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34–739 PDF 2007

S. HRG. 109–861

THE HIDDEN COST OF OIL

HEARING

BEFORE THE

COMMITTEE ON FOREIGN RELATIONS

UNITED STATES SENATE

ONE HUNDRED NINTH CONGRESS

SECOND SESSION

MARCH 30, 2006

Printed for the use of the Committee on Foreign Relations

(

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

COMMITTEE ON FOREIGN RELATIONS

RICHARD G. LUGAR, Indiana, Chairman

CHUCK HAGEL, Nebraska

LINCOLN CHAFEE, Rhode Island

GEORGE ALLEN, Virginia

NORM COLEMAN, Minnesota

GEORGE V. VOINOVICH, Ohio

LAMAR ALEXANDER, Tennessee

JOHN E. SUNUNU, New Hampshire

LISA MURKOWSKI, Alaska

MEL MARTINEZ, Florida

JOSEPH R. BIDEN, JR., Delaware

PAUL S. SARBANES, Maryland

CHRISTOPHER J. DODD, Connecticut

JOHN F. KERRY, Massachusetts

RUSSELL D. FEINGOLD, Wisconsin

BARBARA BOXER, California

BILL NELSON, Florida

BARACK OBAMA, Illinois

KENNETH A. MYERS, Jr., Staff Director

ANTONY J. BLINKEN, Democratic Staff Director

(II)

CONTENTS

Page

Biden, Hon. Joseph R., Jr., U.S. Senator from Delaware, opening statement ... 27

Prepared statement .......................................................................................... 28

Copulos, Milton R., president, National Defense Council Foundation, Alexandria, VA ................................................................................................................. 4

Prepared statement .......................................................................................... 7

Huntington, Dr. Hillard, executive director, Energy Modeling Forum, Stanford

University, Stanford, CA ..................................................................................... 11

Prepared statement .......................................................................................... 15

Lugar, Hon. Richard G., U.S. Senator from Indiana, opening statement ........... 1

Yohe, Dr. Gary W., John E. Andrus Professor of Economics, Wesleyan University, Middletown, CT ............................................................................................ 18

Prepared statement .......................................................................................... 22

(III)

(1)

THE HIDDEN COST OF OIL

THURSDAY, MARCH 30, 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, Hagel, and Biden.

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.

The committee meets today to consider the externality costs of

United States dependence on fossil fuels. The gasoline price spikes

following Katrina and Rita hurricanes underscored for Americans

the tenuousness of short-term energy supplies. Since these events,

there is a broader understanding that gasoline and home heating

prices are volatile and can rapidly spike to economically damaging

levels due to natural disasters, terrorist attacks, or other world

events. But, as yet, there is not a full appreciation of the hidden

costs of oil dependence to our economy, our national security, our

environment, and our broader international goals.

Today, with the help of experts who have thought a great deal

about these issues, we’ll attempt to more clearly define some of

these costs. We’re cognizant that this is a difficult and imprecise

exercise. We’re also aware that most, if not all, energy alternatives

have some externality costs. But we’re starting from the presumption that if we blithely ignore our dependence on foreign oil, we are

inviting an economic and national security disaster.

With less than 5 percent of the world’s population, the United

States consumes 25 percent of its oil. If oil prices remain around

$60 a barrel through 2006, we will spend approximately $320 billion on oil imports this year. Most of the world’s oil is concentrated

in places that are either hostile to American interests or vulnerable

to political upheaval and terrorism. More than three-quarters of

the world’s oil reserves are controlled by national oil companies,

and within 25 years the world will need 50 percent more energy

than it does now.

These basic facts demand a major reorientation of U.S. policy

aimed at reducing U.S. dependence on fossil fuels. Our goals must

be to mitigate the short-term costs of our dependence on oil while

pursuing energy alternatives that would reduce the international

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leverage of petro-superpowers, improve environmental quality,

cushion potential oil price shocks, stimulate new high-tech energy

industries, and ground the American economy on energy sources

that will neither run out nor be cut off by a foreign supplier.

There are at least six basic threats associated with our dependence on fossil fuels:

First, oil supplies are vulnerable to natural disasters, wars and

terrorist attacks that can produce price shocks and threats to national economies. This threat results in price instability and forces

us to spend billions of dollars defending critical fossil fuel infrastructure and shipping choke points.

Second, over time, finite fossil fuel reserves will be stressed by

the rising demand caused by explosive economic growth in China,

India, and many other nations. This is creating unprecedented

competition for oil and natural gas supplies that drives up prices

and widens our trade deficit. Maintaining fossil fuel supplies will

require trillions in new investment, much of it in unpredictable

countries that are not governed by democracy and market forces.

Third, energy-rich nations are using oil and natural gas supplies

as a weapon against energy-poor nations. This threatens the international economy and increases the risk of regional instability and

even military conflict.

Fourth, even when energy is not used overtly as a weapon, energy imbalances are allowing oil-rich regimes to avoid democratic

reforms and insulate themselves from international pressure and

the aspirations of their own people. In many oil-rich nations, oil

wealth has done little for the people, while ensuring less reform,

less democracy, fewer free-market activities, and more enrichment

of elites. It also means that the United States and other nations

are transferring billions of dollars each year to some of the least

accountable regimes in the world. Some of these governments are

using this money to invest abroad in terrorism and instability or

demagogic appeals to anti-Western populism.

Fifth, reliance on fossil fuels contributes to environmental problems, including climate change. In the long run, this could bring

drought, famine, disease, and mass migration, all of which could

lead to conflict and instability.

Sixth, our efforts to facilitate international development are often

undercut by the high costs of energy. Developing countries are

more dependent on imported oil, their industries are more energy

intensive, and they use energy less efficiently. Without a diversification of energy supplies that emphasizes environmentally

friendly options that are abundant in most developing countries,

the national incomes of energy-poor nations will remain depressed,

with negative consequences for stability, development, disease

eradication, and terrorism.

Each of these threats comes with a short- and long-term cost

structure, and, as a result, the price of oil dependence for the

United States is far greater than the price consumers pay at the

pump. Some costs, particularly those affecting the environment and

public health, are attributable to oil no matter its source; others,

such as costs of military resources dedicated to preserving oil supplies, stem from our dependence on oil imports. But each dollar we

spend on securing oil fields, borrowing money to pay for oil imVerDate 11-MAY-2000 14:12 Apr 20, 2007 Jkt 000000 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 OIL.TXT sforel1 PsN: sforel1
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ports, or cleaning up an oil spill is an opportunity missed to invest

in a sustainable energy future.

Certain types of costs are extremely difficult to quantify, and we

understand that many national security risks are heightened by

our dependence. But how, for example, would we assign a dollar

figure to Iran’s use of its energy exports to weaken international

resolve to stop its nuclear weapons program? Yet, we should do our

best to quantify the externality costs of oil so we have a clearer

sense of the economic and foreign policy tradeoffs that our oil dependence imposes upon us.

As the U.S. Government and American business consider investments in energy alternatives, we must be able to compare the costs

of these investments with the entire cost of oil. Public acknowledgment of the billions of dollars we spend to support what the President has called our, ‘‘oil addiction,’’ would shed new light on investment choices related to cellulosic ethanol, hybrid cars, alternative

diesel, and other forms of energy.

As we address these questions today, we’ll have the benefit of a

distinguished panel of experts.

Dr. Hillard Huntington is the executive director of the Energy

Modeling Forum at Stanford University. He is a senior fellow and

past president of the United States Association for Energy Economics. He recently coordinated two studies funded by the Department

of Energy that evaluated the economic risks of oil price shocks.

Mr. Milton Copulos is the president of the National Defense

Council Foundation. He has advised Secretaries of Defense, Energy, and Interior, and was a member of the National Petroleum

Council. He is widely published on military affairs, and has devoted much study to the military expenditures associated with ensuring the flow of oil.

Dr. Gary Yohe is the John E. Andrus Professor of Economics at

Wesleyan University. Professor Yohe is widely published on the adaptation and mitigation of climate change. He recently edited

‘‘Avoiding Dangerous Climate Change,’’ the collection of papers on

the subject that were prepared for last year’s G–8 summit.

We welcome these three distinguished witnesses. We look forward to their insights.

And, first of all, I would like to recognize my colleague, Senator

Hagel, for any opening thought or comment he might have this

morning.

Senator HAGEL. Mr. Chairman, thank you. I do not have a statement. I look forward to listening to our witnesses.

I think your focus on this issue at this time is not only appropriate and relevant, but one of the critical challenges that faces our

country and the world over the next 25 years. So, thank you for

your attention to this. And I thank, as well, our witnesses for giving us their expertise and time.

Mr. Chairman, thank you.

The CHAIRMAN. Well, thank you very much, Senator Hagel.

I’ll ask the witnesses to testify, starting with Mr. Copulos, then

Dr. Huntington, and then Dr. Yohe.

Let me say at the outset that your full statements will be made

a part of the record, so that you need not ask permission for that

to occur. Please either give the statements in full or summarize, as

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you wish. We will not have a rigid time limit. We’ve come to hear

you. We want to hear your testimony, and then have opportunities

to raise questions.

Mr. Copulos.

STATEMENT OF MILTON R. COPULOS, PRESIDENT, NATIONAL

DEFENSE COUNCIL FOUNDATION, ALEXANDRIA, VA

Mr. COPULOS. Thank you, Mr. Chairman. Bear with me. One of

the few signs of advancing age is you need more than one pair of

glasses. The other is, the barber spends more time on the ears than

on the top of your head. [Laughter.]

As you know, I’m Milton R. Copulos. I’m president of the National Defense Council Foundation. I would like to thank Chairman

Lugar for giving me the opportunity to speak with the committee

today. And I would also like to commend him for his leadership in

addressing our Nation’s perilous energy dependence. He ‘‘gets it.’’

And that’s important. Because what he gets is that America is

rushing headlong into a disaster, a disaster that threatens to leave

us with the Hobson’s choice between economic calamity and worldresource war. What’s worse, it’s a disaster of our own design. Like

Pogo said, ‘‘We have met the enemy, and they is us.’’ More than

three decades have passed since the 1973 OPEC embargo first

warned us about our vulnerability to imported oil. And yet, nothing

substantial has been done.

As bad as things were then, the emerging economies of China,

India, and Eastern Europe are increasing competition for scarce resources, making the situation even worse. Indeed, by the year

2025, the world will need an additional 40 million barrels of oil per

day. And the simple fact is, it’s not there to be found from conventional resources.

But it’s not just the physical shortfall that’s the problem. It’s also

the problem of the instability of many of our sources. Out of our

six top suppliers, four—Saudi Arabia, Venezuela, Nigeria, and

Iraq—which supply 38.2 percent of our imports, 22.6 percent of

total production, are of, at least, questionable reliability. Given the

situations in these countries, it’s virtually certain that sometime

within the next 3 to 5 years there will be an oil supply disruption.

And unlike the disruptions of the past, the consequences could be

far, far more severe. We estimated that the oil supply disruptions

of the 1970s cost this Nation between $2.3 and $2.5 trillion. And

I should note that Oak Ridge National Lab places the estimate at

$4 trillion, so, if anything, we’re conservative. However, the next oil

shock, because of our higher dependence, because of our higher use,

could cost this Nation $8 trillion, almost two-thirds of our GDP.

And that’s not the only concern that we have. One of the other

most important ones is that oil, which has always been a vital military commodity, has now become much more of one. During the

gulf war, a contemporary U.S. Army ‘‘heavy’’ division, to illustrate,

used more than twice as much oil on a daily basis as an entire

World War II field army. Indeed, the 582,000 people we sent to the

first gulf war used more than twice as much oil every day as the

entire 2-million-man Allied Expeditionary Force that liberated Europe in World War II. But, as high as that use was, it’s even higher

now. There’s been a 20-percent increase in the amount of oil for a

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deployed soldier that we now require. It now is one barrel of refined products per soldier per day. And it’s going to go up further

from there.

Well, these costs have long been a concern to our organization.

In fact, in 2003 we published a large study, ‘‘America’s Achilles’

Heel: The Hidden Costs of Imported Oil,’’ that entailed the review

of hundreds of thousands of pages of documents, including the entire order of battle of the U.S. Department of Defense. We looked

at historic data. We just did a massive review. And we concluded,

at that point, that the hidden cost of defense and other

externalities came to $304.9 billion annually. That was equivalent,

at that time, to adding $3.68 to the price of a gallon of gasoline.

But much has changed since then. When we did that study, the

refinery acquisition cost of a barrel of oil was $26.92. Indeed, in the

base year, we spent $99 billion on oil imports, and thought that

was high. Well, in 2005 we spent $251,619,000,000 on oil imports.

And this year, as the chairman noted, even if prices don’t go above

$60 a barrel—and I suspect they could—we’re going to spend at

least $320 billion on imported oil.

But that’s not all that’s changed. In 2003, we were spending

$49.1 billion annually to maintain the capability to defend the flow

of oil from the Persian Gulf. And I should note, this is a commitment that is not new. We have had this commitment since 1940—

since February 14, 1945, when Franklin Roosevelt met with King

Abdul Aziz of Saudi Arabia and basically came to an agreement

that we’d protect their oil in exchange for access to it. Every President, Republican and Democrat, since then has reaffirmed it. But

now, when you add in the supplementals for Iraq—and I should

say that it is foolish to suggest there’s no connection to oil in our

involvement there—the total comes to $132.7 billion annually.

So, what does this mean? Well, what it means is that the hidden

cost in 2005 for our oil profligacy came to $779.5 billion. Now, we

looked at it two ways. We amortized it over the total volume of imports, and then we also looked at the Persian Gulf separately, because so much of the defense cost is loaded there. Well, if you look

at it over the total volume of oil, it’s like adding $4.10 to the price

of a gallon of gasoline. In terms of the Persian Gulf, it’s $7.41 to

the price of a gallon of gasoline, which means, at our current purchase price, you’re talking—the true cost is $9.53 a gallon for 2005.

But 2005 was just the beginning, because this year we’re going

to spend at least $320 billion on imports, as I said. That’s a $70

billion increase in just 1 year. When we look at that, it raises the

hidden cost to $825.1 billion. That’s almost twice the President’s request for the Department of Defense authorization for FY 2006. It

also means that, amortized over the total volume of oil, the premium in 2006 will be $5.04; looking at the gulf, $8.35. That means

the real cost of a gallon of gasoline is about $10.86.

To put it in perspective, if you drive a family sedan, a Toyota

Camry, something like that, it’s really costing you $217.20 to fill

your tank. If you have a large SUV, like a Ford Expedition, you’re

spending $325.80 to fill your tank.

Now, of course, the question is, you know, Can we do anything

about it? Obviously, this is a drain on our economy we cannot afVerDate 11-MAY-2000 14:12 Apr 20, 2007 Jkt 000000 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 OIL.TXT sforel1 PsN: sforel1
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ford. And yet, we have had to sustain it. Well, the good news is,

the answer is, yes, we can do something.

The simple truth is, our Nation does not lack energy resources.

What we have lacked is the political will and public commitment

to make full use of what we have. In the short term, we face one

critical problem. We’ve got a short-term problem and a long-term

problem.

The short-term is, How do you fuel the 220 million privately

owned vehicles that are on our roads today? They require some sort

of fuel that will burn in a conventional internal combustion engine.

In the out years, we need to look at how we can make that transition. So, there are some things that we can do, short term.

First, we need to take full advantage of our offshore oil, oil in

other places, where we can get at it—offshore, in particularly, because the access will be quicker. We need to expand our use of renewable fuels—alcohol and biodiesel. And that, I think we should

really consider looking at opening up the Caribbean basin as a

source of those fuels, lifting the tariffs that we have on fuel alcohol

for that region, and let those nations gain some economic traction.

There’s depressed sugar prices now. Turning that sugar into alcohol would help enhance our supplies. And there’s plenty to go

around. It’s not going to compete with domestic producers. We can

use everything they have, and more.

We also should look at nonpetroleum consumption. The fact that

two-thirds of—nontransportation consumption—the fact that twothirds of our oil goes to transportation also means one-third

doesn’t. And, in some ways, it’s easier to fix that than it is to fix

the auto fleet.

