called to order.
    We are honored to have two distinguished colleagues before 
us on our first panel today. To respect their time commitments, 
we will call upon them for their testimony immediately. After 
they have completed their testimony, I will deliver an opening 
statement, as will the distinguished ranking member as he 
arrives, and then we have a remarkable panel to follow this 
morning.
    Rollcall votes will come, three of them, at about 11 
o'clock. So we will do our best to maneuver around them. We 
have some extraordinary opportunities today to learn about 
energy policy, Latin America, and the intersection of these 
with regard to our country.
    It's a real privilege to call now upon the distinguished 
Senator from the State of Idaho, Larry Craig, to be followed by 
the equally distinguished Senator from the State of Colorado, 
Ken Salazar. Gentlemen, proceed as you wish. Your full 
statements will be made a part of the record. If you would 
summarize within a 5- or 10-minute period, that would be 
desirable.
    Senator Craig.

   STATEMENT OF HON. LARRY E. CRAIG, U.S. SENATOR FROM IDAHO

    Senator Craig. Well, Mr. Chairman, thank you very much for 
allowing both of us to be here. I'm pleased to have Ken at my 
side as we discuss these important issues.
    It is an opportunity to address both energy and Latin 
American issues, and I want to commend you and your insight in 
addressing this very timely and important set of topics, and 
for introducing S. 2435, the Energy Diplomacy and Security Act. 
Your bill will help move the Latin American region toward the 
center of this country's strategic planning, and reevaluate 
attitudes amongst some United States officials who currently 
limit our ability to diversify our energy supply and also to 
compete fairly with countries like China for resources in the 
hemisphere.
    Mr. Chairman, you know I've always been fairly direct and 
blunt about these issues. Recent developments in Latin America 
are not in keeping, in my opinion, with the United States' 
energy, economic, or national security interest. For example, 
the nationalization of industries in Latin America is 
troubling.
    Further, while this kind of backward-looking activity is 
contrary to our country's belief in the power of property 
rights and free enterprise in transforming developing 
economies, it is nevertheless very welcome to countries around 
the world with leftist-leaning governments and state-controlled 
industries. In particular, it is my firm opinion that the likes 
of China are exploiting these regressive developments right at 
our doorstep.
    Whether or not that's true, I know China is preparing to 
plant oil rigs 50 miles offshore of our coastline. Venezuela 
has recently purchased 18 rigs from that country. Hugo Chavez 
has stated numerous times that he seeks to divert his oil 
exports away from the United States to China.
    But, in any event, the fact remains that our policies, if 
they ever warrant that term toward Latin America, don't seem to 
be working. And it is arguably the case that China is inclined 
to exploit this precipitous decline in United States influence 
in Latin America. It is a product of failure. The result may be 
that some governments in Latin America are doomed to repeat 
past economic mistakes and thereby relive their failed 
turbulent histories, rather than join the expanding communities 
of modern and progressive democracies.
    As it relates to China's engagement in Latin America, let 
me direct the committee's attention to two statements. In 
yesterday's New York Times, Thomas Friedman points out that 
China, too, thinks of Latin America as its backyard. In 
particular, Friedman states, ``China is almost exclusively 
focused on extracting natural resources--timber, iron, 
soybeans, minerals, gas, and fish--to feed its voracious 
appetite and keep jobs and factories humming in China.''
    Additionally, the administration's own national security 
strategy paper points to China's energy resource hunger and 
states that China is ``expanding trade, but acting as if they 
can somehow lock up energy supplies around the world or seek to 
direct markets rather than opening them up.''
    Mr. Chairman, I firmly believe your bill, S. 2435, of which 
I am a cosponsor, will change a policy toward Latin America of 
nonengagement on substantive issues that ought to be of mutual 
concern to the United States and its neighbors. The position is 
actually worse than merely benign neglect or nonengagement. At 
the same time that we fail to engage on drug interdiction, 
energy development, extradition, and similar criminal justice 
issues, we are actually antagonizing the populations of 
countries with whom we have a strategic interest in maintaining 
productive relationships.
    Mr. Chairman, I will ask that the balance of my statement 
become a part of the record, and let me summarize and conclude.
    I believe it is only through aggressive oversight and 
pushing bills like S. 2435 that we can change course and 
correct our policies in Latin America. Failure to 
constructively engage this region and to promote partnerships 
on energy and other issues between the United States and Latin 
American countries will condemn the United States to 
consistently poor outcomes on matters of importance to our 
citizens.
    Whether it is affordable energy or the jobs that arise from 
soundly executed foreign policy or an orderly and legal 
immigration policy, we have a responsibility to be friends, 
neighbors, and to engage our neighbors to the south. I have no 
doubt that the region you are addressing today is just as 
important, if not more important, than the Middle East, where 
we seem to focus all of our attention today.
    In my opinion, if we do not correct our course in Latin 
America, the long-term consequences to the United States will 
prove seriously adverse. I hope we do not wake up one day and 
realize that our focus has been too narrowly directed at the 
Middle East while equally important events, including the 
petropolitics of Latin America, are in the process of 
delivering a profound and negative impact on this country.
    I thank you for allowing me to testify, Mr. Chairman.
    [The prepared statement of Senator Craig follows:]

   Prepared Statement of Hon. Larry E. Craig, U.S. Senator From Idaho

    Mr. Chairman, thank you for this opportunity to address both energy 
and Latin America issues. I want to commend you for your insight in 
addressing these very timely and important topics, and for introducing 
S. 2435, the Energy Diplomacy and Security Act. Your bill will help 
move the Latin American region toward the center of this country's 
strategic planning by reevaluating attitudes among some U.S. officials 
that currently limit our ability to diversify our energy supplies and 
also to compete fairly with countries like China for resources in this 
hemisphere.
    Mr. Chairman, let's call a spade a spade. Recent developments in 
Latin America are not in keeping with the United States' energy, 
economic, or national security interests. For example, the 
nationalization of industries in Latin America is troubling. Further, 
while this kind of backward-looking activity is contrary to our 
country's belief in the power of property rights and free enterprise to 
transform developing economies, it is nonetheless very welcome to 
countries around the world with leftist-leaning governments and state-
controlled industries. In particular, it is my firm opinion that the 
likes of China are exploiting these regressive developments right on 
our doorstep.
    Whether or not it is the fact that China is preparing to plant oil 
rigs 50 miles off our southern coastline, or that Venezuela has 
recently purchased 18 oil rigs from that country, or the simple fact 
that Hugo Chavez has stated numerous times that he seeks to divert his 
oil exports away from the United States and to China--the fact remains 
constant that our policies (if they even warrant that term) toward 
Latin America don't seem to be working and it is arguably the case that 
China is inclined to exploit the precipitous decline in United States 
influence in Latin America produced by that failure. The result may be 
that some governments in Latin America are doomed to repeat past 
economic mistakes and thereby relive their failed turbulent histories, 
rather than join the expanding community of modern and progressive 
democracies.
    As it relates to China's engagement in Latin America, let me 
quickly point out two statements. In yesterday's New York Times, Thomas 
Friedman points out that China, too, thinks of Latin America as their 
backyard. In particular, Friedman states, ``China is almost exclusively 
focused on extracting natural resources--timber, iron, soybeans, 
minerals, gas, and fish to feed its voracious appetite and keep jobs 
and factories humming in China.'' Additionally, the administration's 
own National Security Strategy paper points to China's energy resource 
hunger by stating that China is ``expanding trade, but acting as if 
they can somehow lock-up energy supplies around the world or seek to 
direct markets rather than opening them up.''
    Mr. Chairman, I firmly believe your bill, S. 2435 (of which I am an 
original sponsor) will seek to change a policy toward Latin America of 
nonengagement on substantive issues that ought to be of mutual concern 
between the United States and its neighbors. The position is actually 
worse than one of merely negligent nonengagement. At the same time that 
we fail to engage on drug interdiction; the development of energy 
resources; extradition and similar criminal justice issues, we are 
actually antagonizing the populations of countries we have a strategic 
interest in maintaining productive relations with.
    Mr. Chairman, to be blunt, we have some resistance to overcome in 
this city to a new approach toward Latin America. While Republican and 
Democrat administrations have come and gone, many bureaucrats remain 
that harbor a strong institutional bias toward Latin America. That 
said, it is my opinion that many high-level bureaucratic officials in 
the State Department and the CIA have been misguided in their 
responsibilities in the region. No doubt Hugo Chavez is a worrying 
phenomenon. However, the questionable antics of our State Department 
during the coup d'etat in Venezuela in 2002 have, in my opinion, had 
dire consequences on our ability to appropriately influence not only 
Venezuela, but other countries in the region as well. There is no 
quicker formula for solidarity among Latin American governments than 
the appearance of interference and victimization by the United States.
    Further, we have small groups in this country who seem to genuinely 
fear the likes of Chavez, Castro, and Morales and want nothing to do 
with them even if it involves the pursuit of U.S. national interests. 
This fear leads to comprehensive nonengagement, leaving the door open 
for further and unwanted influence in the region from other countries 
that do not have our well-being at heart. Those who fear these leftist 
leaders of Latin America must have no faith in the great concepts of 
America, capitalism, diplomacy, the power of engagement, and a human's 
will to be free. Additionally, those driven by fear in this country 
fail severely to see that isolation policies have never been 
successful. Unfortunately, these small, fear-mongering groups do not 
appear to be isolated in particular regions of our country. They also 
appear to be locked in at influential bureaucratic posts at the State 
Department and the CIA.
    It is only through aggressive oversight and pushing bills like S. 
2435 that we can change course and correct our policies in Latin 
America. Failure to constructively engage this region and to promote 
partnership on energy and other issues between the United States and 
Latin American countries will condemn the United States to consistently 
poor outcomes on matters of importance to our citizens--whether it is 
affordable energy, or the jobs that arise from soundly executed foreign 
trade policies.
    I have no doubt that the region you are addressing today is just as 
important, if not more important, than the Middle-East where we are 
heavily involved today. In my opinion, if we do not correct our course 
in Latin America, the long-term consequences to the United States will 
prove seriously adverse. I hope we do not wake up one day and realize 
that our focus had been too narrowly directed toward the Middle East 
while equally important events including the petropolitics of Latin 
America were in the process of delivering a profound and negative 
impact on this country.

    The Chairman. Well, I thank you very much for your 
testimony, Senator Craig, and for your leadership in energy 
policy, generally. I thank you for your specific reference to 
the legislation we have offered and its general concept, that 
our State Department must have officials who are engaged in the 
geopolitics of energy. That clearly includes Latin America, as 
well as the other areas that you have referenced. We must 
urgently reorganize our own efforts, both legislatively as well 
as administratively.
    Senator Salazar, would you proceed with your statement.

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

    Senator Salazar. Thank you very much, Chairman Lugar, and 
thank you to Senator Nelson and Senator Martinez for the 
bipartisan leadership that you bring to this committee and to 
this United States Senate. I also very much enjoy working next 
to my colleague, Senator Craig, on so many issues, from 
veterans' affairs to energy issues, and it's always a pleasure 
to appear with him.
    I come today to talk about energy security in Latin 
America, as a member of the Energy Committee and as someone who 
has long been involved in our struggle to understand the 
unsustainability of our own energy policies and practices here 
at home.
    My home State of Colorado is home to the National Renewable 
Energy Laboratory, and my constituents care deeply about the 
issue of energy independence. From rural communities in the 
eastern plains excited about new ethanol and wind technologies, 
to the citizens who experienced the oil shale boom and bust 
cycle of the late 1970s and early 1980s, they all care about 
the issue of energy very deeply.
    But I have also had the opportunity to think some about 
this relationship between foreign policy and energy security, 
and I appreciate the opportunity to briefly discuss some 
thoughts with the committee today. I worry every day, like all 
of us, about the horrible facts that we face with our 
dependency crisis today.
    America consumes one-quarter of the world's oil supplies 
but has just 3 percent of world oil reserves. Roughly 22 
percent of the world's oil is in the hands of countries under 
United States or U.N. sanctions. By some accounts, only 9 
percent of the world's oil is in the hands of free countries.
    As many of us speak about energy independence, about 
freeing the United States from an ever-escalating, zero-sum 
competition for resources with China and India, and of freeing 
the United States from our dependency on oil-rich regimes that 
are sometimes among the very worst actors on the international 
stage, this is a very serious topic that needs to be addressed.
    I am pleased to be a cosponsor of Senate bill 2435, 
Chairman Lugar's Energy Diplomacy and Security Act of 2006, 
which is also cosponsored by Senator Biden and by Senator 
Craig. This legislation sees the urgent need to elevate energy 
issues on our diplomatic agenda, such as through an 
institutionalized Western
Hemisphere Crisis Response mechanism. Last year's devastating 
hurricanes and their aftermath made plain the need for this 
kind of coordinated approach.
    It also recognizes the opportunities inherent in this 
effort by calling for a Western Hemisphere Energy Cooperation 
Forum and Energy Industry Group. Those entities can help 
emphasize our shared interests with Canada, Mexico, Central and 
South America.
    Those shared interests should be obvious, but too often 
they are obscured by political rhetoric, misperceptions, and 
old grievances. As I have often discussed with my colleague, 
Senator Martinez, the highly politicized and provocative 
policies of Venezuela's Hugo Chavez spring to mind when one 
thinks about the energy issues in the region, as does the Evo 
Morales decision to nationalize Bolivia's oil and gas fields.
    In the Western Hemisphere, as elsewhere, control over 
energy resources can be translated into a certain type of 
political power, but this is not the whole story. We have much 
to learn from our neighbors in the Western Hemisphere. We can 
learn from Brazil's success with ethanol. We can learn from 
Canada's experience with oil sands.
    And we in turn, as the United States, have much to offer to 
our neighbors. By serving as a catalyst for greater cooperation 
and a more strategic approach to energy security in the region, 
U.S. diplomacy can help energize the public and the private 
sectors to address some of the real problems, like inadequate 
electricity infrastructure investment in Latin America and 
other challenges that they face that hamper regional growth and 
create instability.
    An energized approach to regional energy diplomacy, one 
that is respectful of the development needs of our neighbors, 
and one that takes the long-term view, would be a real asset in 
our efforts to build a more stable and a more prosperous world. 
I wish this committee all the best in its work on this issue, 
and I look forward to helping you as an active partner in these 
endeavors.
    I am reminded, in conclusion, of the Alliance for Progress 
which President Kennedy formed in the 1960s. I spent about 4 
months in Central America back in the early 1980s, and the 
people of Central America still remembered that Alliance for 
Progress that had been formed.
    So I think as we look at our world ahead in this new 
century, that the relationship that we have with our neighbors 
to the south and through all of Latin America is going to be 
very crucial for us in our efforts to create a safer and more 
secure world. And I believe that the energy coalitions that we 
could form with these countries can create the foundation for 
the kind of alliance that we need to have with all of Latin 
America.
    I thank you, Mr. Chairman. I thank you, Senator Nelson and 
Senator Martinez, for your attention this morning.
    [The prepared statement of Senator Salazar follows:]

   Prepared Statement of Hon. Ken Salazar, U.S. Senator From Colorado

    First I want to thank Chairman Lugar, Senator Biden, and the rest 
of the committee for inviting me to testify today; it is always a 
pleasure to work with my colleagues on both sides of the aisle who 
share an interest in energy security issues. And of course I always 
enjoy working alongside Senator Craig.
    I come to today's topic of Energy Security in Latin America as a 
member of the Energy Committee, and as someone long involved in the 
struggle to address the unsustainability of our own energy policies and 
practices here at home.
    My home State of Colorado is home to the National Renewable Energy 
Laboratory, and my constituents care deeply about energy issues--from 
the rural communities excited about new ethanol and wind technologies 
to the citizens who experienced the oil shale boom and bust cycle of 
the late 1970s and early 1980s.
    But I have also had the opportunity to think through the 
relationship between foreign policy and energy security, and this 
opportunity to briefly join the discussions of the Foreign Relations 
Committee has helped to crystallize some of that thinking.
    I worry about the horrible, realistic facts that we face with our 
depending crisis today. America consumes one-quarter of the world's oil 
supplies but has just 3 percent of world oil reserves.
    Roughly 22 percent of the world's oil is in the hands of countries 
under United States or United Nations sanctions. By some accounts, only 
9 percent of the world's oil is in the hands of ``free'' countries.
    I often speak, as do many others, of achieving ``energy 
independence''--of freeing the United States from an ever-escalating, 
zero-sum competition for resources with China and India, and of freeing 
the United States from our dependency on oil-rich regimes that are, 
sometimes, among the very worst actors on the international stage.
    No one should mistake this as a quest for isolationism. Energy 
markets are global markets, and that is not going to change. David 
Victor recently published an op-ed about the much-touted success of 
Brazil's energy policies in the Houston Chronicle. He noted that 
Brazil's success involved removing buffers from standing between the 
people of Brazil and the reality of the international energy markets, 
thereby exposing an interesting paradox.
    ``Even as Brazil has become self-sufficient it has also, 
ironically, become more dependent on world markets. That's because the 
Brazilian Government has widely relaxed price controls so that the 
prices of fuels within the country are set to the world market. Thus 
Brazilians see real world prices when they fill up at the pump, and the 
decisions about which cars to buy and how much to drive reflect real 
costs and benefits of the fuel they consume.''
    So I recognize that the quest for energy security is not about 
pulling up the drawbridges and hunkering down. I also recognize that 
moving toward a new energy economy on a global scale promises not 
simply to remove obstacles and problems--it promises to enable new 
partnerships and opportunities that can strengthen important 
international relationships, serve as catalysts for new economic growth 
and development, and enmesh more and more of the world in a web of 
stabilizing relationships that are, literally and figuratively, 
empowering.
    That is why I am so pleased to be a cosponsor of S. 2435, Chairman 
Lugar's Energy Diplomacy and Security Act of 2006, which is also 
cosponsored by Senator Biden and by Senator Craig.
    This legislation sees the urgent need to elevate energy issues on 
our diplomatic agenda--such as through an institutionalized Western 
Hemisphere Crisis Response Mechanism. Last year's devastating 
hurricanes, and their aftermath, made plain the need for this kind of 
coordinated approach.
    It also recognizes the opportunities inherent in this effort by 
calling for a Western Hemisphere Energy Cooperation Forum and Energy 
Industry Group. Those entities can help emphasize our shared interests 
with Canada, Mexico, Central and South America.
    Those shared interests should be obvious, but too often they are 
obscured by politicized rhetoric, misperceptions, and old grievances. 
The highly politicized and provocative policies of Venezuela's Hugo 
Chavez spring to mind when one thinks about energy issues in the 
region, as does Evo Morales' decision to nationalize Bolivia's oil and 
gas fields. In the Western Hemisphere, as elsewhere, control over 
energy resources can be translated into a certain type of political 
power. But this is not the whole story. We have much to learn from our 
neighbors in the Western Hemisphere. We can learn from Brazil's success 
with ethanol. We can learn from Canada's experience with oil sands.
    And we, in turn, have much to offer. By serving as a catalyst for 
greater cooperation and a more strategic approach to energy security in 
the region, U.S. diplomacy can help energize the public and the private 
sectors to address some of the real problems--like inadequate 
electricity infrastructure investment in Latin America--that hamper 
regional growth.
    An energized approach to regional energy diplomacy--one that is 
respectful of the development needs of our neighbors, and one that 
takes the long-term view--would be a real asset in our efforts to build 
a more stable and prosperous world. I wish this committee all the best 
in its work on this issue, and look forward to being an active partner 
of yours in these endeavors.

    The Chairman. Well, thank you very much, Senator Salazar. 
Thank you for that personal reference to your own experience in 
the past, as well as the work you now do on committees that are 
certainly allies of our efforts. This is not a jurisdictional 
problem in the Senate. It's one that offers opportunities for 
many committees, and we would like to play our role. We really 
thank both of you for contributing to that through your 
presence this morning.
    We have, as you both have witnessed, both of our Senators 
from Florida. Before I excuse our two witnesses from the first 
panel, I would like to ask those Senators if they have 
questions or comments they would like to make.
    Senator Martinez.

   STATEMENT OF HON. MEL MARTINEZ, U.S. SENATOR FROM FLORIDA

    Senator Martinez. Mr. Chairman, thank you very much. I 
appreciate that, and I appreciate my colleagues being here on 
this important issue.
    I couldn't agree more with Senator Craig's assertion that 
the importance of Latin America to our country sometimes is 
well understated. The fact is that it is a tremendous area of 
opportunity but also one in which, if we do not care about it 
enough, we may also encounter very great difficulties. I think 
there are great opportunities for cooperation. Obviously, 
political stability, rule of law, are essential for us to have 
the kind of relationships that are positive and that can be so 
fruitful, as we've seen with Mexico and Brazil.
    On the other hand, when we have a disregard for human 
rights and private property rights, then we see the 
catastrophic end which can come, the example, obviously, Cuba. 
But also we see the very, very negative trends in Venezuela, 
which are not good for their own people or good for the 
relationships in the region, recently followed by Bolivia, what 
I think is unfortunate because it has caused tremendous 
disruption to many of their strong partners like Spain and 
other Latin American countries.
    The example of Brazil is one that we should note because 
their shift to ethanol, which has allowed them to achieve 
energy independence, a country that does not enjoy large fossil 
fuel deposits, is something that I think we could take a great 
lesson from. What they have done with flex fuel vehicles as 
well as extensive use of ethanol is something that I think is a 
great lesson for us.
    But thank you for holding this hearing, and thank you for 
the opportunity to speak.
    The Chairman. Thank you very much, Senator.
    Senator Nelson.

    STATEMENT OF HON. BILL NELSON, U.S. SENATOR FROM FLORIDA

    Senator Nelson. Mr. Chairman, I think it's worth noting 
that both the Senators have expressed concern about Hugo 
Chavez. And isn't it interesting that as he threatens to cut 
off his oil supply to the United States, a threat that at this 
moment I think is a hollow threat--simply because of his 
enormous investment and the fact that the refineries on the 
Gulf Coast are the kind of refineries that can process his 
grade of crude, and his infrastructure over the United States, 
all the Citgo gas stations are part of PDVSA--so it's probably 
a hollow threat right now.
    However, the fact that he is threatening to cut off what 
is, in effect, 12 percent of our daily consumption of oil in 
the United States underscores the point that the two gentlemen 
have said: We ought to be looking to alternative fuels, so that 
we're not dependent on that foreign supply of oil, his, 
Venezuela's, or others.
    And thank goodness that the Peruvian people suddenly said 
enough of this foreign meddling in their internal politics and 
their elections for president, and said, ``We don't want 
another country to come in,'' as Venezuela, through President 
Chavez, was trying to do. So that gives us a glimmer of hope.
    But both of these Senators have stated it well. The United 
States foreign policy ought to be much more heavily involved in 
Latin America, and one of the things that we can do indirectly 
is change our dependence on foreign oil, so that we don't have 
that daily dependence on Venezuelan oil.
    Thank you.
    The Chairman. Thank you, Senator Nelson. Let me just 
conclude by mentioning that Senator Craig has been very active, 
and we have tried to support his efforts. It is possible the 
Canadian firm, Iogen, will make an investment in his State of 
Idaho to produce cellulosic ethanol. This would be the first 
large production, and would offer indications of how that 
process is going to go.
    I think it's a tremendously important investment. I know 
Senator Craig has addressed the Secretary of Energy, as I have, 
to try to get through the regulations that seem to need to get 
written to utilize the legislation Congress has already passed 
on loan guarantees. Do you have any up-to-date news, Senator 
Craig, that you can share with the committee on how that 
proceeds?
    Senator Craig. Well, Mr. Chairman, thank you very much. 
Obviously ethanol is becoming a substantial success story in 
this country. To be able to go to a greater biomass like 
cellulose--straw, stubble, cornstalks and all of that--is a 
tremendous opportunity. You've explained it well.
    In the EPAC legislation of last year we produced the 
necessary tools by which to help that happen. DOE and OMB are 
working closely right now to get those regs out. I did meet 
with our new OMB Director this week, and it was a most frank 
discussion because it's kind of like one department pointing at 
the other, both blaming each other. I said, ``Blame game is 
overwith, guys. Go to work and get it done. The timeline is 
important for us, for this country, for this technology.''
    Mr. Portman agrees with that. I think he will move 
aggressively. He tells me he will do so. He is focused on those 
particular regulations. It's not just for Iogen and cellulosic 
development. It's for a broad range of other new technologies 
coming into the market that we're interested in, collectively. 
And so I think with your urging--and I tremendously thank you 
for your support in that--and your continued urging, I think 
they need to know that we're very intent on what they're doing. 
I think they now understand that, and that time is of the 
essence.
    Thank you.
    The Chairman. Well, thank you very much, Senator Craig. And 
I would just add, I have been in touch with our Hoosier friend, 
Al Hubbard, at the White House, so that he might be helpful 
likewise----
    Senator Craig. Good.
    The Chairman [continuing]. Because the President himself 
has spoken of the importance of cellulosic ethanol. I think our 
joint feeling is, this is the time to get on with it. This is 
really an important and urgent situation. But I thank you for 
your additional testimony.
    Senator Craig. Well, thank you.
    The Chairman. We thank both of you for coming and look 
forward to continuing to visit with you.
    The Chair would now like to call the second distinguished 
panel that will appear before the committee this morning: the 
Honorable Domingo Cavallo, chairman and CEO, DFC Associates, 
former Minister of the Economy for Argentina; Mr. Luis Giusti, 
senior adviser, Center for Strategic and International Studies 
in Washington, DC; Mr. Eduardo Pereira de Carvalho, president, 
Brazilian Association of Sugar Cane and Ethanol Producers, Sao 
Paulo, Brazil; and the Honorable David L. Goldwyn, president of 
Goldwyn International Strategies, LLC, of Washington, DC. 
Gentlemen, we are delighted to have you.
    The Chairman. I am going to proceed now, as I indicated, 
with my opening statement. When Senator Biden comes to our 
hearing, we'll recognize him of course for that same 
opportunity.
    The Foreign Relations Committee meets today to continue our 
examination of the ways in which energy is transforming 
geopolitics and threatening United States national security and 
economic prosperity. In previous hearings we have defined the 
severity of these threats, examined options for reducing United 
States oil dependence, and explored in detail how energy is 
affecting our relationships with other nations, including 
India, China, and the Persian Gulf states.
    Today we meet to look at energy security in the context of 
our relations with Latin America. Mexico and Venezuela are two 
of America's top oil suppliers. Mexico has been a reliable 
energy partner. Venezuela, on the other hand, has made repeated 
threats to suspend oil supplies, and President Hugo Chavez has 
tried to use Venezuela's oil wells to gain political advantages 
in this hemisphere. His inflammatory rhetoric and actions, 
coupled with the precipitous nationalization of the natural gas 
sector by Bolivia, underscore the vulnerability of United 
States national security to the political manipulation of 
energy.
    The Government Accountability Office has just completed a 
draft version of a report that I commissioned, that examines 
our country's vulnerability to an oil supply disruption by 
Venezuela. The report says that a 6-month disruption that 
removed, and I quote, ``all or most Venezuelan oil from the 
world market,'' could raise oil prices by $11 per barrel and 
reduce U.S. GDP by $23 billion. Even more startling is the 
possibility the Venezuelan Government might follow through on 
its threat to shut down its wholly owned refinery system in the 
United States, operated by Citgo.
    Even without a government disruption of the flow of oil 
from Venezuela, oil production in that country faces serious 
challenges that could impact the global price of oil and the 
United States economy. The GAO report points to a severe 
deterioration in the ability of Venezuela to meet its oil 
production targets in the foreseeable future. This has happened 
because the Venezuelan oil industry has allowed its technical 
and managerial expertise to deteriorate, and has failed to 
invest sufficiently in the maintenance of its oil fields.
    The GAO study reinforces the urgent need to move away from 
reliance on volatile and sometimes hostile producers. According 
to the GAO, administration officials told them, and I quote, 
that ``they do not have Venezuelan-specific contingency plans 
for a potential loss of oil.'' Instead, our response to a 
Venezuelan oil disruption would rely on the Strategic Petroleum 
Reserve and diplomatic efforts to convince other oil producers 
to increase production.
    In March, I introduced, as has been mentioned by our 
Senatorial colleagues, the Energy Diplomacy and Security Act, 
S. 2435, which would realign our diplomatic priorities to 
address the new geopolitics of energy security. It would 
dramatically enhance our international energy activities, and 
move our policy away from the outdated notion that energy 
security is simply about finding more oil and gas.
    Although global in scope, a particular priority of this 
bill is to stimulate partnerships in the Western Hemisphere. 
The high cost of energy imports, vulnerability to supply 
shocks, and the increased potential for conflict are concerns 
widely shared in the region.
    The bill creates a standing ministerial-level Western 
Hemisphere Energy Forum, modeled on the Energy Working Group of 
the Asia Pacific Economic Cooperation Forum. The Energy 
Diplomacy and Security Act also calls for international 
partnerships among energy producers and consumers.
    One area of energy cooperation that could be especially 
fruitful for our hemisphere is ethanol. The expansion of 
ethanol capabilities would improve the diversity and 
reliability of fuel supplies, create jobs in many countries, 
and help reduce greenhouse gas emissions. Brazil, long ago, saw 
the importance of ethanol and is now energy self-sufficient. 
Brazil and the United States can work together to improve our 
mutual energy security, and that of the region, by spreading 
our shared expertise. The current protective tariff on ethanol 
imports to the United States should be reconsidered in light of 
this mutual interest in improving energy security.
    This morning, we are joined by two distinguished panels, 
and we have heard from the first, our colleagues Senator Larry 
Craig and Senator Ken Salazar. Both, I would point out, are 
members of the Energy Committee of the United States Senate and 
cosponsors of the Energy Diplomacy and Security Act. We 
appreciate the benefit of their energy expertise and their 
counsel as our committee continues to examine these issues, as 
does the Energy Committee.
    On the second panel just before us, we will hear from four 
experts with deep experience in Western Hemisphere energy 
affairs. We welcome Dr. Domingo Cavallo, the former Economy 
Minister of Argentina, and currently chairman and CEO of DFC 
Associates; Mr. Luis Giusti, the former president of Venezuela 
National Oil Company, currently senior adviser at the Center 
for Strategic and International Studies; Mr. Eduardo Carvalho, 
formerly the Deputy Finance Minister of Brazil, currently the 
president of Brazil's Association of Sugar Cane and Ethanol 
Producers; and Mr. David Goldwyn, former Assistant Secretary of 
Energy for Policy and International Affairs, and currently the 
president of Goldwyn International Strategies.
    We thank each one of you for coming to see us this morning. 
Let me say at the outset that your statements will be made a 
part of the record in full. I would like to hear from all of 
you, and we ask for you to summarize your comments within 
perhaps a 10-minute period of time. We will be liberal in 
interpretation because our desire is to hear you and to make 
sure that all of you are heard, prior to 11 o'clock, when we 
will have rollcall votes. So we will work our way around that 
as best we can, with as much continuity as possible.
    We thank you for your patience with our legislative system 
and the duties that each one of us have, not only to hear 
distinguished witnesses but to vote at least three times on our 
armed services authorization bill this morning. I'll ask you to 
proceed in the order that I have introduced you, and that would 
be first of all Mr. Cavallo. Would you turn on your microphone, 
please.