For example, there’s a fellow out in Moline, IL, a builder named

George Bialecki. Small guy. He’s building homes that are 85-percent energy efficient, that use no oil whatsoever. They use geothermal heat pumps instead. And he’s building for 20 percent less

than conventional builders that don’t have the features his homes

do. There’s a new process that’s been developed in Canada—they

are using it; this is not R&D—that turns wood into fuel oil that can

be used. There are many things like that. But to do this, we have

leadership.

And, in that regard, again, I want to note that Chairman Lugar

and his colleagues, Senators Chafee, Coleman, Nelson, and Obama,

deserve particular praise for their sponsorship of S. 2025, the Vehicle Choices for American Security Act. It’s based on the Energy Security Blueprint of the Set America Free Coalition, of which I have

the honor of being one of the founding members. It’s clear that this

is the sort of bipartisan support for the issue that can help us avoid

the Hobson’s choice between economic catastrophe and globalresource war.

And one other point I really want to make sure we don’t forget.

Some portion of every dollar we spend on imported oil finds its way

into the hands of people who would do us harm. At least $1.5 billion of it does. So, in essence, we’re paying for both sides of the war

on terrorism. We shouldn’t have to.

But the main thing to remember is, the situation is not hopeless.

We have the resources necessary to provide our energy’s—our NaVerDate 11-MAY-2000 14:12 Apr 20, 2007 Jkt 000000 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 OIL.TXT sforel1 PsN: sforel1
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tion’s energy needs. All we have to do is find the political will to

do so.

[The prepared statement of Mr. Copulos follows:]

PREPARED STATEMENT OF MILTON R. COPULOS, PRESIDENT, NATIONAL DEFENSE

COUNCIL FOUNDATION, ALEXANDRIA, VA

My name is Milton R. Copulos, and I am president of the National Defense Council Foundation.

I would like to thank Chairman Lugar for giving me the opportunity to speak

with the committee today and I would also like to commend him for his leadership

addressing our Nation’s perilous energy dependence.

A HEADLONG RUSH INTO DISASTER

America is rushing headlong into disaster. What is worse, however, is that it is

a disaster of our own design.

More than three decades have passed since the 1973 Arab Oil Embargo first alerted the Nation to its growing oil import vulnerability. Yet, despite this warning, we

are now importing more than twice as much oil in absolute terms than we did in

1973, and the proportion of our oil supplies accounted for by imports is nearly double what it was then. What makes this dependence even more dangerous than it

was three decades ago is the fact that the global market has become a far more competitive place with the emerging economies of China, India, and Eastern Europe creating burgeoning demand for increasingly scarce resources.

Indeed, over the past decade the Chinese economy has grown at a frenetic pace,

officially estimated at 9.2 percent in 2005. India’s growth rate for that year was 7.1

percent. In Eastern Europe, Belarus grew at 7.8 percent, the Czech Republic at 4.6

percent, and the Ukraine at 4.4 percent. This compares with 3.5 percent for the

United States, 2.1 percent for Japan, and 1.7 percent for the European Union.

As a result of this explosive growth, oil consumption in the developing countries

is expected to increase at a rate of 3 percent annually over the next two decades.

But even this figure may severely understate the problem. Indeed, China alone has

accounted for 40 percent of the total increase in world oil consumption over the past

several years. Moreover China plans to add 120 million vehicles to its automobile

fleet over the next decade, ultimately requiring 11.7 million barrels per day of new

crude oil supplies. India, too, is expected to continue to require increasingly large

amounts of oil with projected increase of 28 percent over just the next 5 years.

Even conservative estimates suggest that nearly 30 million barrels per day of new

oil supplies will be required by the year 2025 just to service the developing world’s

requirements. When Europe and the Americas are included, the requirement is closer to 40 million barrels per day. It is doubtful that new supplies sufficient to meet

this skyrocketing demand will be found from conventional sources.

UNCERTAIN SUPPLIERS

Nor is it just the potential physical shortfall of resources that is a source of concern. An even greater concern lies in the instability of U.S. sources of oil imports.

The top six sources of U.S. oil imports—Canada, Mexico, Saudi Arabia, Venezuela,

Nigeria, and Iraq—account for 65.1 percent of all foreign crude reaching our shores

and 38.9 percent of total domestic consumption. Of these four, Saudi Arabia, Venezuela, Nigeria, and Iraq, provide 38.2 percent of oil imports and 22.6 percent of

total consumption. For a variety of reasons, none of the four I just mentioned can

be considered a reliable source of supply.

Venezuela’s President, Hugo Chavez, is a vocal opponent of the United States who

has twice threatened to cut off oil shipments to the United States.

Nigeria’s production has been repeatedly disrupted by civil unrest, and some

135,000 barrels of oil per day are lost to theft.

Last month, a terrorist attack on the massive Saudi oil processing facility at

Abqaiq was barely thwarted, but not before two of the terrorist’s explosive-laden

cars were detonated. Moreover, this was not the only instance of an attempt to disrupt the flow of Saudi oil. In the summer of 2002, Saudi Interior Ministry forces

blocked an al-Qaeda plot to attack and cripple the loading dock at Ras Tanura

which handles 10 percent of the world’s oil supplies.

Attacks on oil facilities in Iraq are a frequent occurrence.

Nor are the attacks on U.S. oil supplies a coincidence. In December 2004, alQaeda issued a fatwa that said in part: ‘‘We call on the mujahideen in the Arabian

Peninsula to unify their ranks and target the oil supplies that do not serve the Islamic nation but the enemies of this nation.’’

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The fatwa went onto declare: ‘‘Be active and prevent them from getting hold of

our oil and concentrate on it particularly in Iraq and the gulf.’’

Clearly, given the instability that characterizes four of our top six sources of oil,

the question is not whether we will experience a supply disruption, but rather when.

The disruption could occur as a consequence of a terrorist act, or could result from

a politically motivated embargo. In the end, it doesn’t really matter why a disruption occurs, because the consequences would be identical, and severe.

THE CONSEQUENCES OF DISRUPTION

The supply disruptions of the 1970s cost the U.S. economy between $2.3 trillion

and $2.5 trillion. Today, such an event could carry a price tag as high as $8 trillion—a figure equal to 62.5 percent of our annual GDP or nearly $27,000 for every

man, woman, and child living in America.

But there is more cause for concern over such an event than just the economic

toll. A supply disruption of significant magnitude, such as would occur should Saudi

supplies be interdicted, would also dramatically undermine the Nation’s ability to

defend itself.

Oil has long been a vital military commodity, but today has taken on even more

critical importance. Several examples illustrate this point:

• A contemporary U.S. Army Heavy Division uses more than twice as much oil

on a daily basis as an entire World War II field army.

• The roughly 582,000 troops dispatched to the Persian Gulf used more than

twice as much oil on a daily basis as the entire 2-million-man Allied Expeditionary Force that liberated Europe in World War II.

• In Operation Iraqi Freedom, the oil requirement for our Armed Forces was 20

percent higher than in the first gulf war, Operation Desert Storm, and now

amount to one barrel of refined petroleum products per day for each deployed

service member.

Moreover, the military’s oil requirements will be even higher in the future. Therefore, a shortage of global oil supplies not only holds the potential to devastate our

economy, but could hamstring our Armed Forces as well.

THE HIDDEN COST OF IMPORTED OIL

While it is broadly acknowledged that our undue dependence on imported oil

would pose a threat to the Nation’s economic and military security in the event of

a supply disruption, less well understood is the enormous economic toll that dependence takes on a daily basis.

The principal reason why we are not fully aware of the true economic cost of our

import dependence is that it largely takes the form of what economists call

‘‘externalities,’’ that is, costs or benefits caused by production or consumption of a

specific item, but not reflected in its pricing. It is important to understand that even

though external costs or benefits may not be reflected in the price of an item, they

nonetheless are real.

In October 2003, my organization, the National Defense Council Foundation,

issued ‘‘America’s Achilles Heel: The Hidden Costs of Imported Oil,’’ a comprehensive analysis of the external costs of imported oil. The study entailed the review of

literally hundreds of thousands of pages of documents, including the entire order of

battle of America’s Armed Forces and more than a year of effort. Its conclusions divided the externalities into three basic categories: Direct and Indirect Economic

Costs, Oil Supply Disruption Impacts, and Military Expenditures.

Taken together, these costs totaled $304.9 billion annually, the equivalent of adding $3.68 to the price of a gallon of gasoline imported from the Persian Gulf.

As high as these costs were, however, they were based on a crude oil refiner acquisition cost of $26.92. Today, crude oil prices are hovering around $60 per barrel

and could easily increase significantly. Indeed, whereas, in 2003 we spent around

$99 billion to purchase foreign crude oil and refined petroleum products, in 2005 we

spent more than $251 billion, and this year we will spend at least $320 billion.

But skyrocketing crude oil prices were not the only factor affecting oil-related

externalities. Defense expenditures also changed.

In 2003, our Armed Forces allocated $49.1 billion annually to maintaining the capability to assure the flow of oil from the Persian Gulf.

I should note that expenditures for this purpose are not new. Indeed, last year

marked the 60th anniversary of the historic meeting between Saudi monarch King

Abdul Aziz and U.S. President Franklin Roosevelt where he first committed our Nation to assuring the flow of Persian Gulf oil—a promise that has been reaffirmed

by every succeeding President, without regard to party.

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In 1983 the implicit promise to protect Persian Gulf oil supplies became an explicit element of U.S. military doctrine with the creation of the United States Central Command, CENTCOM. CENTCOM’s official history makes this clear stating in

part: ‘‘Today’s command evolved as a practical solution to the problem of projecting

U S. military power to the gulf region from halfway around the world.’’

I am stressing the longstanding nature of our commitment to the gulf to underscore the fact that our estimates of military expenditures there are not intended as

a criticism. Quite the opposite, in fact. Without oil our economy could not function,

and, therefore, protecting our sources of oil is a legitimate defense mission, and the

current military operation in Iraq is part of that mission.

To date, supplemental appropriations for the Iraq war come to more than $251

billion, or an average of $83.7 billion per year. As a result, when other costs are

included, the total military expenditures related to oil now total $132.7 billion annually.

So, where does that leave us?

In 2003, as noted, we estimated that the ‘‘hidden cost’’ of imported oil totaled

$304.9 billion. When we revisited the external costs, taking into account the higher

prices for crude oil and increased defense expenditures we found that the ‘‘hidden

cost’’ had skyrocketed to $779.5 billion in 2005. That would be equivalent to adding

$4.10 to the price of a gallon of gasoline if amortized over the total volume of imports. For Persian Gulf imports, because of the enormous military costs associated

with the region, the ‘‘hidden cost’’ was equal to adding $7.41 to the price of a gallon

of gasoline. When the nominal cost is combined with this figure it yields a ‘‘true’’

cost of $9.53 per gallon, but that is just the start.

Because the price of crude oil is expected to remain at the $60 range this year,

expenditures for imports are expected to be at least $320 billion this year. That

amounts to an increase of $70 billion in spending for foreign oil in just 1 year. That

increase would raise the total import premium or ‘‘hidden cost’’ to $825.1 billion, or

almost twice the President’s $419.3 billion defense budget request for fiscal year

2006. If all costs are amortized over the total volume of imports, that would be

equivalent to adding $5.04 to the price of a gallon of gasoline. For Persian Gulf imports, the premium would be $8.35. This would bring the ‘‘real’’ price of a gallon

of gasoline, refined from Persian Gulf oil, to $10.86. At these prices the ‘‘real’’ cost

of filling up a family sedan is $217.20, and filling up a large SUV, $325.80.

But, can anything be done about this enormous drain on our economy?

The answer to that question is ‘‘Yes.’’

SOLVING THE PROBLEM

The simple truth is that we do not suffer from a lack of energy resources. Rather,

what we suffer from is a lack of the political will and public consensus to use them.

As Pogo said, ‘‘We have met the enemy and they is us.’’

What then can we do?

The first step is to recognize that we face a two-fold problem. The first part entails assuring adequate fuel supplies for the 220 million privately owned vehicles

on the road today. These vehicles have an average lifespan of 16.8 years and the

average age of our vehicle fleet is 8.5 years. Therefore, we will require conventional

fuels or their analogs for at least a decade, even if every new vehicle produced from

this day forth runs on some alternative.

The second part of the problem is how to affect a transition to alternatives to conventional petroleum. This transition will take much longer than a decade—perhaps

a generation or more—but the longer we delay beginning to make the change, the

longer it will take to accomplish.

In the near term, say the next 5 to 10 years, we essentially have two options.

First, to make the greatest possible use of our readily accessible conventional domestic resources, particularly the oil and natural gas that lay off our shores. We

should also consider using some of our 1,430 trillion cubic feet of domestic gas reserves as a feedstock for motor fuels produced through the Fischer-Tropsch process.

Indeed, we currently have 104 trillion cubic feet of so-called ‘‘stranded’’ natural gas

in Alaska and a pipeline with some 1.1 million barrels per day of excess capacity.

Stranded gas could be converted into clean burning motor fuel and transported in

the existing pipeline to the lower 48 states.

We can also expand our use of renewable fuels such as alcohol and biodiesel. A

concerted program to make full use of them could significantly add to our motor fuel

stocks within the stated timeframe.

We should also encourage the acquisition of advanced vehicle technologies such

as flex-fuel vehicles, hybrids and plug-in hybrids and vehicles that use propane or

natural gas. At the same time, we should encourage the installation of biodiesel and

10

E85 pumps in our Nation’s filling stations so that the infrastructure for alternative

fuels can keep pace with the growth of the alternative fuel vehicle fleet.

Another point is to make sure that we do not forget to address nontransportation

petroleum consumption. The fact that two-thirds of our petroleum is consumed in

the transportation sector means that one-third is not. The opportunities to reduce

oil consumption from nontransportation are greater than you might expect.

Take residential energy use, for example. Roughly 12 percent of distillate use goes

to home heating, most of it imported from the Middle East. Yet, there are alternatives readily available that could totally eliminate this use, and at the same time

save consumers money. For instance, a developer in Moline, IL, is currently building

homes that are between 85-percent and 90-percent energy efficient, and meet their

heating and cooling requirements with geothermal energy. More important, these

homes are being sold for 20 percent less than conventional housing sold in the same

area. So consumers are not only saving energy, they are saving enormous amounts

of money.

There is another commercial process that converts wastewood into a zero-sulfur

industrial boiler fuel. Our Clean Forests Program that removes deadwood and debris from national forests to prevent fires is generating an enormous amount of such

wastewood, and that is just the tip of the iceberg. Oak Ridge National Laboratory

estimates that a total of 1.366 billion tons of biomass is available for energy production each year. Utilizing this process, it could be turned into 5.6 million barrels of

oil, per day, or close to 27 percent of our total domestic requirements.

These, of course, are just two examples. Many more exist. The important consideration is that we have a wealth of options that could help in the near to intermediate

term if we would only make use of them. To do this, however, we must have leadership.

In this regard, I should note that Chairman Lugar and his colleagues, Senators

Chafee, Coleman, Nelson, and Obama, deserve particular praise for their sponsorship of S. 2025, the Vehicle and Fuel Choices for American Security Act, which is

based on the Energy Security Blueprint of the Set America Free Coalition, of which

I was a founding member. It is focused on reducing our dependence on foreign oil,

not by compromising the American way of life, but by encouraging fuel choice, utilization of the vast array of America’s domestic energy resources and accelerated deployment of advanced vehicle technologies. It is clear that this sort of bipartisan effort is exactly the kind of action that is required if we are to make any progress

on this critical issue.

In the longer term, there are other domestic energy resources that can be brought

into play. We have between 500 billion and 1.1 trillion barrels of oil contained in

our huge oil shale resources. We have 496.1 billion tons of demonstrated coal reserves—27 percent of the world total. We also have 320,222 trillion cubic feet of natural gas in the form of methane hydrates. This is equivalent to 51.1 trillion barrels

of oil. Indeed one on-shore deposit in Alaska, alone, contains 519 trillion cubic feet

of natural gas. That is equal to 82.9 billion barrels of oil.

We also have 4.85 billion pounds of uranium reserves. Harnessing this vital resource to provide electricity for our cities, towns, and farms is only common sense.

Moreover, it could serve to reduce the need to use natural gas for electricity generation, preserving it for higher uses.

There is one final point I want to make sure is not forgotten. Some portion of

every dollar we spend on imported oil finds its way into the hands of individuals

who wish to do us harm. The simple truth is that international terrorism stands

on two financial pillars: Oil and the drug trade. To the extent that we reduce the

revenues generated by either of these activities, we hinder the ability of terrorists

to operate.

To conclude, while our Nation is in dire peril due to its excessive dependence on

imported oil, the situation is far from hopeless. We have the resources necessary to

provide our Nation’s energy needs if we can only find the political will to do so.

The CHAIRMAN. Well, thank you very much for that testimony.

A great start for our morning, and we appreciate it.

I would just make the comment, parenthetically, that the President, in his speech yesterday at the Freedom House, in an extemporaneous response to a question on energy, gave a very passionate

talk in which he touched upon each of the major themes that you,

as witnesses, are going to be touching today. He indicated that

there are many technologies available in our country to deal with

energy challenges, and a sense of urgency if needed. He admitted

11

that some are skeptical about his speech in the State of the Union

and the ‘‘oil addiction’’ remark. He acknowledges that. But he says,

in fact, ‘‘They’re wrong. That’s where I am.’’

So, I appreciate that. It gives me some encouragement in holding

this hearing this morning with my colleagues, that we have, I

think, a President now who is very much interested in this. And

so, we will make your statements available to the President so that

he will have the benefit, as we have, of what you are having to say

this morning.

I’d like to call now upon Dr. Huntington.

STATEMENT OF DR. HILLARD HUNTINGTON, EXECUTIVE DIRECTOR, ENERGY MODELING FORUM, STANFORD UNIVERSITY, STANFORD, CA

Dr. HUNTINGTON. Thank you, Chairman Lugar and Ranking

Member Biden and distinguished members of the committee. I appreciate the opportunity to discuss with you today the hidden cost

of oil.

As you’ve mentioned, tight oil markets with minimal surplus capacity have made world oil prices jumpy. Over the last 6 months,

a series of political and natural events have cascaded around the

globe and left their impact on increasingly nervous oil-consuming

nations. The list goes on. I have listed them in my handout, but,

basically, suicide attack—thwarted suicide attack in Saudi Arabia,

the Niger Delta speedboat attacks, the Venezuelan pipeline explosions, and, of course, the devastating hurricanes here in the United

States. Each time, they have a sporadic nature to them, and it conveys an element of unpredictability and surprise.

I have recently coordinated several studies for the Energy Modeling Forum at Stanford University that relate directly to this

issue. I’d like to share a few observations that I think summarize

the perspectives of many—certainly not all, but many of the participants who were involved in the studies.

Our forum frequently brings together leading experts and advisors from Government, business, and universities and—to discuss

how we can improve analysis of key problems that keep policymakers awake at night. I think this is clearly one of them.

In this particular case, the work was done primarily for the U.S.

Department of Energy, but we were asked to invite those individuals we thought would be leading people on the issue. So I think

it’s a good cross section of people working on the topic.

Our two studies focused on two areas. One is the risk of another

major oil disruption. And the second one is the economic consequences of those oil-price shocks. I am also submitting both reports that we did, and they certainly go into a lot more detail than

I can remark here in my brief comments.

I’ll also just spend a little time talking about a third issue that

we did not look at, and that is our dependence on the oil-producing

cartel.

Although these recent episodes have made oil-importing countries nervous, and have imposed some very high costs on people

and infrastructure, they have yet to duplicate the kinds of shocks

that we experienced during the 1970s and the early 1980s—and

the early 1990s. As a result, their economic impacts have been

12

more tolerable than in the past. Despite recent oil price volatility,

for example, we’ve still had very strong economic growth. GDP

growth has maintained 31⁄2 percent since the end of 2001.

A number of knowledgeable experts, however, are concerned

about the very real possibility of more damaging shocks in the future. A group assembled by Stanford’s forum, of which I am the director, thought that the odds of at least one very damaging shock

over the next 10 years, were higher than a continuation of today’s

events, where we have an oil market with a lot of volatility, but

without such a disruption. And, although another major oil disruption is not a certainty, its likelihood is significantly high that, I

think, we have to be quite worried about it.

Basically, the way I describe our results is that your odds of

drawing a club, a diamond, or a heart from a shuffled deck of playing cards are three out of four. In the EMF study that I referred

to, the participants found that the odds of a foreign oil disruption

happening over the next 10 years is basically that. It was actually

a little higher, at 80 percent.

And the disruption events that we looked at included surprise

geopolitical, military, or terrorist turmoil that would remove at

least 2 million barrels per day. That’s about 2.1 percent of the expected global oil production. And it could be more than that level,

but it had to remove at least that amount.

Foreign disruptions of this magnitude would have more serious

effects on oil prices and the economy than we have seen with

Katrina and Rita. Oil prices, however, would rise more, and longer

than a few months in the heating season. And, basically, we

thought of these episodes as perhaps doubling the price in a 3-

month period.

In the study, the experts estimated the amount of oil lost to the

market is the number of barrels removed from the market by the

initial disruption, minus any offsets from using excess capacity

from undisrupted regions. So, if the disruption was not in Saudi

Arabia, maybe they would have some extra capacity.

We asked the experts to exclude any releases from the U.S. Strategic Petroleum Reserve, as these actions require separate decisions from the Government during an emergency.

The approach identified four major supply regions where disruptions are most likely. And you can imagine what those regions

were. They account for roughly similar shares of total world oil production, collectively. As a group, they account for about 60 percent

of total world oil production. The study lumped in one region—Algeria, Angola, Libya, Mexico, Nigeria, and Venezuela—and called

that group the ‘‘West of Suez.’’ Saudi Arabia was the second region.

And other Persian States—Iran, Iraq, Kuwait, and the other Persian Gulf States—were the third region. And, finally, Russia and

the Caspian States comprised the fourth region.

Of these regions, the riskiest areas were the Persian Gulf countries outside of Saudi Arabia, and several countries along the Atlantic basin, such as Nigeria and Venezuela. The least risky area,

from a disruption point of view was Russia and the Caspian States.

Though the participants found the possibility of disruptions was

lower in Saudi Arabia than in the other regions, certainly disruptions there would tend to have larger effects, if they did happen.

13

In the second study, on the economic consequences of a major

disruption, we sought to understand how easily the economy could

absorb such a shock. And figure 1 that’s shown here, as well as in

my presentation, shows that oil price shocks preceded 9 out of the

last 10 recessions in the United States. The solid line indicates the

path of the inflation-adjusted crude oil prices since 1950. This is

the line that’s moving up and down on the chart. The gray bars on

the slide, that are moving in a vertical direction, denote periods

when the U.S. economy was experiencing recessions, as defined by

the National Bureau of Economic Research. This finding was first

advanced by Professor James Hamilton at the University of California at San Diego, and it’s been confirmed by a number of other

researchers. So, the price shocks occur before, rather than after,

the recession.

If a large disruption does occur, we can expect very serious economic consequences. Large disruptions, especially if they move inflation-adjusted oil prices higher than experienced recently, will

cause unemployment and excess capacity to grow in certain key

sectors. Many large-scale models of the U.S. economy estimate that

the level of real GDP could decline by 2 percent for a doubling of

oil prices. That impact is on the level of real GDP. Since the economy is growing more rapidly than 2 percent per year, that would

not mean, necessarily, a recession, but it would certainly slow down

economic growth.

Other researchers in the group, however, think that these estimates underestimate the impacts, because they do not focus explicitly on sudden and scary oil price shocks, which cause a different

set of results.

These other researchers think that our historical experience suggests that the level of real GDP would decline by more. And their

estimate is at about 5 percent for a doubling of the oil price.

My personal view is that this second estimate is probably closer

to what would happen if the world actually had a major disruption,

because I think they’ve taken the care to sort out shocks from other

types of oil price movements. But if they are correct, it clearly

means we’re going to have a recession if we have a major disruption of this kind.

Now, some people think that oil shocks may not be a problem,

because the Federal Reserve Board could intervene and lessen the

impact. I have a great deal of faith in the Federal Reserve Board.

They’ve done a marvelous job in controlling inflation, which places

the U.S. economy in a better position for offsetting oil disruptions

than in previous decades. However, I’m not an expert on the Federal Reserve Board, but I am not yet convinced that they can compensate the economy for a large, devastating disruption. They

would have to make some important decisions very quickly, at a

time when fears were running rampant. They may also find it difficult to stimulate the economy, because the nominal interest rates

are already very low, both here in this country, as well as abroad.

For this reason, I think that the United States should seriously

consider other types of insurance policies that would allow the Federal Reserve Board more leeway and flexibility in controlling our

inflation rates.

14

As a general rule, strategies that reduce our dependence on oil

consumption are more effective than policies that reduce our imports. That may seem a little strange, but let me explain it this

way. One should view the world oil market as one giant pool, rather than as a series of disconnected puddles. When events happen

overseas anywhere in the market, they will raise prices not only

there, wherever the disruption is, but also everywhere that connect

to that larger pool. And since reducing our imports with our own

production does not sever this link to the giant pool, disruptions

will cause prices to rise for all production, including that originating in the United States. So, more domestic supplies, by themselves, do not really protect us from these price shocks. Reduction

in our use tends to be more effective.

Unfortunately, insurance policies are never free. I think we all

recognize this. It will cost us something to implement a strategy

that reduces our risk to a major oil disruption, but it will also cost

us a lot of money and jobs if we do not adopt an insurance policy

and the Nation faces another major disruption.

Now, figure 2 in my presentation, which I don’t have shown separately, shows that the Nation’s oil use per dollar of gross domestic

product can respond to oil prices. And, as a result of the 1970 oil

price shock, we shifted away from oil in many sectors in the early

1980s, as shown by the top line in that chart. But that trend has

slowed considerably since then.

Moreover, transportation remains strongly tied to oil use. The dependence on transportation is shown by the bottom line in that

chart. The dependence on oil in transportation not only affects

households directly, through higher gasoline costs, but it also raises

the cost of transporting goods around the country.

Now, our most recent studies did not address a third issue that

could influence the cost of using oil. And let me say a word about

it. And that is that the United States could adopt policies that

would try to minimize or break the oil-producing cartels’ control

over the market. Our forum, many years ago, addressed this issue,

and, although the range of views was wide, the working group then

conservatively estimated that the hidden cost of oil from this

source might be something on the order of 12 cents per gallon. If

you’re used to thinking in terms of per barrel, it’s $5 per barrel,

or 12 cents per gallon.

In their review of the corporate average fuel efficiency standards

of several years ago, the National Research Council used a very

similar estimate. That estimate is not trivial, but it is certainly not

as large as some of the estimates I’ve seen for gasoline’s hidden

cost due to pollution, congestion, and automobile accidents.

To summarize, I think the Nation is vulnerable to another major

disruption, not because the economy necessarily imports oil, but because it uses a lot of oil, primarily for gasoline and jet fuel. Even

if domestic production could replace all our imports, which I’m not

advocating that we do, the economy would remain vulnerable to the

types of disruptions discussed here. However, it is very appropriate

for the committee to focus on oil, because I think it is essentially

a foreign policy issue.

15

Oil-importing governments have committed significant political

and military resources to the Middle East over a number of decades in order to provide regional stability for the world oil supplies.

Excessive exposure to our oil vulnerability risks in this country

increases the cost of pursuing foreign policy. It’s much—as you

called—it’s often used as a weapon against the oil-weak countries,

I think, Senator Lugar, is the way you put it, very eloquently. And

I think that’s a very key concern, and it reduces our capacity to

conduct the foreign policy in this way.

Unfortunately, none of the estimates that I’ve seen can really put

a number on that figure. And yet, it may be the most important

issue of all. You’ve actually encouraged me to think more about

this issue. Maybe we can try to develop something along that line.

In sum, I would say it’s a very important policy issue. I think

that it’s only right that you are concerned about it. And I am extremely pleased that you are concerned about it.

Thank you.

[The prepared statement of Dr. Huntington follows:]

PREPARED STATEMENT OF DR. HILLARD HUNTINGTON, EXECUTIVE DIRECTOR, ENERGY

MODELING FORUM, STANFORD UNIVERSITY, STANFORD, CA

Thank you, Chairman Lugar, Ranking Member Biden, and distinguished members of the committee, for the opportunity to discuss with you today the hidden cost

of oil.

Tight oil markets with minimal surplus capacity have made world oil prices particularly jumpy over recent months. In the last 6 months, a series of political and

natural events have cascaded around the globe and left their impact on increasingly

nervous oil-consuming nations. These developments have been extremely varied and

include the following:

• A thwarted suicide attack in February at the Abqaiq oil processing facility in

eastern Saudi Arabia;

• A string of turmoil in the Niger Delta highlighted by a recent speedboat attack

in January by gunmen on the riverside offices of Italian oil company Agip;

• Antigovernment attempts to disrupt congressional elections in Venezuela culminating in an explosion at an oil pipeline connected to that country’s largest oil

refinery; and

• Devastating Hurricanes Katrina and Rita in the United States in August and

September.

Their sporadic nature conveys an element of unpredictability and surprise.

I have recently coordinated several studies for the Energy Modeling Forum at

Stanford University that relate directly to this issue. I would like to share a few

observations that I think summarize the perspectives of many (but certainly not all)

participants who were involved in the studies. Our forum frequently brings together

the leading experts and advisors from government, business, and university and

other research organizations to discuss how we can improve analysis of key energy

problems that keep policymakers awake at night. In this particular case, the work

was done primarily for the U.S. Department of Energy, but we were asked to invite

individuals we thought were the leading people on this issue.

Our two studies focused on the risks of another major oil disruption and the economic consequences of oil price shocks. I am also submitting both reports that expand considerably over my brief remarks here today. I will also briefly discuss a

third issue: Our dependence on the oil-producing cartel.

Although these episodes have made oil-importing countries nervous and have imposed some very high costs on people and infrastructure, they have yet to duplicate

the types of oil shocks that were experienced during the 1970s and early 1990s. As

a result, their economic impacts have been more tolerable than in the past. Despite

recent oil price volatility, for example, real GDP in the United States has grown

strongly, by 3.5 percent annually since the end of 2001.

A number of knowledgeable experts, however, are concerned about the very real

possibility of much more damaging shocks in the future. A group assembled by

Stanford’s EMF thought that the odds of, at least, one very damaging shock over

the next 10 years were higher than those of an oil market with some volatility but

16

without such a shock. Although another major oil disruption is not a certainty, its

likelihood is significantly high enough to be worrisome.

Your odds of drawing a club, diamond, or heart from a shuffled deck of playing

cards are three out of four. In the EMF study, the participants found that the odds

of a foreign oil disruption happening over the next 10 years are slightly higher at

80 percent. Disruption events included surprise geopolitical, military, or terrorist

turmoil that would remove at least 2 million barrels per day—an amount representing about 2.1 percent of expected global oil production. Foreign disruptions of

this magnitude would have more serious effects on oil prices and the economy than

we have seen with the Katrina and Rita hurricanes. Oil prices, however, would rise

more and for longer than a few months or a heating season.

In the study, experts estimated the amount of oil lost to the market as the number of barrels removed by the initial disruption, minus any offsets from the use of

excess capacity from undisrupted regions. The experts were asked to exclude any

releases from the U.S. strategic petroleum reserve, as these actions require separate

decisions from the government during an emergency.

The approach identified four major supply regions where disruptions are most

likely. These regions account for approximately similar shares of total world oil production. Collectively, they account for about 60 percent of total world oil production.

The study lumped Algeria, Angola, Libya, Mexico, Nigeria, and Venezuela as the

first region, called ‘‘West of Suez.’’ Saudi Arabia was the second region, and other

Persian Gulf States—Iran, Iraq, Kuwait, Qatar, UAE, and Oman—were the third.

Russia and the Caspian States comprised the fourth region.