   STATEMENT OF HON. DOMINGO CAVALLO, CHAIRMAN AND CEO, DFC 
 ASSOCIATES, LLC, AND FORMER MINISTER OF ECONOMY FOR ARGENTINA

    Mr. Cavallo. Chairman Lugar, Senator Martinez, Senator 
Nelson, Senator Chafee, thank you for this opportunity to 
discus with you a situation that impacts energy security.
    As paradoxical as it may sound, the ``Bolivarian'' policies 
that the President of Venezuela describes as ``integrationist'' 
are destroying the very valuable comparative advantage that the 
Southern Cone of America had developed in the previous decade. 
Therefore, I predict that they will be self-defeating.
    President Hugo Chavez's rhetoric and actions not only 
create a sense of vanishing security in the United States but 
also, through their influence on President Evo Morales of 
Bolivia, have a concrete negative impact on several South 
American countries. Their policies are destroying a very 
promising regional integration process that until recently 
benefited the energy-scarce economies of the region.
    To make things worse, Argentina, which during the 1990s, 
led the regional energy integration process, has been trapped 
by misaligned energy prices in 2002. This has the effect of 
reinforcing the disintegration process fostered by President 
Hugo Chavez.
    Chile and Brazil are already suffering the impact of 
regional energy disintegration. For the time being, the 
Argentinean Government does not acknowledge the negative effect 
on its economy
because it has shifted the burden of the adjustment to Chile. 
Nevertheless, the country's business community is already 
foreseeing natural gas and electricity shortages ahead.
    The sooner Argentina starts to work together with Chile and 
Brazil to revive the energy integration process of the 1990s by 
re-encouraging private investment in the energy sector, the 
better for reversing this trend and for opening the eyes of 
President Evo Morales and making him conscious of the bad 
advice and false promises he receives from President Hugo 
Chavez.
    During the 1990s, energy supplies increased in the Southern 
Cone, thanks to significant investment in exploration and 
exploitation of hydrocarbons and in the generation, 
transmission, and distribution of electricity and gas. Energy 
availability and energy costs became an important source of 
comparative advantage for the region vis-a-vis other regions of 
the world.
    This competitive edge had its origin mainly in the 
availability of reserves of natural gas in Bolivia and in 
Argentina, and acquired a regional dimension thanks to the 
rapid process of cross border energy integration. Availability 
of natural gas reserves strongly influences the cost of 
electricity generation because natural gas is the main, primary 
input for the production of electricity.
    In my written statement I provide a description, with 
prices and quantities, of this very nice process of energy 
integration and the good results that it generated.
    This favorable integration process began to change when, in 
the aftermath of the Argentine crisis in 2002, the Argentinean 
Government decided to impose a price freeze on natural gas 
tariffs at the ``pesified'' precrisis level. This, which would 
have been already problematic in the absence of any other 
developments, happened at the time when the international 
prices of energy began to surge.
    In practice, this implied that the prices of natural gas in 
Argentina fell to one-third of its precrisis level at the same 
time when the international price of energy more than doubled. 
The consequences of these policies were to foster domestic 
demand and to discourage domestic supply.
    In the year 2005, Argentina already imported again 5 
million cubic meters a day from Bolivia, and had to curtail 
exports to Chile. To this date, the most optimistic forecasts 
of energy production in Argentina predict that it will stop 
being a net exporter of gas by the year 2010, but most likely 
at the current rates of consumption Argentina will become a net 
importer earlier.
    This new situation generated the surge in demand for 
Bolivian gas. The forecast predicts the level of demand of 68 
million cubic meters per day in 2010, compared to 31 million 
cubic meters per day in 2005. This is because the entire region 
will become dependent on Bolivian gas. Peru, which has been 
investing in exploring and exploiting natural gas, 
intelligently chose to develop a facility for exporting LNG via 
the Pacific, so at this point it can only be expected to be a 
marginal source of supply for its neighbors via cross-border 
gas ducts.
    The increased demand for its natural gas reserves could 
have allowed Bolivia to increase exports at more advantageous 
prices, if it had chosen to create the correct market 
incentives for further exploration and exploitation of its 
existing untapped reserves.
    Unfortunately, President Evo Morales, following the advice 
of President Hugo Chavez, has chosen a policy path that will 
likely have the opposite effect. By breaking its contractual 
agreement with the private companies that had invested in 
exploration and exploitation of natural gas in the last decade, 
it has increased the uncertainty faced by private sector 
producers, and will likely generate disinvestment in the 
sector.
    The combination of these policy choices in Argentina and 
Bolivia have had the effect of restricting supply and lethally 
harming the comparative advantage that had evolved in the 
previous years.
    The advocates of these new energy policies in Latin America 
argue that Chavez's Venezuela will become the main regional 
supplier of natural gas at low prices and the supplier of 
capital and technology for Yacimientos Petroliferos Fiscales 
Bolivianos to expand its natural gas production. This is not 
warranted by the recent developments by Venezuela's own oil and 
gas production.
    Oil production that had reached 3.5 million barrels per day 
in 1998 has dropped to 2.6 in 2005, and natural gas production 
dropped from 89 million cubic meters per day to 77 in the same 
period. This is not surprising because Venezuela under Chavez, 
rather than increasing human capital investment in the state-
owned energy company, PDVSA, and creating incentive for private 
sector risk-taking, has done exactly the opposite.
    In practice, the only state-owned company that could 
actually help Yacimientos Petroliferos Fiscales Bolivianos 
become an efficient energy producer is the Brazilian Petrobras, 
which has shown to be efficient and visionary. During the same 
period in which Venezuela reduced its energy production, 
Brazil, which is significantly poorer in nonrenewable energy 
resources, has increased its oil production from 1 million 
barrels per day to 1.5 million, and its natural gas production 
from 17 million cubic meters per day to 30 million.
    But the Bolivian strategy, instead of choosing Petrobras as 
its partner, so far has made it its main victim. If, as it has 
already been announced by President Lula, Brazil encourages 
more investment in exploration of its own offshore gas reserves 
and succeeds in becoming self-sufficient in natural gas by 
2008, or invests in regasification plants to access the LNG 
market, Bolivia may lose its main client. By then, President 
Evo Morales will realize that the advice of President Hugo 
Chavez was lethal.
    Paradoxically, its only alternative for the future will be 
to encourage the production and exportation of LNG, as former 
Presidents Quiroga and Sanchez de Lozada had envisaged. Of 
course, that solution will require creating very favorable 
conditions for international private investment, because 
Bolivia will have neither the human nor the financial resources 
for such an endeavor.
    [The prepared statement of Mr. Cavallo follows:]

   Prepared Statement of Hon. Domingo Cavallo, Chairman and CEO, DFC 
       Associates, LLC, Former Minister of Economy for Argentina

    Chairman Lugar, Senator Biden and members of the committee, thank 
you for this opportunity to discuss with you a situation that impacts 
hemispheric energy security.
    As paradoxical as it may sound, the ``Bolivarian'' policies that 
the President of Venezuela describes as ``integrationist'' are 
destroying the very valuable comparative advantage that the Southern 
Cone of America developed in the last decade.\1\
---------------------------------------------------------------------------
    \1\ I would like to acknowledge the comments of Pablo Givogri, Raul 
Garcia, and Carlos Bastos.
---------------------------------------------------------------------------
    President Hugo Chavez's rhetoric and actions not only create a 
sense of energy insecurity in the United States, but also, through 
their influence on President Evo Morales of Bolivia, have had a 
negative impact on several other South American countries. Their 
policies are destroying a very promising regional integration process 
that until recently benefited the energy scarce economies of the 
region. To make things worse, Argentina, which during the 1990s led the 
regional energy integration process, has been trapped by misaligned 
energy prices since 2002. This has the effect of reinforcing the 
disintegration process fostered by President Hugo Chavez.
    Chile and Brazil are already suffering from the impact of regional 
energy disintegration. For the time being, the Argentinean Government 
does not acknowledge the negative effect on its economy because it has 
shifted the burden of the adjustment to Chile. Nevertheless the 
country's business community is already foreseeing natural gas and 
electricity shortages. The sooner Argentina starts to work together 
with Chile and Brazil to revive the energy integration process of the 
1990s by re-encouraging private investment in the energy sector, the 
better the chances are for reversing this trend and for making 
President Evo Morales aware of the bad advice and false promises he 
receives from President Hugo Chavez.

          THE REGIONAL ENERGY INTEGRATION PROCESS OF THE 1990S

    During the 1990s, energy supply increased in the Southern Cone, 
thanks to significant investment in exploration and exploitation of 
hydrocarbons and in the generation, transmission, and distribution of 
electricity and gas. Energy availability and energy costs became an 
important source of comparative advantage for the region vis-a-vis 
other regions of the world. This competitive edge had its origin mainly 
in the availability of reserves of natural gas in Bolivia and in 
Argentina, and acquired a regional dimension thanks to the rapid 
process of cross border energy integration. Availability of natural gas 
reserves strongly influences the cost of electricity generation because 
natural gas is the primary input for the production of electricity.\2\
---------------------------------------------------------------------------
    \2\ Gas interconnections reached around 7,000 kilometers in 
extension connecting Argentina, Bolivia, Brazil, Chile, and Uruguay.
---------------------------------------------------------------------------
    This process was guided by several energy integration protocols 
signed by Brazil, Argentina, Uruguay, Paraguay, Chile, and Bolivia. 
Each country was committed to restructuring its energy sector according 
to a common vision and common regulatory principles. These were (a) 
promotion of competition, (b) attraction of private capital, (c) 
regulation of monopolist activities, (d) open access to transport 
facilities, (e) economic criteria for price setting, (f) independent 
regulatory authorities, and (g) encouraging the participation of many 
international actors.
    This very promising process of regional integration is now in 
crisis. The policies of price freezes for natural gas and electricity 
in Argentina after the devaluation of 2002 significantly reduced 
investment carried out by the private sector in the energy sector. \3\ 
More recently, as the consequence of nationalization of hydrocarbons in 
Bolivia, natural gas producers have announced the suspension of new 
investments. In summary, these recent policy decisions by the two key 
suppliers in the energy matrix of the region are destroying the natural 
comparative advantage that had been developed in the previous decade.
---------------------------------------------------------------------------
    \3\ The government intervention in the gas market deepened in 2004 
when gas prices were segmented by end-user category and activity. After 
the 2002 devaluation and domestic rates ``pesification,'' gas prices 
were split between the domestic and the external market. Until such 
date, gas prices for both markets had evolved with virtually no 
noticeable differences among them. The government's agreement with 
producers in 2004 determined a further split in gas prices within the 
domestic market prices. Such domestic price split distinguishes the 
captive distributors' market (residential, commercial users)--which 
maintains the same rate--from the deregulated clients market (mostly 
large users buying directly from the producers).
---------------------------------------------------------------------------
   THE EFFECT OF PRIVATE INVESTMENT IN THE ENERGY SECTOR OF ARGENTINA

    In the early 1990s, Argentina organized the energy sector in line 
with the principles of the signed integration protocols and, in a short 
period of time, became a net exporter of natural gas to the region. The 
production of natural gas in Argentina increased from 62 to 98 million 
m\3\/day between 1995 and 2000. Thanks to this impressive increase in 
supply, Argentina stopped importing natural gas from Bolivia in 2000 
\4\ and began exporting significant volumes to gas-strapped Chile 
(since 1997).\5\ The market wellhead prices paid to natural gas 
producers that created the incentives for exploration and extraction of 
natural gas in Argentina was around $1.4 per mmbtu in the Neuquen 
basin. The City Gate prices that include transportation costs, ranged 
from $2.0 per mmbtu in the Greater Buenos Aires Area to $2.8 per mmbtu 
in Santiago. These prices were roughly half of the price of natural gas 
in the U.S. market. This price differential exemplifies the extent of 
the aforementioned comparative advantage in natural gas that had 
emerged in the Southern Cone.
---------------------------------------------------------------------------
    \4\ Imported volumes decreased significantly during 1999--1.1 
million m\3\/day compared to 1998 volumes--4.7 million m\3\/day.
    \5\ Exports to Chile from Argentina increased from 1.9 MMm\3\/day 
in 1997 to 12.0 MMm\3\/day in 2000.
---------------------------------------------------------------------------
THE EFFECT OF PRIVATE SECTOR INVESTMENT IN THE ENERGY SECTOR OF BOLIVIA

    Bolivia, which as a consequence of expansion of natural gas 
production in Argentina, was losing its only foreign client, began 
negotiating with Brazil the export of volumes of natural gas that were 
four times bigger than those that it had been exporting to Argentina. 
At the end of 2001, the negotiated wellhead price of U.S. $1.2 per 
mmbtu in the Tarija basin \6\ translated into a U.S. $3.0 per mmbtu in 
the San Pablo City gate. This was slightly higher than prices paid in 
Argentina and Chile but still substantially lower than prices in the 
United States. The exports of natural gas from Bolivia to Brazil 
reached 22 million m\3\/day in 2005. Production in Bolivia increased 
from 9 to 31 million m\3\/day between 2000 and 2005.
---------------------------------------------------------------------------
    \6\ The base wellhead price of the gas to be exported through 
Bolivia to Brazil (BTB) pipeline was U.S. $0.95 per million btu for a 
volume from 8 to 16 MMm\3\/day. For additional volumes up to 30.08 
MMm\3\/day the established base price is U.S. S1.20 per million of btu. 
These prices are adjusted through a formula related to the price of an 
international fuel oil basket.
---------------------------------------------------------------------------
                      POLICY REVERSAL IN ARGENTINA

    These favorable integration forces began to change when, in the 
aftermath of the Argentine crisis in 2002, the Argentinean Government 
decided to impose a price freeze on natural gas tariffs at the 
``pesified'' precrisis level.\7\ This, which would have been already 
problematic in the absence of any other developments, happened at the 
same time when the international prices of energy began to surge. The 
prices of natural gas in Argentina fell to one-third of its precrisis 
level at the same time that the international prices of energy more 
than doubled. The consequence of this policy was an increase in 
domestic demand and a decrease in domestic supply. In the year 2005, 
Argentina imported 5 million m\3\/day from Bolivia, and had to curtail 
exports to Chile. The most optimistic forecasts of energy production in 
Argentina predict that it will stop being a net exporter of gas by the 
year 2010. But most likely, at the current rates of consumption, 
Argentina will become a net importer earlier.
---------------------------------------------------------------------------
    \7\ Wellhead gas prices for the distribution market were indirectly 
frozen as a consequence of suspending the pass through gas price 
mechanisms to end users rates--contemplated in the licenses awarded by 
the Government of Argentina.
---------------------------------------------------------------------------
               INCREASED DEMAND FOR BOLIVIAN NATURAL GAS

    This new situation generated a surge in demand for Bolivian gas. 
The forecasts predict a level of demand of 68 millions m\3\ per day in 
2010 compared to 31 million m\3\ per day in 2005. This is because the 
entire region will become dependent on Bolivian gas. Peru, which has 
been investing in exploration and exploitation of natural gas, 
intelligently chose to develop facilities for exporting LNG via the 
Pacific, so at this point it can only be expected to be a marginal 
source of supply for its neighbors via cross border gas ducts.
    The increased demand for its natural gas reserves could have 
allowed Bolivia to increase exports at more advantageous prices, if it 
had chosen to create the correct market incentives for further 
exploration and exploitation of its existing untapped reserves. 
Unfortunately, President Evo Morales, following the advice of President 
Hugo Chavez, has chosen a policy path that will likely have the 
opposite effects. By breaking its contractual agreements with the 
private companies that had invested in exploration and exploitation of 
natural gas in the last decade it has increased the uncertainty faced 
by private sector producers and will likely generate disinvestment in 
the sector.

      EXPENSIVE CONSEQUENCES OF POLICIES IN BOLIVIA AND ARGENTINA

    The combination of these policy choices in Argentina and Bolivia 
have had the effect of restricting supply and lethally harming the 
comparative advantage that had evolved in the previous years. Once 
these policies have worked out all their effects, the costs of energy 
for industrial consumers of natural gas and electricity power plants in 
the main industrial areas of the region will be close to the levels 
paid by their counterparts in the United States. The reason is that 
natural gas users in these areas will have to purchase LNG from foreign 
markets at international prices which are roughly equivalent to 
alternative sources of energy like fuel and diesel oil.

                       VENEZUELA'S FALSE PROMISES

    The advocates of these new energy policies in Latin America argue 
that Chavez's Venezuela will become the main regional supplier of 
natural gas at low prices and the supplier of capital and technology 
for YPFB (Yacimientos Petroliferos Fiscales Bolivianos) to expand its 
natural gas production. This is not warranted by the recent 
developments of Venezuela's own oil and gas production. Oil production 
that had reached 3.5 million of barrels per day in 1998 has dropped to 
2.6 in 2005, and natural gas production dropped from 89 millions m\3\ 
per day to 77 in the same period. \8\ This is not surprising because 
Venezuela, under Chavez, rather than increasing human capital 
investment in the state-owned energy company, PDVSA, and creating 
incentives for private sector risk taking, has done exactly the 
opposite.
---------------------------------------------------------------------------
    \8\ Furthermore, only 15 trillion of cubic feet (TCF) gas reserves 
are not associated with oil and could be develop as an additional 
source of natural gas for exports. Of these, 11 TCF are already 
committed to a LNG project. So, Hugo Chavez is offering gas that 
Venezuela actually will not have available.
---------------------------------------------------------------------------
                    PETROBRAS COULD HAVE HELPED YPFB

    In practice, the only state-owned company that could actually help 
YPFB become an efficient energy producer is the Brazilian Petrobras, 
which has shown to be efficient and visionary. During the same period 
in which Venezuela reduced its energy production, Brazil, which is 
significantly poorer in nonrenewable energy resources, has increased 
its oil production from 1 million barrels per day to 1.5 million and 
its natural gas production from 17 millions m\3\ per day to 30. But the 
Bolivian strategy, instead of choosing Petrobras as its partner, so far 
has made it the main victim.

                 IN THE MEDIUM TERM BOLIVIA WILL SUFFER

    If, as it has already been announced by President Lula da Silva, 
Brazil encourages more investment in exploration of its own offshore 
gas reserves and succeeds in becoming self-sufficient in natural gas by 
2008, or invests in regasification plants to access the LNG market, 
Bolivia may lose its main client. By then, President Evo Morales will 
realize that the advice of President Hugo Chavez was lethal. 
Paradoxically its only alternatives for the future will be to encourage 
the production and export of LNG as former Presidents Quiroga and 
Sanchez de Lozada had envisaged. Of course, that solution will require 
creating very favorable conditions for international private 
investment, because Bolivia will have neither the human nor the 
financial resources for such an endeavor.

            WELLHEAD NATURAL GAS PRICES IN THE SOUTHERN CONE
                               [US$/MMBTU]
------------------------------------------------------------------------
                                        Precrisis--prices
                                              before         Segmented
              At Wellhead                  devaluation     markets--2008
                                              (2001)
------------------------------------------------------------------------
Tarija Basin (Bolivia)
    Exports to Brazil.................            1,23             3,00
    Exports to Argentina..............              --             3,00
Noroeste Basin (Argentina)
    Residential and Small Users                   1,21             0,40
     (commercial, small industries)...
    Other Users (CNG and users with               1,21             0,98
     consumption >300 m\3\/day).......
    Deregulated Market (large users)..            1,18             1,51
    Exports...........................            1,26             1,89
    Import from Bolivia at Border.....              --             3,24
Neuquina Basin (Argentina)
    Residential and Small Users                   1,44             0,48
     (commercial, small industries)...
    Other Users (CNG and users with               1,44             1,04
     consumption >300 m\3\/day).......
    Deregulated Market (large users)..            1,39             1,64
    Exports...........................            1,48             2,05
Austral Basin (Argentina)
    Residential and Small Users                   1,03             0,34
     (commercial, small industries)...
    Other Users (CNG and users with               1,03             0,87
     consumption >300 m\3\/day).......
    Deregulated Market (large users)..            0,98             1,45
    Exports...........................            0,96             1,81
Santos Basin (Brazil)                             1,58             3,60
------------------------------------------------------------------------

            CITY GATE NATURAL GAS PRICES IN THE SOUTHERN CONE
                               [US$/MMBTU]
------------------------------------------------------------------------
                                        Precrisis--prices
                                              before         Segmented
             At City Gates                 devaluation     markets--2006
                                              (2001)
------------------------------------------------------------------------
      Greater Buenos Aires (GBA)
By TGN System
    Residential and Small Users                   1,96             0,65
     (commercial, small industries)...
    Other Users (CNG and users with               1,96             2,07
     consumption >300 m\3\/day).......
    Deregulated Market (large users)..            1,93             2,63
    Import from Bolivia...............              --             4,45
By San Martin Pipeline
    Residential and Small Users                   1,97             0,66
     (commercial, small industries)...
    Other Users (CNG and users with               1,97             2,11
     consumption >300 m\3\/day).......
    Deregulated Market (large users)..            1,92             2,76
               San Pablo
Gas from Bolivia......................            3,02             4,82
Gas from Domestic Production..........            1,89             3,91
Residential, Commercial, Industries...            3,02             4,82
Power Generation......................            2,59             3,92
               Santiago
Gas from Neuquina Basin (all users)...            2,81             3,44
------------------------------------------------------------------------

    The Chairman. Thank you very much, Mr. Cavallo.
    I would like to proceed now with our second witness, Mr. 
Giusti.

    STATEMENT OF LUIS E. GIUSTI, SENIOR ADVISOR, CENTER FOR 
      STRATEGIC AND INTERNATIONAL STUDIES, WASHINGTON, DC

    Mr. Giusti. Thank you very much, Mr. Chairman. It's an 
honor to share the floor with you and the rest of your 
colleagues.
    I'd like to start with a brief backdrop. The discussion 
about oil independence has taken center stage in this country, 
but that independence, understood as self-sufficiency, is not 
the real issue, not only because it's not feasible but because 
the business of oil is global. The high prices of recent times 
result not from the large imports of oil into the United 
States, but from the fundamentals and perceptions of the global 
oil market.
    Today, crude oil inventories in OECD countries are at a 20-
year high, and global inventories are at an 8-year high. The 
futures market has been in ``contango'' since October 2004, 
meaning that future prices are higher than pump prices, which 
has triggered sustained stockpiling. On the other hand, growth 
in demand for oil has been slowing down, 3 million barrels a 
day in 2004, 1 million barrels a day in 2005, and so far this 
year about 800,000 barrels a day, indicating that the high 
price is having an effect on consumption.
    Then why are prices so high? The most important factor is 
the erosion of spare capacity. Having been large in the past, 
15 million barrels a day in 1985, 9 million barrels a day in 
1991, and 8 million barrels a day still in 2002, it is now down 
to 2 million barrels a day.
    But can we expect the future development of new large spare 
oil production capacity for us to feel comfortable again? Most 
likely the answer is no, because with the exception of Saudi 
Arabia, nobody is planning to build it. The spare capacity 
enjoyed in the past was not planned for. It resulted from an 
overestimation of long-run demand. Inadvertently, we developed 
a comfort cushion.
    Perhaps now the world will have to develop a new 
perspective of the meaning of inventories. The director of the 
International Energy Agency, Claude Mandil, has gone to great 
length and efforts to convey the message that strategic stocks 
of OECD are enough to cover 18 months of an eventual absence of 
Iranian exports, 2.7 million barrels a day, but to little 
avail.
    The conclusion is that the oil market is global, and oil is 
generally fungible. For that reason, in analyzing supply 
stability, it would be shortsighted to look at oil flows from 
Latin America into this country in isolation, or for that 
matter any other oil imports from other regions or countries. 
The United States will continue to be a large importer of oil, 
and those imports can only increase. Stability and security 
will always depend on the global fundamentals, irrespective of 
where the imported oil comes from.
    Having said that, I'm going to address the three points 
that you asked me to comment about in your letter. The first 
one has to do with reliability of supplies from Venezuela, a 
point that has been already mentioned several times this 
morning.
    Let's start with capacity. Currently Venezuela's production 
capacity stands at 2.6 million barrels a day, but since that 
number includes 1.1 million barrels a day being produced by the 
private companies that operate the joint ventures, it can be 
deduced that the PDVSA capacity is 1.5 million barrels a day, 
and that represents a severe drop of 1.8 million barrels a day 
since this government, the current government, has been in 
office. This is a result of poor management, weak technical 
capacity, and weak execution capacity, mostly deriving from the 
dismissal of 18,000 workers.
    However, and I think this is a very important point, 
despite this diminished capacity during the 7 years of the 
current Venezuelan Government, oil from that country continues 
to flow to the United States at a rate of about 1.4 to 1.5 
million barrels a day, in line with the tradition of many years 
of trade. I would argue that despite the aggressive political 
discourse against the U.S. Government, oil exports to this 
country have a high priority in the slate of Venezuelan sales.
    As part of the political agenda, President Chavez 
continuously threatens the U.S. Government with suspending 
exports to the United States, and has indicated that those 
exports would most likely be diverted to China. This was 
mentioned by your colleague, Senator Nelson.
    The 1.5 million barrels a day of Venezuelan oil imports 
into this country are the result of many dozens of contracts 
with clients in the United States that have been buying 
Venezuelan oil for decades. Many of those clients have 
refineries capable of processing sour and heavy feedstock, 
which constitutes the largest portion of Venezuelan oil.
    The continuity of those exports to the United States is of 
utmost importance for Venezuela, despite anything that is 
contained within the political discourse of the Venezuelan 
Government. Exporting that oil to China is practically 
impossible, because the refining network in China is mostly 
primitive and incapable of receiving those volumes of sour and 
heavy crude.
    It would take several years of bilateral, coordinated joint 
planning and investment to turn such an initiative into 
reality, and this, by the way, is not happening. And it would 
be absurd to build this capacity to export to China at the 
expense of the most profitable option for those exports, which 
is none other than the United States. It would take new oil to 
be developed for this initiative.
    Nevertheless, in the unlikely event of a suspension of 
those shipments, Venezuela would have to sell the crude at 
other destinations, and oil being generally fungible, oil from 
other places would come to the United States shores. It would 
naturally generate logistical complications and at least 
temporarily increase costs, but eventually the necessary 
adjustments would take place and everything would return to 
normalcy.
    It is true that imports of Venezuelan oil are very 
important to the United States, but it is a fact that Venezuela 
needs badly its oil exports to the United States, and 
especially the current government, in order to finance its huge 
expenses.
    Finally, the threat of a shutdown of Citgo refineries 
occasionally included in the political speech of the Venezuelan 
Government is empty talk. Citgo operates through a network of 
some 14,000 retail outlets, but it does not own any of them. It 
only owns refineries, terminals, and pipelines. An arbitrary 
shutdown of Citgo refineries would imply breaching thousands of 
contracts without justification, posing an unmanageable and 
costly legal situation for Venezuela.
    I would argue that the only risk represented by the present 
Venezuelan administration concerning oil supply to the United 
States is not current, it's not of today. It relates to 
frustrated expectations of building up new barrels in the 
future. This is a direct consequence of the diminished 
operational and financial capacity of the national oil 
corporation. In addition, plans and projects of expansion 
coming from private international companies operating in 
Venezuela are losing momentum as a result of the frequent 
changes of rules and the difficult surrounding environment 
these companies have to face, so a significant increase of that 
country's production is unlikely.
    The second topic you assigned to me was resource 
nationalism. In the history of oil we will find a secular 
inclination of oil countries to get a larger share of the 
revenues. However, attracting the capital required has implied 
moderating that appetite in order to allow the oil companies to 
assume calculated risks and make an attractive profit.
    The very high prices that we are seeing now have generated 
huge revenues, leading every oil country to consider ways of 
capturing a larger portion of the windfalls. Even the United 
States and the United Kingdom and Canada have discussed the 
idea of higher or new taxes. Despite the somewhat questionable 
justification of some actions aimed at changing taxes and 
contracts, the initiatives of seeking to renegotiate terms are 
understandable and are within the realm of manageable and 
acceptable. As a reference, in no country is resource 
nationalism stronger than in Saudi Arabia, yet it is perhaps 
the most reliable supplier in the world.
    What is certainly unacceptable is to take actions like the 
recent unilateral expropriation of the hydrocarbons industry in 
Bolivia. The only other case in which we have seen abusive 
actions, never to that degree, of course, is in Venezuela.
    In the case of Ecuador, for example, the government has 
insisted that the seizing by the government of Block 15 of Oxy 
should not be interpreted as equivalent to the Bolivian case. 
They argue that the affair is purely legal and related to an 
alleged violation of contract by the international oil company. 
Well, time will soon tell what is the case.
    And the last point, and I'll try to be brief on this, that 
you assigned me was, what about opportunities for increased 
United States and Latin American cooperation?
    And I would like to remind you that there was a spinoff of 
the Summit of the Americas in 1994. It was called Energy 
Integration of the Americas. A lot of work was carried out to 
try to identify barriers for a larger integration, like 
political hurdles, tariffs, quotas, logistics, and eventually 
undertake the necessary forums, with the ultimate objective of 
having a seamless energy platform that would benefit all 
countries and in addition facilitate and improve commercial 
activities.
    We could say a lot more about this, but there is no time 
here. We can discuss as we go along, but my view is that 
salvaging the initiative of 1994 could be an excellent way of 
having a fresh start that should be in every country's best 
interest.
    However, I am sure you will agree with me in stating that 
the dialog cannot compromise the basic principles of business, 
a market-based approach, public-private cooperation, respect 
for property rights and contracts, and the right balance among 
policy, regulations, and operations and business. Although this 
would probably mean that we would have a few casualties, 
because maybe some would not like to come to discuss under 
those terms, countries such as Brazil, Colombia, Chile, Peru, 
Trinidad-Tobago, and even Ecuador, could lead the way, together 
with the United States to the north, of course. Their leaders 
are thinking creatively, and have instituted effective measures 
to develop their respective resources in productive ways. The 
presence of Canada would certainly enhance the initiative.
    There is no silver bullet here, but hard work along the 
described lines could translate into a more balanced and 
reliable regional energy network. This, by the way, would be 
entirely consistent with section No. 4 of the EDSA, Energy 
Diplomacy and Security Act, which refers to strategic energy 
partnerships.
    Thank you very much, Mr. Chairman.
    [The prepared statement of Mr. Giusti follows:]