The riskiest areas were the Persian Gulf countries outside of Saudi Arabia and

several countries along the Atlantic Basin, such as Nigeria and Venezuela. The least

risky area was Russia and the Caspian States. Although the participants found the

possibility of disruptions was lower in Saudi Arabia than in several other vulnerable

regions, disruptions there would tend to have larger effects.

In the second study on the economic consequences of a major disruption, we

sought to understand how easily the economy could absorb such a shock. Figure 1

shows that oil price shocks preceded 9 of the last 10 recessions in the United States.

The solid line indicates the path of inflation-adjusted crude oil prices since 1950.

The gray bars denote periods when the U.S. economy was experiencing recessions

as defined by the National Bureau of Economic Research (NBER). This finding was

first advanced by Professor James Hamilton at University of California at San

Diego and has been confirmed by numerous other researchers.

If a large disruption does occur, we can expect very serious economic consequences. Large disruptions, especially if they move inflation-adjusted oil prices

higher than experienced recently, will cause unemployment and excess capacity to

grow in certain key sectors. Many large-scale models of the U.S. economy estimate

17

that the level of real GDP could decline by 2 percent for a doubling of oil prices.

Since the economy is growing more rapidly than 2 percent per year, that impact

would not mean a recession.

Other researchers, however, think that these estimates underestimate the impacts, because they do not focus explicitly on sudden and scary oil price shocks.

These other researchers think that our historical experience suggests that the level

of real GNP would decline by more, at 5 percent for a doubling of the oil price. My

personal view is that the higher estimate may be closer to what would actually happen if we had a major disruption. That would mean a recession.

Some people think that oil shocks may not be a problem because the Federal Reserve Board could intervene and lessen the impact. I have a great deal of faith in

the Federal Reserve Board. They have done a marvelous job in controlling inflation,

which places the U.S. economy in a better position for offsetting oil disruptions than

in previous decades. I am not yet convinced that they can compensate the economy

for a large devastating disruption. They would have to make some important decisions, very quickly, at a time when fears were running rampant. They may also find

it difficult to stimulate the economy because nominal interest rates are already very

low, not only here but also abroad. For this reason, I think that the United States

should seriously consider other types of insurance policies that would allow the Federal Reserve Board more leeway and flexibility in controlling our inflation rates.

As a general rule, strategies that reduce our dependence on oil consumption are

more effective than policies that reduce our imports. One should view the world oil

market as one giant pool rather than as a series of disconnected puddles. When

events happen anywhere in the market, they will raise prices not only there but also

everywhere that connect to that large pool. Since reducing our imports with our own

production does not sever our link to that giant pool, disruptions will cause prices

to rise for all production, including that originating in the United States. More domestic supplies do not protect us from these price shocks.

Unfortunately, insurance policies are never free. It will cost us something to implement a strategy that reduces our risk to another major oil disruption. But it will

also cost us a lot of money and jobs if we do not adopt an insurance policy and the

Nation faces another major disruption.

Figure 2 shows that the nation’s oil use per dollar of Gross Domestic Product can

respond to oil prices. As a result of the 1970 oil price shocks, we shifted away from

oil in many sectors in the early 1980s, but that trend has slowed considerably since

then. Moreover, transportation remains strongly tied to oil use. The dependence on

oil in transportation not only affects households directly through higher gasoline

costs but it also raises the costs of transporting goods around the country.

18

Our most recent studies did not address a third issue that could influence the

costs of using oil. It is sometimes argued that the United States could adopt policies

that would try to minimize or break the oil-producing cartel’s control over the market. Our forum addressed this issue many years ago. Although the range of views

was wide, our working group conservatively estimated that the hidden cost of oil

from this source might be $5 per barrel, or 12 cents per gallon. Several years ago,

the National Research Council used a very similar estimate in their review of the

corporate average fuel economy standards for automobiles. That estimate is not trivial, but it is considerably smaller than various estimates for gasoline’s hidden costs

due to pollution, congestion, and automobile accidents.

In summary, the Nation is vulnerable to another major disruption not because the

economy imports oil but primarily because it uses a lot of oil, primarily for gasoline

and jet fuel. Even if domestic production could replace all oil imports, which I am

not advocating, the economy would remain vulnerable to the types of disruptions

discussed here. However, it is very appropriate that this committee focus its energy

on this issue. Oil-importing governments have committed significant political and

military resources to the Middle East over a number of decades in order to provide

regional stability that is critical to world oil supplies. Excessive exposure to oil vulnerability risks in this country increases these costs or reduces the capacity to pursue foreign policy objectives that are critical for mitigating nuclear proliferation, terrorism and other risks that reduce global security. I cannot provide you with an estimate for this political cost of using oil, but it is extremely important.

The CHAIRMAN. Well, thank you, Dr. Huntington, for your contribution to this discussion this morning.

We call now on Dr. Yohe.

STATEMENT OF DR. GARY W. YOHE, JOHN E. ANDRUS PROFESSOR OF ECONOMICS, WESLEYAN UNIVERSITY, MIDDLETOWN, CT

Dr. YOHE. Mr. Chairman, members of the committee, thank you

very much for your invitation to present testimony today on the

hidden costs of oil.

My task is to think about the hidden costs related to climate

change that is buried in the background of petroleum costs that

don’t reflect that externality. And the idea is to try back out the

share of oil to get the right order of magnitude in thinking about

such things.

I’m afraid that the answer to this deceptively simple question is

the same as it is to just about every economics question that I’ve

ever seen, and that is that ‘‘it depends.’’ And so, what I would like

to do is spend a little bit of time walking you through some of the

contexts of what it depends on and how much Mother Nature and

scientific uncertainty plays a role in that.

I will begin with a brief review of 100 published estimates of

what is termed the social cost of carbon, which can be backed down

to the social cost of the carbon content of petroleum.

I will observe that those estimates vary all over the map, and

offer some explanation of why.

I will also try to provide an alternative way about thinking about

the hidden cost of oil, and that is the notion that the climate is

changing, may, in fact, turn out to be changing abruptly. There will

be times, perhaps, in the future when we begin to recognize that,

and sudden adjustments in climate policy will be required. The

costs of those adjustments will be much smaller if we begin to

hedge against those costs. And that gets us out of the realm of

thinking about the uncertainty of climate damages and into the

realm—which is still uncertain, but not quite as uncertain—the

realm of estimating the economic cost of energy policy, per se. It

19

also allows uncertainty to become a reason to do something in the

near term, rather than a reason to delay, because this hedging

strategy is essentially, as Hill just mentioned in another context,

buying insurance, and the more risk you face and the wider the uncertainties; the more insurance you pay—the more insurance you

buy at a particular premium. But uncertainty is the reason why

you’re doing something.

I will, finally, argue that, perhaps another hidden cost is embedded in the investment decisions that are made in the public arena

and in the private arena, that ignoring the social costs, climate

costs of petroleum, systematically undervalues investment projects

that would provide alternative fuels, like ethanol—I’ve heard that

mentioned two or three times this morning already—and, perhaps

more of concern, it overvalues investments in projects that would

actually perhaps increase our reliance and consumption of petroleum.

So, to wander through these thoughts:

Economists may disagree on the number, but they do agree on

the approach to thinking about the hidden cost, the climate-change

cost of carbon, and that is to think about the marginal cost of a

unit of emissions at a particular point in time, as it’s cast forward;

and you try to track where the damages occur, and try to estimate

those damages, and bring it back, to get some idea of was is the

extrasocial damage created by those particular units of emission.

Economists also, oddly enough, agree on something else. That is,

that this social-cost estimate will rise, over time, at 2 to 3 percent

per year, as the concentrations of greenhouse gases increase.

Where they don’t agree is, of course, on the estimation, per se.

So, what I would like to do is provide a couple of glimpses of the

sources of concern from the climate literature. On your right is a

figure from the third assessment report of the Intergovernmental

Panel on Climate Change. It is the summary of the lines of evidence of impacts of climate. And identified are five different reasons for concern. The color codes suggest the degree of vulnerability

that systems around the world might face, even taking into account, to as much degree as possible, the ability of those systems

to adapt to those external stresses. It goes from white, which is not

much vulnerability, through yellow and orange, and up to red. In

the red areas, it’s essentially a judgment by the people who assess

the literature that the capacity to adapt to these climate-related

stresses may, in fact, be overwhelmed by the stresses that are

there.

It’s also important to notice that any one of those lines of concern, sources of vulnerability, are unevenly distributed around the

globe. So, the second figure that I provided indicates two different

possibilities for a picture in 2050. One calibrates vulnerability

around the world to aggregate impacts, which is the second row on

that particular—on the ‘‘Burning Embers’’ diagram from the

IPCC—it suggests that developing countries are, as according to

the hypothesis, perhaps more vulnerable to climate change. But the

developed world doesn’t get away scot free either. If you calibrate

the distribution in terms of something a little bit more urgent, like

the risk of extreme weather events, the portrait for 2050 again displays high vulnerabilities now in the developing world and signifiVerDate 11-MAY-2000 14:12 Apr 20, 2007 Jkt 000000 PO 00000 Frm 00023 Fmt 6633 Sfmt 6602 OIL.TXT sforel1 PsN: sforel1
20

cant vulnerability across the developed world, including North

America, which sits up there, in an orange. And if you look over

there, it’s sort of on its way to being something to which we could

begin to worry that even our ability to respond to the external

stresses of these climate events might be overwhelmed by the

events themselves.

So, economists have then taken a look at these and tried to estimate them over time. I didn’t have—I didn’t ask that the third figure I provided be blown up, but there is a distribution indicated

there of the estimates of the social cost of carbon across the hundred published estimates that are currently available, expressed

both in dollars per ton of carbon emitted and also backed into dollars per barrel, based on the carbon content of petroleum.

Now, the way to read the table, at least in terms of the numbers,

is to think about your old days when you took SATs, and think

about percentiles. Point A, for example, indicates the estimate of

zero for the social cost of carbon. It’s the 14th percentile, indicating

that 14 percent of these estimates actually had negative costs—i.e.,

benefits. How is that possible? Some of the estimates, some of the

models, suggest some moderate benefit to some sectors of developed

economies for very modest changes in climate. And a high discount

rate that picks up very little of the downstream costs could end up

with a benefit to climate. But the median estimate is point B.

That’s where 50 percent of the estimates are below that, at that

number, and 50 percent are above that number. That comes out to

about $2 a barrel. The 80th percentile is $9 a barrel. That means

80 percent are below that, but 20 percent of the estimates are

above $9 a barrel. And the average across all of the estimates, because the distribution is skewed, is $11 a barrel. And to reemphasize, the notion is that those are for emissions in 2005, and that

they would increase—those costs would increase at 2 or 3 percent

per year.

So, how do you interpret the content of that? Richard Tol, a

friend of mine who’s an economist at the University of Hamburg,

looks at that distribution—he’s actually the one who did the metaanalysis that produced it—and said that it looks like $50 a barrel

is about the maximum reasonable number for the social cost of carbon.

Tom Downing, who’s a geographer at the Stockholm Environment Institute, however, looks at that distribution, and he’s one

that’s spent a lot of time looking at vulnerabilities across Africa

and developing countries, looking at the risks that peoples in those

places face to changes in climate, and he thinks $50 is a threshold,

as well, but he thinks it’s the lower bound. He thinks the social

cost of carbon is legitimately much above $50 a barrel.

How do we get such a wide range? Well, there are a lot of different reasons. I already mentioned the discount rate. There’s also

the possibility of equity weighting: Do you really worry about the

people in Africa versus the people in a developed world? These are

choices that decisionmakers get to make, parameters they get to

think about as they judge the opportunity cost and the degree to

which they would like to pursue polices in terms of these particular

problems.

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There are, however, a wide number of parameters underneath

those estimates over which you do not have decisionmaker authority. These are essentially determined by Mother Nature. The major

one is climate sensitivity, the degree to which the global mean temperature would increase if atmospheric concentrations were to double. The IPCC has reported that number between a degree-and-ahalf and 41⁄2 or 51⁄2 degrees, depending on which report you read.

But more recent research suggests that the historical data cannot

reject the hypothesis that that climate sensitivity could be as high

as 8 or 9 or 10 degrees centigrade. And if you plug those climate

sensitivities into a model, even if you have high discount rates and

don’t worry about equity at all, you still get a high social cost of

carbon. So, decisionmakers cannot get out of it with respect to that.

So, the question, I think, is: Given the range of uncertainty, and

given the attempts to understand where it comes from, and recognizing that we simply don’t know what Mother Nature has in store

for us, how do we think about the social cost of carbon in a constructive way? And I would like to propose a second way, which,

as I suggested earlier, was to think about hedging against the adjustment costs of making policy decisions in the near to medium

term that would essentially have to abruptly change the way we

consume energy.

What might such a thing be? Abrupt climate change—it’s called

‘‘risks of large-scale discontinuities,’’ in the jargon of the IPCC—is

one place. Some work that I’ve done with Michael Schlesinger and

some other folks suggests, for example, that if the global mean

temperature were to increase another 2 degrees from 2000 levels,

that there would be a 50-percent chance of the collapse of the

thermohaline circulation, otherwise known as the Gulf Stream.

That’s—you were talking about pulling cards out of a deck—that’s

a flip of a coin. Heads, it shuts down; tails, it keeps going. We’re

not quite sure exactly how that’s going to happen, but that’s the

best that our scientific knowledge will tell us. And should it become

clear that that’s happening—and that’s not an experiment we’d like

to try on the only planet we have—there might come a time when

we need to make a policy adjustment.

So, my proposal is to think about minimizing the expected costs

of making such policy adjustments. And, again, Michael Schlesinger and I and a couple of other people did a little thought exercise, in a very simple model that was actually motivated by an exercise that the Energy Modeling Forum put together 15 years ago,

and came up with the notion that about $1.50 a barrel, starting

now, as the reflection of a climate policy, but increasing persistently and predictably at the rate of interest over time, would be a

reasonable hedge against the economic—abrupt economic costs of

abrupt changes in policy. It’s a very simple exercise. It only had

one source of uncertainty—the climate sensitivity—so, I think that

number is too low, but it’s indicative of the notion that you can

think about that as an insurance premium, as a hedge against

something that we can predict and estimate a little bit more than

climate effects. And it does, as I said before, as well, give uncertainty the reason to do something, rather than the reason not to

do something.

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Last, the last hidden cost that I mentioned, it strikes me that if

you do not include the environmental costs of petroleum, the climate costs of petroleum, in your evaluations of what it really costs

the planet for you to burn a barrel of oil, for whatever purpose, you

systematically undervalue conservation projects—programs, plans,

policies—projects that would look for alternative energy sources,

things that are more sustainable. And that is—and makes it less

likely that those projects would be undertaken. Systematically, as

well, you overvalue new sources of oil, you overvalue new sources

of consumption of oil, simply because the energy required to drive

it is not priced appropriately.

So, if you ask me what a number would be, as I said, I think

$1.50 is too low. I think $6 would be OK. That’s the Downing/Tol

threshold. Ten dollars might be OK. It’s actually really less important what number starts the policy now. It is more important, and

absolutely critical, that it increase over time at a predictable rate,

like the rate of interest, which has some economic validation to it.

It then becomes predictable. It’s persistent, and it’s incorporated in

the planning and investment decisions that people would undertake.

I would encourage the second risk approach to thinking about climate policy, get out of the cost-benefit-calculator mode and begin

to think about managing risks in thinking about policy portfolios,

and uncertainty becomes the reason to do something in the near

term, and to continue to do something at an increasing rate over

the medium term.

I thank you very much for your attention.

[The prepared statement of Dr. Yohe follows:]

PREPARED STATEMENT OF DR. GARY W. YOHE, JOHN E. ANDRUS PROFESSOR OF

ECONOMICS, WESLEYAN UNIVERSITY, MIDDLETOWN, CT

Mr. Chairman, Senator Biden, and members of the Committee on Foreign Relations, thank you for your invitation to present testimony on ‘‘The Hidden (Climate

Change) Costs of Oil.’’ It is indeed an honor to be here, today.

The task that I accepted when I agreed to testify involves providing some insight

into the economic cost of carbon emissions so that you can ‘‘back out the share of

oil to get the right order of magnitude.’’ I am afraid, however, that this deceptively

complicated question has the same answer as nearly every other question in economics: ‘‘It depends.’’ My testimony will, therefore, be directed at providing insight

into the underlying factors upon which these costs depend. I will, however, also offer

some thoughts about what the underlying uncertainty means for climate policy and

the hidden cost of oil.

I will begin with a brief review of the range of more than 100 published estimates

of what is termed the ‘‘social cost of carbon’’; this is the calculation by which we

can attribute a share of cost to oil based on its carbon content (per unit energy).

I will highlight why the range of these estimates is so large. I will suggest which

of the factors that make the range so large can be influenced by political decisionmakers, but I will also focus attention on scientific factors that are beyond their control. Thinking about how we should cope with these scientific factors will lead me

to identify two fundamental sources of hidden cost that may not be immediately obvious.

I will, in particular, suggest an alternative way to calculate the hidden climate

costs of oil based explicitly on hedging against the potentially severe economic costs

of abrupt changes in policy. These policy adjustments may be required over the near

to moderate term as we come to know more about the impacts and/or likelihoods

of climate change (particularly abrupt climate change). It is important to recognize

that many of these impacts have not yet been included in the direct calculation of

social cost. Adopting a risk-management (hedging) approach to minimize the cost of

future policy adjustments is, therefore, an appropriate, economically rational way to

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think about the social cost of carbon. Moreover, it makes uncertainty a reason to

act immediately rather than a reason to procrastinate.

I will, as well, argue that ignoring social costs calculated by either a tradition direct method or one derived from a risk-management approach systematically undervalues projects and programs that would reduce our consumption of petroleum (like

investment in ethanol as an alternative source of energy) while it produces an symmetric overvaluation of projects and programs that would do just the opposite (like

drilling in the Arctic National Wildlife Refuge).

To begin, I recall ‘‘burning ember’’ diagram from the Third Assessment Report

(the TAR) of the Intergovernmental Panel on Climate Change (2001) in Figure 1.

It duplicates Figure TS–42 from the Technical Summary of the Third Assessment

Report where five Lines of Evidence’’ were identified. These are the five sources of

concern, or indicators of vulnerability, that have captured our attention. Two are essentially economic indicators of aggregate impacts at the global and regional levels.

They are dominated by estimates of the costs of the climate impacts in marketbased sectors like real estate (in response to rising seas), agricultural, energy, and

the like. As such, they do include evaluations of how various nations and even communities within nations might adapt to climate-related stress. It is important to recognize, of course, that these impacts are felt unevenly across the globe. Panel A of

Figure 2 offers a representative portrait of a possible geographic distribution of vulnerability to climate impacts in 2050 calibrated in terms of aggregate impacts. Developing countries show up as most vulnerable, but developed countries are surely

not immune to climate risk even when their superior capacities to adapt are recognized.

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A third row in Figure 1 focuses attention squarely on ecosystems, although the

IPCC did not provide the detailed assessment of ecosystem services that was so

thoroughly documented in the recently completed Millennium Ecosystem Assessment. The last two rows reflect vulnerability to two potentially more significant

areas concern: ‘‘Risks from Future Large-Scale Discontinuities’’ and ‘‘Risks from Extreme Weather Events.’’ Figure 2 illustrates the uneven impact point by displaying

a plausible global distribution of vulnerability in 2050 calibrated to the risks of extreme weather events. Developing countries are still most vulnerable, but developed

countries also face significant vulnerabilities from a more urgent ‘‘source of concern.’’

Economists have been trying for some time to assign currency values to the impacts of climate change identified in Figure 1 by tracking their potential trajectories

along long-term scenarios of how the future might unfold. Not surprisingly, economists do not agree on what that future might hold. They do, however, agree on what

25

measure to use: ‘‘the social cost of carbon.’’ What is that? It is the damage caused

over time by releasing an addition unit of ton of carbon in the atmosphere discounted back to the year of its emission. That is to say, the social cost of carbon

represents the ‘‘marginal cost’’ of emissions; alternatively, it represents the ‘‘marginal benefit’’ of unit of carbon emissions reduction. Most importantly for present

purposes, the social cost of carbon, when modified by the carbon content of petroleum, is the hidden (climate change) cost of oil.

26

Figure 3 displays the range of more than 100 estimates currently available in the

published literature; it is derived from Tol (2005). Panel A of Figure 3 displays the

social cost in dollars per metric ton of carbon; Panel B tracks the estimate to the

hidden cost of oil by expressing social cost in dollars per barrel of oil.

How should the data portrayed in Figure 3 be read? Percentile values are recorded up the vertical axis for cost estimates ordered from lowest to highest. So, for

example, point A indicates that 12 percent of the published estimates were below

$0. Point B highlights the median estimate, suggesting that 50 percent of the estimates were below $13 per ton of carbon ($2 per barrel of oil), and 50 percent of the

estimate were above this benchmark. Point C shows that 20 percent of the estimates

were above $73 per ton of carbon ($9 per barrel of oil). Finally, the average across

all of the published estimates is $85 per ton ($11 per barrel of oil).

How should the content of Figure 3 be read, given all of the disagreement that

it reveals? Richard Tol, an economist from Germany, read the data to mean that

$45 per ton should be interpreted as the upper bound for a reasonable ‘‘best’’ estimate of the social cost of carbon; this is $6 per barrel of oil. Thomas Downing

(2005), a geographer from the Stockholm Environment Institute office in the United

Kingdom looked at the same distribution through the lens of enormous experience

in developing countries where changes in climate produce enormous displacement

effects that cannot be quantified in terms of currencies. He read the data to mean

that $45 per ton or $6 per barrel of oil should be interpreted as a lower bound to

the true social cost of carbon.

I have been told that presenting such a figure in a political environment would

allow people, who do not think that climate is a problem, to focus on the lower part

of range and people who think that climate is a large problem to focus on the upper

part of the range. Productive conversations between the two sides, I have also been

told, would seldom be a product of such readings.

For this, and a few other reasons, I now preach caution to all. To appropriately

read Figure 3, we must work to understand what is going on behind the scenes.

Why is the range so large? Which of the ‘‘Lines of Evidence’’ do the estimates include, and which do they miss? What combinations of underlying factors produce

low or even negative estimates of social cost, and what other combinations support

estimates on the high end of the scale? Answers to these questions can be enormously revealing.

The choice of discount rate and the incorporation of equity weights are extremely

important, and both lie within the purview of decisionmakers. High discount rates

sustain low estimates because future damages become insignificant. Conversely, low

discount rates produce high estimates because future damages are important. Meanwhile, strong equity weighting across the globe support high estimates because poor

developing countries are most vulnerable. Conversely, weak or no equity weighting

can produce low estimates because poor developing countries do not factor heavily

in the overall calculation.

It turns out, however, that several scientific parameters that decisionmakers cannot choose are even more important in explaining the variability depicted in Figure

3. Indeed, climate sensitivity (i.e., the increase in global mean temperature that

would result from a doubling of greenhouse gas concentrations from preindustrial

levels) is the largest source of variation. It is possible to derive high estimates for

the social cost of carbon even if you assume low discount rates and almost no equity

weighting. All that is required is the assumption that the climate sensitivity lies

at the high range of the latest range of estimates. Andronova and Schlesinger

(2001), for example, find that the historical record could easily be explained with

climate sensitivities as high as 8 or 9 degrees Centigrade (even though the TAR reported an upper bound of 5.5 degrees).

Moreover, none of the estimates from which Figure 3 was drawn include the economic costs of ‘‘Risks from Extreme Climate Events’’ or ‘‘Risks from Future LargeScale Discontinuities.’’

To offer one glimpse at the role that these sources of concern might play, I can

report the results of some more recent work that focuses on what we know about

when the Atlantic thermohaline circulation (the Gulf Stream when it flows close to

the United States) might weaken or suddenly collapse. Schlesinger, et al. (2006) put

the chance of collapse at 50 percent if the global mean temperature were to climb

by another 2 degrees Centigrade. Put another way, Yohe, et al. (2006) show more

than a 40-percent chance of collapse by 2105 along a ‘‘middle-of-the-road’’ emissions

scenario. Imposing a global policy targeted at a $100 per ton social cost of carbon

($12 per barrel of oil) would reduce that likelihood to 25 percent if it were initiated

immediately; but only to 35 percent if it were delayed by 30 years.

At this point, it is essential to reemphasize the point that none of these critical

scientific factors can be decided by committee deliberation and popular elections.

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Their values are up to nature to decide, and we simply do not know what she has

in the cards for us. The bottom line is that the planet faces significant risks whose

economic impacts have not yet been quantified. We have some idea of their likelihood, though, and so it is impossible to claim with certainty that they will not materialize as the future unfolds.

What should we do? We should recognize that the climate policy will be adjusted

over time as we learn more, especially if all (or even one) of the really bad news

scenarios begin to materialize. We should also recognize that these adjustments

could significantly, and immediately, change the economic environment in which we

will be living. Moreover, we should recognize that these adjustments might be required sooner rather than later.

All of this risk in the policy realm suggests an alternative method for estimating

the social cost of carbon. Yohe, et al. (2004) conducted a simple ‘‘act-then-learn’’ experiment which showed that the expected discounted cost of global policy adjustment in 2035 could be minimized if a modest hedging policy were begun now. Their

work suggests a risk-based social cost of carbon in 2005 equal to about $10 per ton

($1.50 per barrel of oil). And their approach makes uncertainty is the reason to act

in the near term rather than a reason to delay.

To be clear, tacking on $1.50 to the price of a barrel of oil will not do the trick.

This risk-based social cost would increase over time at the rate of interest. So it

would be $3 per barrel in 2020 and $5 per barrel just after 2030. The critical component of the policy, and this estimate of social cost, is not the starting point. Consistent with the observation by Watkiss, et al. (2005) that the traditionally computed social cost of carbon increases over time, it is the persistent and predictable

ratcheting-up of the effective price of carbon that would give the hedging strategy

any traction at all.

This observation brings me to my last point—identifying a second potentially expensive consequence of ignoring the hidden climate cost of oil. Failing to include estimates of the social cost of the carbon content of oil simply makes projects that use

more oil or provide more oil more likely to go forward. Why? Because the calculations upon which the investment decisions would be made would inappropriately underestimate true costs. They would, in other words, show exaggerated benefit-cost

ratios because the denominators would be too low. Conversely, failing to include the

social cost of the carbon content of oil makes projects that conserve oil or provide

alternative sources of energy less likely to go forward. They would simply show deflated benefit-cost ratios because the numerators would be too low.

So, what if I had to pick a number? What would I say if asked to estimate place

the hidden social cost of oil in perspective? I think that my $1.50 per barrel riskbased estimate is too low, since our analysis assumed immediate global participation in any policy response 2005 and it captured only a very limited set of possible

sources of uncertainty. Given all of the impacts that are not yet part of the more

traditional approaches, though, I do not think that the $6 per barrel estimate that

separated Tol from Downing is too high. If pressed, I would probably say $5 per barrel for 2006, but I could be just as comfortable with $10. Indeed, I would insist only

that the social cost attributed to oil for its climate impacts increase over time at

the real rate of interest.

Again, thank you for the opportunity to be here today, and thank you for your

attention.

The CHAIRMAN. Well, thank you very much, Dr. Yohe, for, once

again, a very informative and provocative discussion.

I wanted to call upon the distinguished ranking member, Senator

Biden, for an opening statement or opening comments that he

might have for the hearing.

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

FROM DELAWARE

Senator BIDEN. I’d just like to explain to this impressive panel

that the reason I wasn’t here, we have a markup in the Judiciary

Committee, which I happen to be a member of, as well. And I

apologize for being late.

I look forward to reading all your statements. And, when it’s appropriate, I will have a few questions.

28

But, in the meantime, I’d put my statement in the record, rather

than take the time now.

The CHAIRMAN. Thank you. The statement will be placed in the

record in full.

[The prepared statement of Senator Biden follows:]

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

DELAWARE

Mr. Chairman, thank you for holding this hearing on the ‘‘Hidden Costs of Oil.’’

For most of us, the costs of oil seem far from hidden. They are right up there on

the signs at our gas stations, they are there in black and white on our heating bills.

But as our witnesses will show us today, the price at the pump, the price on our

heating bills, as bad as they may be, are only part of the story. Those prices conceal

the hidden tax we pay to OPEC countries who use their pricing power to charge

us more than they could get in an open international market for oil.

In addition, those prices conceal the costs of the security commitments we face

to protect the supply of oil from OPEC and other foreign sources. And they conceal

the costs to our foreign policy, which has been handcuffed for over half a century

by our dependence on oil from parts of the world with very different interests from

our own. At the same time, the rising price of oil has created a cushion that props up despotic regimes and finances their militaries or allows other countries to put off hard

decisions about democratic and economic reform.

Finally, the price at the pump hides the long-term environmental damage—as

well as the economic and social disruptions—that will come with global warming.

The economic, social, political, and environmental costs we face today—and the costs

of dealing with their repercussions in the future—will not stay hidden. There is no

free lunch, as economists never tire of telling us. Somebody eventually has to pick

up the tab.

When we pay too much for oil—because OPEC can use its market power—we

have less money for other priorities. That artificial inflation affects both domestic

and imported oil, since there is essentially just one world market for oil. In turn,

we pay too much for transportation and power. We pay too much for the plastics

and other products derived from oil.

That is a dead-weight loss for the entire economy. Every watt of electricity from

our powerplants, every minute we run a refrigerator or air-conditioner, every trip

to the store, everything shipped by truck or rail—all those parts of our everyday

lives costs more than they should. That leaves us with less to spend on other priorities. It make us poorer—as individuals, as families, as a nation.

Mr. Chairman, we often speak about the costs of our foreign policy—usually we

are speaking metaphorically. We may talk about trading values or prestige in one

area to secure influence or leverage in another.

But there are real costs to our policies, too, of course. As hard as they may be

to calculate, we must try to measure the economic costs of our reliance on oil, especially on imported oil, on oil from countries that are themselves unstable or that

promote instability.

That will be important testimony for the record of this committee, Mr. Chairman.

Throwing our net a little wider, Mr. Chairman, from the quantifiable costs of oil

to our economy, and the costs of our foreign entanglements to secure that oil, we

come to the costs we will incur to cope with the climate change that will result from

our use of oil and other fossil fuels.

You and I share a concern about all of the foreign policy implications of climate

change, Mr. Chairman. Climate change will alter growing seasons, redistribute natural resources, lift sea levels, and shift other fundamental building blocks of economic, social, and political arrangements around the world. It could spark massive

human migrations and new wars over resources. We will pay a price for those, too.

No other issue carries such a threat to our way of life. Putting a dollar value on

that threat can show us what we are risking if we don’t act now to slow global

warming.

In every one of the areas we will look at today, the near term prospects are grim.

The rise of the massive economies of China and India will continue to put pressure

on supply, will demand tens of billions in investments, will further complicate global

oil and energy politics, and will accelerate the accumulation of carbon dioxide and

other greenhouse gases.

Half the world’s population—3 billion people—live on $2 a day. Just to provide

them with a little electricity to replace wood and kerosene for cooking, to pump

29

water, to light a schoolhouse—will require more than our current energy system can

provide.

To meet the inevitable challenges built into our current fossil fuel economy, we

must first start with the facts. Today we will learn the many ways the true costs

of oil are hidden from us.

To make clear choices, we need to have the right information. Hidden costs lead

consumers to make the wrong choices. They distort investment decisions—we invest

too much in systems that will make our problems worse, and we invest too little

in solutions.

This hearing will give us some of the facts we need to start making the right

choices.

Thank you, Mr. Chairman.

The CHAIRMAN. Let me begin the questioning. We’ll have a 10-

minute round, and perhaps several rounds, because there is so

much to talk about.

Let me begin with some topical references to what we’re talking

about today that I culled from the New York Times this morning.

Three perspectives.

The first deals with the problems in Ukraine following the election, but really going back to January 1, when Russia cut off some

gas lines and delivery to Ukraine. Ukraine citizens then took some

gas from lines that were going across Ukraine to Europe. A 48-hour

contretemps occurred. The article describes the very unusual organization that was formed by Russia. It starts with the rather bizarre thought that the head of this organization is in a remote

house, and no one has ever heard of him.