   Prepared Statement of Luis E. Giusti, Senior Adviser, Center for 
          Strategic and International Studies, Washington, DC

                              I. BACKDROP

    As a result of the tightness of the oil market during the last 4 
years, the world as a whole, and certainly the United States, has been 
affected by extremely high oil prices. This has a detrimental effect on 
our day to day, reflected by the prices we pay for gasoline and diesel 
at the pump, as well as heating oil and gas for our homes.
    As a result, the discussion about oil independence has taken center 
stage in this country. But that independence (understood as self-
sufficiency) is not the real issue. Not only because it is not 
feasible, but because the business of oil is global. The high prices of 
recent times result not from the large imports of oil into the United 
States, but from the fundamentals and perceptions of the global oil 
market.
    It would take much longer than the time assigned to this testimony, 
to explain why and how we got to where we are today. However, it is 
worthwhile to point out briefly that today crude oil inventories in 
OECD are at a 20-year high and global inventories are at an 8-year 
high. The futures market has been in ``contango'' since October 2004 
(meaning that future prices are higher than prompt prices), which has 
triggered sustained stockpiling. On the other hand, growth in demand 
for oil has been slowing down (3 million BD in 2004, 1 million BD in 
2005, and 800,000 BD in the first half of 2006), indicating that the 
price is having an effect on consumption. Then, why are prices so high? 
The most important factor is the erosion of spare capacity. Having been 
large in the past (15 million BD in 1985, 9 million BD in 1991 and 8 
million BD in 2002), it is now down to 2 million BD. A second factor is 
the tightness of the refining network in a time of strong demand for 
high quality refined products, which is driving prices up along the 
whole supply chain.
    But, can we expect the future development of new large spare oil 
production capacity for us to feel comfortable again? Most likely the 
answer is ``no,'' because with the exception of Saudi Arabia, nobody is 
planning to build it. The spare capacity enjoyed in the past was not 
planned for. It resulted from an overestimation of long-run demand. 
Inadvertently we developed a ``comfort cushion.'' Perhaps the world 
will have to develop a new perspective of the meaning of inventories. 
Currently, global oil stock cover runs at 72 days (commercial stocks), 
which should be a strong reason for comfort. Maybe a somewhat larger 
stock cover will replace the absence of spare capacity. Additionally, 
the director of the IEA has gone to great length and efforts to convey 
the message that strategic stocks of OECD are enough to cover 18 months 
of an eventual absence of Iranian exports (2.7 million BD), but to 
little avail. In the event of a major disruption, how much a difference 
would it make between having say 76 days or 71 days of stock cover? 
That difference would be immaterial, but it can mark a difference of 
$4-$5 per barrel in today's oil market.
    The conclusion is that the oil market is global and oil is 
generally fungible. For that reason, in analyzing supply stability it 
would be shortsighted to look at oil flows from Latin America into this 
country in isolation, or for that matter any other oil imports from 
other regions or countries. The United States will continue to be a 
large importer of oil and those imports can only increase. Stability 
and security will always depend on the global fundamentals, 
irrespective of where the imported oil comes from.

            II. A BRIEF LOOK AT OIL AND GAS IN LATIN AMERICA

    Following is a summarized description of the characteristics of the 
most important countries in connection with oil and gas in Latin 
America.

Chile
    Chile has meager oil reserves of 150 million barrels, and its oil 
production is 18,400 BD, while its consumption is 225,000 BD, the 
deficit being covered by imports, mainly from Argentina and Brazil, but 
also from Nigeria and Angola.

Colombia
    In 1999, oil production in Colombia stood at 820,000 barrels per 
day. However, as a result of lack of investment production, has fallen 
to 530,000 BD and the country faces a future sustained decline. Proven 
oil reserves have fallen to a very modest 1.6 billion barrels and 
proven gas reserves are scarcely 4 trillion cubic feet. Fears have 
risen that the country will become a net importer by 2010. On the other 
hand, more than 80 percent of Colombian territory remains unexplored 
and its basins hold a large hydrocarbons' potential (possible reserves 
have been estimated at 47 billion barrels), but for many years the 
country failed to attract new investment due to the poor internal 
security environment, coupled with unfavorable energy investment terms. 
Nevertheless, during the last 2 years the Colombian Government has 
turned the trend around by putting in place a much more attractive 
framework for investments in exploration and production. The most 
important reform was the creation of a regulatory agency (Agencia 
Nacional de Hidrocarburos), in charge of regulation and administration. 
A large portion of Ecopetrol's portfolio was carved out and assigned to 
the agency. This new framework plus a more attractive model for 
investment, in addition to the much improved political stability and 
security resulting from the effective policies of President Uribe, have 
oil companies flocking to the country. It should be expected that very 
soon Colombia would become a producer of growing importance in the 
region and perhaps an important oil exporter.

Peru
    Peru's oil reserves are very small at 253 million barrels and it 
barely produces 100,000 BD, while it consumes 160,000 BD. But it is 
rich in free gas reserves, with some 16 Tcf. These reserves will be 
tapped by the Camisea project, the most ambitious project in the 
history of Peru. Consisting of the extraction, transportation, and 
distribution of natural gas, this project is a fundamental factor of 
Peru's energy strategy. By tapping into a reliable, low-cost energy 
source, Camisea will not only provide direct benefits to electricity 
end-users, but it will also improve the country's competitiveness and 
increase its technical capacity. The project will help alleviate Peru's 
trade deficit by converting the country from energy importer into an 
exporter by 2007. Direct investment in the project will be around $2 
billion. Part of the gas volume will go as LNG to the North American 
west coast.

Trinidad--Tobago
    Unlike the rest of the islands in the Caribbean basin, Trinidad/
Tobago is hydrocarbon rich and is the largest producer of oil and 
natural gas in the region. Oil reserves are a modest 1 billion barrels 
and oil production is 130,000 BD, but gas
reserves are 26 Tcf and current gas production is 2,700 MMcfd. Since 
the 1970s,
Trinidad/Tobago has embarked in several successful initiatives that 
have expanded its local gas industry as part of a government strategy 
to promote industrialization. Its large natural gas reserves have 
enabled the country to become the most industrialized in the Caribbean. 
The energy sector represents 72 percent of total exports, and the 
country's political stability and attractive geology, as well as its 
proximity to the high demand United States, Latin America, and Europe, 
have supported high levels of foreign direct investment. The country 
has established a large LNG infrastructure and today has three 
liquefaction trains with 10 mtpa, plus a fourth one about to come on 
stream. Immediate plans contemplate building two additional trains. 
Together with Nigeria, Trinidad/Tobago dominate the Atlantic LNG 
market.

Brazil
    Brazil has a population of 175 million, fifth largest in the world 
and its economy of $452 billion is the 13th in the world. After years 
of efforts in exploration, mostly offshore, Brazil has reached an oil 
production of 2.0 million BD. However, its sustained economic growth 
has increased oil demand to a level of 2.2 million BD, with the deficit 
covered by imports from Africa, the Middle East, and minor volumes from 
Argentina. Great credit for the large increase in oil production goes 
to its national oil company Petrobras, which has become a world class 
oil company and a leader in deep water drilling. In recent years, the 
company has gone international in E&P. Current oil reserves stand at 11 
billion barrels. Its gas reserves are a modest 8.8 Tcf, with production 
of 1,100 MMcfd being less than the 2,300 MMcfd of demand. The deficit 
is covered by imports from Bolivia and Argentina.
    The recent actions by the Bolivian Government cast shadows over the 
longer term gas trading to Brazil, a country that will very likely be 
looking for alternatives, including LNG imports. An additional 
highlight is that the country is the world's largest producer and 
exporter of ethanol. Over half of all cars in the country are flex 
fuel, meaning they can run on 100 percent ethanol or on an ethanol-
gasoline mixture. Ethanol in Brazil is made from sugarcane, which 
prospers in the country's tropical climate. The current high prices of 
oil, natural gas, and hydrocarbon products have prompted the government 
to mandate all gasoline for domestic consumption to contain 25 percent 
ethanol. Also, Brazil has plans for sizable nuclear developments. Two 
plants are already in operation and a third one is under construction. 
There is a large accumulation of stranded gas in the north, in a place 
called Urucu. The hydrocarbons industry in Brazil is well organized, 
with a strong institutional framework, including a regulatory agency. 
Practically every big international oil company has acreage and/or 
other interests in the country. This has been crucial for supplying the 
needs of a very large country, although great challenges lay ahead.

Argentina
    Argentina has oil reserves of 2.7 billion barrels and it produces 
700,000 BD, while oil consumption is 400,000 BD (41 percent of primary 
needs). Oil exports are important for the country, but marginal in a 
worldwide context. They essentially go to Brazil and Chile. The country 
is long in natural gas, with reserves of 21 Tcf. It produces some 4,400 
MMcfd, enough to supply its domestic needs (45 percent of primary 
energy) and to export some volumes to Uruguay and Chile. However, it 
imports some gas from Bolivia, for geographic/logistical rehaznos, and 
in recent times its policies have slowed down investments affecting gas 
exports.

Bolivia
    The third poorest nation in the hemisphere behind Haiti and 
Nicaragua, holds oil reserves of 440 million barrels and produces 
42,000 BD. However, it is very long in natural gas with reserves 54 Tcf 
(30 Tcf proven and 24 Tcf probable). Despite those huge reserves, gas 
production stands at 1,500 MMCf/d and investment has slowed down to a 
trickle and some companies are leaving due to an insecure and arbitrary 
operating environment. The most recent actions of expropriation of the 
oil industry may prove to be the last nail in the coffin for the 
possibilities of a large-scale gas development. This can be considered 
a tragedy. A combination of ignorance and populism has led to a 
rejection of foreign investments, and there is virtually no credible 
alternative scenario whereby Bolivia would be able to grow economically 
without exploration, production, and export of its natural gas 
reserves.

Ecuador
    The country holds oil reserves of 2.5 billion barrels and oil 
production is 550,000 BD, two thirds of which go to the export market. 
This is a marginal number in a worldwide scale, but it is of 
fundamental importance for the future of Ecuador. Gas reserves stand at 
a meager 0.4 Tcf. This country is also seeing international energy 
investors depart because an unfair and arbitrary investment climate, in 
addition to excessive bureaucracy and political volatility.

Mexico
    Mexico has a population of more than 100 million and its economy is 
the number 10 in the world ($640 billion). It has benefited immensely 
from its partnership in NAFTA. It has the fourth largest oil reserves 
in the hemisphere (oil 12 billion barrels and gas 15 Tcf) and currently 
produces 3.5 million BD. It is the third supplier of crude to the 
United States, behind Canada and Saudi Arabia. However, its reserves 
are plummeting and it is forced to import billions of dollars of 
gasoline and natural gas. Despite having possible oil reserves of 50 
billion barrels, the lack of investments is leading the country to a 
short-term demise as an oil exporter. This is the direct result of a 
combination of heavy dogmatism and populism, that has dominated the 
political landscape for decades. The last two governments have 
struggled to open the energy sector to private investments, with only 
modest political progress, although the magnitude of the eventual 
collapse of the oil industry is beginning to change the minds of many 
politicians.

Venezuela
    The country remains the most important oil and gas country in the 
hemisphere, with 78 billion barrels of oil reserves, 150 Tcf of natural 
gas (although only 15 Tcf are of free gas), and some 220 billion 
barrels reserves of extra-heavy oil in the Orinoco Belt. After the 
sustained increase in production capacity to 3.5 million BD during the 
1990s, the country has suffered a major setback resulting from 
political instability and arbitrary management of the oil industry. In 
addition, frequent changes of the rules and several international 
arbitration lawsuits have instilled confusion and uncertainty in the 
international oil companies partnering with PDVSA in Venezuelan 
territory. As a result, oil production capacity has fallen to 2.6 
million BD, despite an increase of 1.1 million BD resulting from the 
contracts with private companies that were put in place in the previous 
administration. Unless the prevailing uncertainty and the frequent 
obstacles posed by the government can be diffused, Venezuela will 
undoubtedly continue being important, but its growth as an oil exporter 
will only be marginal (see the following point).

              III. RELIABILITY OF SUPPLIES FROM VENEZUELA

    Oil production capacity in Venezuela has suffered a severe drop in 
the past few years. In February 1999, when the current government took 
office, that capacity stood at nearly 3.5 million BD. At that moment, 
already some 200,000 BD were operated by private oil companies as part 
of the new contracts signed for joint operational agreements and 
strategic associations. Thus, the capacity of PDVSA proper was some 3.3 
million BD. Currently, Venezuela's production capacity stands at 2.6 
million BD, but since that number includes 1.1 million BD being 
produced by the private companies that operate the joint ventures, it 
can be deduced that PDVSA's capacity is 1.5 million BD, i.e., a drop of 
1.8 million BD. This is the result of poor management and weak 
execution capacity, mostly deriving from the dismissal of 18,000 
workers.
    However, during the 7 years of the current Venezuelan Government, 
oil from that country continues to flow to the United States at a rate 
of 1.4-1.5 million BD, in line with the tradition of many years of 
trade. I would argue that despite the aggressive political discourse 
against the United States Government, oil exports to this country seem 
to have a high priority in the slate of Venezuelan sales.
    As part of the political agenda, President Chavez continuously 
threatens the U.S. Government with suspending exports to the United 
States, and has indicated that those exports would most likely be 
diverted to China. But, as you very well know, the U.S. Government does 
not own terminals, refineries, pipelines, or distribution networks. In 
fact, it does not even buy oil, with the exception of the occasional 
program of royalties in kind. The 1.5 million BD of Venezuela oil 
imports into this country are the result of many dozens of contracts 
with clients in the United States that have been buying Venezuelan oil 
for decades. Many of those clients have refineries capable of 
processing sour and heavy feedstock, which constitute the largest 
portion of Venezuelan oil. The continuity of those exports to the 
United States is of utmost importance for Venezuela, despite anything 
that is contained within the political discourse of the Venezuelan 
Government. Exporting that oil to China would be practically 
impossible, because the refining network in China is mostly primitive 
and incapable of receiving those volumes of sour and heavy crude. It 
would take several years of bilateral coordinated joint planning and 
investments to turn such an initiative into reality (it is not 
happening), and it would be absurd to build it at the expense of the 
most profitable option for those exports, which is non-other than the 
United States market. Add to that the volumes that go to Citgo, a 
subsidiary of PDVSA, and it is highly unlikely that there would be any 
disruption of Venezuelan exports to the United States. Nevertheless, in 
the unlikely event of a suspension of those shipments, Venezuela would 
have to sell the crude at other destinations, and oil being generally 
fungible, oil from other places would come to the U.S. shores. It would 
naturally generate logistical complications and at least temporary 
increased costs, but eventually the necessary adjustments would take 
place and everything would return to normalcy. It is true that imports 
of Venezuelan oil are very important to the United States, but it is a 
fact that Venezuela needs badly its oil exports to the United States, 
and especially the current government in order to finance its huge 
expenses.
    Finally, the threat of a shutdown of Citgo refineries, occasionally 
included in the political speech of the Venezuelan Government is empty 
talk. Citgo operates through a network of some 14,000 retail outlets, 
but it does not own any of them. It only owns refineries, terminals, 
and pipelines. An arbitrary shutdown of Citgo refineries would imply 
breaching thousands of contracts without justification, posing an 
unmanageable and costly legal situation for Venezuela.
    The only real risk represented by the present Venezuelan 
administration concerning oil supplies to the United States is not 
current. It relates to frustrated expectations of building up new 
barrels in the future. For the past 6 years the Venezuelan Government 
and PDVSA have been announcing ambitious (normally not viable) 
expansion plans of the country's production, but nothing significant 
happens. This is a direct consequence of the diminished operational and 
financial capacity of the national oil corporation. In addition, plans 
and projects of expansion coming from private international companies 
are losing momentum, as a result of the frequent changes of rules and 
the difficult surrounding environment they have to face. So a 
significant increase of that country's production is unlikely.
    These opinions are entirely consistent with the ones I have 
expressed in my public writings and interviews, and which I gave to 
representatives of GAO with whom I met for some 4 hours as part of 
their work in putting together their report for Senator Lugar.

               IV. RESOURCE NATIONALISM IN LATIN AMERICA

    The term ``resource nationalism'' is in hot vogue these days. But 
what does it really mean? If what we have in mind is the seizing of 
higher revenues, we should not forget that in the history of oil we 
will find a secular inclination of oil countries to get a larger share 
of the revenues. However, attracting the capital required has implied 
moderating that appetite, in order to allow the oil companies to assume 
calculated risks and make an attractive profit.
    In recent times, the price of oil has reached extremely high 
levels, but most importantly levels that no one would have expected 
only 4 years ago (in early 2002 price predictions for the year were 
$22-$23 per barrel, and OPEC had agreed to a ceiling of 21.7 million BD 
in anticipation of a very soft market). These very high prices have 
generated huge revenues, leading every oil country to consider ways of 
capturing a larger portion of the windfalls. Even the United States and 
the United Kingdom have discussed the idea of higher or new taxes. 
Despite the somewhat questionable justification of any actions aimed at 
changing taxes and contracts, the initiatives of seeking to renegotiate 
terms are within the realm of the manageable and acceptable.
    What is certainly unacceptable is to take actions like the recent 
unilateral expropriation of the hydrocarbons industry in Bolivia. I do 
not intend in these lines to address the implications of that case, 
which are well known by the distinguished Senators present here. The 
only other case in which abusive actions have been undertaken by a 
government is in Venezuela, although it has never gotten to the 
extremes of unilateral expropriation.
    In the case of Ecuador, the government has insisted that the 
seizing by the government of Block 15, formerly in charge of Oxy, 
should not be interpreted as equivalent to the Bolivian case. They 
argue that the affair is purely legal and related to an alleged 
violation of contract by the international oil company. Despite a very 
poor sense of timing to say the least, coming in the middle of 
discussions of a FTA with the United States, and without taking sides, 
it looks like it could in fact be an isolated case. Time will soon 
tell.
    In Colombia, Peru, Brazil, and Trinidad-Tobago, there are no 
indications whatsoever of anything similar to the case of Venezuela, 
and much less to the case of Bolivia. Mexico is a special case in its 
own characteristics. Finally there is Argentina, but I am sure that my 
friend Domingo Cavallo, will give you an accurate picture of that case.

V. OPPORTUNITIES FOR INCREASED UNITED STATES-LATIN AMERICA COOPERATION 
          ON ENERGY SECURITY (GOVERNMENTS AND PRIVATE SECTOR)

    In 1994, as a spin-off from the Summit of the Americas held in 
Miami, an initiative called ``Energy Integration of the Americas'' was 
installed. Its objective was to build an integrated energy data bank, 
evaluate existing interconnections among the countries, identify 
barriers for a larger integration (political hurdles, tariffs, quotas, 
logistics, etc.), and eventually undertake reforms and agreements, with 
the ultimate objective of having a seamless energy platform that would 
benefit all countries, and in addition facilitate and improve 
commercial activities. The initiative, which involved the public and 
the private sectors of each one of the countries of the American 
hemisphere, was launched in Washington and was followed up with working 
meetings in Santa Cruz, Bolivia and in Caracas, Venezuela. One of the 
relevant features of the existing network is that while North America 
has a large deficit of oil, Canada and Latin America have large 
surpluses of energy resources, which if developed efficiently and 
effectively, can be a leading engine of regional development and an 
important contributor to global competitiveness. However, in the next 
few years the initiative lost momentum and eventually faded out.
    The evolution of the energy landscape in the past few years has 
once again brought to the fore the importance of the subject. In the 
words contained in a recent report published by the Council of the 
Americas, if geography is destiny, the Americas are ripe for 
development of an energy partnership benefiting both suppliers and 
consumers, while linking the economies of the countries and increasing 
trade. The report continues to argue that the entire Western Hemisphere 
stands to gain if energy partnership is pursued, assuming the 
implementation of terms and conditions consistent with a market-based, 
public-private approach to energy sector development. Beyond politics, 
the key questions center on the ability to raise and utilize 
effectively the massive amounts of increased investment required to 
develop the resources that already exist. Fundamentally, unless 
investment climates are improved in the energy sector and elsewhere, 
investors will continue to look to other markets as opportunities with 
greater interest than the Americas. Without necessary investment, 
reserves will be depleted, imports into the region will increase, and 
terms of trade will deteriorate. My view is that salvaging the 
initiative of 1994 could be an excellent way of having a fresh start 
that should be in every country's best interest. However, the dialog 
cannot compromise the basic principles of business, a market-based 
approach, public-private cooperation, respect for property rights and 
contracts, and the right balance of policy-regulation-operations/
business. Although this would probably mean losing a few significant 
actors, countries such as Brazil, Colombia, Chile, Peru, Trinidad-
Tobago, and even Ecuador could lead the way. Their leaders are thinking 
creatively and have instituted effective measures to develop their 
respective resources in productive ways. The presence of Canada would 
certainly enhance the initiative. There is no silver bullet, but hard 
work along the described lines could translate into a more balanced and 
reliable regional energy network.

                             VI. REFERENCE

    Council of the Americas' Energy Action Group, Energy in the 
Americas--Building a Lasting Partnership for Security and Prosperity 
(Washington, DC: Council of the Americas, October 2005), 6-8.

    The Chairman. Well, thank you very much, Mr. Giusti.
    I would like to call now on Mr. Carvalho.