The problem, however, is acute for the citizens of Ukraine, even

as they try to form their government. In large part because the gas

was shut off, it is apparent that President Yushchenko lost a great

deal of authority. He lost it in two ways, one of which was that his

country was cold. People were cold, physically. Their industry,

which was fledgling, was stymied. I’ve described this, I hope in not

ultradramatic ways, as waging war without sending the first troops

across the line, or bombing or strafing. You can ruin, decimate a

country by cutting off energy.

Now, nevertheless, the world came to the rescue. Europeans said

to President Putin, ‘‘You’re the head of G–8. You want to talk about

energy this year. Don’t do this to all of us,’’ meaning Germans,

Poles, others. We had the President of Poland here testifying what

it’s like when the pressure goes down in your country, because it’s

coming across Ukraine and it’s being stolen there. Now, in essence,

this is for real. This is not hypothetical anymore with regard to

fairly large nation-states.

However, the article points out that we’re 90 days into the 6

months of the deal that only lasts for 6 months. Some Turkmenistan gas mixed together with some Russian gas, with a very

strange entity somewhere based in Switzerland, rather difficult for

anyone to find—for President Yushchenko, for Ms. Tymoshenko,

former Prime Minister, leader of the party that came in second, or

for the former Prime Minister, whose party came in first. And the

people of Ukraine try to weigh, How do you do this, at this point?

You have a government that might be more sympathetic to Russia.

And, therefore, perhaps the next deal, July 1, works out differently.

Or, do you go with Ms. Tymoshenko, for example, who says, ‘‘Down

with the Russians. Independence. Investigation into all of this,’’

and so forth?

30

So, the implications we’re going to see played out in the next few

days—and April the 7th being the first day in which a government

might be formed—will be interesting on some of the relevant problems here.

At the end of the day, however, the pricing for Ukraine was $95 for the units of gas that used to cost $55. The Russians had demanded $220. They gave Belarus $47. And anyone—people talking

about market forces here are up against the fact that we’re talking

about nationalized industries that use power plays for their advantage.

Now, I mention that, because this comes in the same paper with

the headline, ‘‘Automakers Use New Technology to Beef Up Muscle,

Not Mileage.’’ And I hope I don’t oversummarize by pointing out

that, essentially—and the article points out as to why this is the

emphasis—it says, in improving fuel economy, virtually everyone

agrees that there is only one way to do it. There has to be a will.

‘‘There’s no shortage of technology,’’ said a senior analyst at Environmental Defense. However, the fact is that the automobile companies have decided the most saleable product is more zoom in the

cars. If you want to, at least have something that is marketable,

a car that gets off the mark faster, rather than slower, is more desirable. Some would emphasize, ‘‘After all, a large car is safer.’’ A

huge tank running down the street is probably more defensible

than a small car.

So, all things considered, the technology may be there, but the

market strategy is really to sell something else, which is somewhat

discouraging, you know, given our parlay this morning.

Finally, there is a very interesting profile of the new president,

or chief executive, of Exxon Mobil. It is flattering, in some respects,

that he has indicated, for example—and I quote, ‘‘He defends

Exxon’s record of investing to search for alternative fuels, saying,

$100 million contribution to the Global Climate and Energy Project

at Stanford University focused on long-term technological changes.

‘‘However,’’ he said, ‘‘we are looking for fundamental changes, but

that is decades away. The question is, What are we going to do in

the meanwhile?’’

Now, his suggestion is: Explore for oil and gas. And it commends

finds in Indonesia, for example, which have been significant recently. But then, it also points out in the article that it’s hard even

for Exxon Mobil, with all of its resources, to find enough gas or oil,

day by day, to replenish that which is already being produced. In

other words, the precarious political position in Qatar, which is another find recently, is a very different one from that even 2, 3, 5

years ago, for this very large company. However, the article points

out, getting back to what people would say is reality, is that Exxon

Mobil, in terms of its per-share earnings, has been doing better

than BP and Chevron, sometimes cited by environmentalists and

others as being more ‘‘with it’’ and taking a look at the issues we’re

discussing today.

In short, the Wall Street people, as the article points out, look

at earnings per share, and give appropriate rewards for this situation, maybe the same way a motorist trying to get off to a fast start

after a stoplight looks at the engineering that may give that kind

of a boost.

31

So, here we are discussing, today, a subject in which, topically,

there are crises in the world that are observed by some. I give a

speech about Ukraine, and my visits last September with President

Yushchenko or Ms. Tymoschenko, and their apprehensions about

all of this. They find much of this to be news, that actually there

was a cutoff, that these things happen in the world. In other words,

the transmission from people who are having academic discussions,

or even Foreign Relations Committee meetings about this, to the

grassroots, demonstrates that we still have a long way to go. And

this is why the President’s statement, ‘‘We’re addicted to oil, and

we have to transfer 50 or 75 percent of our needs somewhere else

in a while,’’ is important, because it catches the attention of tens

of millions of people all at once; whereas, we capture very few.

I would just ask this, however. You’ve, in your papers, given

some remarkable estimates of the costs involved in this. Now, for

instance, Dr. Yohe, you’ve suggested, even without knowing, in the

climate-change situation, what any of these catastrophes may

mean. What I gathered was that we should be setting aside $1.50

a gallon as, I guess, an endowment fund or some type of emergency

fund for the catastrophes to come; in other words, recognizing that

the probability of catastrophe is very high, or high enough to merit

this kind of public policy change. Is that right, essentially? Just

physically in our budget policy, what should we do, have an account, let’s say, for energy or climate-change catastrophe, or however you want to characterize this, and put that aside, in the same

way we would do with, say, the Social Security reserve fund or

something else that has a dedicated public notice?

Dr. YOHE. It—my thought wasn’t exactly that. I don’t want to be

flip, but I hesitate to tell Members of Congress, ‘‘This is money you

can do with what you want.’’ It is essentially sending a price signal

that the economic costs on the environment need to be incorporated

in the cost of petroleum. How you do that, whether or not you tax

petroleum at $1.50 a barrel or $10 a barrel, or you set up carbon

permits so that the targeted price is that, the critical notion is that

that ‘‘rent,’’ that’s reflected in the price, increase at a rate of interest. And were it taxed, and the revenue collected, then it would

make sense, it seems to me, to think about what to do with that

money—to encourage alternative sources of energy. There are adaptation funds being set up by the GEF under the Framework Convention on Climate Change that begin to try to help developing

countries participate.

One of the concerns in the Energy Committee is that we need

broad global participation in a climate policy. Perhaps you could

offer them climate insurance or climate variability insurance if

they were willing to sign onto some mitigation, some best practices,

in terms of their energy investments.

The CHAIRMAN. The reason I raised it in this way is—for instance, Mr. Copulos has raised the point that we will be spending

$320 billion or so, as I suggested it, at the $60 level; and we already know, at least as of today, that the price has gone to $65,

and who knows where from there? That’s an amount of money that

our country is spending somewhere else. The implications for our

Federal budget that you have mentioned, Mr. Copulos, in terms of

just the defense budget, go way up to $132 billion, or some such

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amount. This, we have to pay. We’re appropriating money for defense; and, of that money, $132 billion is involved in the expense

of this oil.

Now, that’s why it seems to me that if we’re to get serious about

this sort of thing, we could, as you say, simply put a tax on, of

$1.50 or $6, whatever you’ve suggested, that translates into so

much for a gallon, but that revenue would flow into our Treasury.

It would help pay for either part of the $300 billion trade deficit

or the $129 billion of domestic deficit, but really be lost in the shuffle, without any recognition that we think there’s a problem here

that probably, even if we don’t know which of these disasters is

going to occur, is going to cost us some money. For example, we’ve

quickly cobbled together some money to help when the terrible

storm came to Indonesia, because it’s an emergency. People are

dying. There’s all sorts of difficulties there. Now, it may not have

been climate change. Some would say the recurrence of some of

these storms has some traces here. But it certainly would be a climate change if Bangladesh went underwater, at least 10 million

people. And what do we do then? Well, we quickly appropriate an

emergency appropriation, from nothing. We just simply add to the

deficit.

That’s why I just wanted, for the sake of argument, with this expert panel, to think, if we’re serious about this, whether we try to

identify, literally, an insurance policy, as you’ve suggested.

And maybe we change the actuarial principles as time goes on,

in the same way that you do, from yellow to red. If it’s getting more

red, maybe the thing goes up. But, at least, at that point there is

some recognition in a public-policy way. For the moment, there is

not.

Essentially, without ascribing to Exxon Mobil their views on this,

they are not unique in saying that, ‘‘Of course there must be a

problem out there. Clearly, something is happening. But we really

don’t know. The science is still—not necessarily vague, but in dispute. And, therefore, to change policies while this great public dispute is going on among academics and a few politicians would not

be very sound in benefiting our stockholders or any prudent person

in business.’’ So, we are back to that again.

Essentially, we’re talking here about what we think is going to

be catastrophe. Eventually, if any of you gentlemen are right, the

catastrophe comes. Somebody will say, ‘‘Why was there no vision?

Why was there no courage? Why didn’t somebody rise up?’’ You

know, this is the attempt to do that, to have hearings like this in

which these questions are raised, and hopefully people who are expert, like you, inform us, who are learners and are trying very hard

to see what sort of public policy ought to be adopted, or at least

advocated by some of us, understanding that you have to be patient

sometimes for some of these things get through two houses and be

signed.

Well, with all of that, let me turn to my colleague.

Senator BIDEN. I agree. [Laughter.]

Gentlemen, there used to be a song that was popular back in the

late fifties, when I was in high school, and I forget who sang it,

but the lyrics were—I remember, the lyrics went ‘‘Tick-a-tick-atock. Timin’ is the thing. Timin’ is everything.’’

33

And it seems to me—and I have been of the view that there is

an environmental catastrophe in the making. And I’ve been of the

view that that’s been the case for the last decade. And I don’t know

nearly as much as all of you know, or any one of you know. But

it seems to me we may—that famous—that phrase has become—

title of a book’s become a phrase that everybody’s beginning to digest—we’re maybe heading toward a ‘‘tipping point’’ here.

But I don’t get the sense that that has been in any way absorbed

by the public. And those of us who think—the chairman being

one—who think that we have got to deal, for a whole range of reasons, with the—our energy policy—environmentally, from a foreign

policy standpoint, from a—from the standpoint of, in effect, developing entire new industries, if you look at it optimistically—the

idea of an environmental tax is—you first have to convince people

there’s an environmental disaster in the making, or that they can

somehow quantify, for average people—and the American people

are pretty darn smart—to see the correlation between a $10-a-barrel tax, or whatever the number is, and their ability to breathe

clean air or have—not have their roses grow in December in New

York State.

So, when you guys talk about this—it’s not your responsibility,

I acknowledge here, to do this—from a public policy standpoint and

the sale-ability of this, I mean, what kind of feedback do you all

get when you make this case to—and I know you’re usually making

the cases you’re making here to public policy panels and/or to other

academics, but, I mean, when you have this conversation at the

barbeque in the backyard with your next-door neighbor, who works

for the electric company or is—you know, is a salesman for whatever, I mean, what do you—how do you talk to them about it? Or

do you?

Mr. COPULOS. Perhaps I could give you some indication, because

I had a recent experience that really brought that home to me. I

had an—I have an article, in the current issue of the American Legion Magazine, dealing with this, and possible solutions, and I’ve

had probably 200—it only came out last week—200 e-mails from

members of the legion around the country who’d read the article

and responded. And, uniformly, they have expressed concern. They

kind of understand it, but the problem is, they don’t know what to

do about it, and that’s why they’re asking—that, plus some rhetoric

about brain-dead people in Washington not addressing the issue.

And——

Senator BIDEN. That resonates in my community.

Mr. COPULOS. Yeah. Yeah. [Laughter.]

And—but the—but it’s not that people don’t ‘‘get it.’’ It’s that

they want to—Americans are doers. They don’t—you know,

they’re—they don’t want you to overwhelm them with some sort of

rhetoric, or preach catastrophe. They know there’s a problem.

They’re not stupid. What they say is, ‘‘OK, now, what are you going

to do about it?’’ We’re a practical people.

I, earlier, had mentioned a good example of this, which I think

shows the sort of thing we have to start encouraging. There’s a fellow out in Moline, IL, in Senator—where Senator Obama just

opened an office, actually. He had never built a doghouse in his

life, no background in construction, was providing visiting nurses

34

to retirement communities, and said, ‘‘You know, these people are

really being taken to—these people are getting shafted. This is terrible. I—you know, they worry about locking their door. I could put

my hand through the wall, it’s so flimsy. They can—we can do better.’’ So, he went out, and he looked up all sorts of environmental

technologies, and he built his first development 2 years ago, homes

that anyone would be proud to live in. And he built them for $130

a square foot, which is 20 percent less than the average in his area,

and they’re 80 to 85 percent energy efficient.

The word got out on this little—in fact, in January and February

2005, when they had a very cold winter, the average utility bill for

an entire unit—2,000-square-foot unit was $98. He’s got some new

units he’s built that are 1,750 square feet. And during that recent

cold snap they had in Moline, the heating bill for an average 1,750-

square-foot home was $25. In fact, he was laughing that they had

to pay more in community fees and taxes and hookup fees than

they were for the actual energy to heat their homes. This uses no

new technology. It’s not—and this is a guy who’s not an engineer

or a—he said, ‘‘I’m going to go out and do something about it.’’

And that, ultimately, is what we’ve got to start encouraging people to do. If we point them in the direction, if we say, ‘‘Look, you

can do X, Y, and Z, and it makes real good sense’’—because the

American people are sensible. You say, ‘‘You know, this makes

common sense. Just do these things, and you can save yourself’’—

geothermal heat pumps, for example, from the—day one of installation in every heating zone in this country, you save money if you

use a geothermal heat pump.

Senator BIDEN. OK. Now, what would some guy say—say, ‘‘By

the way, Charlie, I’ve just convinced the Congress to raise the price

of a gallon of gasoline at the pump for you 35 cents or a dollar’’?

Is he going to say, ‘‘Great, I—that’s right up my alley, man’’?

Mr. COPULOS. He’s going to say, ‘‘Who is that guy? I’m going to

vote against him.’’

Senator BIDEN. That’s right.

Mr. COPULOS. And the other thing we have to bear about—bear

in mind about that is, you know, we talk about high prices for gasoline. And, as I’m sure you Senators realize—you travel outside the

United States—we don’t pay high prices for gasoline. As a practical

rule, because we are a very wealthy nation with a high median income, you would have to raise the price of gasoline so high to have

an effect on consumption that it’s impractical. I mean, say, $3-agallon gasoline, fine, the average person uses 1,000 gallons a year.

The median income of this country is $44,000-and-change, almost

$45. You’re talking 6 percent of gross income, maybe. And, also,

against the background that 90 percent of all driving is nondiscretionary—you have to go to work, you have to go to the grocery

story, you have to take kids to school—so, you’re only playing without about 10 percent there, one way or the other.

Price increases, per se, are not going to change patterns of driving.

Senator BIDEN. So, the only reason for the price increase, then,

justified, would be for this, in effect, insurance policy.

Dr. YOHE. Yeah, let——

Senator BIDEN. Right?

35

Dr. YOHE [continuing]. Let me respond to a couple of things I’ve

just heard.

First of all, I don’t agree, as an economist, that a price signal

won’t work. Now, I admit that it won’t work in anything that would

be politically viable over the near term. But, remember, I was talking about a price that was persistently increasing, predictably increasing over time, so that investment decisions that private individuals make on automobiles, that industry makes on their plant

and equipment, that government makes on their infrastructures,

knows that the tax was 10 cents in 2005, but it’s going to be 20

cents in 2020, and 35 cents in 2025. And you build that into——

Senator BIDEN. But do you think that——

Dr. YOHE [continuing]. Into what’s going on.

Senator BIDEN [continuing]. That affects—I’m not——

Dr. YOHE. I do.

Senator BIDEN [continuing]. Behavior of consumer—the average

consumer? I mean, I don’t know any consumer, where I live, who

thinks that their gasoline prices are ever going to go back down

again. I don’t know anybody—I don’t know anybody who thinks,

‘‘You know, Joe, we’re going to get back down to, you know, 95, 85

cents a gallon.’’ I don’t know anybody who thinks we’re going to get

down to a dollar a gallon. And I don’t—everybody that I know—

now, I’m just a plain old politician now, not an economist, and I

think I probably am better at this than you are at guessing what

average people think they’re going to do. It is presumptuous of me

to say that, but I think most everybody here is. That’s our living.

And the fact is, I think everybody thinks the price is going to continue to go up. I don’t know anybody who thinks that 10 years from

now they’re not going to be paying more for a gallon of gasoline

than they are today, a year from now, they’re not going to be paying more—and, it may go from $3 down to $2.56 or $2.36 and back

up to $2.80, but it’s going to go from $2.36 to $3, and next year

it’s going to go from $2.42 to three-two, next year it’s going to go

from $2.75——

I mean, so, I don’t get your point that if you said to the—now,

in long-term investment by, maybe a guy building a new warehouse and storage facility, I don’t disagree with you. I don’t—I

think that will affect that kind of behavior. But the significant portion of the consumption is coming from nondiscretionary fuel costs

that go into people driving automobiles, I think. And so, I’m always

attracted by, I think—to take a name where—that’s become a—

very popularly associated with the gas tax, Tom Friedman. I have

great respect for Friedman. I think he has been pretty prescient

about a number of the things he has written about over the last

10–12 years. But, on the gasoline tax, I kind of come out where you

do, sir. I mean, I don’t see any change in behavior or consumption

when gasoline went to $3 a gallon. Did it? I mean, is there anything that—did people—even though it was temporary—but did

anybody—I didn’t notice much.

Mr. COPULOS. Senator, there is a waiting list—I’m on it—for the

Dodge Charger R/T S8.

Senator BIDEN. Yeah.

Mr. COPULOS. It’s got a 454 horsepower HEMI——

Senator BIDEN. Yeah.

36

Dr. YOHE [continuing]. Well——

Mr. COPULOS [continuing]. Little turn 13s. You know, that’s—

people are not concerned—the only times that you saw a change in

the purchasing of automobiles related to mileage, when people really started basing their decisions—there were only two occasions—

1973 and 1979—and they both were specifically tied to an absence

of energy. We had gasoline lines, and people were shooting each

other. And that gets down to a very fundamental point that we

have to understand. And that is that the—it is the availability of

energy that drives behavior, not the price. Whatever the price of

energy is, we will adjust, sooner or later. The only times prices affect—I take that—there is one time it can be a factor, and that’s

if it’s a shocking price. In Maryland, in several other States, we see

electricity prices predicted to go up 72 percent this summer. Consumers are up in arms, because they see this as a huge spike. But,

I’ll tell you what, 6 months after it’s in effect, people will have adjusted, and they won’t have changed their behavior.

Senator BIDEN. Well, I hope that’s wrong, but I’m afraid—I worry

you may be right, which leads me to—look, what—I’m asking—deliberately and intentionally asking topical questions here about

how—because I don’t disagree with what you’re asserting as what

the—the extent of the problem, the need to deal with the problem,

and the fact that those boneheads here in Washington aren’t paying attention to this, and we’re going to all say, 2, 5, 10, 12 years

from now, ‘‘My God, why didn’t anybody talk about this?’’ So, we’re

all on the same page on—in that regard.

But let me—one of the things that seems to sell with average

people, as it relates to the notion of whether or not their behavior

will be affected by anything, is that—and I mean—and by behavior

to be affected by: Should we be spending more Federal tax dollars

investing in alternative energy sources? Should we be doing it

through incentives? Should we be doing it through direct loans?

Should we be doing it by generating it ourselves? The—whose

statement it was—excuse me—Mr. Huntington’s statement. He

said, as a general—strategies to reduce our dependence on oil are

more effective than policies that reduce our imports. We should

view the oil market as one giant pool, rather than a series of disconnected puddles. Whatever—when events happen anywhere in

the market, they will raise prices, not only there, but also everywhere, that connect to the—that large pool. More domestic supplies

will not protect us from these price shocks.

The oil companies have this nice—and others—have this nice

mantra that the way in which to drive down prices, the way in

which to stabilize prices, is, ‘‘We’ve got to go out and find more oil,’’

and that the—the impression is, particularly if we found domestic

oil—‘‘If we found more domestic oil, then, you know, we’re going to

be—we’re going to be, not home free, but we’re going to have a lot

more control. So, really, we should be, you know, investing our resources’’—them—‘‘as well as the Federal Government.’’

For example, we passed an energy bill—an energy bill at the

time when the oil companies are having—and I’m not making the

populist argument, but just a factual argument—when they’re having these gigantic surpluses, in terms of profit. And we decided we

needed to give them—what was it, $6 billion?

37

STAFF MEMBER. Two and a half, overall.

Senator BIDEN. $21⁄2 billion? A $21⁄2 billion incentive for them to

go out and look for more oil. And people here—you know, they

drank the Kool-Aid. You know, they said, ‘‘Yeah, it sounds right,

you know, because we’ve got to get more domestic oil.’’

Talk to me a moment about—all three of you, if you would—

about what benefit—let’s assume we were able to discover and

produce three times the amount of oil we are now producing domestically—and we found it overnight—that could come online over

the next 4 years. We found it in—you know, in the middle of Delaware or——

[Laughter.]

Senator BIDEN [continuing]. You know, in Maine, in, you know,

Washington State. I mean, we found it in unlikely places. We—

boom—all of a sudden, we tripled, with essentially the same recovery cost. What would be the effect of that?

Dr. HUNTINGTON. Well, Maybe I should jump in here, since——

Senator BIDEN. Please.

Dr. HUNTINGTON [continuing]. That was the comment that you

took from me. I think it’s very important to emphasize that the oil

market can be in a couple of different kind of situations. The kind

of situation I was talking about was when there is a disruption on

the market. My point there was that the price is going to rise for

everything, and just having more domestic supplies is not going to

protect you from that——

Senator BIDEN. Right.

Dr. HUNTINGTON [continuing]. Price rise. But now, let’s take the

other state of the world, the state of the world where we live in

most of the time, when we don’t have a disruption. More domestic

supplies is going to help pull down the price of oil on the market.

Just by putting that more supply on, we will help the market out

that way. So, the price will be lower. And so, that would actually

be beneficial. If it was economic, it would be beneficial.

The problem would come in if it was not economic. Then you’re

really hiding the cost, in a way. You’re saying, ‘‘Yes, I’m putting

on more supply, but it’s really costing the taxpayers a whole lot

more money somehow, because we’re giving it a subsidy for it to

come on.’’

Senator BIDEN. If I can add onto that, if—we would have to find

a heck of a lot more than twice or three times what we’re producing now, wouldn’t we, to meet our domestic energy needs? What

would we have to do to meet our domestic energy needs, in terms

of being ‘‘totally self-sufficient,’’ in—as it relates to oil and gas?

Mr. COPULOS. We’d have to roughly triple what—we use about

20.8 million barrels a day, and we import 12-and-change of that,

so it’s about—two-thirds of what we use is imported, so we’d have

to, roughly, have three times our production.

But, I think one point we have to look at here, in terms of—the

argument over domestic oil/foreign oil, kind of, in one way, misses

the point, because we’re going to run out of oil. That’s a given. If

you take a look at global demand, I don’t care how much we

produce. And you’re—the Chinese are adding 120 million cars. You

look at demand, and it—just Third World demand alone, in 2025,

is going to require an additional 30 million barrels a day. When

38

you add in the rest of us, it’s 40. And there’s no ‘‘there’’ there. Can’t

be done.

What we need to do is to facilitate the transition away from a

reliance on oil as a motor fuel and in other areas. But to do that,

we have another problem. There are 220 million privately owned

vehicles on the road today. They have an average age of 81⁄2 years,

an average life span of 16.8—actually, it’s a little longer than that,

in reality. So, basically, for a decade, because people are not going

to junk their cars, you’re going to have to do something to provide

them with fuel. That means you need something that can burn in

those cars.

Now, fortunately, we have some options. We’ve got alcohol, we’ve

got biodiesel, which can help, to a degree. If we find—if we can find

a little more natural gas, we can actually turn some of that into

a motor fuel if we have to. But, in the near term—I’m talking

about 5–10 years—as we make the initial start of the transition,

we really need to use domestic—we need to use oil and gas; to the

extent we can do it domestically, we’re actually better off. In the

longer term, what we need to do is understand that that’s a temporary fix that gets—keeps us from having an economic calamity,

and then we start bringing in all the alternatives.

Dr. YOHE. It’s very——

Senator BIDEN [continuing]. Well, my time is——

Dr. YOHE [continuing]. It’s—excuse me. The—both of these conversations are missing one of the fundamental points that I teach

my students, that there are two sides to every market. And I think

the simple answer to your question, ‘‘What happens if we tripled

our supplies?’’ given in the context of what Hill put in his statement, is that we could join OPEC, that we would become a supplier

of petroleum to the world, and that that would be something that

would allow us to participate with respect to that.

The other thing that’s going—sort of, going back to the price-size

business and the changes in behavior—Senator Lugar was speaking about more zoom in the car. A story that I can remember from

a National Academy Panel Meeting 21⁄2 years ago, where somebody

fairly high up—and I don’t know his name, so—that’s probably

good—from Ford Motor Company, said that they could not see any

way that hybrid automobiles would become popular in the United

States, and that Ford had no intention of creating them or marketing them.

Senator BIDEN. I had a similar conversation with Chrysler.

Dr. YOHE. And if you look lately, they are. And why? It’s because

the demand side of the market has responded, so that the political—part of the political leadership that is required is to alert people of these problems and get them to understand that it’s—

changes in their behavior, at a pace where it is not uneconomic to

do it, will help the problem a good deal. You don’t have to junk

your 4-year-old car, but next time it’s time to buy a car, go look

at a Prius until Ford gets one that looks the same and works just

as well.

Senator BIDEN. Well, my time is way over. I appreciate it, Mr.

Chairman. Let me conclude by recounting a similar example. 1974,

I was a young Senator in a garret in this office building, number

100 in seniority, and I got a call from a fellow named Mr. Ricardo,

39

chairman of the board of the Chrysler Corporation, and Leonard

Woodcock, the president of the AFL—of the—excuse me—the UAW,

and asked if they could come to see me. And they sat in my office

and jointly told me that I could not support—I had run—I was a

bit of an environmentalist—I could not support the Clean Air Act,

because the Clean Air Act was going to put restrictions, in some

way, on tailpipe emissions of automobiles. I’ll never forget Mr. Ricardo looking at me—this was 1974—and saying, ‘‘You don’t understand’’—and I think I’m right about the numbers—‘‘we now have

18 percent of the large-car market. It is our plan, in the next 5

years, to get 35 percent of the large-car market.’’ So much for management vision about how they were going to move.

Anyway, I thank you all very much. Thank you for your indulgence, Mr. Chairman.

The CHAIRMAN. Let me just pick up a little bit on the conversation that you’ve had with Senator Biden and further my interest

in what is being offered to American motorists in this particular

year.

The New York Times story that I mentioned, just to make the

point, says that the 1975 Pontiac Firebird could get from zero to

60 miles per hour in 9.8 seconds. The 2005 Toyota Camry can

make it in 8.1. Now, the point they’re trying to make is that the

developments in the last 30 years have been largely in terms of

performance and the ‘‘zoom’’ speed, as I’ve described it. But, in this

particular year, if we are hoping and holding our breaths that that

is not where the technology is being focused, the point is that a

2006 Cadillac STS–V can reach 60 miles per hour in 5 seconds.

And that——

Senator BIDEN. Helluva an engine.

The CHAIRMAN [continuing]. Unfortunately, appears to be where

the competition is. In the process of this—and I quoted the President from his speech yesterday—he talked about the technologies

that are out there. And they are. I saw the distinguished president

of Purdue University yesterday, Martin Jischke. He’s very enthusiastic, at that university, about taking on all of these technologies

in a comprehensive way. But automobile companies—in fairness—

have some very talented people.

Now, the dilemma here is described further in the New York

Times story by someone who noted that he would like to get better

gas mileage, but he’s been driving, in essence, a truck for years,

and he’s comfortable in a truck. He doesn’t want a Prius. He wants

a truck. And, therefore, even though it does cost more, and he acknowledges $3 a gallon is more than he would like to pay for it—

all things considered, that is sort of his habit, his comfort level, his

feeling of safety. He doesn’t want to zoom off at 5.1 for the first

stretch after the stoplight, but he does really want to have safety

and comfort.

We’ve been talking, ‘‘Does price at the pump influence people?’’

Probably, somewhat. It did, for a while, bring a waiting list, and

maybe still does, for the few Prius cars that are available now, or

other hybrid cars. And people are mentioning this. We’ve had testimony from Jim Woolsey, in our committee, that the hybrid cars

that we’re now driving will be obsolete. The President himself went

to see the battery factory in which somebody produced the techVerDate 11-MAY-2000 14:12 Apr 20, 2007 Jkt 000000 PO 00000 Frm 00043 Fmt 6633 Sfmt 6602 OIL.TXT sforel1 PsN: sforel1
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nology for the first plug-in Prius or whatever else people have, and

got—and the President mentioned, yesterday, in his remarks, off

the top of the head—40 miles, somebody could get in this community. I could drive from my home to the Senate Office Building and

back, which is about all the driving I do in a day, and never use

a drop of gas. And so, that’s very attractive.

And, as you’ve said, about 90 percent of driving may be mandatory, anyway.

I’m trying, I suppose—and this is the purpose of the hearing—

to say that all of this does not really take into consideration any

of the hidden costs that you have illustrated, whether it is climate

change, disruptions that are huge, or the strategic predicament

that we have here.

Now, I want to zero in on one of the strategic predicaments. And

this really has to do with the thoughts that you had, Mr. Copulos,

on the Armed Forces.

You point out, just historically, that in 1983 the implicit promise

to protect Persian Gulf oil supplies became an explicit element of

U.S. military doctrine with the creation of the United States Central Command, CENTCOM. And their official history makes the

point clear, you point out, and I quote, ‘‘Today’s command evolved

as a practical solution to the problem of projecting U.S. military

power to the gulf region from halfway around the world.’’

Now, you point out, then, they further have refined the doctrine

by saying, ‘‘Without oil, our economy could not function.’’ And,

therefore, protecting our sources of oil is a legitimate defense mission. And the current military operation in Iraq really is a part of

that mission.

To date, supplemental appropriations for the Iraq war come to

more than $251 billion—this is supplemental appropriations, on

top of our regular military budget—an average of $83.7 billion a

year. As a result, when other costs are included, the total military

expenditures related to oil now are $132.7 billion annually. That is

a big figure.

It’s not reflected, in terms of our market economy. The automobile companies have to make their own strategy. So do the oil

companies. What I’ve suggested from the New York Times story is

a strategy to use technology for so-called performance and safety,

not for what we’re talking about today with regard to disruption or

the oil economy or what have you. Some oil companies, but not

all—I’ve cited just one, because it’s a very large one—say, ‘‘Our job

is performance for our stockholders, first of all, those who have invested in this place. And, second, it’s to try to think about the future, and that is getting more of whatever we sell. We’ll do a little

bit of research on the side and genuflect in that direction. But that

is very long term. Long term. Not this year. We are oil people.’’

Now, that is still, I’m afraid, the prevailing view among major

players in this. What I’m trying to figure out—and I’m certain Senator Biden shares this thought—how do we get a recognition that

our military doctrine, our national defense, now commits $132 billion a year to the protection of Middle East oil lines? Not just for

us, but for everybody else, for that matter. I don’t see this coming

through. It’s sort of buried in the supplemental. They don’t have

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an account for oil there, nor is there a mention of 1983, which is

now 23 years ago.

I think you, in your paper, even go back to Franklin Roosevelt

and his original meeting with the Saudi King in which, essentially,

this is the assurance that came, ‘‘If you produce it, we’ll protect it.’’