STATEMENT OF EDUARDO PEREIRA DE CARVALHO, PRESIDENT, BRAZILIAN 
  ASSOCIATION OF SUGAR CANE AND ETHANOL PRODUCERS, SAO PAULO, 
                             BRAZIL

    Mr. de Carvalho. Thank you, Mr. Chairman, honorable 
Senators. Thank you for the honor and privilege to address this 
committee.
    We are living in a changing era for energy, given 
environmental imperatives and security of supply of fossil 
fuels. Two countries, the United States and Brazil, emerge in a 
privileged position to develop ethanol as an octane booster or 
a gasoline enhancer or even as its perfect substitute.
    There will be no silver bullet, as my colleague has said, 
to petroleum substitution. But, and I quote, ``Biomass ethanol 
is the best alternative to partially replace oil derivates in 
the next decades, considering consumers acceptability and 
strategic considerations,'' as declared recently by none less 
than Shell International.
    Brazil's large experience with ethanol has been developed 
over the last 30 years, not only in high blending volumes but 
also in 100 percent ethanol-dedicated cars, or in its present 
version of flex fuel vehicles. This was possible due to the 
gradual setting of a huge infrastructure for ethanol 
distribution, whereby all of the more than 33,000 gas stations 
all over the country have at least one dedicated pump for E100 
fuel.
    At the same time, the United States has been expanding its 
own ethanol production at an astonishing growth rate of about 
20 percent a year, consistent with public policies established 
to increase its consumption to 7.5 billion gallons in 2012, but 
its potential use can be much more ambitious. Today, the 
combined ethanol production of the United States and Brazil of 
around 9 billion gallons accounts for less than 2 percent of 
the total world consumption of gasoline. Could we think of a 
potential market for ethanol of 49 times the present 
production?
    Brazil has been working to promote the global market for 
ethanol. In order to achieve this growth, we consider that it's 
important to launch a Brazil-United States partnership. Brazil 
and the United States account for 70 percent of world ethanol 
production. In our view, there is not going to be a global 
market until we see ethanol being produced and consumed in many 
countries. We need more players. Such partnership between our 
two countries could pursue goals such as common standards, 
technical cooperation, common research projects and, above all, 
joint efforts to promote ethanol in third markets.
    Therefore, let me be very clear on this point. The 
Brazilian private sector does not have any goals of displacing 
the domestic ethanol industry in the United States. We realize 
that a thriving ethanol industry in the United States is of 
enormous importance to consolidate a global market for ethanol. 
In this spirit, I repeat, we do not think that it would be in 
our own interest to displace domestic production in the United 
States, our goal being complement it and/or displace oil 
imports.
    Within the spirit of such a desirable partnership, it's 
important to point out that autarkic development in renewable 
fuels contradicts the framework of a free and global trade in 
fossil fuels. The present tariff and other duties on imported 
ethanol in the United States are an obstacle to an even more 
aggressive market expansion, and certainly an inducement to 
higher prices than those that could prevail in more liberalized 
conditions.
    Is Brazil able to contribute, with its vast potential, to a 
larger ethanol market? Certainly.
    Let us consider, first, the necessary acreage for it. 
Today, no more than 7.5 million acres are used to produce 4.5 
billion gallons of fuel in Brazil, but we have in Brazil more 
than 250 million acres that can be taken as a potential area to 
expand agriculture, respecting all preservation areas, 
especially the rain forests. Current expansion programs suggest 
a production level of 8 billion gallons by 2011, based on our 
domestic market, mainly induced by the spectacular acceptance 
of flex fuel vehicles, and some moderate growth assumptions on 
exports.
    The search for alternative fuels must be based on their 
economic, environmental, and social sustainability. 
Economically speaking, Brazilian sugarcane ethanol is already 
competitive with any gasoline obtained from $40-a-barrel crude, 
without any form of subsidy either in agriculture, industry, or 
to the consumer.
    Sugarcane ethanol is a most efficient instrument to 
sequester carbon dioxide in the atmosphere and consequently 
mollify the serious threat of global warming. For each unit of 
fossil fuel consumed in the whole process of production, 
sugarcane ethanol generates 8.3 units of renewable energy.
    The social dimension is shown by the high rate of 
employment generation, turning the areas with sugarcane 
cultivation into one of the most developed areas within the 
country, the highest wage paid in the agriculture sector, the 
best social conditions, education, health, and so on. There is 
every reason, Mr. Chairman, to believe that the conditions 
created in Brazil can be replicated as well in the tropical 
regions of the world, benefiting hundreds of millions of 
people, especially in Latin America, Africa, and Southeast 
Asia.
    A freer trade policy regarding ethanol in the United States 
would enhance the potential of not only much more ambitious 
goals to gasoline substitution, but also prevent and smooth out 
possible price peaks and pressures. Additionally, it could 
induce effective changes in the process of economic development 
of a vast number of underdeveloped and developing nations.
    In short, free markets and fair systems to govern them need 
to be recognized as powerful instruments to secure a balanced 
supply of renewable fuels in the near future, and Brazil and 
the United States would have much to gain by joining forces to 
globalize ethanol as an energy commodity.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. de Carvalho follows:]

Prepared Statement of Eduardo Pereira de Carvalho, President, Brazilian 
   Association of Sugar Cane and Ethanol Producers, Sao Paulo, Brazil

    Mr. Chairman, honorable Senators, thank you for the honor and 
privilege to address this committee. We are living in a changing era 
for energy, given environmental imperatives and security of supply of 
fossil fuels.
    Two countries, the United States and Brazil, emerge in a privileged 
position to develop ethanol, as an octane booster, or a gasoline 
enhancer, or even as its perfect substitute.
    There will be no ``silver bullet'' to petroleum substitution. But, 
``biomass ethanol is the best alternative to partially replace oil 
derivates in the next decades, considering consumers acceptability and 
strategic considerations'' as declared recently by none less than Shell 
International.
    Brazil's large experience with ethanol has been developed over the 
last 30 years. Not only in high blending volumes, but also in 100 
percent ethanol dedicated cars, or in its present version of flex fuel 
vehicles. This was possible due to the gradual setting of a huge 
infrastructure for ethanol distribution, whereby all of the more than 
33,000 gas stations all over the country have at least one dedicated 
pump for E100 fuel.
    At the same time, the United States has been expanding its own 
ethanol production at an astonishing growth rate of around 20 percent a 
year, consistent with public policies established to increase the 
consumption to 7.5 billion gallons in 2012. But its potential use can 
be much more ambitious. Today, the combined ethanol production of the 
United States and Brazil, of around 9 billion gallons, accounts for 
less than 2 percent of the total world consumption of gasoline. Could 
we think of a potential market for ethanol of 49 times the present 
production?
    Brazil has been working to promote a global market for ethanol. In 
order to achieve this goal, we consider that it is important to launch 
a Brazil-United States partnership. Brazil and the United States 
account for 70 percent of the world's ethanol production. In our view, 
there is not going to be a global market until we see ethanol being 
produced and consumed in many countries. We need more players. Such 
partnership between our two countries could pursue goals such as common 
standards, technical cooperation, common research projects and--above 
all--joint efforts to promote ethanol in third markets.
    Therefore, let me be very clear on this point: The Brazilian 
private sector does not have any goals of displacing the domestic 
ethanol industry in the United States. We realize that a thriving 
ethanol industry in the United States is of enormous importance to 
consolidate a global market for ethanol. In this spirit, I repeat, we 
do not think that it would be in our own interest to displace domestic 
production--our goal is to complement it and/or displace oil imports.
    Within the spirit of such a desirable partnership, it is important 
to point out that autarkic development in renewable fuels contradicts 
the framework of a free and global trade in fossil fuels. The present 
tariff and other duties on imported ethanol in the United States are an 
obstacle to an even more aggressive market expansion, and certainly an 
inducement to higher prices than those that could prevail in more 
liberalized conditions. Is Brazil able to contribute, with its vast 
potential, to a larger ethanol market?
    Certainly.
    Let us consider, first, the necessary acreage for it. Today, no 
more than 7.5 million acres are used to produce 4.5 billion gallons. 
But we have in Brazil more than 250 millions acres that can be taken as 
a potential area to expand agriculture--respecting all preservation 
areas, especially our rain forests. Current expansion programs suggest 
a production level of 8 billion gallons by 2011. This, based on our 
domestic market, mainly induced by the spectacular acceptance of the 
flex fuel vehicles, and some moderate growth assumption on exports.
    The search for alternative fuels must be based on their economic, 
environmental, and social sustainability. Economically speaking, 
Brazilian sugarcane ethanol is already competitive with any gasoline 
obtained from a $40 barrel of crude, without any form of subsidy--
either in agriculture, industry, or to the consumer.
    Sugarcane ethanol is a most efficient instrument to sequester 
carbon dioxide in the atmosphere and consequently mollify the serious 
threat of global warming: For each unit of fossil fuel consumed in the 
whole production process, sugarcane ethanol generates 8.3 units of 
renewable energy.
    The social dimension is shown by the high rate of employment 
generation, turning the areas with sugarcane cultivation in one of the 
most developed areas within the country: The highest wages paid in the 
agricultural sector; the best social conditions (education, health 
care, etc.).
    There is every reason to believe that the conditions created in 
Brazil can be replicated elsewhere in the tropical regions of the 
world, benefiting hundreds of millions of people, especially in Latin 
America, Africa, and South East Asia.
    A freer trade policy regarding ethanol in the United States would 
entrance the potential of not only much more ambitious goals to 
gasoline substitution, but also prevent and smooth out possible price 
peaks and pressures. Additionally, it could induce effective changes in 
the process of economic development of a vast number of underdeveloped 
and developing nations.
    In short, free markets and fair systems to govern them, need to be 
recognized as powerful instruments to secure a balanced supply of 
renewable fuels in the near future. And Brazil and the United States 
would have much to gain by joining forces to globalize ethanol as an 
energy commodity.
    Thank you.

    The Chairman. Well, thank you very much, Mr. Carvalho, for 
that important visionary statement and agenda that you 
presented.
    I would like to call now upon Mr. Goldwyn.

    STATEMENT OF HON. DAVID L. GOLDWYN, PRESIDENT, GOLDWYN 
         INTERNATIONAL STRATEGIES, LLC, WASHINGTON, DC

    Mr. Goldwyn. Thank you, Mr. Chairman. Mr. Chairman, members 
of the committee, it's a pleasure to be here.
    I think, without a doubt, the erosion of U.S. power and 
influence around the globe due to our dependency and that of 
our allies and our competitors on oil is the key foreign policy 
challenge of our time. I commend the chairman and the committee 
for a comprehensive and a sustained and very responsible 
approach to this issue, and it gives me hope that maybe this 
time we'll actually do something about it.
    With respect to the hemisphere, I would say that the energy 
trends in the hemisphere are mixed, but overall investment is 
declining, production is flattening, and resource nationalism 
is rising in the key producing nations. With respect to our 
diplomacy in the region as you have focused on it, it's 
increasingly confined to North America. Most of our 
longstanding bilateral and multilateral energy dialogs are 
dormant, and we have no strategic engagement on energy with two 
of the most important producers, Venezuela and, of course, 
Brazil.
    But the key foreign policy issue that results from all this 
is that U.S. influence in the hemisphere is declining fast. I 
share the chairman's vision that we need a fresh approach to 
energy diplomacy in the hemisphere, and I think the Energy 
Diplomacy and Security Act provides a terrific framework for 
this kind of approach.
    But, in addition, I think the United States has to enhance 
its energy security by engaging the region on the issues that 
concern its people, and those are the issues of job creation 
and poverty alleviation, migration, and trade promotion. An 
asymmetrical approach, one that focuses on a broad range of 
issues rather than just energy security, may pay great 
dividends in energy security, more than one that's just focused 
on energy. I think the ``energy for development'' component of 
the EDSA is a good example of how to leverage this asymmetrical 
approach.
    So this morning I'm going to talk very briefly about the 
trends in the hemisphere, how and why they negatively impact 
our foreign policy that's driving this, and then, what we 
should do about it.
    In terms of the hemisphere itself, I think as my colleagues 
have said this morning, there's no question that Latin America 
is a key component of United States energy diversity. We don't 
have a whole lot of diversity from the Middle East if we don't 
have the supply from this hemisphere. It's much more important 
even than Africa in that context. There's no getting around its 
importance. Also, they are close by and, as Luis has said, 
deeply integrated into the U.S. system.
    We're seeing two trends now. One is the rise in state 
control, and that's in Venezuela and Bolivia, Ecuador, and as 
the former finance minister has said, what happened to 
Argentina in 2002. And there we're seeing investment leave 
those countries, we're seeing production flatten.
    But the other trend is toward a market model, and there I 
think we have to acknowledge Brazil's tremendous success, 
Colombia's, and Peru's. Brazil has gotten a lot of credit for 
being self-sufficient in oil because of ethanol, but they 
increased their production by 1 million barrels a day over 10 
years, and that has an equal or greater effect on their self-
sufficiency.
    But the problem is, since the greatest producers are Mexico 
and Venezuela, the net effect is negative, and that's a 
problem. Why is that a problem, and why do we care? Well, there 
are economic reasons why these trends are bad. Obviously, it's 
bad for the shareholders of U.S. companies when their profits 
get cut significantly, and when production flattens, it puts 
long-term pressure on oil prices.
    But the real consequence that we need to worry about is the 
foreign policy impact, and there we're seeing a growing 
rejection of free markets, an erosion of democratic structures 
in a lot of countries, and the decline of U.S. influence in the 
region. What's new about this is that for the first time since 
the fall of the Soviet Union, the United States has a political 
and ideological competitor in Hugo Chavez, and a competitor 
that is well financed with oil wealth and very creative about 
how they're competing with us.
    I would argue that this trend is reversible, and that U.S. 
alliances can be expanded and restored, if we are prepared to 
engage the hemisphere with respect and creativity on the issues 
that matter to the hemisphere. But we have to compete, and 
right now I would argue in Latin America we're not even on the 
field.
    Some examples of how our influence is declining: First, 
polls show our image is at a historic low in the hemisphere. 
Anti-United States rhetoric is up. Support for liberalized 
markets and free trade is declining. The FTAA is pretty much 
dead in the water. The 2005 Mar de Plata Summit of the Americas 
couldn't even produce a consensus statement. We have suspended 
our military cooperation with 10 countries because they don't 
conform to our orthodoxy on the International Criminal Court. 
We couldn't get support, probably for the first time in our 
history, on a candidate for the Secretary General for the OAS, 
and we're actually not doing so well on who the next Latin 
American candidate is on the Security Council, either.
    A greater concern is that as these populist regimes take 
power, democratic structures are eroding. By democratic means, 
referenda and other things, the political space is eroding. 
Space for political opposition is disappearing as referenda 
create more and more restrictive rules for how these 
governments govern. And our institutions like IRI and NDI, 
which have been great ways to build party opposition, are 
basically no longer welcome in these countries. These internal 
governance issues need to be the focus of our policy.
    Now, why is this happening? There are really three reasons. 
Some of this is self-inflicted wounds from U.S. diplomacy, some 
of it is internal, and some of it is energy. I think we have to 
acknowledge the self-inflicted wounds of U.S. diplomacy in the 
hemisphere. We don't pay attention to Latin America because of 
Latin America.
    Our policy in Latin America has primarily been about 
counternarcotics. When we had close ties with regimes that 
marginalized their own indigenous populations, we didn't pay a 
whole lot of regard to it, and now they're in power, and guess 
what? They don't like us too much. It's actually ironic because 
we provided a lot of support for political parties in these 
countries, particularly in Bolivia, and by empowering them and 
teaching them how to participate in the process, they are now 
in power, but our support has not been very well recognized.
    Our image is also declining because of policies in other 
places in the world, no doubt in the Middle East, and things 
like Guantanamo and Abu Ghraib have hurt our image in the 
hemisphere. Our direct assistance for things like child 
survival is declining for budgetary reasons, so we're viewed as 
being insensitive to the region's concerns.
    But there are lots of internal reasons also, and that's 
that trade liberalization and GDP growth have not led to 
poverty alleviation or the inclusion of excluded minorities in 
countries like Venezuela, Bolivia, Ecuador, and Peru. That has 
led to a rejection of markets and the Washington consensus. 
That doesn't mean that it's bad, but it means that we haven't 
really looked at all the consequences of what those countries 
actually experienced.
    Another reason is that their populations are growing, they 
need more money, and guess where they go. They go to oil 
revenues because that's the greatest source. And, as Luis has 
said, the United States, the United Kingdom, Canada, lots of 
people are raising taxes.
    But the new piece and the piece of most concern is the 
competition from Venezuela. Hugo Chavez is not the first 
hemispheric leader to try and compete with the United States or 
demonize us to increase his popularity, but he's the best 
financed, and rarely has the United States been so destructive 
and inept in our own way of competing with someone.
    I think we have to be careful here not to dismiss the 
reasons why Hugo Chavez came to power, or to exaggerate the 
potency of his model in other places in the region. What does 
have to concern us is that Venezuela is trying to export this 
model to other countries, and they're being clever about it.
    In places where trade liberalization has hurt a country--we 
do a trade deal with Colombia, we wipe out the Bolivian soybean 
market. What's U.S. policy? Let the market provide. What's 
Venezuelan policy? We'll buy your soybeans. It's clever.
    On the days when U.S. oil companies are here testifying 
about how Congress needs to deal with low income heating 
assistance programs, what does President Chavez do? He decides 
to provide heating oil to Northeast communities. It's clever.
    They have also capitalized on these differences in the 
regions by offering subsidized energy products in cooperation 
and joint investment to the rest of the region. And I think the 
jury is frankly out on whether this model will be of appeal, 
whether anybody wants their investment, but everyone will take 
cheap oil and the cheap products.
    So the question is, what are we doing to compete? What are 
we doing to defend our model? What are we doing to try and 
improve our own brand in the hemisphere? And here I think we 
need to do a couple of things.
    I think the Energy Diplomacy and Security Act is a terrific 
framework. We have to care about energy. We have to focus on 
the region. We have to build up our frameworks in the 
hemisphere. And I would just argue, as I have in my written 
testimony, that we have to have the flexibility to allow us to 
do this at the subregional level as well.
    But we need a positive agenda in the hemisphere. We really 
need one that recognizes the need to improve education and 
infrastructure, that addresses the negative social impact of 
trade liberalization, and that offers the respect and 
cooperation of the United States to the countries that work 
with us. I think this is going to advance our interests no 
matter what the price of oil is.
    We need to address issues like poverty. We can do a lot of 
things. One is on trade liberalization. We ought to think about 
lifting that tariff on Brazil and developing that market. We 
have to show there are rewards for these kinds of exports. We 
can improve the visa process for people who will be the future 
leaders of these countries. We could improve our military 
cooperation with the region's militaries, without this 
orthodoxy; and deal with migration with Mexico, which is 
obviously important to them. We can support World Bank and 
Inter-American Development Bank programs on things like 
bringing electricity, particularly rural electrification, in 
the region. This is stuff that people care about, and like the 
Alliance for Progress that the Senators talked about earlier, 
it shows that we actually care about their welfare. It's a 
positive agenda.
    I think we can also do things like compete in areas where 
we have adversaries. In Venezuela and Bolivia, we should not 
abandon the field. We should not reduce our diplomacy. We 
should not reduce our engagement. We should ratchet it up, 
because we have something to say and we should defend it. And 
Venezuela, hopefully we'll talk about it in the question and 
answer period, but there too I think we ought to end the dialog 
through the media, talk directly, and reengage.
    Overall in the hemisphere, dialog and diplomacy will be the 
important means to try and address energy security in the 
hemisphere. But more than the dialog, we really have to have 
the product, we really have to have the substance, and that's 
where I think we need this asymmetrical approach that addresses 
a broader range of issues.
    Thank you.
    [The prepared statement of Hon. Goldwyn follows:]

    Prepared Statement of Hon. David L. Goldwyn, President, Goldwyn 
             International Strategies, LLC, Washington, DC

    Mr. Chairman and members of the committee, it is an honor to speak 
with you today about the intersection between growing resource 
nationalism in Latin America and the erosion of United States influence 
in the hemisphere. The energy trends in the hemisphere are mixed, but 
overall investment is declining, production is flattening, and resource 
nationalism is rising in some key producing nations. United States 
energy diplomacy is increasingly confined to North America. Most of our 
longstanding bilateral and multilateral energy dialogs are not 
functioning. We have no strategic engagement on energy with two of the 
three key producers: Venezuela and Brazil. U.S. influence in the 
hemisphere is declining fast. The United States needs a fresh approach 
to energy diplomacy in the hemisphere. The Energy Diplomacy and 
Security Act (EDSA) provides an excellent framework for such an 
approach. In addition, the United States will enhance its energy 
security by engaging the region on issues that concern its people: job 
creation, poverty alleviation, migration, and trade promotion. An 
asymmetrical approach, one that addresses a broad range of issues 
rather than just energy security, may pay dividends equal to or greater 
than one focused solely on energy. The ``Energy for Development'' 
component of the EDSA is an excellent example of this kind of approach. 
EDSA should also, however, ensure that the United States has the 
flexibility to utilize subregional energy dialogs and that any new 
framework strengthens, rather than weakens, the energy diplomacy 
mission of the Department of Energy. I will discuss current energy 
trends in the hemisphere, their impact on U.S. foreign policy, the 
status of existing energy security dialogs, and the utility of a fresh 
approach, with a specific focus on EDSA.

                  I. THE IMPORTANCE OF THE HEMISPHERE

    Latin America is a strategic region for United States foreign 
policy for many reasons. We are neighbors, trading partners, investment 
partners and we share deep family and cultural ties. The hemisphere is 
democratic, with one notable exception. In the energy sphere, the 
hemisphere provides the United States with a large portion of our 
diversity of oil and gas supply. For this reason, the failure of the 
hemisphere to realize its potential for growth is a serious concern for 
U.S. and global energy security. Latin America is far closer to the 
United States market than the Middle East. While the investment climate 
in key Latin American countries is deteriorating as state control 
increases, even in Venezuela access to exploration acreage remains 
superior to that in the Middle East. Additionally, the non-OPEC 
producers in this region exert counterpressure on OPEC's monopoly 
power.
    Mexico and Central and South American nations delivered nearly 14 
percent of global oil production in 2005, and possess approximately 9.7 
percent of global oil reserves, with 6.5 percent in Venezuela and 1.1 
percent in Mexico alone. The region is also a major refining center, 
with nearly 9.2 percent of the world's refining capacity. Regional 
refineries are designed to serve the specialized needs of U.S. markets. 
The most important exporters, Venezuela and Mexico, consistently rank 
in the top four sources of United States oil supply along with Canada 
and Saudi Arabia. Venezuela averaged 1.29 million barrels per day (m/
bpd) in 2005; Mexico averaged 1.59 m/bpd in that year.

                  II. ENERGY TRENDS IN THE HEMISPHERE

    In Latin America today we see two trend lines. One trend is toward 
rising state control of energy resources--in Venezuela, Argentina, 
Bolivia, and Ecuador, in particular. The concern here is that this 
trend will limit the growth of global supplies of oil and gas by 
undermining the value of existing investments, discouraging future 
investment or barring foreign investment altogether. The economic 
consequence of these trends is that the hemisphere will contribute less 
to the diversification of oil supply, thereby increasing the importance 
of OPEC supply and over time undermining economic development in the 
region. The political consequences of these trends in the short run are 
the decline of U.S. influence in the region to competing ideologies and 
the erosion of democratic structures.
    A second trend is toward creative fiscal regimes that welcome 
foreign investment and require state-owned companies to compete with 
international companies, with independent regulators that promote fair 
and efficient regulation. Countries observing this model are increasing 
production or stalling the decline of existing reserves. Brazil, 
Colombia, Trinidad and Tobago, and Peru are key examples of this 
creative model.
    When we consider that Mexico, so far, continues to bar foreign 
investment in its upstream oil and gas sector, and the size of the 
reserves and production of the countries practicing the resource 
nationalism model, the net effect is negative. Foreign investment in 
the oil sector is shifting away from South America to North America, 
particularly to Canada's oil sands. When we compare 2005 to 2004, only 
Brazil and Trinidad managed to increase production significantly, while 
other countries faced decline or very modest gains.
A. The rise in state control
    Venezuela and Mexico are the most important oil exporters in the 
hemisphere. While Brazil, Colombia, Ecuador, and Argentina are 
important destinations for foreign investment, and helpfully produce 
enough oil to meet their own domestic needs and make some contribution 
to the global export market, they are not strategic suppliers to the 
global market at this time. Only Mexico, Brazil, and Venezuela produce 
more than a million barrels per day. Bolivia has enormous gas reserves, 
but exports mostly to Brazil and modestly to Argentina. Only Trinidad 
and Tobago is a key supplier to the world gas market.
    From those countries now committed to increasing state control, the 
United States faces two key challenges: The loss of production growth 
and diversity of supply from the region if new economic frameworks are 
unattractive to foreign investors and, most critically, the loss of 
United States influence from well-financed political competition.

            THE ECONOMIC IMPACT OF RISING STATE CONTROL

    The recent wave of changes in contractual terms and dramatic 
changes in tax regimes in Venezuela, Bolivia, Ecuador, and in recent 
years Argentina, threatens to slow new investment and eventually deepen 
instability and poverty in these nations as well as destroy shareholder 
value for the companies invested there. The deterioration in the 
investment climate for energy in these countries is primarily an 
economic threat, helping to lock in constrained supply and high prices. 
We are seeing the revision of economic terms at a time when producers 
rather than companies hold more market power.
    Venezuela passed a hydrocarbons law that mandated a 51 percent 
share by the national oil company and a higher royalty rate. 
Operations, such as those under Operating Service Agreements, which may 
have stretched the legal interpretation of the law when they were 
begun, were subject to a strict and adverse legal interpretation when 
they appeared to be poor earners for the government. Taxes once 
renounced, like the export tax, have been revived so that the 
government can earn, in essence, a fixed 33.33 percent royalty. The 
impact, according to expert analysts like Deutche Bank and Wood 
Mackenzie, is a massive flight of investment capital from Venezuela's 
heavy oil sector to Canada's oil sands, effectively freezing 
development of the hemisphere's largest oil reserves during one of the 
greatest oil booms in history.
    In Bolivia, President Evo Morale's May 1, 2006 decree declared that 
the state would take control of all gas fields. Royalty payments to the 
Bolivian Government at the largest gas fields, including San Alberto 
and San Antonio, will now increase from 50 percent to 82 percent. All 
producers are obliged to sell at least 51 percent of their holdings to 
the Bolivian Government, with the value of that share to be assessed by 
audit and negotiation. The state will take 60 percent of production 
from other fields. Bolivia has left itself an open door through which 
it can compromise or retreat: Details of new contracts are to be worked 
out on a case-by-case basis. But companies were given only 6 months to 
renegotiate contracts or be expelled.
    In Ecuador, President Palacios seeks to increase windfall revenues 
from 30 percent to 50 percent and to renegotiate production sharing 
contracts, while still embroiled in disputes over company claims for 
refunds of value added tax payments denied by the government. Ecuador 
has now seized and will attempt to operate an oil field developed by 
Occidental Petroleum. Argentina reversed a successful fiscal regime by 
imposing export taxes and other restrictions which have returned it to 
being a net oil importer.
    The net effect of these developments is that new investment in 
these countries is virtually frozen at a time when prices should be 
driving new exploration and production. It is notable that even China, 
which is aggressively competing for exploration acreage worldwide, is 
not a major player in the hemisphere. China holds less than 10 percent 
of upstream assets in the hemisphere, primarily recent acquisitions of 
Western assets in Ecuador and Peru, and enjoys no preferential access 
in Venezuela at this time. No new investment has been made under 
Venezuela's 1998 hydrocarbons law. New investment is unthinkable in 
Bolivia until existing companies can determine the extent of their 
losses. Ecuador's investors are mulling legal action for expropriation 
and suspension of existing investments. The future growth potential of 
the hemisphere is being undermined and the region's economies risk a 
major contraction if oil prices drop significantly anytime over the 
next decade.

B. The market model
    The hemisphere is not monolithic. We have seen remarkable success 
stories like Brazil, Colombia, and Peru, which have created independent 
regulators and obliged their national energy companies to compete with 
outside companies for exploration rights. Such progressive cases 
provide bright spots in the region. Brazil has received enormous, and 
well-deserved credit for the contribution that sugar-based ethanol has 
made to its self-sufficiency in oil. But equal credit should go to 
Brazil for a remarkable change in its terms for welcoming foreign 
investment, which made Brazil one of the most desirable destinations 
for exploration. Brazil's aggressive oil production strategy increased 
domestic oil production by 1 m/bpd over 10 years. In 1995, Brazil 
produced less than 700 m/bpd. In 2006, they are forecast to produce 
close to 1.7 m/bpd. Their jump in domestic production has had as great 
an impact on reduction in oil imports as anything else.
    Competition has also made Petrobras a better company and a fearsome 
global competitor. Peru is set to become a net gas exporter if plans to 
build an LNG terminal and production from the Camisea project meet 
expectations. But these market-based energy producers are not the 
dominant economic models in the hemisphere, are not major oil exporters 
and, with the exception of Brazil, do not operate in the countries with 
the greatest reserves. Colombia is battling a rapid decline of its 
reserves and production. Peru is a net exporter.
            Mexico
    Mexico has been a long-time reliable supplier, but its upstream oil 
sector has been closed to foreign investment and it is projected to 
decline unless this policy changes or unless the Mexican Government 
dramatically increases the amount of PEMEX earnings it can keep for 
capital investment. In 2004, PEMEX paid the government 60 percent of 
its revenues. Mexico has enormous oil potential on its side of the Gulf 
of Mexico and a change in policy could both change global oil markets 
and create a formidable source of wealth for development of the country 
itself. Mexico will hold a closely contested Presidential election this 
July, and the winner will have to address how to avoid seeing Mexico 
decline as an oil power. For now, all candidates appear to oppose 
foreign investment in the energy sector but economic reality, 
opportunity, and perhaps creative political action could yet provide 
this generation of Mexicans with an economic bonanza.

  III. THE IMPACT OF HEMISPHERIC ENERGY TRENDS ON U.S. FOREIGN POLICY

    The most important challenge to the United States from these 
hemispheric energy trends is political, not economic. U.S. influence in 
the hemisphere is waning in key areas, support for liberalized markets 
and free trade is declining, and democratic structures are under stress 
as populist governing models reduce the space for political opposition. 
The November 2005 Mar De Plata Summit of the Americas could not produce 
a consensus statement. Military cooperation with nearly 10 countries 
has been suspended for the failure of these neighbors to conform to 
U.S. orthodoxy on the International Criminal Court. The United States 
could not muster support for its candidate for Secretary General of the 
Organization of American States.
    Much of this decline is self inflicted. The hemisphere has not been 
a priority for U.S. foreign policy for many years, other than as target 
for our counternarcotics policy. Bilateral relations are focused on 
whether the hemisphere supports U.S. policy in other areas. The image 
of the U.S. is declining in the hemisphere due to U.S. policies in the 
Middle East and human rights issues raised by our treatment of 
detainees from Abu Ghraib to Guantanamo. Nonmilitary aid for 
development assistance and child survival is declining for budgetary 
reasons. The United States is widely perceived as insensitive to the 
region's concerns and our influence has been harmed as a result.
            The Venezuelan challenge
    For the first time since the fall of the Soviet Union, the United 
States now has an ideological and political competitor for political 
influence, arising primarily from Venezuela.
    High oil prices have enabled President Chavez to maintain very high 
revenues for his government, allowing increased domestic social 
spending, high levels of foreign assistance, and modest reinvestment by 
PDVSA in countries in South America and the Caribbean. President Chavez 
has a competing vision from that of the United States on a broad range 
of issues. He opposes the United States on trade integration, our 
liberal (versus his Bolivarian) model of democracy, on Iran and Iraq, 
and seeks to exclude the United States from regional economic energy 
arrangements in South America and the Caribbean. His economic policy is 
to raise taxes and royalties on foreign energy investment, demand 
majority control of projects, and in the non-oil sector to seize land 
or other underutilized industrial resources for the state.
    Venezuela competes with the United States in the hemisphere, 
offering aid for solidarity. Venezuela has capitalized on the different 
needs of the hemisphere's subregions by creating PetroCaribe, 
PetroAndina and Petrosur to foster cooperation and joint investment on 
a subregional basis. It has created an alternative trade grouping 
called ALBA, the Bolivarian Alternative for the Americas--which 
attempts to force nations to choose between trade agreements with the 
United States and with Venezuela. Venezuela is also identifying places 
where trade liberalization has a negative impact and stepping in to 
provide redress. Venezuela purchased debt issues from Argentina and 
Ecuador, and when the Colombia free-trade agreement with the United 
States threatened Bolivia's soybean crop, Venezuela agreed to purchase 
it.
    The jury is still out on whether the Venezuelan economic model is 
viable at $25 oil and whether their neighbors support the Bolivarian 
vision and will really allow joint investment, or if they are just 
accepting President Chavez's assistance. But the political challenge to 
the U.S. vision for the region is unmistakable.
    The Venezuelan model is an issue in every nearly every election in 
the hemisphere. In Bolivia, the mobilization of long disenfranchised 
indigenous forces--aided by years of United States assistance in party 
building and election organizing--led to the election of President Evo 
Morales, who is following the Venezuelan model. In Peru, Alan Garcia 
defeated Ollanta Humala, a proponent of the Venezuelan model, in a 
close election. In Mexico, the PAN candidate, Felipe Calderon, has 
closed a large gap with his PRD opponent, Manuel Lopez Obrador, by 
asserting he will follow the Venezuelan model if he is elected.
    Given these mixed results, we should be careful not to overstate 
the salience of the Venezuelan model or to dismiss too quickly the 
forces that gave rise to it in the first place.
            The roots of the antimarkets approach
    It is important to understand what is behind the challenge to the 
U.S. model. We are seeing the rise of state control and forced revision 
of contracts for two reasons. One is that trade liberalization and 
increased GDP growth have not led to poverty alleviation or inclusion 
of excluded minorities in countries like Venezuela, Bolivia, Ecuador, 
and Peru, leading to a rejection of liberalized markets and the 
Washington consensus in many countries. Another is that growing 
populations have increased the pressure for governments to raise 
revenues in economies that are still resource-dependent, so governments 
are appropriating the best available source of cash regardless of the 
long-term consequences. This latter trend has led to higher taxes and 
royalties all over the world, including the United Kingdom.
    The United States should protest violations of contracts or 
expropriations where these takes place and deny benefits such as 
bilateral trade agreements to countries that do not respect the 
agreements they have signed. The United States suspension of free-trade 
agreement talks with Ecuador is a good example of this. But the market 
will either tolerate or punish the economic actions of governments that 
raise tax and royalty rates or other fiscal terms adversely. If 
companies can make money under the new terms offered by Venezuela or 
Bolivia, they will pursue these opportunities. If companies cannot 
profit, they will close their operations, and if countries do not spend 
their own capital to develop their resources, then production will 
fall, their revenues will shrink, and the popularity of their programs 
will shrink with them. This may lead to higher energy prices, but 
foolish economic policy is not a basis for U.S. Government 
intervention.
            The need for a new hemispheric foreign policy approach
    What the United States lacks is a positive agenda in the 
hemisphere, one that recognizes the need to improve education and 
infrastructure, addresses the negative social impacts of trade 
liberalization, and offers the respect and cooperation of the United 
States to those countries that work with us. This will advance U.S. 
interests, no matter what the price of oil is. We need to address 
legitimate issues like poverty and advocate how our model can address 
them. Examples of this are addressing trade barriers to agricultural 
imports, expanding educational opportunities in the United States for 
future leaders, improving the visa application process, expanding 
military to military contacts, especially exchanges under the 
International Military Education and Training Program, dealing with 
migration issues with Mexico in a spirit of respect and fairness, 
supporting World Bank and Inter American Development Bank 
infrastructure programs in the hemisphere, supporting the development 
of civil society and the capacity of democratic institutions and 
treating our relations with our hemispheric neighbors as intrinsically 
important, not as litmus tests of loyalty to the United States on Iraq 
or other issues external to the region itself. In countries where we 
face ideological competition, like Venezuela and Bolivia, it is crucial 
that we do not abandon the field. We need to increase our diplomatic 
engagement and defend our way of thinking.
    I believe that Bolivia's recent actions will mark the nadir of the 
turn toward repudiation of contracts. Countries like Bolivia and 
Ecuador are too poor and frankly, too insignificant to global energy 
markets to sustain the kind of behavior they are engaging in. Powers 
like Brazil can communicate this to Bolivia better than the United 
States can. The United States should maintain dialog with Bolivia and 
give it our best, even if unwelcome, advice and cooperate where we can.
    Venezuela is a more complicated case. Venezuela is a competitor, 
but it is not likely to halt supply to the United States as an act of 
political warfare unless we embargo them first. They have, in fact, 
remained reliable suppliers of oil and products, despite the heated 
rhetoric reported in the media. An act of energy aggression by 
Venezuela against its neighbors is also unlikely at this time. Any hope 
Venezuela has for regional leadership would evaporate if they used 
their oil wealth for acts of military aggression against a neighbor. 
Withdrawing oil supply from the market will harm their new friends and 
future markets, as well as cut the government's supply of revenue. The 
United States could, would, and should use the Strategic Petroleum 
Reserve to redress the unlikely event of a production halt by 
Venezuela, or another (equally unlikely) strike by its workers. For 
now, the Venezuelan challenge is ideological.
    Here too U.S. policy has failed to understand what factors have led 
to President Chavez's enormous popularity. Venezuelan Governments prior 
to the Chavez government governed poorly, practiced corruption, ignored 
poverty, and excluded minority sectors of its society. The Chavez 
government came to power determined to
return control of energy policy from the national oil company to the 
government
ministry, to reclaim some of the oil rents held by the national oil 
company for the government's own account, and to change the economic 
terms of its acreage allocation from those set when oil was $10. This 
is a policy the United States would support in any other country. The 
government has spent lavishly and allegedly unwisely on social 
programs, but this is what we pray most African Governments would do 
with their own oil wealth. The famous strike of 2002-2003 was a battle 
between the national oil company and the government and the government 
won. I cannot imagine the United States supporting the PEMEX in a 
battle against the Mexican Government for control of the PEMEX Board of 
Directors. The U.S. rhetorical support for the coup that displaced the 
President for a day was foolish, destructive, and devastating to our 
bilateral relations.
    Where Venezuela has gone wrong economically is by changing contract 
terms with impunity and hostility, rather than by negotiation with 
companies who have been its partners for decades, invested billions in 
its energy sector, and created the production that now enriches the 
nation. The manner in which the recent changes have taken place has 
been shortsighted, destructive, and unnecessary. Venezuela has changed 
its interpretation of its own tax laws, but it is provocative and 
disingenuous to accuse companies of being tax cheats as a consequence. 
Time will tell whether the attractiveness of Venezuela's tremendous oil 
and gas reserves overcomes the pain inflicted by the way these changes 
have been made. Oil companies tend not to be emotional about these 
issues as long as they are making money.
    Where Venezuela has gone wrong, politically, is by using legal 
methods to restrict freedom of the press, prosecution to intimidate 
political opposition, and constitutional assemblies to unbalance 
formerly balanced institutions like the Supreme Court and national 
election commission. The regime itself, helped by the failure of a 
political opposition to mount a campaign describing what it was for, 
and high oil prices sufficient to fund the government and external 
programs at the same time, does not appear to need to use either tactic 
to win large majorities. These internal governance issues should be the 
focus of a regional policy, which includes, but is not led by the 
United States. We should have objective assessments as to whether 
Venezuela's actions are undermining any other important United States 
security interests. Venezuela has positioned itself as an ideological 
competitor to the United States in the hemisphere. We need not and 
should not treat Venezuela as an enemy; we should, however, try to 
compete. We should also end our dialog via the media and resume the 
dialog between our senior foreign affairs, commerce, energy, and 
cultural officials. We should work with Europe and with hemispheric 
partners to reinforce a message of respect for democratic institutions.

  IV. THE STATUS OF CURRENT DIALOGS AND THE NEED FOR A FRESH APPROACH

    The United States has had a number of bilateral and multilateral 
energy policy fora in the hemisphere over the years. Some are active, 
while others have lapsed or are stagnant. These fora are platforms to 
understand market dynamics, share best practices on energy efficiency 
and conservation, share understanding on ways to enhance energy 
production, and exchange views on how a nation's energy policies may be 
enhanced or reformed to promote the nation's own policy. These policy 
dialogs are also essential for building the understanding and 
relationships that are essential for trade promotion and conflict 
resolution.
    The premier multilateral energy forum was the Hemispheric Energy 
Initiative (HEI), a multilateral meeting of the hemisphere's energy 
ministers, with many active subgroups, which was cochaired by the 
United States and Venezuela. The HEI is dormant due to the status of 
our relationship with Venezuela, leaving us with no effective forum at 
all. Bilaterally, the United States had a Principal Coordinators Energy 
Dialog with Venezuela, as well as a 30-year technical cooperation 
agreement with Venezuela. The bilateral Venezuelan dialogs were 
suspended for political reasons.
    The United States has a trilateral energy policy dialog with Canada 
and Mexico, which has addressed electric power, energy conservation, 
harmonization of standards and market outlooks. It has taken many 
forms, but it functions very well.
    What remains of engagement is not adequate. A fresh approach which 
engages the United States with all the region's producers and consumers 
is sorely needed. I commend the Chairman for the vision contained in 
EDSA and for the framework it provides. I wish to comment on four 
aspects of the bill.
    With respect to section 3, on the Sense of the Congress on Energy 
Security and Diplomacy, I strongly share the call to integrate energy 
security into national security policy coordination by an interagency 
grouping and by creation of a new position at the State Department. In 
practice, there will be a need for energy security to be considered in 
many of the bilateral policy groups as well, so the issue is not 
marginalized, but these are important new measures. I would hope that 
the Secretary of Energy will be a player on bilateral policies in the 
Middle East, Central Asia, and other regions as well, so that the 
Energy Department's expertise is enhanced and not diminished.
    The Strategic Energy Partnerships contained in section 4 of the 
bill will be essential. We may have some of these on paper, but they 
need to have the diplomatic attention that has been lacking. The lack 
of high-level engagement with Brazil is a case in point. Here I would 
caution that we should not exclude dialog with countries that are 
ineligible to receive economic or military assistance. This kind of 
assistance gets suspended from time to time, with countries ranging 
from Nigeria to Venezuela. We should not tie the hands of our diplomats 
especially when we are using other measures like withholding assistance 
to impact a country's behavior.
    The Energy Crisis Response Mechanisms in section 5 are essential 
for bringing China and India into the international collective energy 
security system. Here, too, I would urge some flexibility to include 
other nations such as Thailand, Singapore, or Indonesia in such a 
system so we do not marginalize them or miss the chance to build an 
even stronger collective energy security system with consuming nations 
who will have a common interest with us.
    Finally, with respect to section 6, I share the Chairman's view 
that we need a new Hemispheric Energy Cooperation Forum with a strong 
private sector forum. The United States needs to engage producing 
countries with successful policies, such as Brazil, Colombia, and Peru, 
as well as competitors like Venezuela. We need to engage the consuming 
countries as well, in the Caribbean and Central America, as well as the 
Southern Cone, to address policies that favor consumers. One lesson we 
have learned from the HEI is that different regions of the hemisphere 
have different needs--some focus on power generation, others on 
integration of their grids, still others on access to oil and gas. The 
United States may be able to forge stronger bonds, and frankly compete 
more effectively on an energy security vision for the region, if we can 
organize along subregional lines, and meet in plenary when the timing 
is right. I think we have to recognize that while there is a state of 
conflict among the producing nations, a hemisphere-wide forum will face 
great challenges in achieving any meaningful consensus. I think we need 
one, but I suggest the bill provide some flexibility in how it is 
organized.
    I have some concern, as a former Assistant Secretary of Energy, 
with putting the State Department in charge of this effort with 
Energy's cooperation, rather than the other way around. I recognize 
there may be jurisdictional issues here. One factor I urge you to 
consider is that we need to deepen the international energy diplomacy 
capacity of the Department of Energy. Their relationships with civil 
servants in ministries across the globe provide a bridge across changes 
in government here and there. They can talk when the politics of 
nonenergy issues obstruct dialog among the foreign ministries. It is 
easier to get energy ministers together for regular meetings than 
secretaries of state. Their staff should be expanded and serious 
program budget established to make our cooperation more than 
rhetorical. For true reform to be achieved, I agree that foreign 
ministers, indeed heads of government will have to be involved. This 
will be the key to integrating energy security into foreign policy. But 
I urge some flexibility on the bureaucratic leadership provisions of 
this section as well.

                          V. EXTERNAL POLICIES

    In addressing challenges in Latin America, EDSA recognizes that the 
United States cannot go it alone. I note with admiration that the 
Chairman has placed an emphasis on integrating energy security into 
NATO policy, and into dialog with China and India. I would only add 
that we need to take an asymmetrical approach to our multilateral 
diplomacy outside the energy sphere. We need to focus the United 
States-European Union Dialog on democracy promotion and conflict 
resolution in Latin America. We must also begin a dialog with China and 
India on security and stability in energy-producing areas. Both are 
great powers and we share an interest in stable energy supply and 
conflict resolution. As these powers grow on the international stage, 
we need to talk to them about their policies and how they interact with 
the IMF, World Bank, and international multistakeholder efforts like 
the Extractive Industries Transparency Initiative.
    While it is the topic of many of your other hearings, it must be 
said that regional approaches to combat the use of oil as a tool of 
foreign policy are tactical measures to manage the near-term 
consequences of the impact of oil wealth on many oil producing nations. 
The energy dependency of the United States, our allies in Europe and 
developed Asia, and the growing dependence of rising powers such as 
China and India on imported oil, is rapidly eroding United States 
global power and influence around the world. My colleague, Jan Kalicki, 
and I, and a host of energy experts from around the world from 
producing and consuming nations, analyzed the sources of these problems 
and suggest a set of domestic and international solutions to them in a 
book we coedited titled ``Energy and Security: Toward a New Foreign 
Policy Strategy'' (Wilson Center Press/Johns Hopkins University Press, 
2005). As the Chairman so eloquently argued in his Brookings speech 
this year, a strategic approach to this program must focus on reducing 
the importance of oil as a global commodity. While this is a 20- or 30-
year effort, a strategic energy policy that invests in new technology, 
uses tax and regulatory policy to accelerate the deployment of 
alternative fuels and vehicles, and drastically increase fuel 
efficiency, and expands the system of collective energy security to 
include China and India, is the only way to protect America's power and 
influence for the long term. I commend the committee for its historic 
attention to these fundamental issues.

    The Chairman. Well, thank you very much, Mr. Goldwyn, for a 
very comprehensive statement on our whole diplomacy, in 
addition to the energy focus.
    Let me recognize the distinguished ranking member of the 
committee, Senator Biden, for his opening statement or 
comments.

   STATEMENT OF HON. JOSEPH R. BIDEN, JR., U.S. SENATOR FROM 
                            DELAWARE

    Senator Biden. Mr. Chairman, I apologize. I had to, attend 
another meeting, and I apologize for being late. I look forward 
to being able to ask some questions.
    The Chairman. Let me just pragmatically suggest 5 minutes 
on this first round. We're all sort of coming and going, and 
the Chair will try to recognize people as they reappear, and 
hopefully the panel will not be dismayed by these comings and 
goings.
    I want to start by asking this question. Essentially you 
have mentioned, Mr. Carvalho, that it would be helpful even in 
a bilateral relationship with Brazil, but you have extended 
that to really all other countries in the hemisphere, to have 
what might be a roundtable in which we would discuss how 
Brazil's success in ethanol from sugar could be replicated by 
many countries in Latin America, and for that matter, elsewhere 
around the world.
    And second, I ask you this. Could that roundtable, in 
addition to production expertise, and all the problems Brazil 
faced over 20 years which need not be faced by everybody else 
if we learn the Brazilian story well, talk about flex fuel 
cars? How are these going to be produced? Who will do that sort 
of thing?
    Because in our experiment here in the United States, in my 
home State of Indiana, we're into production of corn ethanol in 
a big way. But then it leads to a question: What about there 
being only 75,000 flex fuel cars in the whole State of Indiana, 
and only 32 filling stations that have a pump? In other words, 
how do other countries, in addition to Brazil and the United 
States, if we get into this dialog, replicate what is required 
for that type of alternative situation?
    Whether it's sugar ethanol or corn ethanol or cellulosic, 
as we discussed with the first panel, all these potential 
alternative fuels offer great possibilities for countries in 
Latin America that just don't have any deposits of oil, but do 
maybe have sugar or fiber that can yield ethanol, as we can in 
50 States in the United States. In other words, theoretically 
it's possible for every country to be involved in the energy 
business, for new wealth to come to each of these countries in 
a way that no one has envisioned until recently.
    We have just discovered the Brazilian model in the last 120 
days. My guess is that around this country virtually no one 
knew 77 percent of the cars are flex fuel, or 52 percent of the 
sugar crop goes to ethanol, or facts that all of us now rattle 
off simply because this has become almost doctrine of how you 
have success. Plus there has been some good offshore drilling 
for oil, which is also very important in terms of bringing 
about this energy independence.
    Now, just physically, how do we get everybody around the 
table? You are out there in the field now, in Brazil, and 
you've come here today to dialog with us in the United States. 
We're encouraging a lot more of that, which is good in itself, 
a Brazilian-American relationship. And you suggest that we drop 
the tariffs and the barriers. I endorsed that in the opening 
statement.
    But beyond that, how do we extend this to the rest of the 
continent, to Central America?
    Mr. de Carvalho. Well, Mr. Chairman, I think you are 
extremely qualified to talk about it, and I have read carefully 
your article, together with our Ambassador Abdenur, and I 
congratulate you on----
    The Chairman. He's a good man.
    Mr. de Carvalho [continuing]. Your vision on energy. The 
fact that the introduction of ethanol as a partial substitute 
for gasoline, as we have said, there's no silver bullet at all, 
but certainly ethanol can contribute. The problem is how we can 
generalize production and then consumption of ethanol, and the 
fact that the sustainable ethanol out of sugarcane cannot be 
replicated outside the tropical world calls for the cellulosic 
processing, ethanol production, which always has been 10 to 15 
years ahead.
    I have been dealing with this for the last 20 years. Always 
it's 10 or 15 years ahead. But now I propose something 
different. Why don't we join on research? Why don't we get 
together and see what kind of improvements on research programs 
can be made in order to accelerate? We cannot wait another 10 
to 15 or 20 years to have ethanol production that can be 
sustainable everywhere in the world. Because if we get this 
process, we will develop ethanol production everywhere, 
especially in the northern hemisphere. And then the market is 
there, as I said. There is 450 billion gallons of gasoline 
market to be conquered by ethanol.
    Now, we should be collaborating. I think that we have to 
recognize different problems. I think Argentina began a program 
on ethanol, although in the early 1980s, but unfortunately 
didn't go ahead. Colombia today has a very important program of 
substitution, of blending ethanol in their gasolines, and the 
sugar in-
dustry is transforming part of their sugar exports into ethanol 
pro-
duction to use locally. I think Guatemala is in such a process. 
In Mexico there is a study. I think we could be together in a 
kind of association or whatever instrument, to get together to 
work toward those goals.
    There is much that needs to be done. We have never to 
forget, though, that ethanol in production in the gasoline 
market is not an economic proposition at the beginning. It 
should be economic, certainly, but it's much more than that. It 
is strategic.
    So why have we had success in Brazil? Because that was a 
strategic decision of the country, faced with necessity. 
Necessity is what made our program a successful one today, but 
it was not always a success, and several times people didn't 
regard it as a viable program at all. So there must be 
political leadership. Otherwise, there will be no place for 
ethanol, because oil companies will never allow us to sell 
ethanol if there is not a political mandate to do so.
    And once you have the political mandate, then you will have 
the possibility of improving your infrastructure of 
distribution, of gas stations, etcetera, etcetera, etcetera. 
But when people realize there is a political decision of the 
country to get rid really of the oil ethics, as President Bush 
has said, then things will fall.
    When people realize that your 5 million flex fuel cars that 
you have in the United States can be fueled by ethanol, the gas 
stations will come, but not if you design a program that is 
only fitted for the local production capacity. The market for 
ethanol in the United States is much larger than the 7.5 
billion gallons of ethanol that is due to be produced in 2012.
    The actual market for gasoline today, which is the actual 
potential market for ethanol, in the United States alone is 140 
billion gallons a year. Imagine what you can do with that. 
Imagine the kind of investment that people will be ready to 
make if there is such a strategic political decision.
    That's some of the thoughts that your provocation helps me 
to----
    The Chairman. Well, I'm glad to have provoked you into a 
remarkable statement. I appreciate that.
    Senator Biden.
    Senator Biden. I would like to follow up, if I may, Mr. 
Carvalho. What was the effect on the rural economies, not just 
on the country's overall lack of dependence any longer on oil? 
What were the spinoff effects on the economies in rural areas? 
In other words, did it generate other economic benefits, in 
addition to giving you the independence on balance of payments, 
deficits, etcetera? Are there tangible effects in rural 
communities?
    Mr. de Carvalho. Well, thank you, Mr. Senator, for your 
question. It's very simple. Sixty-five percent of all sugarcane 
production, 70 percent of all sugar and ethanol production is 
concentrated in the state of Sao Paulo.
    If you go to the sugarcane areas in Sao Paulo, you will see 
what we call the California of Brazil, because the distribution 
of income, the generation of employment, No. 1--because it's a 
high employment industry. Especially on the sugarcane fields, 
we employ at least a million employees, direct employees, which 
means some 3 to 4 million in direct employment, and where you 
have the highest wage rates in agriculture sector in the whole 
Brazil. You can see visually what happens in the places where 
sugarcane comes.
    There was a saying in the early part of our introduction of 
a few programs, ethanol programs, in the late 1970s, early 
1980s, whereas people said, ``No, sugarcane is going to destroy 
food production,'' and this argument is being used today here 
in our states elsewhere, which is not true. The capacity of the 
agriculture is much more, agriculture is much more 
sophisticated than that.
    We are not substituting food production. We are the country 
inducing further food production, because the income levels 
rise and demand rises and people begin to produce much more 
things.
    Senator Biden. I was on one of the Sunday shows, and so I 
missed a ``Meet The Press'' show on oil executives. Any of you 
guys see that? I didn't, until I saw clips of it.
    The oil executives were making the argument to Mr. Russert 
on Sunday that corn ethanol wasn't a really good bet. 
Everything from the price of corn chips to other food products 
would go up, and that the total cost to the economy would be 
significant in diverting this much of the agriculture 
production.
    I kind of found it interesting. At the same time they 
talked about how they're going green. And that's why I asked 
the question about the impact on rural communities, not only in 
terms of employment in harvesting sugarcane and the refining 
process, but the generated income in the region from refining--
that you would have a greater wealth in these communities. 
That's why I asked the question. I found it fascinating that 
there were many arguments why diversification was going to 
drive up the prices.
    The second question I have is on this point, if I may, for 
another moment. You made the same statement that others have 
made on this issue: That transition is not perceived to be in 
the interest of the oil companies, notwithstanding the oil 
companies are arguing that they are making transitions 
themselves.
    Did you find a necessity to provide a floor for the price 
of oil, so that they couldn't drive this emerging market out of 
business? In other words, in our case right now, it's 
economical to go to corn ethanol, if oil is at $30 a barrel. 
What was your experience with the industry in trying to retard 
or encourage this transition?
    Mr. de Carvalho. Well, Mr. Senator, we had that problem, 
because all the ethanol industry was built in the late 1970s 
and early 1980s. But when oil prices began to drop by the 
middle of the 1980s, our ethanol program was practically 
abundant. And we producers, we had to sustain the whole process 
of building up our sugarcane fields, our plants, and they were 
just on stream.
    Fortunately enough, at that moment Soviet Union 
disappeared, so a protected market for Cuba's sugar 
disappeared, and there was an opportunity for our plants to 
transform sugarcane into sugar and not ethanol, and we became 
the leader in sugar exports during the 1990s. We were no one in 
the sugar market in the early 1990s, and we finished the decade 
being the number one exporter of sugar in the world.
    But the fact is that we had a tremendous increasing 
productivity. Our cost of production for 1,000 liters of 
ethanol in the early 1980s was $850, and today I don't know 
what is the cost of production because my associates, they 
don't tell me what their cost of production is, but I know it's 
below $200, constant dollars, of the same quantity of 1,000 
liters.
    So we will increase productivity. We will never say that I 
would like to have a guaranteed minimum price of oil in order 
for us to compete with it. No, that's not the way to proceed. 
What we have is to believe that the cycle of petroleum is 
changing and we will not have any more cheap oil. We have to 
bet. The private industry is there to risk, and this risk we 
can assume.
    Senator Biden. Thank you. My time is up.
    The Chairman. Thank you very much, Senator Biden.
    Senator Chafee.
    Senator Chafee. Thank you, Mr. Chairman, very much, and 
welcome, distinguished panelists.
    Senator Craig in the first panel said the fact remains 
constant that our policies--and he said if they warrant that 
term--toward Latin America don't seem to be working, and then 
Mr. Goldwyn said what the United States lacks is a positive 
agenda in the hemisphere, and then Mr. Goldwyn talked about our 
counternarcotics efforts. Is that the area where we've really 
gone wrong and alienated some of our friends in the hemisphere, 
and what can we do better in that area?
    Mr. Goldwyn. Well, I think we haven't gone wrong in seeking 
counternarcotics cooperation. And I think some of the trade 
preferences that we have offered, that we are about to 
eliminate, to countries that try and switch from crops that 
produce drugs to other ones, has been a good effort and maybe 
we ought to continue it. But I think the problem is that we 
haven't done a whole lot else.
    I think with respect to that policy, the fact is that the 
profit that farmers make from these alternative crops is well 
below what they were making from growing coca, and the amount 
of jobs created by those programs was pretty thin, and so it 
wasn't very appealing. Other people were able to compete with 
us. So I think we need to be more creative on our 
counternarcotics program.
    But I think the greatest problem is that we didn't do a 
whole lot else, and the fact is that trade liberalization is a 
wonderful thing but it has severe dislocation consequences and 
we didn't really think those through. We didn't really engage 
the region's governments on how they were dealing with it. And 
so we have these large indigenous, marginalized populations 
that have been out of the economy for years and are very 
hostile to the Washington consensus.
    So I think what we need is a policy that's a little bit 
more creative. Now, that might be a better way to look at job 
creation there. It might be lifting some of these trade 
barriers, so they can grow sugar and corn and other things and 
export them to the United States without facing our trade 
barriers. Probably the best job creation policy that we could 
have for the hemisphere, would be to lift the barriers we have 
on the things that they make the most.
    But I think that we also need to look at some positive 
engagement in the region. Things like rural electrification 
would make a huge difference. It would promote development in 
areas that are pretty much off the grid. It's not needed in 
every country, but it's needed in a lot of them.
    I think our visa application process and educational 
exchanges, where once upon a time we brought lots of people 
from the hemisphere to our universities, and they went on to 
become finance ministers and heads of state, well, now it's 
kind of hard to get a visa to come to the United States and we 
don't welcome a lot of those people here. We are basically 
throwing away the seed corn of the future leaders. So I think 
things along that line would give us a positive agenda in the 
hemisphere.
    Senator Chafee. Maybe I could ask the other panelists to 
comment also on how we can have a better relationship in the 
hemisphere. Mr. Cavallo? If you agree with Senator Craig and 
Mr. Goldwyn's premise?
    Mr. Cavallo. Yes, I agree with what Mr. Goldwyn said, 
except that I don't think that it's trade liberalization that 
caused the problems in Latin America. Actually I would say the 
lack of trade liberalization in terms of the protection that 
the United States still
provides to, for example, agricultural products that are 
efficiently produced in Latin America, and also we have seen 
the case of ethanol which is particularly related to the supply 
of energy in the world.
    Now, I think that the big mistakes of the United States in 
dealing with Latin America refer to the management of a 
financial crisis. The United States in the early 1990s offered 
Latin American support through the Brady Plan and through the 
joint participation in the negotiation of the Uruguay Round, 
and also in the Initiative for the Americas, to launch reforms 
that were not decided in Washington, that had been decided in 
each one of the Latin American countries by their leaders, but 
were in line with the prevalent views in the United States and 
in the most advanced countries in the sense that a market-
oriented system would be more efficient and conducive to 
improved growth and wealth in all the countries.
    Now, the United States was not ready enough, or more than 
the United States, the IMF, to work together with the countries 
at a time of crisis to prevent the very negative effect of 
financial crisis in the region. That was particularly the case 
of Argentina.
    For example, all the problems that the Southern Cone is now 
facing in terms of energy supply relates to the combination of 
``pesification'' and devaluation that came as a consequence of 
the financial crisis in Argentina. But the United States and 
the IMF could have helped Argentina to have a smooth transition 
to a new set of policies by the end of 2001 and 2002, but 
instead of doing that, it preferred to let Argentina go to 
hell, you know.
    So I think that the policy of the United States vis-a-vis 
Latin America should pay more attention to global stability of 
the countries and be ready to help in critical moments, to 
prevent the sort of climate of confrontation that we now have 
in the hemisphere.
    Senator Chafee. Thank you very much. I see my time has 
expired. Thank you.
    Senator Coleman. Thank you. There's so much that I want to 
ask and so little time. I've just got to make just a general 
statement beforehand.
    We talk about American policy, and I would agree that we 
need a more positive agenda, but I think to blame trade 
liberalization on some of the challenges we're seeing with 
populist regimes in Latin America, I'm not sure I necessarily 
buy that. With all the negatives, there are a lot of positives 
going on, too.
    Uribe just gets reelected. Humala is rejected in Peru. John 
Danilovich with the Millennium Challenge Account is doing some 
tremendous things, and brings great experience to that. The 
election of Bachelet in Chile and our relationship with Tabare 
Vazquez in Uruguay.
    And I would say respectfully, Mr. Cavallo, that the 
concerns that Argentina has had about its fiscal situation is 
not an IMF problem. I mean, part of what we're saying is, you 
know, people have to act responsibly. When Uruguay had a 
problem, we were there.
    So it's easier to paint with a broad brush these challenges 
in the region, but I think even the challenges ultimately 
perhaps develop into opportunities. I think that Brazil and 
Colombia, and even Spain is now looking at Chavez as a problem, 
and it's not a United States problem. It's a problem of 
instability in the region. And so when Morales moves against 
the oil fields, the Brazilian interests, all of a sudden the 
Brazilians have an awakening.
    And we have got, you know, Colombia wants to do an 
agreement, and I hope that we get to it, and there are some 
challenges with that. And Peru, Bolivia, looking at the 
Millennium Challenge Account, we've got to deal with that. So I 
think there's a range of opportunity. I think it's a little 
simplistic to kind of look at the United States as the big bad 
guy here and somehow the cause of some of the challenges. There 
are some deep-seated issues in Latin America. And we need to be 
at the table, and I certainly agree with that.
    Let me ask, Mr. de Carvalho, one of the things you talked 
about was in regard to ethanol, the service stations. We talked 
about the challenge. Half the ethanol, half the E85 pumps in 
America are in my State, Minnesota. So as we talk about flex 
fuel engines, we talk about production of ethanol, and you're 
right on the money, you know. We talked about 7.5 billion 
gallons in 2010 as some high watermark. We're going to exceed 
that. If we did nothing, we'll be at 14 billion gallons, and it 
can't all be done by corn and soybeans.
    And I want to reflect on the very good question by the 
ranking member. You know, this issue about what kind of 
economic, well, I can tell you that $100 million of economic 
activity, now close to probably $150 million, in Fairmont, MN 
is a big deal. It's a big deal in Austin, MN. It's a big deal 
in Benson, MN. It's a big deal getting capital investment in 
rural communities that are growing jobs and then raising 
prices, so I think there's great opportunity.
    But the question I have is, for Brazil, we face an issue 
here with the lack of infrastructure, and I thought you made 
the comment that the stations there will come. Did Brazil do 
anything to support that infrastructure, to create that 
infrastructure? What did the Government do to provide greater 
opportunity for distribution of ethanol?
    Mr. de Carvalho. To remember the circumstances at the time 
when the program was launched, second half of 1970s, early 
1980s, the 100 percent ethanol car was launched in 1979 on the 
second oil shock. When you are blending ethanol with gasoline 
it's a very simple operation, economically speaking. But when 
you are selling the 100 percent ethanol, which in your case is 
the E85, you have to know that you have to price it accordingly 
with the mileage of each one of those fuels.
    Although ethanol is a fantastic enhancer to driveability, 
it has a minus component, which is the fact that you drive less 
miles per gallon than with gasoline, and this differential must 
be seen at the price at the gas station. It means that for you 
to sell E85, you have to price it below 70 percent of the 
gasoline prices.
    Senator Coleman. But my question, if I may, in the limited 
time I have, the presence of the pump itself, the actual 
infrastructure--in other words, one of the challenges we have 
is the lack of E85 pumps in places, so----
    Mr. de Carvalho. That is simple. We had this special 
gasoline at the time, the blue gasoline, whatever they were 
called at the time. They were transformed into ethanol deposit 
and pump. The pump is there. The problem is the distribution 
system, but the pump is there.
    They have at least four or five deposits at the gas 
station, so you can put one of them dedicated to ethanol, and 
you arrange some of the rubber, some of the material, to be 
more consistent with the corrosive action of the ethanol which 
is higher than gasoline. But this is a very simple problem.
    The problem is on the distribution system, the basis, how 
you distribute it. For instance, you do have a problem here 
because you do not carry ethanol on your pipeline system, and 
that's something incredible, because we do transport our 
ethanol on our pipeline system, and Petrobras has an experience 
of 30 years of doing so. But, unfortunately for us, you do not 
do so, which makes the markets of both East and West Coast 
extremely accessible to our ethanol because of the general 
costs of distribution.
    Now, what you have to do is, you have to have volume of 
production, and price competitive with gasoline, but because of 
your low taxes on gasoline it's difficult to arrive at such a 
situation under present production circumstances and then the 
protection, because protection, as we know, induces higher 
prices. Higher prices does not induce for the consumption of 
ethanol on your 5 million flex fuel vehicles that you have 
today. That could represent at least 2 to 3 billion liters, 
gallons, of ethanol consumption, the existing flex fuel fleet 
you have in the United States.
    Senator Nelson. Senator Coleman, we're down to 2\1/2\ 
minutes to vote.
    Senator Coleman. All right. I would just ask this question, 
and the ranking member will recess the committee until the 
chairman comes back, so that we can cast this vote on the 
floor.
    What I would like for you to state for the record, is the 
threat that Chavez makes in the cutoff of the oil--we discussed 
it earlier, about how he would give up all of the 
infrastructure that he has in the United States through the 
Citgo stations and so forth--what is the timing when he would, 
in your opinion, make good on that threat to cut off the oil to 
the United States? That's what I would like you to state for 
the record.
    Senator Biden. Please. Fire away.
    Mr. Giusti. Fire away? I personally think that it's highly 
unlikely that we're going to see anything of that kind in the 
foreseeable future, in the next few years. And the reason, the 
reason is that those exports are not only necessary for 
Venezuela, but they do not have alternative destinations 
because of the sour and heavy nature of the crudes that are 
exported to the United States.
    And the second thing, which I also mentioned in my 
statement, had to do with Citgo. And the threat that they're 
going to shut down the refineries of Citgo I think is also very 
highly unlikely because the stations, the outlets, are not 
owned by Petroleos de Venezuela, and as a result of that those 
are contracts with clients.
    So in the event, unlikely event, that they would shut down 
the refineries, there will be a breach of thousands of 
contracts, and I cannot foresee how that could be managed 
legally, to have a breach of 10, 12, 13,000 contracts in the 
United States. I think this is highly unlikely. This is my 
answer to that.
    Mr. Goldwyn. If I could add to it, I agree with everything, 
with what Luis Giusti has said. Chavez often couches his threat 
with ``if we are attacked, if something happens to us, then we 
will cut off the oil.'' And I really think it is only in the 
face of an attack by the United States or an embargo or a 
direct action by us that he would actually do this.
    The Chairman. Well, I appreciate your continuing on as we 
are coming and going. Let me commence another round of 
questioning at this point, and simply explore the issue further 
with you, Mr. Goldwyn. You made the three points as to why 
things have not gone well for the United States diplomacy 
overall, the first point being we've not paid much attention to 
Latin America.
    And there have been, most of us have noticed, we've had 
testimony, we were all deeply involved in election campaigns in 
Central America in particular, occasionally South America, in 
the 1980s. We saw a lot of visitation by members of this 
committee, by members of the Senate, various groups. But in the 
1990s we became preoccupied with the fall of the Soviet Union, 
with Russia, with Eastern Europe, with other implications of 
that situation, and unfortunately there was a lapse of 
attention.
    The energy situation for us is imperative, but likewise, as 
you have suggested, poverty and income and so forth are pretty 
important for all of us, whether we're in the United States or 
in Central or South America. Suddenly we have the possibilities 
of using agriculture for industry, whether it's the sugar crop 
in the tropical areas or cellulosic fiber in the nontropical 
areas. In our country corn and soybeans come to mind as 
possibilities.
    I notice, for instance, just in rural counties in Indiana 
where the ethanol is about to be produced--it hasn't quite 
gotten there yet, but it will in the next few months--the 
injection of that much new income into a small county in 
Indiana, plus the enhanced value of the corn that is soaked up 
from all around, are going to have huge implications that 
people in our State have not quite grasped yet. They will. It 
will be almost like oil wealth coming suddenly to a country 
that has something of this sort. But that could also happen 
throughout Latin America.
    Diplomatically, how do we get this to happen? Who calls the 
meeting? Who begins to integrate a structure of relationships? 
As people like myself and even the President have inquired, 
what if we drop the tariff with regard to ethanol vis-a-vis 
Brazil?
    Countries in Central America who are part of our new 
Central American Free Trade Agreement will say, ``Now, hang on 
here for just a minute. We think that may disadvantage us.'' 
And they reason that really won't work for them.
    We have sugar producers in the United States who will say, 
``Now, hang on,'' again, because here sugar is going to be 
coming in under a different guise. And we say, ``Well, you 
folks just don't get it. We have an energy crisis in the 
country. It's not just a sugar subsidy problem for 1,100 farms 
that are left in the South, that deal with this sort of 
thing.''
    In other words, the vested interests in each of these cases 
are entrenched with political clout in their governments, ours 
included. However, is it a possibility that in fact the United 
States and other countries can begin to talk about new wealth 
for every country and the possibilities of sharing expertise, 
and all of the lessons we have learned? Mr. Carvalho's 
situation went from $800 to $200. There is no need for us all 
to go through that whole experiment again. Does this make a 
difference, do you think, ultimately, in the overall diplomatic 
situation, in addition to our energy predicament?
    Mr. Goldwyn. Mr. Chairman, I think that it could. I think 
it could really be transforming for our hemispheric policy. Let 
me address two questions. First is how do you do it, and then 
what is the impact.
    There are three options for how you, in a sense, call this 
meeting. There is the now-dormant Hemispheric Energy 
Initiative, the spinoff of the Summit of the Americas. It's 
dormant because the United States and Venezuela are the 
cochairs. But it doesn't mean that you can't have a hemispheric 
summit called by the United States and Brazil, you know, with 
this topic. But that's a meeting of energy ministers. That's 
one option.
    The other is the ad hoc approach. We have a global 
partnership on carbon sequestration. We've got a global 
partnership on nuclear energy. There's no reason why we can't 
have a hemispheric partnership on biofuels or alternative fuels 
and energy, and we can invite to it anybody who wants to 
participate.
    But as you have said, Mr. Chairman, the focus here isn't on 
the producers, it's also on the consumers. It's all these 
countries in Central America and the Caribbean that are 
terribly squeezed by product prices right now, and it's all the 
countries that can produce fuel. So you could do that on an ad 
hoc basis----
    The Chairman. That's the point I have often made, that 
there are some consumers here in addition to all the producers 
that we're talking about.
    Mr. Goldwyn. More consumers than producers, and a lot of 
the producers subsidize the cost of the products in their own 
country, so it's a tax on them, too. And so that's why we 
always focus on the big guys, but there are greater numbers in 
focusing on the consumers.
    And a third way is really to create a new forum, the way 
you've suggested in your bill, which would be to have our State 
Department's trade ministries and other people together at the 
table.
    I think one of those approaches is the way to do it. You 
can bridge these differences and these entrenched interests by 
looking at what the potential market is for alternative fuels 
in the hemisphere, what the potential could be, what measures 
like our renewable fuel standard could drive you there, and 
whether they are high enough. You might show that the pie is 
big enough for everybody to produce or for people to produce 
more without severely damaging United States sugar interests or 
damaging the Central American interests. There 
might be a hook to include more countries in some sort of a 
regional trade agreement, even though the authority is about to 
expire, which is based on expanding the pie rather than the way 
people tend to look at it right now.
    The Chairman. Mr. Giusti, do you have a comment in this 
area?
    Mr. Giusti. Yes. Thank you very much, Mr. Chairman. I would 
like to say that I'm sure that many good things can be done 
along the lines that David has been mentioning, but I would not 
cast in general a negative outlook on the region. You were not 
here when Senator Coleman spoke, but I share a lot of his 
views. There are many good stories there.
    First of all, the FTA of Peru, the FTA of Columbia, even 
Ecuador, I think some of the things are going to be solved and 
that will come to terms also. The story in Colombia is an 
excellent story concerning the reform, the new institutional 
framework, the fact that companies are flocking there, it's 
going to become an exporter. We have the case of Trinidad-
Tobago, not being Latin America, which is a great story. Brazil 
is an excellent story in many ways.
    And I think we have to be careful not to follow too much 
the very loud voices that capture most of the headlines, 
because there are a lot of things that can be said at that 
moment. Because everybody says, you know, the White House, 
instead of really what it is, which is the multilateral 
institutions, and there are consequences.
    But a lot of the countries have learned that they really 
have to reinforce their institutional framework, and they're 
making great progress. So I think there is room enough to 
really do a lot of good things in terms of diplomacy from the 
United States.
    The Chairman. Mr. Cavallo.
    Mr. Cavallo. Yes, I agree that there is room for reviving 
the trade negotiations, starting with or focusing on the energy 
issues, but I think the only chance of attracting complete 
interest by the Latin American countries is to start linking 
energy to agriculture, and I think ethanol could be a good 
bridge between the two subjects.
    Of course, the reason why Free Trade of the Americas has 
not become very interesting for Brazil or for Argentina or for 
other efficient producers of agricultural products was because 
of the fact that agriculture is always left for the discussion 
in the Doha Round. Now, I suggest that the United States starts 
working together with Latin America, as it did in the late 
1980s, early 1990s, at the time of the Uruguay Round, to try to 
cooperate, to get free trade of agriculture products in the 
Doha Round, and to start discussing these issues within the 
hemisphere linked to energy.
    The Chairman. Along that line, do I hear you right? We 
don't know how the Doha Round will come out. Some are very 
pessimistic. But in the meanwhile, is it conceivable we could 
have a free trade agreement on agriculture in the hemisphere?
    Mr. Cavallo. Yes, that would be a big step.
    The Chairman. This need not be a total comprehensive 
agreement of everything in the world but, as you are saying, 
there is clearly a link with agriculture and energy.
    Mr. Cavallo. And energy.
    The Chairman. And maybe we all have something to say about 
that, but the point that some of you have made, is to show some 
interest on the part of the United States in other countries in 
the hemisphere, to indicate that we really care, that we have a 
national interest in this. The consensus would be in fact a 
free trade agreement for agriculture.
    Now, somebody might say, ``Oh, why don't we try out 
something else,'' but let's sort of keep it simple for the 
moment. Doha is all wrapped around agriculture because the 
world has simply got to solve that before we take on 
automobiles or pharmaceuticals or everything else.
    Agriculture does speak to the plight of many people who are 
very poor, and some of them who are not doing too well in the 
United States, for that matter. When I talk about counties in 
which suddenly an ethanol plant arrives, why, that may be a 
deliverance in terms of jobs as well as revenue in the banks 
and various other things in our country. So I am intrigued by 
that slice of the pie that you have mentioned. It may be 
helpful for us here.
    Mr. Cavallo. Yes, and let me add one point. You should not 
be accepting on the effectiveness, or you should be clear that 
I think Hugo Chavez has not been effective in convincing the 
rest of South America, particularly because of the consequences 
for the energy-scarce countries of Latin America of the actions 
he is implementing, and also he is recommending to Evo Morales.
    The Chairman. Taking that principle of our relationship 
with Venezuela which you were discussing as I was coming in, 
winding up that thought, what if we were to have this dialog 
with all the countries in the hemisphere about agriculture and 
energy?
    There is no reason why we could not be of help to Venezuela 
in this situation, you know, as opposed to an adversarial 
situation in which we say, ``Are you about to cut off our 
oil?'' or what have you, and accept the fact that that is 
unlikely, as many of you have mentioned, because of the 
refinery problems and because of many problems of this sort, 
and at the same time welcome Venezuela around the table, 
welcome Evo Morales around the table.
    Now, these folks might not know exactly what to do and say 
in these situations. They might not come. They might advise 
others to stay away. But, nevertheless, it's an affirmative 
situation in which, as opposed to picking out places where the 
sky may fall, we are really trying to address the situations of 
many countries with whom our relationships might be 
refurbished.
    So I have envisioned this as a way and I think all of you 
are expressing this--that we meet problems that are 
strategically urgent with regard to energy in the world. In 
other hearings, for example, we have heard that maybe three-
quarters of all the oil reserves in the world are really now 
governed by states, by people like Vladimir Putin, or others 
who may be in charge, or Iran currently, and so forth, as 
opposed to there being a free-flowing market.
    The testimony used to be, ``After all, this is very 
fungible. It shows up one place, doesn't show up someplace 
else.'' But what if, as is being suggested, governments as a 
matter of policy simply don't develop reserves, or restrict 
certain areas from receiving whatever they are?
    We are about to hear testimony again from Europeans that 
they are not only disturbed, but in some cases frightened, by 
the fact that President Putin suggested his emphasis might go 
to the Far East. Our testifiers would say, ``Well, that isn't 
practical. The natural gas lines all go to Europe, and oil 
might go there.'' But nevertheless, even the implication that 
there's a possibility, that somehow if you're 80 percent 
dependent on natural gas from Russia, as Hungarians are, for 
example, or even 40 percent in Germany, that you might see your 
industry in real disarray while one of these experiments went 
on, is worrisome in this context.
    In our hemisphere we don't have that kind of urgency for 
the moment, although in our own national situation in the 
United States we do have a sense of urgency. It's most often 
expressed by people coming into our hearings and asking, ``Are 
the oil companies gouging me at the pump locally?'' or some 
situation of that variety, as opposed to the overall problem of 
the difference between demand and supply in the world being as 
narrow as you have all pointed out, and the events of the day 
causing spikes and difficulties.
    We've had a revelation, I think, as we've heard about 
Brazil. That's why we've focused so much on that today. The 
Ambassador of Brazil has visited with me and with others. 
Brazilian officials are noticing a more friendly attitude, that 
we're deeply interested in what's happening. And so as a 
result, why, the visitations have increased substantially. 
We've always been interested in Brazil, but maybe not with that 
intensity for a while.
    I wrote an op-ed for the Miami Herald with the Ambassador 
of Brazil, just to illustrate the fact that two people can 
actually pen an article together that other people in the 
hemisphere might read. Just leaving aside whatever we said, 
just the fact that we were doing it, and the fact that this is 
a unique experience, illustrates what you have been saying 
about lack of attention, lack of intensity.
    This is why I'm trying to think organizationally with our 
State Department. What if we do set up this new bureau and we 
do have this focus? Somebody has to staff it. Somebody has to 
call the meetings. Our role as legislators is really not 
administrative. We are not over there day-by-day, sort of doing 
the Lord's work in our diplomacy. Through these hearings we try 
to bring advice from people like yourselves that have seen a 
good bit of this situation, that might be helpful.
    Do you have any further comment, Mr. Carvalho? I've already 
asked you so many questions, but you've been most informative.
    Mr. de Carvalho. Mr. Chairman, you have said a lot of very 
important things. Let's take Minister Cavallo saying about 
agriculture and energy. First of all, we must understand what 
is the oil, what are we living.
    We are living in a situation whereas there is no more 
surplus cushion production capacity, as you have said. It has 
been sharply reduced, and essentially all the oil producers 
don't want to have discussion. It means that increasingly oil 
will be more and more scarce, and there will be substitution 
for natural gas where it's possible to do so, or not. But then 
Europeans are preoccupied with the Ukrainian situation.
    Now, what is oil, or what is natural gas, or what is coal? 
It's photosynthesis that was buried in the soil for 500 million 
years. Now, we have the possibility of having the 
photosynthesis in every agricultural field in the world produce 
energy.
    Now, what is the problem with agriculture today? And this 
is a very important point, and I think that Mr. Cavallo 
mentioned it, and I think that David mentioned it also. It is 
the fact that with present agricultural technology you can 
produce anything. The specter of hunger, the specter of the 
population growing and not growing food production, that's 
something of the past. We have proven that we can produce 
whatever product is necessary from agriculture. The problem is 
income distribution that doesn't lead people to have access to 
what can be produced, which is a completely different problem.
    Now, what is the problem of developing underdeveloped 
countries, is that those countries are able to produce 
agricultural products. That's what they are able to do. They 
cannot produce big computers. They cannot produce the big 
Mercedes, beautiful cars. But they can produce grains, they can 
produce energy, but they are induced not to produce because 
there are no markets, because the present agricultural markets 
are closed by the protection of the developing Northern 
Hemisphere countries. That's true. That's what happens. Where 
you have tariff peaks, where you have real protection which 
does not appear, is on agricultural products.
    Now, if you take the $360 billion figure for subsidies in 
Europe and North America, you will understand that it's 
impossible for those countries in the south to produce products 
because markets are closed. They are only open when there is a 
clear interest in having this market open. The rule is to close 
the market.
    We are seeing the present difficulties of the Doha Round of 
the negotiations. Unfortunately, Mr. Chairman, you are not 
there on the negotiations table, because I would love to have 
you on the negotiations table on the side of the U.S. 
Government, because your position is so clear, so open.
    But in energy we can have a differential. Let's open up. 
Let's not pay the farmer not to produce, which is nonsense in 
the world. You pay the guy not to use the land, but let's use 
the land to produce energy. Let's put the subsidies not to 
produce competing food produces, let's use these subsidies to 
begin ethanol and biodiesel production, and some day in the 
future these subsidies will disappear.
    Let's use the subsidies, not as a permanent defense to 
nonproductive production, agricultural production, but to 
induce and to enhance processes that need some subsidy to begin 
with, and then, 10 years from now, 5 years from now, 15 years 
from now, we will have increasing independence and reliability 
on renewable fuels to substitute the fossil ones. We have 
everything. We have the lands. We have the technology, and some 
of it must be developed. We have the goodwill of people. Why 
don't we do that?
    So I strongly support your act, Mr. Chairman, to get 
together people and to try to design programs and actions that 
can produce this result.
    Mr. Giusti. Could I make a brief comment, Mr. Chairman?
    The Chairman. Please.
    Mr. Giusti. This is extremely important, of course, the 
ethanol, and I support it in full, but we should not lose the 
perspective of the global picture. There is abundant oil. There 
is abundant gas. We may be a little bit confused because of the 
market that we're seeing now, but the market will change. It 
would take a long time to analyze the market in detail, which I 
of course will not try to do here, but we can speculate about 
that.
    But one thing is clear: Oil, the oil is there. If you take 
proven and probable reserves and you add them up, and even 
taking the very ambitious profile of the International Energy 
Agency, oil would last for the next 50 years, even without 
exploration. That is not the real question, and the big oil 
issue is not a question.
    The real question is, is there going to be the right 
paradigm in terms of the cooperation between the national oil 
companies and the international oil companies? Those two groups 
have their own problems. The problem and the limitation of the 
IOCs is access to reserves.
    But then the national oil companies do not have the above 
ground resources, which is market savvy, financial capacity, 
technology, managerial and operational expertise. Some of them 
have. The high price is not helping, because people tend to 
feel that they can do everything on their own.
    But I think we will evolve into a new stage when the market 
changes, where once again this cooperation is going to have to 
come about, because at the end the question is, who is in 
charge of supplying oil to the world? Nobody. It's only actors 
that have common interests that will bring about the 
development of these resources. And even when ethanol and other 
sources are going to be extremely important in the future, we 
still are hanging in with 25 or 30 years or even more of fossil 
fuels, especially oil and gas, and we have to deal with those.
    The Chairman. That's a very important point, and I suppose 
that each of you would agree with this idea. To the extent, 
however, that we have vital ethanol production and alternative 
fuels and so forth, we're likely to have more civil 
conversation with all the nations about oil. That is our 
predicament, given the fact that we don't have any 
alternatives, that some people, to use a cliche, have us over 
the barrel for the moment.
    But if in fact it was apparent that there are all sorts of 
ways that we can fuel our cars and other things, then oil is 
only one of the options we have. There probably will be a lot 
of years to get to that point.
    On that very score, let's say that we got this energy-
agriculture dialog going. Would other countries, other than the 
United States and Latin America, be more effective, say, in 
visiting with the Mexicans about PEMEX, just to take that 
example?
    I have visited with the Mexicans, and we even raised this 
in this committee. They advised, ``Why don't you suggest that 
the United States might invest $10 billion in PEMEX, to try to 
get the facilities up-to-date, to get the production going 
again, to maybe double the production? It would be good for 
Mexico, for the GNP of that state and all its citizens, quite 
apart from the hemisphere.'' So I raised that issue in a public 
hearing like this.
    Well, no one in the United States pays any attention to 
such a thought, but they do in Mexico, and it's all adverse, 
with people indicating that ``this is our national heritage. 
This is almost like Mexican blood in the soil. We don't want 
Americans fooling around with that.'' I understand that. 
There's a high degree of nationalistic fervor surrounding this 
subject.
    But at the same time, in terms of the best interests of 
Mexico, the hemisphere, the United States, all the rest of us, 
it would be helpful if in fact they doubled their production, 
improved their facilities, and increased their national wealth. 
But some of you make the point, I think correctly, that maybe 
the posture of the United States vis-a-vis all the countries in 
the hemisphere is not quite the posture right now that leads 
anyone to do reasonable things.
    I'm just wondering, is there anybody in Latin America who 
could visit with the Mexicans about this situation?
    Mr. Giusti. I am sure that, if I may, I am sure that a lot 
can be done, and the reason is very simple. The Mexicans have 
realized, in a very hard way, that they have to change.
    This is a country, this is a company, PEMEX, that has 
consumed 15 billion barrels of oil reserves in the past 15 
years. They have gone down from 27 billion barrels to 12. They 
are seeing their future as an oil country in jeopardy, and 
unless they do something--because when you have to go and drill 
a well in these areas where they have expectations, in the Gulf 
of Mexico, that well will cost you even $100 million. They 
don't have the money. They know they need it.
    I'm sure that anybody who is elected now in Mexico is going 
to face a very, very difficult dilemma. All of these roots that 
come from the early 20th century are going to have to be 
revised, because this nationalism is really, the way it's 
conceived now, it's really going to destroy the possibilities 
of Mexico. So I think there is room there, and especially with 
some of the candidates that really have a clear vision of this.
    Mr. Goldwyn. If I can join in, Mr. Chairman, I think 
Petrobras would probably be one company that could talk to 
PEMEX. Luis Tellez contributed a chapter to a book I coedited 
on energy and security. He is the former energy minister for 
Mexico.
    He looked to Norway as an example of how Mexico could find 
a vision for state-led development of the energy sector and 
have the security that they wouldn't lose control of the 
resources, but they could develop them in a model that might be 
more palatable to them. It could be the former Venezuelan 
model, it could be the Petrobras model, or the Norwegian model. 
He argues that more than anything else, to leave the resources 
for this generation of Mexicans in the ground rather than 
develop it would be a waste.
    If I could offer a quick comment on your previous point. If 
I understood you correctly, what you're proposing would be 
really a phenomenal act of geopolitical jujitsu. Because I 
think what you were suggesting is that we could mobilize the 
nongovernment-controlled sectors of the oil producers, and make 
the farmers into the energy producers, and create a 
constituency in each of those countries which was pro-free 
trade, which would be very hard for those governments to resist 
because they would have to in a sense oppose their own farmers 
who wanted to export fuel or export crops for fuel.
    We have to solve the cellulosic ethanol problem in order to 
really be able to produce at that scale and price-competitive, 
but it's such a big idea, if that's what you're talking about, 
that I think it's certainly worth talking about because that 
could really be transforming not only in the hemisphere but 
also in Africa.
    The Chairman. Well, I thank you for illuminating the idea 
and endorsing it so well.
    Let me thank each one of you. We have another vote, and 
then we will have another vote, so I don't want to detain you, 
but we really appreciate so much your testimony, your papers as 
well as your forthcoming responses. We look forward to calling 
upon you again, if we may.
    So saying, our hearing is adjourned.
    [Whereupon, at 11:00 a.m., the hearing was adjourned.]
                              ----------                              

              Additional Material Submitted for the Record

 Prepared Statement of Eric Farnsworth, Vice President, Council of the 
                                Americas

    The Council of the Americas (Council) appreciates the request of 
the Senate Foreign Relations Committee to provide testimony concerning 
energy security in Latin America and to offer comments in relation to 
the ``Energy Diplomacy and Security Act,'' S. 2435. For over 40 years, 
the Council has been a leading voice for policy and business in the 
Western Hemisphere. Our members include over 170 prominent companies 
invested and doing business in the Americas, with a mandate to promote 
policy and commercial partnership in the Americas based on democracy, 
open markets, and the rule of law.
    Since mid-2004, the Council has led an Energy Action Group, a 
leading public-private dialog designed to focus attention on the 
strategic issues at the heart of hemispheric energy issues, while 
providing concrete recommendations to policy makers for the outlines of 
a Western Hemisphere energy strategy. On this basis, in late 2005 the 
Council issued a well-received report with recommendations, ``Energy in 
the Americas: Building a Lasting Partnership for Security and 
Prosperity,'' which called attention to the vital issues at stake while 
highlighting areas of partnership and convergence as well as areas for 
further attention.

 ENERGY IN THE WESTERN HEMISPHERE IS A STRATEGIC MATTER FOR THE UNITED 
                                 STATES

    Despite other issues around the globe that demand the attention of 
policy makers, energy in the Western Hemisphere--whether we realize it 
or not--is of the highest strategic importance to the United States. We 
are the world's largest energy user; even if we are overtaken at some 
point by China, our own energy needs will continue to increase as both 
our economy and population grow. At the same time, though we ourselves 
have abundant energy resources including oil, gas, coal, and a growing 
potential for alternatives, we are not self-sufficient, and self-
sufficiency is not a realistic goal. We are energy interdependent, and 
to meet our needs, we will have to continue to rely on imported energy.
    The perception is that most of our imported energy comes from the 
Middle East, a region of constant political and military risk, making 
supplies uncertain. In fact, three of our top five sources of imported 
energy are in the Western Hemisphere: Canada, Mexico, and Venezuela 
(along with Saudi Arabia and Nigeria), making the Western Hemisphere a 
key to our economic well-being and strategic interests. If existing 
trends continue until 2025 or 2030, the increasing U.S. demand for 
energy can actually be met by sources from our own hemisphere, but only 
if the massive investments are mobilized that will be required to fully 
develop these impressive hemispheric resources. As a result, all other 
things equal, a more coordinated, vibrant energy partnership in the 
Americas based on market forces would support broader U.S. economic and 
strategic interests.
    At the same time, the democratic development of Latin America and 
the Caribbean is a top regional priority for United States policy 
makers on a bipartisan basis, and enhanced wealth creation in the 
hemisphere is a critical component for that development. In fact, given 
significant concern in Washington with Latin America's supposed ongoing 
``lurch to the left,'' democratic development is perhaps the top 
regional issue facing U.S. policy makers. To put things into 
perspective, the World Bank recently reported that between 1980 and 
2000, per capita GDP in Latin America grew, in total, less than one 
percent. On the other hand, over the same period of time China enjoyed 
per capita GDP growth of over 8 percent per year. It is in addressing 
this development gap, which increases every year, that energy in the 
Americas becomes so important, and so relevant to broader U.S. 
interests in the hemisphere.

           ENERGY RESOURCES EXIST, THE QUESTION IS INVESTMENT

    Fortunately, including Canada's massive oil sands deposits, 
recoverable energy reserves in the Western Hemisphere surpass even the 
Middle East and dwarf other regions of the world. In terms of proven 
conventional reserves in the Western Hemisphere, Venezuela is at the 
top, followed by the United States, Mexico, Brazil, and Ecuador, and 
Brazil has also just announced promising additional finds. The 
hemisphere also enjoys plentiful deposits of natural gas--a key fuel 
source in terms of electric power generation. After the United States, 
Venezuela again has the highest level, followed in order by Canada, 
Bolivia, Trinidad and Tobago, and Mexico. As well, significant 
potential exists to produce and consume alternative fuel sources, such 
as ethanol, from Brazil, Colombia, and elsewhere, or coal bed methane 
from Canada. In terms of coal, the United States remains well ahead of 
our hemispheric neighbors in both production and consumption.
    These resources by any measure can play an important, if not 
paramount, role in regional development if produced and consumed 
wisely. On the supply side, absent energy, the development prospects 
for a nation such as Bolivia, South America's poorest nation, or 
Ecuador, are uncertain at best. Nonetheless, recent government actions 
that aggressively target foreign energy investors, change the rules of 
the game mid-stream, or unduly politicize the energy sector and 
actively discourage the direct foreign investment that is required to 
identify, finance, and manage the energy resources that are 
increasingly difficult, for technological, geologic, or other reasons, 
to develop. In a global economy, such investment will flow elsewhere, 
where the risk-reward profile is more favorable.
    On the demand side in the hemisphere, without greater attention to 
market efficiency in the development and utilization of energy 
resources, it will be more difficult for producers and consumers alike 
to build regional competitiveness in a global economy.
    This directly impacts the hemisphere's ability to compete 
successfully against the rapidly modernizing economic giants of China 
and India, as well as a host of other nations. For example, Chile is 
now looking to ship liquefied natural gas from East Asia, incurring 
transportation and infrastructure costs, rather than pipe it from its 
neighbors, because regional gas supplies are subject to political 
manipulation and thus unreliable. Once new supplier relationships are 
established with the Far East, South American producers will be less 
able to sell their own products efficiently to their neighbors.
    Clearly, there would appear to be a mutuality of long-term 
interests in the hemisphere in building energy partnership in the 
Americas.
    The Western Hemisphere is part of a global economy, competing for 
the same marginal investment dollars as other geographic regions. For 
investors to invest, the risk-adjusted climate must be welcoming. It is 
therefore incumbent upon nations in the hemisphere wishing to develop 
their natural resources who might otherwise lack technical and 
managerial expertise, as well as significant capital of their own, to 
create an investment climate whereby foreign energy companies can work 
in partnership with local governments to develop their resources in a 
mutually beneficial manner. Attention to industry-specific and more 
general investment climate issues is needed: Improvements in education, 
training, and the rule of law; regulatory certainty; nondiscriminatory 
and stable tax regimes; effective personal security; anticorruption; 
and effective dispute resolution. Those countries which have paid 
attention to these matters have seen investments increase. As well, 
international financing institutions have an important role to play in 
mobilizing capital for investment.

                            RECOMMENDATIONS

    Several recommendations flow from this analysis. First, it is self-
evident that maintenance of a secure energy supply from foreign sources 
is a strategic matter for the United States, and energy in the Americas 
must therefore be a priority. Increasing partnership in hemispheric 
energy matters must be an important part of our overall hemispheric 
policy approach, not an afterthought or taken for granted. A balanced, 
engaged approach is needed.
    Second, in a global environment, competitiveness is perhaps the key 
issue facing the hemisphere. High direct or indirect energy costs such 
as petroleum in the transport sector or power generation, respectively, 
impact all energy users, making the region a less attractive place to 
do business, and quality of life suffers, too. As well, investment 
climates that are unattractive compared to other countries and regions 
will not attract the direct foreign and domestic investment required to 
develop either the energy resources mentioned above nor the broader 
economy. Mexico, for example, despite sitting on sufficient natural gas 
reserves, actually imports natural gas and has done so since 2000. This 
directly impacts Mexico's national income accounts and their national 
competitiveness profile at a time when that nation, even with the NAFTA 
relationship with the United States and Canada, faces a direct economic 
challenge from China. Hopefully, we will see forward movement on these 
issues in Mexico after their elections in less than 2 weeks, but that 
remains to be seen, and of course it is up to Mexicans themselves to 
determine how best to develop their own energy resources.
    In the North American context, energy issues are an important part 
of the Security and Prosperity Partnership (SPP) which the 
administration has rightfully made a priority, and which the Council 
has strongly endorsed. As in other hemispheric nations, it is difficult 
to see how Mexico develops if its energy reserves continue to fall due 
to a lack of investment in the energy sector, and an underdeveloped 
Mexico is of strategic concern to the United States, particularly in 
relation to the vexing issue of illegal immigration. But it is not just 
Mexico; it will be impossible to fully develop Canada's energy 
resources, too, unless the three governments find a means whereby labor 
markets and products to service the fields are made more flexible 
through the SPP or alternative means.
    Finally, in addition to conservation, which is perhaps the top form 
of alternative energy available, both the public and the private 
sectors must do a better job exploring the possibility of alternative 
fuels in the hemisphere, which could prove to be a boon for development 
while making the region less reliant on imports from elsewhere. As a 
strategic matter, no less than the late George Kennan advocated an 
aggressive reduction in energy consumption in order to lessen our 
reliance on energy imports from unstable areas. He might also have 
considered viable alternatives in the Western Hemisphere. More 
recently, the President quite rightly mentioned ethanol in his State of 
the Union address, and he also discussed it directly with Brazil's 
President Lula during a short trip to Brasilia in November. Chairman 
Lugar has also been a strong and thoughtful proponent of these issues. 
The resources are there, especially in Brazil and also Colombia, 
particularly if a free trade agreement with the latter nation is 
approved that will allow importation of ethanol duty-free to the United 
States. What has been missing has been a market to use ethanol as well 
as a price point of conventional fuels high enough to make ethanol 
economically viable. But as oil prices remain historically high, the 
cost of ethanol production is now economical. As well, flex fuel 
automobiles, which automatically determine the proper fuel mix between 
gasoline and ethanol, are becoming a legitimate alternative. The 
question, though, is not actually about energy, but rather trade 
policy. Ethanol from South America is primarily made from sugar, which 
remains politically sensitive in the United States. Nonetheless, as a 
strategic matter, the issue bears active consideration.
    These issues are ripe for further consideration. The energy 
resources exist, and so does the need. What does not yet exist, though 
could, is the size and quality of investment needed to develop and 
effectively utilize these resources. That is the real issue facing 
those who would promote energy partnership in the Americas.
    Once again, the Council of the Americas appreciates the opportunity 
to provide testimony on this critical matter before the Senate Foreign 
Relations Committee and stands ready to assist committee members as 
they further investigate these important issues.
                                 ______
                                 

  Prepared Statement of Stephen C. Johnson, Senior Policy Analyst for 
   Latin America, The Kathryn and Shelby Cullom Davis Institute for 
             International Studies, The Heritage Foundation

    Chairman Lugar, distinguished members of the committee, thank you 
for inviting me to submit testimony on this important subject--energy 
security in Latin America. Your hearing comes at a time when rising 
gasoline prices have opened our eyes to the vulnerabilities of supplies 
worldwide, especially those in our own neighborhood.
    Speaking at The Heritage Foundation on March 31, 2006, Assistant 
Secretary of Energy for Policy and International Affairs, Karen 
Harbert, said that a secure and prosperous Western Hemisphere is vital 
for our national interest. Integrated energy markets, interconnected 
infrastructure, development of a broad range of resources, and 
efficient use will benefit the United States and the populations of 
neighboring countries.
    However, there are significant roadblocks to achieving those goals. 
Differing philosophies about resource ownership, exploitation, and 
distribution within the Americas hamper the establishment of a free 
energy market. Weak or inconsistent
governance plagues some states, thereby limiting investment and 
cooperation. Dwindling reserves and rising consumption generally 
threaten energy security where further exploration and research into 
fresh technologies is absent.
    Keys to overcoming these impediments are more active hemispheric 
diplomacy, urging neighboring countries to embrace open markets, not 
cartels, more support for improvements in democratic governance, and a 
commitment to diversify energy supplies.

                         STAGGERING STATISTICS

    Energy sources can be broken down by fossil fuels, electricity 
generated from renewable sources, and nuclear energy. By far, fossil 
fuels are the mainstay of transportation systems and electrical 
powerplants--our major concern.
    On average, the Western Hemisphere consumes about 30 million 
barrels of oil per day, of which the United States uses more than 20 
million barrels, two-thirds of it imported.\1\ In 2005, net imports 
accounted for 58 percent of U.S. total petroleum consumption. According 
to the Department of Energy, 13 states in our hemisphere provided 49 
percent of the United States' gross imports of crude oil and petroleum 
products. Top suppliers included Canada, Mexico, and Venezuela. These 
three countries accounted for 39 percent of United States gross imports 
in 2005, with Ecuador, Colombia, Brazil, Trinidad and Tobago, and 
Argentina following close behind.\2\
---------------------------------------------------------------------------
    \1\ U.S. Department of Energy, Information Administration, 
International Energy Annual 2003, June 28, 2005, table 1.2, at 
www.eia.doe.gov/pub/international/iealf/table12.xls (February 10, 
2006).
    \2\ Karen A. Harbert, ``Western Hemisphere Energy Security,'' 
testimony before the House Subcommittee on Western Hemisphere Affairs, 
March 2, 2006.
---------------------------------------------------------------------------
    As economies expand worldwide, car ownership is rising and new 
factories require more energy. As an example of the relationship 
between energy consumption and growth, China's petroleum use increased 
by 15 percent in 2004, outpacing its 9 percent economic growth rate.\3\ 
Without significant discoveries of new reserves or technological 
advances, the world will face an energy crunch.
---------------------------------------------------------------------------
    \3\ Jason Bush, ``China and India: A Rage for Oil,'' Business Week, 
August 25, 2005, at www.businessweek.com/bwdaily/dnflash/aug2005/
nf20050825_4692_db016.htm?chan=gb (February 7, 2006).
---------------------------------------------------------------------------
    The United States has estimated reserves of 21 billion barrels of 
oil (in decline since the 1970s) and 192 trillion cubic feet of natural 
gas. Canada has 178 billion barrels of oil and 56 trillion cubic feet 
of gas, making it potentially the largest petroleum supplier. Mexico 
has only 15 billion barrels of oil and about 16 trillion cubic feet of 
gas.\4\ Venezuela has an estimated 77 billion barrels of oil (supplying 
about 7 percent of United States' needs) and about 149 trillion cubic 
feet of gas.\5\ These, plus other known global reserves might last for 
30 years or more, barring no new discoveries.\6\
---------------------------------------------------------------------------
    \4\ Based on estimates from U.S. Department of Energy, ``World 
Proved Reserves of Oil and Natural Gas.''
    \5\ Ibid.
    \6\ The United States produces almost 90 percent of the 
hemisphere's coal and has significant reserves--but there are limits to 
how it can be used.
---------------------------------------------------------------------------
                 OBSTACLES TO COOPERATION AND SECURITY

    Countries throughout the Americas hold differing concepts of 
property rights and the purpose of government that impact resource use 
and the stability of markets. Consequently, they have sharply divergent 
capacities to exploit resources and pursue technological advancement.
Apples and oranges
    In colonial times, Britain's weak rule permitted the growth of 
community governments and free commerce in the north. As a result, 
North Americans developed a system of property rights that protected 
that which was granted to, bought, or invented by an individual. 
Spain's military expeditions imposed centralized government and 
monopolies in the south. If not so stated in national charters of 
resulting independent nations, the right to own property was considered 
a concession of the state. Whereas individual citizens and private 
enterprises could stake claims to underground treasure in the United 
States and Canada, almost all Latin American constitutions made 
subsurface resources the property of the state.
    Today, property rights may be stronger in some Latin American 
countries than others, but minerals, petroleum, and gas are controlled 
by those in power. Governments predominantly own fields, pipelines, and 
refineries, subjecting them to political influences. Where economies 
are not big or free enough to support enterprises that can explore, 
extract, and market resources, the state offers concessions to foreign 
operators in exchange for part of the revenues.
    These arrangements can remain stable for years. But if market 
prices rise, politicians may desire a bigger cut of the profits or 
suddenly think they have the capacity to operate such industries on 
their own. Ecuador's May 2006 takeover of Occidental Petroleum's 
concessions is an example of the latter. In Venezuela, deputy oil 
minister Bernard Mommer recently told foreign oil companies, ``The 
government can promise you whatever they want--it is not binding.'' \7\ 
Such caprice is an outgrowth of centuries-old personalistic rule and 
traditions of impunity.
---------------------------------------------------------------------------
    \7\ Thomas Catan and Andy Webb-Vidal, ``Caracas warns oil companies 
of more tax increases,'' The Financial Times, April 11, 2006, p. 11.
---------------------------------------------------------------------------
Squandering profits
    For years, the revenue transfer from Pemex (Petrleos Mexicanos) to 
the Mexican state was the epitome of industry serving a single-party 
state. By the time Mexico's first opposition president, Vicente Fox, 
came into office, Pemex was turning over more than half its revenues to 
the government, amounting to half the federal budget. At the same time, 
executives claimed it was losing about $1 billion annually to internal 
corruption.\8\ Since then, Petroleos de Venezuela (PDVSA) has surpassed 
Pemex as an example of industry supporting a misguided state, but also 
funding the malicious agenda of an authoritarian leader.
---------------------------------------------------------------------------
    \8\ Tim Weiner, ``Corruption and Waste Bleed Mexico's Oil 
Lifeline,'' The New York Times, January 21, 2003, p. 1.
---------------------------------------------------------------------------
    On December 2, 2002, business and labor leaders called a national 
work stoppage, hoping to pressure Venezuelan President Hugo Chavez into 
resigning. Some 35,000 PDVSA workers walked out, temporarily slowing 
production. Chavez fired nearly half of them, then put the semi-
autonomous oil giant under his direct control. Petroleum income now 
appears to support his Bolivarian social programs, foreign debt 
purchases, campaign contributions to leftist candidates in neighboring 
countries, and a worrisome arms build-up. Democratic, market-oriented 
Trinidad and Tobago could be a target of intimidation should Chavez 
decide to seize some of its adjacent offshore gas fields.
    Throughout the region, Chavez plays petropolitics. In September 
2003, he accused the Dominican Republic of harboring former President 
Carlos Andres Perez, a political foe. He then stopped oil deliveries, 
triggering a temporary energy crisis while Dominican authorities 
scrambled for new suppliers. Such turmoil helps lift prices, giving him 
the ability to offer discounted fuel to cooperative admirers in foreign 
countries, including the United States, where he can influence politic 
discourse and public opinion. In May 2006, he donated fertilizer and 
oil to Sandinista mayors in Nicaragua. Presidential elections will take 
place there in November.
    President Evo Morales of Bolivia is headed in a similar direction, 
announcing the partial nationalization of gas fields in May 2006. He 
has so far followed Chavez's playbook in politics, announcing a 
constituent assembly to rewrite the constitution, inviting Cuban 
advisors to help run the police, and devising a scheme to redistribute 
land. Bolivia's pygmy economy generates about the same activity 
annually as Springfield, IL, and higher rents from the hydrocarbon 
industry could help Morales consolidate power as long as mismanagement 
does not put him out of business.
    Markets versus monopolies. Outside of the taxes, salaries, and 
dividends to stockholders, private energy companies use profits to 
modernize equipment, service fields and mines, and conduct research in 
such areas as renewable energy supplies. In contrast, Mexico's Pemex 
still supports the state to such an extent that field maintenance and 
further exploration has become a minor priority leading to stagnating 
output. Foreign investment could help, but Mexican elites fear such an 
opening could lead to loss of financial control, while pliant 
politicians have convinced the public that national patrimony is at 
risk. Sadly, Mexico now imports natural gas from the United States, 
even though it has some 15 trillion cubic feet of reserves.
    Further South, Venezuela's Chavez announced an extravagant $20 
billion, 5,000-mile gas pipeline from Venezuela to Argentina that will 
probably never materialize.\9\ More realistically, he is starting to 
unite state hydrocarbon industries into a cartel under his control. 
Petrocaribe, Petrocentro, Petroandina, and Petrosur are entities he 
invented under an umbrella organization called Petroamerica. Ecuador's 
statist oil and Bolivia's hydrocarbon industries are good candidates 
for membership. Argentina, Uruguay, Central America, and many Caribbean 
states with few or no resources could make up the client base. High 
prices outside the cooperative would support subsidies within. But 
attendant corruption, mismanagement, and lost foreign investment could 
also provoke collapse.
---------------------------------------------------------------------------
    \9\ The gas pipeline will be more expensive to build and operate 
than liquefying and shipping gas. ``The Explosive Nature of Gas,'' The 
Economist, February 11, 2006, p. 36.
---------------------------------------------------------------------------
    Energy-hungry China, the world's fourth largest economy, is another 
power player on the state industry side of the ledger. China has 
pursued petroleum partnerships with Venezuela, Ecuador, Colombia, 
Argentina, Brazil, Mexico, and most recently Cuba, where it could soon 
be drilling in the Florida Straits, 50 miles from United States shores. 
China's state-to-state business deals reinforce the region's tradition 
of centralized decisionmaking and anti-competitive practices.

                          JUMPING THE HURDLES

    Rising global consumption and the emergence of powerful new 
economies mean that timely adoption of effective energy strategies is 
crucial. The best way to assure sufficient resources is to foster 
competition and let markets respond to needs. And while prospects for 
much of the region seem grim based on prevailing anti-market policies 
in neighboring countries, the United States has reliable energy 
partners in market-oriented Canada, Trinidad and Tobago, and even 
statist Mexico, Colombia, and Peru. Brazil could become an important 
associate in developing new supplies of ethanol, a product that 
involves more private enterprise than government monopoly. To move the 
ball forward, the United States should:

   Embrace regional energy diplomacy. Right now Venezuela's 
        Chavez has seized the initiative by developing monopolistic 
        arrangements in Latin America. As suggested by the proposed 
        Energy Diplomacy and Security Act (S. 2435), the U.S. 
        Departments of State and Energy could promote a hemispheric 
        energy security forum to encourage collaboration among willing 
        states on competitive
        energy markets, attracting investors, replacing monopolies with 
        regulatory authorities, and sharing information and research--
        as some Latin American countries have attempted to do before 
        without much success. The U.S. Congress should support those 
        and existing multilateral diplomatic efforts with adequate 
        funds for travel and dedicated personnel.
   Urge neighboring countries to embrace free markets, not 
        cartels. Eventual adoption of stronger property rights and 
        competitive enterprise is the key to spreading prosperity 
        through jobs and ownership. One way to make state energy 
        monopolies truly public is to distribute company shares among 
        the country's voting population. The government's role then 
        converts to regulation. United States public diplomacy could 
        help Latin American publics understand such concepts.
   Consistently support improvements in democratic governance. 
        Since elections took place in the majority of Latin American 
        nations in the 1990s, United States support for checks and 
        balances, constituent representation, transparency, and rule of 
        law has been spotty. Development funds have been shifted to 
        serve other regions of the globe while big dollar environmental 
        and health programs have dominated Latin American assistance 
        efforts. The U.S. Secretary of State should ensure that 
        development programs in Latin America help consolidate deeper 
        democratic traditions to bring voters of all classes and income 
        closer to their governments and diminish the appeal of 
        authoritarian populists.
   Promote diverse energy supplies. At home, the U.S. Congress 
        should end the 54-cent per gallon tariff on sugarcane-based 
        ethanol meant to protect U.S. corn farmers. There are other 
        uses for corn besides making ethanol. The United States, 
        Caribbean and Central American allies, and Brazil could then 
        collaborate in developing ethanol markets to free each other 
        from Hugo Chavez's extortionist petropolitics. American 
        lawmakers should ease complicated regulations that limit 
        refinery expansion and mandate complicated regional recipes for 
        gasoline that have made it difficult for existing refiners to 
        meet growing demands. By equal measure they should make further 
        exploration possible for responsible extraction of fossil 
        resources.

                               CONCLUSION

    According to the United States Department of Energy, Latin America 
will require nearly $1.3 trillion in energy sector investment between 
now and 2030. Unfortunately, high oil prices have resulted in a 
resurgence of government control over industries and the rise of 
populist, authoritarian leaders in Venezuela and Bolivia. Outside of 
the hemisphere's market economies, needed investment will probably not 
occur. While the United States cannot rescue every neighbor from bad 
decisions, it can encourage cooperation among allies in making ones 
that will help sustain growth and broaden prosperity.
    As responsible neighbors, we must agree on policies that allow 
market forces to shape demand, guide energy users in changing 
consumption habits, and promote the development of new technologies 
such as fuel cells and hydrogen power. Considering the emergence of 
powerful global economies and expanding populations in our own 
hemisphere, there is little time to lose.
    Again, I appreciate the chance to provide testimony on this 
important topic and commend the committee for its work.
                                 ______
                                 

     Prepared Statement of Johanna Mendelson-Forman, Ph.D., Senior 
Associate, Center for Strategic and International Studies, Washington, 
                                   DC

    My name is Dr. Johanna Mendelson-Forman. I am a senior associate at 
the Center for Strategic and International Studies, and formerly the 
director of Peace, Security and Human Rights Programs at the U.N. 
Foundation. I am an expert on post-conflict reconstruction issues, 
security and development, and a Latin Americanist by training. I 
appreciate this opportunity to provide the committee with written 
testimony.
    For the last decade I have worked on security issues in this 
hemisphere and in Africa. My work on peace building and development 
have led me to conclude that among the most important relationships 
that can ensure a durable peace is by using the issue of energy supply 
as a tool for building security and development. A secure source of 
energy in a country emerging from war can mean the difference between a 
safe environment and one riddled by crime. Giving communities access to 
electricity and lighting can reduce criminal activity that often 
frequents war zones.
    Using the potential of renewable energy, we have also learned that 
creating products like ethanol and biodiesel can provide a ready means 
of employment of demobilized soldiers and combatants. Not only will 
growing the feedstock for biofuels allow people to earn a decent living 
and provide immediate job security, but it is also clear that renewable 
biofuels can support transportation. Biodiesel is easily used in trucks 
and cars with diesel engines. Little refining is needed for this 
product. And helping farmers produce crops that can be converted to 
bioenergy also gives these individuals a chance to export products to a 
world market where alternative fuels are in high demand.
    Unfortunately, our planning for reconstruction has often overlooked 
what has become very clear in the last few years of soaring energy 
costs, and less reliable sources of fossil fuel. In Africa, the 
Caribbean, and many parts of Southeast Asia, the climate is ripe for 
converting sugar and other crops into fuel. And the appropriate use of 
biomass energy, while used at a community level, could also be expanded 
to ensure that all people have access to fuel for cooking.
    Not only does an energy and security approach benefit the war-
affected country, but it also has the ability to create work, serve as 
a poverty alleviation tool, and provide a means for energy deficient 
countries to rise from dependence on fossil fuels. In the recent World 
Bank Report on biofuels the Bank economists calculated that for every 
unit of energy produced from agricultural crops you create 100 new 
jobs. The 25 poorest countries, many of which are also conflict-ridden, 
are also bereft of natural resources for energy generation. A focus on 
renewable sources of energy helps to promote peace and a more stable 
economy. Development of an indigenous biofuel industry could provide 
the last best chance for highly indebted nations to reduce the burden 
of paying for high priced energy derived from fossil fuels, thus 
permitting precious state funds to be used on social and economic 
development.
    One need only look at our own hemisphere to comprehend the linkage 
between energy and security in the last few years. The Caribbean, our 
third border, is a region ripe for the creation of a huge biofuel 
producing zone. Today it still lacks the adequate infrastructure or 
investment to start the process in a systematic or coherent fashion. 
But a policy that promoted an energy zone in the Caribbean would go far 
in supporting the concept behind the legislation introduced by Senator 
Lugar.
    Weak states and the increased vulnerability that many Caribbean 
islands have to drug traffickers and transnational crime also further 
complicates the situation when little funds are left to fight these 
kinds of problems when resources are going to pay for energy costs. 
Regional dependency on fossil fuels among almost every Caribbean island 
(except Trinidad and Tobago which has oil and natural gas) makes all 
these nations vulnerable to the petroleum diplomacy of President Hugo 
Chavez of Venezuela who has provided cheap subsidized fuel from 
Venezuela to win over support for his political agenda in the Americas. 
Subsidized Venezuelan oil gives Chavez an important leverage point for 
political gain as so many of these island states have come to rely on 
him to meet their energy needs. This situation further exacerbates 
United States relations with many Latin American states who see their 
need for oil as a trade-off between support for the government of Hugo 
Chavez and their own need to maintain good relations with the United 
States.

               TRANSNATIONAL THREATS AT THE THIRD BORDER

    Without a stable supply of energy for oil dependent nations of the 
Caribbean, existing problems will only be exacerbated by the shock of 
economic instability coming from fluctuating oil prices. A majority of 
Caribbean states experience problems that already impact U.S. national 
security and well-being, with significant potential growth:

   Weak or failing states (Haiti),
   Potential launching grounds for terrorist activities,
   Transshipment of narcotics,
   HIV/AIDs,
   Illegal immigration,
   Transshipment of weapons, and
   Safe havens for criminal activities such as money 
        laundering.

    Even though many Caribbean islands have experienced economic growth 
over the past decade, these gains are now in jeopardy as short- to 
medium-term high-priced fossil fuels and long-term depletion concerns 
threaten economic sustainability. Only with specific interventions to 
protect island economies through alternative energy sources will the 
Caribbean be able to sustain economic growth. Also, a move toward 
energy independence will promote security through generating 
development and stability.
    Access to energy has also served as both a stick and a carrot for 
United States policies in the Latin American region. Currently, United 
States dependency on oil produced in Venezuela has created turmoil in 
our policies to democratic development and democracy promotion. The 
Caribbean, in particular, has been a focus of the use of oil as a 
carrot through potential political endorsement at the regional and 
international levels. The potential for the use of Caribbean oil 
dependence as a stick is inherent in the lessons from the recent 
experience of the Russian shut-off of Ukrainian gas supplies, and not a 
relationship conducive to United States national security.
    I will use the opportunity of this testimony to describe two 
important cases. The first will discuss the potential for using 
alternative energy production as a means of saving Haiti from state 
failure, while also providing the Dominican Republic with an important 
export market for its sugar production. Combining peace building and 
renewable energy may very well save Hispaniola from the long-term 
prospect of state failure and decline.
    The second case will discuss how in Bolivia, a country where the 
United States Government spends millions of dollars on coca eradication 
and crop substitution, that a better way to approach this problem may 
be through a focused project for renewable energy that would use 
feedstock that could be converted into ethanol, and then used for both 
domestic and export markets. The world demand for ethanol continues to 
grow each day, and giving Bolivian peasants a chance to grow crops 
whose export value is high, and where demand is insatiable, affords a 
brighter alternative for development than our current crop substitution 
programs provides.
1. Saving Hispaniola
    An island-wide project on bioenergy could create significant 
benefits for peace and security. Not only would the development of 
alternative energy sources benefit the Dominican Republic, it may also 
lay the foundation for greater cross-border collaboration with Haiti. 
The continued deterioration of political, economic, and environmental 
conditions in Haiti creates strain on the Dominican Government as 
continued migration across a porous border, transshipment of illegal 
narcotics, and the vulnerability to spreading issues of HIV/AIDS and 
violence rises. The benefits of biofuels for energy self-sufficiency 
and poverty reduction would potentially also be available to Haitian 
communities at the border. Such a situation could lead to a wider 
effort to use energy as a bridge to peaceful relations between the two 
nations and improvement of the Haitian economic and social 
situation.\1\
---------------------------------------------------------------------------
    \1\ Information for this section is derived from a field assessment 
performed by the author, and Dr. Daniel de la Torre Ugarte and Ms. 
Charlotte McDowell for the U.N. Trade and Development Agency (UNCTAD) 
and the U.N. Foundation Biofuels Initiative in November 2005.
---------------------------------------------------------------------------
                                CONTEXT

    The Dominican Republic is a poor island nation that has experienced 
remarkable economic growth in the last few years. Agriculture and sugar 
in particular, has been replaced by free trade zones and a range of 
service industries as the main revenue generating businesses as the 
primary source of export earnings. Yet, according to the 2005 National 
Human Development Report, the Dominican Republic's shift to these 
industries was accompanied by considerable social upheaval and scarce 
human development. The accelerated and unplanned growth of the tourism 
sector has created problems of resource overexploitation, citizen 
insecurity, and the predominance of enclave economies, and is seen as 
unsustainable in its current form. The free trade zones have been 
stagnating and are losing competitiveness in relation to other 
countries, and job creation has been greatest in the informal sector, 
thereby prompting the deterioration of quality of employment and living 
conditions for the majority of the population.\2\
---------------------------------------------------------------------------
    \2\ UNDP National Human Development Report, Dominican Republic 
2005.
---------------------------------------------------------------------------
    But sustained economic growth and social integration in the 
Dominican Republic will require the resolution of two important issues: 
Energy and the political crisis in Haiti. Without a source of fuel to 
generate electricity, the Dominican Republic will be unable to grow its 
important tourism industry, let alone in an environmentally sustainable 
and socially responsible manner. Unless the downward spiral of Haiti is 
stopped, the proximity to a failed state at its border will continue to 
put pressure on the Dominican Republic through unabated migration of 
Haitians that continues to tax an already underfunded public sector and 
is the cause of much social tension. Thus, without alternative energy 
sources, economic development will remain illusive, and unless the 
Haitian border is converted into a zone where projects that generate 
employment and energy on both sides, there will be little hope for 
long-term economic progress and social stability.

                              ENERGY NEEDS

    The dramatic rise in oil prices over the last 6 months has 
precipitated a crisis in the energy sector. Over 80 percent of the 
Dominican Republic's energy comes from petroleum products. As the price 
of oil has increased so has the Nation's debt. With no other immediate 
energy source, the Dominican Republic is now searching for sustainable 
alternative energy supplies that can mitigate the effects of its oil 
dependency.
    Bioenergy is not a new idea in the Dominican Republic. Its large 
sugar plantations have already attracted the attention of investors. 
But to date no large-scale conversion of sugarcane to ethanol has 
occurred, as the United States' quota system, the possibility of 
gaining preferential market access to the European Union, and the 
domestic price support provided by the Dominican Government combine to 
create prices well above world market levels. These conditions have 
delayed investment considerations on biofuels, and therefore thinking 
about biodiesel fuel is relatively new and limited to small scale 
projects.
    Yet all this may change, based on information gathered on the 
recent visit to the Dominican Republic. Not only is there a new 
consensus at the highest political level that alternative energy is a 
priority issue, but it is also clear that the most recent increase in 
oil prices has strengthened the hand of President Leonel Fernandez to 
take steps regarding the energy crisis. These steps will ultimately 
result in important conservation initiatives such as allowing combined 
ethanol-gasoline mixtures. He has also supported the National 
Commission on Energy to coordinate the government's response to the 
island's energy needs. On November 8, the President signed an agreement 
with President Uribe of Colombia in which Colombia will provide energy 
assistance and the transfer of technology for ethanol production. It is 
also clear from the number of Brazilian investors knocking at the doors 
of government agencies that the time for biofuels has arrived in the 
Dominican Republic.

                  POTENTIAL FOR AN ISLAND-WIDE PROJECT

    Another compelling reason for considering the Dominican Republic 
for a pilot case for the biofuels initiative is that it shares an 
island with one of the most environmentally devastated nations on 
earth--Haiti. After years of neglect, internal conflict, and entrenched 
poverty, Haiti's problems have compounded the urgency of finding 
alternative energy sources that would serve the needs of both Haiti and 
the Dominican Republic. Projects that used the development of renewable 
energy resources between both countries could also have a positive 
impact on resolving some of the more intractable political problems. 
Solving the energy needs of both the Dominican Republic and Haiti could 
also lead to some innovative models of peace building. Bringing 
citizens together around common problems, such as the lack of 
electricity or fuel, can potentially create solutions that politicians 
may be unable to resolve.

                           PRODUCTS: ETHANOL

    Sugarcane has historically been one of the most important 
agricultural products of the Dominican Republic. During the mid-1980s, 
sugar accounted for 85 percent of the country's export earnings. 
However, sugarcane production peaked with the 1982 output of 11.8 
million metric tons, and in 1993 the amount of land planted with 
sugarcane peaked at 234,000 hectares (736,000 MT).
    Currently, the sugar industry is far from these levels, with 
production reaching only 5.3 million metric tons and a total of 135,000 
hectares planted with the crop. This loss in both land utilization and 
productivity has resulted from several factors: The reduction of the 
export quota to the United States, world overproduction of sugar and 
therefore falling international prices, the arrival of non-sugar 
sweeteners, lack of investment in the sector, and unsuccessful 
privatization efforts.
    Given the experience of sugar production in the Dominican Republic, 
these gaps between historical and current sugar production raise the 
question of whether conversion of sugarcane to ethanol provides an 
alternative for revitalization of sugarcane production. The answer to 
this question is complex, as there are two clearly distinguishable 
producer groups with diverse interests. On one hand are large, modern, 
integrated producers, and on the other hand are colonos: Independent 
landholders that received land from the privatization of land 
previously owned and operated by the government.
    Most of the current domestic market and sugar export quota is 
filled by the production of the modern sector, which also absorbs about 
30 percent of the colonos' production. These producers sell at prices 
well above the 15 cents per pound that characterizes world markets. 
This access is to a large extent a function of their control of 
marketing and distribution systems in both the domestic and U.S. 
markets.
    For these modern producers, the conversion of sugar to ethanol is 
not an immediately attractive venture. Ethanol would garner prices for 
sugarcane below 12 cents per pound, compared to the current price of 
nearly 20 cents per pound. Even when considering expansion of 
productive capacity beyond the traditional sugar market, it would not 
be possible to recuperate the capital investment required for the 
conversion to ethanol within the expected time frame to recoup their 
capital investment of 7 years. In summary, modern producers do not see 
themselves as pioneers of ethanol production in the Dominican Republic.
    The other important producer group is the colonos. They represent 
approximately 60,000 hectares of sugarcane land. The colonos view the 
conversion of sugarcane to ethanol as a way to develop a market for the 
sugar they currently produce or could potentially produce on fallow 
land. They are confident that a long-term plan for ethanol would allow 
them to invest in sugar productivity that would yield more than 60 MT/
ha, a level nearly double their current yield of 32 MT/ha. This would 
allow colonos to produce sugar for ethanol at levels that would be 
profitable for private investors. The aim would be to supply enough 
feedstock for at least three plants of 1 million metric tons. However, 
one of the challenges facing the colonos is their lack of control of 
processing facilities needed for both sugar and ethanol.
    Although foreign private investors have shown interest in 
establishing ethanol conversion plants to process the colonos' 
harvests, the issue still remains on how to coordinate between 
producers and processors to maintain a stable long-term agreement on 
the price and supply of feedstock. Potential investors have indicated 
the need for a clear institutional and legal framework for biofuels, as 
well as the need for specific incentives for ethanol production. The 
level or type of incentives required to make these investments feasible 
is unclear.
    In any case, utilization of bagasse for the cogeneration of 
electricity is viewed as necessary complement of ethanol conversion 
facilities. The level of electricity generated beyond the needs of 
conversion facilities would depend on the efficiency of the boilers and 
the size of the plants.
    Finally, there is support at the country's only oil refinery 
(REFIDOMSA) for the use of ethanol in a fuel blend of up to 10 percent 
with gasoline. The refinery has already drawn up plans for developing 
the infrastructure to store and blend either local or imported ethanol 
with gasoline in preparation for the possibility of low-priced ethanol.

                               BIODIESEL

    There is nearly common agreement on the part of all public and 
private actors in the biofuels sector to support production of 
biodiesel. The area known as the ``linen del noroeste'' (northwest 
line) is viewed as one of the areas with greatest potential, and is 
also one of the most economically depressed areas of the country. This 
region includes a significant amount of idle land suitable for the 
production of Jatropha, castor, coconut, and other species rich in oil 
content. To a large extent, the enthusiasm for biodiesel production is 
rooted in its potential to provide not only a cleaner and renewable 
source of energy, but also in its potential to generate economic 
development in the region and to recuperate eroded areas. The 
transparent integration of biodiesel into the current distribution and 
utilization system is also perceived as an important advantage.
    While there is much more agreement regarding the potential 
production of biodiesel than there is for ethanol, there is less 
specific information. The Ministry of Agriculture is currently in the 
process of assessing the resource potential for these and other 
species, as well as regions in the country suitable for production.
    Various stakeholders expect that the oil crops used as feedstock 
for biodiesel would be largely produced by small farmers, and that the 
cost of the feedstock would be compatible with small scale, less 
capital intensive conversion processes.
    Some of the oil crops that are endemic to the Dominican Republic 
and Haiti, such as Jatropha, could also play a significant role in 
recuperating degraded soils and slopes, thereby alleviating a 
significant environmental problem for both countries.

                  INTEGRATED DEVELOPMENT OPPORTUNITIES

    There are currently various cases in the Dominican Republic of 
small scale alternative energy projects aimed at creating energy self-
sufficiency in rural areas by utilizing biomass. These projects range 
from development of biodigestors by the Organization of American 
States' Inter-American Institute for Cooperation on Agriculture (IICA) 
to research by the University Institute of Technology (INTEL) on the 
possibilities for generating energy from various seaweed species. 
Additional reports of individual communities that have developed solar 
power capabilities with the support of Peace Corps volunteers and have 
been demonstrating their results to interested members of other 
Dominican and Haitian communities, indicating that further small-scale 
projects have yet to be disseminated and replicated.
    The proliferation of such small-scale, development-oriented 
projects indicates the need for coordination of researchers and 
practitioners in the interests of creating dialog on existing efforts. 
Both the UNDP country office and the Dominican Global Foundation for 
Democracy and Development expressed interest in potential joint support 
of a series of conferences to generate knowledge-sharing and 
cooperation on such projects.
    A Haitian-Dominican private-sector and NGO consortium is also 
currently seeking funding for a planned cross border community-based 
biodiesel project.\3\ This effort has been presented to the local UNDP 
office as well as the European Community for funding. The project would 
initially work to develop jatropha, sweet sorghum, and castor beans to 
generate biofuels for community-based consumption on both sides of the 
border. They have also drawn up plans for a potential ethanol project 
that would utilize mobile mills to be deployed across the border to 
Haiti to overcome infrastructure problems and provide for Haitian 
laborers in their native communities to gain employment. The UNDP 
office has reportedly secured a European contribution to this project 
that should become available by the end of the year, and is looking to 
their own ability to provide small grants to such an effort and related 
energy sector projects. Both the NGO itself and the UNDP office 
expressed the need for additional technical support for this project.
---------------------------------------------------------------------------
    \3\ The Consorcio Tecno-DEAH is supported by the Dominican 
Institute of Integrated Development (IDDI), and directed by Omar Bros, 
Flanz Flambert, and Alex Rood.
---------------------------------------------------------------------------
    Aside from this potential project, other U.N. offices have limited 
activities in the area of energy. FAO is in the initial stages of 
considering the impact of renewable energy projects in the Dominican 
Republic. In 2004, they published a report on the rehabilitation of the 
Dominican sugar industry and a socioeconomic survey of the small-scale 
sugar growers that could be relevant to an ethanol-based project, and 
have also made important contacts with both the political and 
agricultural community. For its part, the UNDP has been working in the 
area of energy to a limited degree through its small grant program, but 
efforts have been primarily in the area of electrification of rural 
areas and solar projects. The potential for collaboration with the UNDP 
through the small grants program and technical support or information-
sharing appears to hold positive partnership opportunities rather than 
the duplication of efforts.
            Environment for change
    The legal-regulatory environment has the potential to assist 
biomass energy alternatives. As early as 1949, a law was passed 
regarding ethanol-gasoline mixtures for automobiles. Even before this 
current crisis, the government of former President Hipolito Mejia 
signed an executive order in 2002 that would provide tax exemptions to 
businesses for developing technical facilities to mix ethanol with 
gasoline.\4\ In October 2005, President Fernandez issued an executive 
order that created technical requirements for the mixing of ethanol 
with gasoline, and also set specific guidelines for mixture that would 
allow up to 10 percent ethanol to be mixed with gasoline.\5\ While this 
was an important step and signaled to refiners that ethanol mixtures 
are allowable, the actual decree does not mandate immediate 
implementation.
---------------------------------------------------------------------------
    \4\ Decreto No. 732-02, 2002 (September 10).
    \5\ Decreto No. 566-05, 2005 (October 11).
---------------------------------------------------------------------------
    In terms of trade, the Dominican Republic has access to 
preferential and growing United States markets for ethanol through the 
provisions in the Caribbean Basin Initiative and the CAFTA-DR 
agreement. Because the legal import quotas of these initiatives are 
expressed in percentages, as the U.S. market continues to grow, the 
absolute amount allowed for duty-free imports will also grow. The 
United States recently passed a renewable fuels mandate of 7.5 billion 
gallons, which may provide a significant export opportunity for 
countries such as the Dominican Republic.
    1. Caribbean Basin Initiative--The Caribbean Basin Initiative was 
established in 1983 to promote ``a stable political and economic 
climate in the Caribbean region.'' As part of the initiative, duty-free 
status is granted to a large array of products from beneficiary 
countries, including fuel ethanol under certain conditions. If produced 
from at least 50 percent local feedstock (e.g., ethanol produced from 
sugarcane grown in CBI beneficiary countries), ethanol may be imported 
duty-free to the United States. If the local feedstock content is 
lower, limitations apply on quantity of duty-free ethanol.
    Nevertheless, up to 7 percent of the U.S. market may be supplied 
duty-free by CBI ethanol containing no local feedstock. In this case, 
hydrous (``wet'') ethanol produced in other countries, historically 
Brazil or European countries, can be shipped to a dehydration plant in 
a CBI country for reprocessing. After the ethanol is dehydrated, it is 
imported duty-free into the United States. Currently, imports of 
dehydrated ethanol under the CBI are far below the 7 percent cap 
(approximately 3 percent in 2003). For 2003, the cap was about 150 
million gallons, while only about 60 million gallons were imported 
under the CBI. Dehydration plants are currently operating in Jamaica, 
Costa Rica, and El Salvador.
    2. CAFTA-DR--The Free Trade Agreement with Central America and the 
Dominican Republic (CAFTA-DR) does not increase overall access to the 
United States ethanol market. The agreement allows the Dominican 
Republic and Central American countries and to share in the CBI quota, 
but does not increase the quota.
    Whether through CBI or CAFTA, the vehicle currently exists to 
utilize export potential to the U.S. as a means to generate the volume 
and experience required for a viable domestic ethanol industry.
            Public opinion
    Public awareness of the energy crisis is at best a financial issue. 
The price of gasoline at the pump has impacted lower income families 
with one car and the price of public transportation. It has also 
affected the cost of electricity, exacerbating what is already one of 
the highest electricity costs in the region. Energy conversation as a 
public policy is still in its initial phases. The government has chosen 
to educate consumers about saving energy through public service 
announcements and billboards. The National Energy Commission published 
a consumer guide, but it is unclear who actually has read it, or the 
degree of its dissemination nationwide. What is clear is that 
environmental considerations for clean energy are less evident, though 
many nongovernmental organizations exist with a mission to promote 
conservation of natural resources, forest land, and soil.
    For the Dominican Republic, the challenge is one of timing and 
creating a consensus around what steps are needed immediately to ensure 
reduced demand for gasoline and electricity. The social impact of 
closing gasoline stations is dramatic. From the time that the President 
ordered service station closures until the week of November 20, 2005, 
newspapers reported a 34 percent decline in gasoline consumption. But 
progress on this front will ultimately impact the economy as fewer 
individuals are mobile on the weekends, especially during the key 
holiday shopping season.
    Another challenge for the Dominican Republic will be to find a way 
to service the debt it has incurred in the electric sector. According 
to interviews and newspaper accounts, the government has a half-billion 
dollar shortfall in electricity revenues, something that continues to 
prevent adequate and continuous production of electricity. That 
situation, coupled by a 40 percent loss of electricity through 
distribution inefficiencies and illegal tapping of power lines, has 
created an unworkable situation in a country where fossil fuels are 
essential for power.
            Foreign investment opportunities
    Internationally, the conditions in the Dominican Republic have 
attracted the attention of foreign investors who see the potential for 
bioenergy and are aggressively pursuing government offices in search of 
contracts and long-term arrangements to reap the rewards of ethanol 
production. Brazil has been especially evident in its trade missions to 
government offices and to private sector investors as that nation have 
both the technology and the ethanol that could jump-start the 
production of fuel mixtures. A joint Belgian-Spanish private sector 
endeavor has plans for immediate construction of a 100,000 ton ethanol 
plant, along with support of the sugar-grower federations, although the 
actual start date of construction is uncertain.\6\
---------------------------------------------------------------------------
    \6\ The venture was agreed to by ALCOGROUP of Belgium, an ethanol 
producing and distributing company, and Tomas Destil of Spain, a 
specialist in engineering and manufacturing of alcohol distillation 
plants. The plant was originally scheduled to be under construction in 
September of 2005 and to go online in the last trimester of 2006.
---------------------------------------------------------------------------
    How much foreign investment will help move the Dominican Republic 
toward energy independence is still unknown. In our conversations with 
government officials and private sector individuals, there was a more 
marked interest to pursue biodiesel as a first solution to high 
petroleum prices. Indeed, there was broad consensus about biodiesel as 
a major approach to the immediate energy needs because of the lower 
necessary investment for production. Additionally, the land needed for 
biodiesel production could be less arable, and even arid, given the 
current sources of oil from nut-bearing plants like Jatropha and Castor 
bean. Even though ethanol was on everyone's agenda, it was also evident 
that it would require much larger investments to start production on 
any larger-scale program.
            Potential funding mechanisms
    It is very likely that biofuels-related projects would have access 
to the Clean Development Mechanisms (CDM) of the Kyoto Protocol. Access 
to these mechanisms could provide marginal revenues that would reduce 
investment risk for biofuels projects. However, gaining access to these 
funds is not a trivial task: It requires the estimation of 
environmental impacts from a baseline situation and is a complex 
process that could delay or even limit access to projects in the 
Dominican Republic. There is also a need to access long-term financing 
that could make projects viable with significant investment in fixed 
assets over a longer-term repayment period than private investors are 
willing to offer. Due to their potential environmental and social 
impacts, some of these projects could be particularly suited to 
``socially concerned'' investors.
            Government position today
    President Leonel Fernandez has laid a strong foundation for a new 
energy policy in the Dominican Republic. With an eye toward good 
governance and insistence on using a National Energy Commission to 
unite his key ministries, he has created a sense of urgency and 
collaboration on the need to solve the energy crisis that was evident 
in all our meetings, from the Foreign Ministry, to Agriculture, to 
Industry and Commerce. Every government leader sees himself or herself 
as a stakeholder. It would be too easy to say that coordination and 
information sharing is complete, however. As in any bureaucracy, there 
are gaps in communication, and a lack of understanding in specific 
issue areas. Yet given the nation's history of having suffered a long 
period of authoritarian rule, followed by a series of centralized 
government authorities, the situation under Fernandez' leadership 
provides the basis for eventual success in developing a much higher 
degree of energy independence.
    The political component of Fernandez' mission is also important. 
Unlike his predecessors, he recognizes that any energy solution in the 
Dominican Republic must also embrace the actual situation in Haiti. His 
approach to securing an energy future of Hispaniola is genuine, and 
though an uphill battle, is sensitive to how his Haitian neighbors 
affect not only the Dominican Republic's own social climate, but also 
its potential as a place for foreign direct investment.
            Challenges
    Key challenges for 2006 will include:

   Developing an integrated strategy among government agencies 
        and public groups on an appropriate and measured policy 
        framework for bioenergy and other alternative sources, from 
        photovoltaic to wind energy.
   Encouraging small-scale projects that provide immediate 
        energy cost relief to the rural areas, such as methane farms, 
        and other types of biomass projects that can help local 
        producers.
   Creating a public campaign that supports the eventual 
        conversion of sugar to ethanol, while also engaging larger 
        producers and independent sugar growers in a dialog about the 
        timing and sequencing of such conversion.
   Developing an immediate program to launch biofuels as a 
        means to generate electricity in its national power system.
   Providing broad citizen education at all levels of schooling 
        that support energy conservation.
   Working with the international community to ensure that the 
        efforts in the Dominican Republic are captured so they can be 
        applied and refined for use by other small island states.
   Creating a binational commission after the Haitian elections 
        that uses the current energy crisis as a means to rebuild trust 
        and confidence between the two nations, thereby creating a new 
        pathway for engagement and dialog.

    The Dominican Republic is ripe for new energy opportunities. It was 
easy to engage leaders, NGOs, the private sector, and academics on the 
importance of energy independence. If the high price of fossil fuels 
continues over the long-term as experts predict, it will be even more 
urgent to consider the leadership of the Dominican Republic, through 
its President Leonel Fernandez, as a role model for working toward 
short-, medium-, and long-range solutions to current conditions.
2. Ending addictions and creating new markets: Biofuels for crop 
        substitution
    The United States has two addictions: One to oil and the other to 
drugs. In his State of the Union speech in January, President Bush 
announced that the United States must end its addiction to oil. And he 
advocated agricultural crops as alternative energy sources. What he 
failed to note is that those same crops could also address another 
addiction--cocaine.
    A proposal to encourage Andean growers to substitute grasses that 
can be converted to ethanol for the lucrative coca plant could help 
address the scourge of cocaine. With a world market suddenly craving 
ethanol, not only would farmers have a crop with insatiable demand, but 
growing it would provide a legal, sustainable income. This two for one 
result could form the foundation of an approach to Latin America that 
promotes the region's need to address security, poverty reduction, 
energy needs, and sustainable development.
    Our dependence on imported petroleum from conflict areas must end. 
There is no better opportunity than in our own backyard. The Caribbean 
and Central America are especially ripe for a full-blown energy policy 
that uses the agricultural resources already in place--sugar and oil 
palms--to support ethanol and biodiesel industries that will reduce 
dependence on fossil fuels, create employment, and address an ever-
increasing demand for sustainable energy from renewable resources. And 
the Andean region, where hundreds of hectares of illegal cocaine are 
grown and destroyed, the potential to convert these plants into 
biofuels for transportation could transform the economy of the entire 
region.
    With $70 a barrel oil, and no end in sight, the Caribbean nations 
are quickly turning to biofuel production as an alternative to their 
mono-economies based on sugar and tourism as the hope of the future. 
And high oil prices make using sugarcane even more profitable for 
regional producers to make ethanol than to import fossil fuels. With 
the market for Caribbean sugar limited in Europe and the United States, 
small producers are making the switch. St. Kitts and Nevis have already 
diverted their sugar harvest to ethanol, and larger islands like the 
Dominican Republic and Barbados are exploring such prospects, while 
also thinking about ways to convert other sources such as palm oil to 
biodiesel. This model could also be replicated in the Andean countries, 
where large scale production of feedstock for biofuels opens an entire 
new market for international trade and development.
    Brazil began tapping ethanol more than three decades ago. More than 
40 percent of Brazil's energy comes from green sources, compared with 7 
percent in the developed world. It plans to become energy self-
sufficient this year, a landmark accomplishment. The country has 
developed ethanol technology and is aggressively marketing its 
technology to other countries, particularly the Caribbean. The 
efficiency of converting sugarcane into ethanol is enhanced by using 
the waste, bagasse, to fuel the entire process, thereby eliminating the 
dependence on fossil fuels and reducing energy costs.
    Even with the second largest supply of natural gas in the 
hemisphere, Bolivia still remains dependent on foreign oil sources for 
transportation. If a program to encourage energy self-sufficiency were 
launched with a way to generate better livelihoods for those currently 
growing coca plants, the potential for creating a drug-free zone in the 
Andes would carry with it energy independence.
    An enlightened new policy toward our Latin American relations must 
attack our addiction to oil and drugs in a way that also addresses 
United States national security concerns. Biofuels are part of the 
solution. Continued income inequality produces political unrest which 
can prepare the ground for terrorism to take root. And corruption that 
arises from the trade in illegal narcotics, porous borders, weak 
governance, and continued regional dependence on Venezuelan oil weaken 
the United States' ability to leverage its influence in a region where 
our national interests remain an integral part of our own post 9-11 
security agenda.
    A Latin America policy that anchors itself on the development of 
alternative energy sources such as ethanol and biodiesel not only 
addresses the challenge of the future energy needs, but also becomes a 
major tool for development, poverty reduction, and regional diplomatic 
and commercial cooperation.
    A renewable energy policy for the hemisphere--especially the 
Caribbean and Central America, and the Andean region--developed in 
close cooperation with Brazil will also confront some of the major 
threats that we face now:

   Energy self-sufficiency as oil supplies are being depleted, 
        a reality in some countries as early as 2025.
   Poverty reduction and the creation of sustainable 
        livelihoods through development of highly marketable products--
        the demand for which grows steadily as China, India, and other 
        countries expand rapidly.
   An alternative to the expansion of nuclear energy in poor 
        countries that can ill-afford the construction, let alone the 
        maintenance, of nuclear power plants.
   Ending the tyranny of drug cartels that corrupt security 
        forces, and victimize growers who have few viable economic 
        alternatives in farming.
   Reducing the risks of failed states, especially in the 
        Caribbean.

    The president's message of ending addictions should be taken at 
face value. Isn't reducing poverty and income inequality, while also 
ending the vagaries of global petroleum supply, a good approach to our 
hemispheric security policy?
    Thank you for allowing me the opportunity to propose some new 
approaches to an old problem. The time is ripe for creative thinking 
about how to use energy security as a keystone in our approach to 
hemispheric issues, to build stronger ties with our neighbors, and to 
promote programs that reinforce policies that prevent terrorism from 
taking root in our own backyard. The surest way to that goal is by 
engaging in an enlightened development program in the Americas that 
makes renewable energy the core of its approach and provides 
opportunities for public-private partnerships to ensure that within the 
next decade we live in a region no longer dependent on fossil fuels for 
transport and for living.

                                  
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