Americans have not only spent money, but they’ve lost a lot of

lives defending all of this. And that is not reflected in the market

situations that we’re talking about today. And I think one of the

emphasis of this, from a foreign-policy, strategic standpoint is, How

do we reflect that? That was why I raised the question. Do we

make an explicit foundation or endowment in which we set aside

so much? Because simply to add $1.50 to the price of a barrel or

a gallon or so forth may not make it. It may be that my friend, who

is in the article, says, ‘‘I still want the comfort of my truck.’’

So, in terms of a market choice, I’m not sure we get there. Maybe

some administration will come along and say, ‘‘Listen, folks, this is

what our doctrine costs, $132 billion a year,’’ explicitly, ‘‘plus whatever lives we lose, whatever risks Americans take, to keep all this

going. Do you want—do you like that, or not?’’ As Senator Biden

says, our constituents are saying, ‘‘Why don’t you guys do something about $3 gas?’’

Senator BIDEN. That’s right.

The CHAIRMAN. ‘‘What are you—just sitting there in Washington,

fiddling around?’’ This is the big issue out here. If I had a dollar

for every Republican banquet I’ve attended in which people, in February, March, or whenever a crisis occurs, come to me and say, you

know, ‘‘Why aren’t you doing anything about that?’’ Whatever——

Senator BIDEN. Add a dollar for the Democratic banquets, too.

We’ll both get rich. [Laughter.]

The CHAIRMAN. That’s the politics of the country. Now, why? Because the public recognition of this problem is at that point, that

$3 at the pump. They pay it, but they’re irritated. And they think

that we ought to perform and get it down.

Now, we can say, theoretically, that’s a part of the problem—it

goes up, down. It’s forgotten. People go through an upset period,

but then they get over it. But, here, you’re looking at climate

change, which keeps it going on inexorably, you know, whether

we’re having this discussion or not. Or disruptions—you’ve illustrated those in your paper, Dr. Huntington, that are actual facts.

Plus, you know, the huge problem that might have occurred in the

Saudi refinery if the terrorists actually had gotten down the road

and disrupted 13 percent of the oil supply that day. You’ve indicated we could have as much as a 5-percent loss in GNP. Well, we

don’t have 5 percent gain in GNP now. That takes us to a negative

figure. That takes us to a huge unemployment in our country. The

same motorist who wanted the comfort of his van is unemployed,

and then the whole agenda of this government changes. How do we

bring compensatory payments, safety nets, retraining? What in the

world do we do at this particular point? And whatever is on these

charts today is sort of forgotten, but it shouldn’t have been, because

this is the reason we got to that point.

We’re looking for you not to substitute for us as politicians and

to try to think through what legislation, resolution, what have you,

we offer. But, as a practical matter, how do we translate the wisVerDate 11-MAY-2000 14:12 Apr 20, 2007 Jkt 000000 PO 00000 Frm 00045 Fmt 6633 Sfmt 6602 OIL.TXT sforel1 PsN: sforel1
42

dom of this testimony into measures that give us some protection?

Maybe this endowment or this insurance policy, maybe the fact

that we try some element of pricing that is different from what we

do, without getting into all the political hazards that Joe Biden has

discussed so well, you know, namely, woe be to the person that just

suggests putting a quarter on it. They’d say, ‘‘Why?’’ Or the

thought that you do a little bit more each year, that is even worse

still, because you invite a congressional candidate or a President to

come along and say, ‘‘We’ve had enough of this kind of stuff. I’m

going to reduce your taxes. And we’re not going to take a look at

a long-term feature.’’

So, can anybody give a little essay off the top of the head on this?

Dr. Huntington.

Dr. HUNTINGTON. Well, this will really be off the top of my head,

but let’s give it a try.

One of the ways to look at this hidden cost component is as a

tax put on people’s purchase of gasoline. And I actually agree with

Gary that you won’t see a lot of effect in the first few years. The

real effect you see is in the types of vehicles that people buy eventually, later on. Consumers may not realize this effect immediately,

but the people who are selling the automobiles realize that they

need to be more efficient when they produce the automobile. That

is the important effect.

But, step back for a minute. Let’s say we’ve just decided that a

tax is not the way we’re going to go, and that we need another approach. The one way I look at this hidden cost is that it’s a measure of how much you should do in an area. Suppose you want to

discourage gas-guzzling vehicles in some manner, or you want to

encourage a substitute fuel for gasoline. What it should tell you is

that you shouldn’t go above—suppose that Gary and I agree on a

number, $10 a barrel, or something like this. It should tell you that

you should not go above that level. If you’re trying to give a subsidy you shouldn’t provide a larger disincentive for people to use

gasoline. You shouldn’t make it more costly than whatever that

hidden-cost estimate is. That’s another way to look at that number.

It’s not a formal account that you would have, but it should tell

you that you shouldn’t be looking at very large policies above that

level. I don’t know if that helps you thinking about the issue, but

I think that’s one way to think about this issue.

Senator BIDEN. Chairman, can I—not amend, but add on to your

point, and maybe add this to the mix?

It seems to me that American business and industry is much

more sensitive to price than the consumer at the pump is to price.

If, in fact, the major businesses in my State, or small businesses

in my State, realize they can add literally a penny or two pennies

to their bottom line by shifting—economically shifting to another

source of fuel, they’ll do it, in my experience. They’re much more

price sensitive—even though they pass on the price, they’re much

more price sensitive, because they’re competing, than, I think, the

consumer at the pump is. But—and, again, this is above my

paygrade here. That’s why we’re having this hearing.

If that’s true, and even though that’s a smaller percentage of the

market that’s—consumes energy in America, has anybody thought

about strategies that deal with that smaller percent of the market,

43

where you won’t get as big a bang for the buck, but there—will be

more likely to embrace the change that takes place—the incentive

offered, or the disincentive?

And I know that’s not how we think about it, but has there been

any studies done? Have you fellows looked at that?

And the last piece is that it seems this hidden cost that the

chairman is—in putting together this hearing to have you all

speaking about, breaks—my staff just pointed out the DuPont companies recently saved $2 billion in energy by cleaning up climate

emissions for them. I mean, to them, it’s a big deal.

But, at any rate, the other—in the hidden costs, there seems to

be two hidden costs that fall—they fall in two categories that the

American public could understand. One is the hidden costs relating

to environmental costs. The other hidden costs is—are relating to

defense costs. It seems to me we are much—the public is much

more attuned and believes that the defense costs are more real, apparent, and immediate than the environmental costs, even though

I think they know, and they think, that there are environmental

costs. But one of the things we all say, in one form or another—

I won’t put words in the chairman’s mouth, but obviously I would

say—does anybody think we would be in the Middle East if, in fact,

we were energy independent? Does anyone—would there be any

American out there willing to, you know, give their son or daughter’s life out there if, in fact, we, in fact, thought that we didn’t

need anything that the oil oligarchs had to offer? They get that

pretty quickly. They get that pretty quickly.

So, as you think through the things that we can, or should, be

doing—and the point you just made, Dr. Huntington, that whatever

we do, the price of accomplishing this independent—not independence—greater flexibility can’t be so high as to discourage that effort—what about focusing on the smaller end of the consumption

continuum here—that is, industry? And what about a strategy relating to making the defense piece a more palatable or understandable argument as an incentive to change behavior?

Dr. YOHE. I don’t—I’ll leave it to folks to talk about the expense

stuff. And I’m—don’t know how—the defense stuff. And I don’t

have specific references with respect to your business question.

But it—the notion of providing the appropriate incentives for

businesses to take a longer term view of what their energy costs

are going to look like is the part of the persistent and increasing

business. And if you look in my statement, there’s a sentence that

said, ‘‘almost doesn’t matter where you start it.’’ You can actually

even separate it from the social cost of carbon. What you need to

do is get it in there, get the train out of the station so that people,

as they make these decisions, begin to take it into account.

With respect to its being small, over the long term it might not

be to the degree that it influences infrastructure decisions and

long—large capital decisions that businesses and governments

take, that we will define the energy structure of the United States

through 2060 by 2025. We will determine the energy structure of

the United States by the—through the end of the century by 2050.

Senator BIDEN. Right.

Dr. YOHE. We are locked in. And so, if we haven’t——

Senator BIDEN. Right. That’s why——

44

Dr. YOHE [continuing]. If we haven’t fiddled on that margin,

we’re stuck for a very long time.

Senator BIDEN. What are some of the things you could do to ‘‘fiddle on the margin’’?

Dr. YOHE. Let me think about that. [Laughter.]

Senator BIDEN. Well, that’s what we have to do.

Dr. YOHE. Yeah.

Senator BIDEN. See? I mean——

Dr. YOHE. No, I mean——

Senator BIDEN [continuing]. When it gets down to it, we have to

come up with concrete, specific ways to fiddle. I mean, you know,

it is—it’s not like—we can’t generically talk about this. Assuming

the Federal Government has any role to play in affecting this behavior.

Dr. YOHE. The bill that’s being discussed in the Energy Committee, which has this sort of ratcheting permit price idea that was

vetted last spring, I think—and I think they’re talking about it

again—is an attractive idea. And, frankly, the $5 or $7, or whatever they’re picking out for a ton of carbon, isn’t going to—you

know, isn’t fixing the climate problem, but that it goes up at—I

don’t think it goes up fast enough, but it goes up at a nominal rate

of interest, and there’s a ceiling that’s a little bit too low, and

things like that, in terms of incentives that you want to create, but

maybe the fiddling is in the specifications of how that evolves over

time to make sure that it’s persistent, predictable, and maybe invulnerable to political manipulation every 4 years.

The CHAIRMAN. Let me just say, picking up on the word ‘‘fiddling’’ that my colleague used, a couple of provisions in one bill

that I and several others have offered says that all the cars produced in America ought to be flexible-fuel cars within a 10-year period of time. I don’t know why it really couldn’t be within a 2-year

period of time. That’s about a $100 adjustment, in terms of the cost

of the car. But it does, at least, give American motorists the same

options Brazilian motorists now have, and have had for several

years, as a matter of fact. And it does make possible, then, the

practical notion of some amount of ethanol, whether it be cornbased, sugar-based, or cellulosic or however one wants to get along

with those projects.

The other thing, which probably is our bailiwick and difficult to

do is, is to find somebody close to the President—because we think

this is a prime emergency—that coordinates all the missing pieces

of this. And without going into laborious detail, for instance, in my

State—and I suspect that’s true in Delaware—there, we are encouraging people to produce ethanol—right now, from corn. And we

have got one place that started up in 1983, in South Bend. There’ll

be two more places that will be producing ethanol, hopefully, in November, if the construction season goes well, and about five more

the following year. And there are now 27 places, single tanks, in

Indiana where you could use E85—that is 85 percent ethanol, 15

percent petroleum. This is out of several thousand tanks.

Now, the dilemma here is that suddenly life is never simple. The

demand for ethanol has increased so much that USA Today points

out in many places that it’s higher than petroleum-based. And you

say, ‘‘Well, how can this be? It’s supposed to be 50 cents lower. This

45

is the incentive.’’ Well, it can be, because MTBE is being substituted by people in California and New England, a long distance

away from Indiana. But suddenly at the very moment that we

think about making these substitutions and trying to get flexible

cars built fast enough—Ford’s pledged 250,000; General Motors,

likewise, 250,000—suddenly we’re not sure there is any ethanol to

buy.

And my point is that—and when I go back to my State, I say,

‘‘Well, who is managing this whole thing?’’ Well, it turns out it’s

some volunteer organizations——

Senator BIDEN. Right.

The CHAIRMAN. One lady, working out of her living room in

Mooresville, IN, has more control over this than the Governor of

the State or the President of the United States, in large part because we don’t take it seriously. There is not really any leadership

focus in all of this, despite all the pledges for people to do something.

So, when I’m talking about ‘‘fiddling at the margins,’’ as opposed

to the big picture, we’re really thinking on the ground now, with

some things that have some small alleviation.

And I pick up your point, Mr.—I think you made it, Mr.

Copulos—that we ought to begin thinking, in a foreign policy way,

about our hemisphere. The Brazilian Ambassador came to visit me

the other day. He’s probably visited with Senator Biden and others.

And he said, ‘‘Now, we could furnish a lot of ethanol to you right

now.’’ The President, just to be provocative, told a small group of

Senators this in the White House, you know, ‘‘How about’’—Well,

my goodness, here you have people on the Agriculture Committee,

and I’ve served on that distinguished committee, and they say,

‘‘Not on your life,’’ you know——

Senator BIDEN. Yeah.

The CHAIRMAN [continuing]. ‘‘We have a sugar policy. There will

be no amendment to the farm bill through 2007. As a matter of

fact, we’re not sure we want to see a change in 2008–09.’’ You

know, in other words, leaving aside the emergency we’re talking

about today—Americans sacrificing their lives—sugar comes first,

or whatever it happens to be, in terms of our vested interest.

This is the niggling business that we’re dealing with. But it’s

very serious. And this is why the big picture you present is helpful

to us for people who do take this seriously, which I think most of

our colleagues do, when they are confronted with this.

But I’m still back to Senator Biden’s plea to you for suggestions

for legislation, enactments, speeches, you know, action steps that

may come from this conference today.

Mr. COPULOS. Well——

The CHAIRMAN. Yes, sir.

Mr. COPULOS [continuing]. We’ve given a lot of thought to that,

and actually have been very involved. We put together the first Alternative Fuel Vehicle Program at the Department of Defense in

1990, so—and I have done some work with the Tank-Automotive

and Armor Command up in Detroit—actually, Warrenville, Michigan. But there are some things we can do. And what we need to

do, first of all, is to understand and recognize that the American

46

people are practical. If you say, you know, ‘‘Go do this. It’ll do X,

Y, or Z,’’ they’ll go do it.

And there are some real simple things. I think your suggestion

on having all new vehicles be flex fuel is excellent. There’s no reason they can’t do that next year. All you’re doing is changing one

chip and some fuel lines. It costs $100 in the factory. You could

even—I would even go so far as to say give a tax credit to let people retrofit it. But when you do, you’ve got to make sure that Detroit doesn’t turn around and void their warranties, because what’s

been happening is that people who might want to use more, they’ll

say, ‘‘Well, that’s fine, but under our warranty, if you use more

than 15 percent or 20 percent’’—it varies by manufacturer—‘‘your

warranty is voided. And if your engines goes bad, it’s all on you.’’

A second thing that we can do—the Department of Defense has

this 21st-century-base program. The idea is to make bases sustainable, in terms of their own energy. Now, one of the things I’ve suggested is, under the Energy Policy Act rules, Federal vehicles are

supposed to be, by now, 80 percent alternative fuels. They’ve managed to get around that by buying the flex fuel vehicle and not

using flex fuels. But we need to solve that. But one of the other

things is, why not put E85 pumps—since they’re supposed to be

using it anyway in their civilian vehicles—in military installations,

post offices, to fuel the Government vehicles, but then have them

available to the public.

One of the problems you’ve got now is infrastructure. If you want

to use E85 or—where do you find it? Well, there’s—there are military and Government installations that have fuel depots in every

city in every region of this country. You could very quickly begin

to do that.

Now, once you did that, what’s going to happen is, the Exxons

and BPs of this world are going to go, ‘‘Well, wait a minute now,

I don’t want them buying that from the Government.’’ [Laughter.]

You know, ‘‘God help us there.’’ So, you’re going to see those

cropping up at regular filling—it’s the same thing that happened

with diesel in 1973. You couldn’t find a diesel pump, to save your

life, in 1973. Along came the boycott. All—they had to literally give

out books with, ‘‘This is where the pumps are, these truckstops.’’

Every gas station you pull into today has a diesel pump.

The CHAIRMAN. Let me just interrupt by saying that we’ve tried

to—in a statesmanlike way—to write letters to all the major oil

companies——

[Laughter.]

The CHAIRMAN [continuing]. Suggesting that they might want to

put E85 pumps on the premises of stations that they have in our

country. The letters that I receive back usually point out that, you

know, ‘‘Understand I’m well motivated,’’ and, you know, there’s

some salutary——

Senator BIDEN. You’re a good man.

The CHAIRMAN [continuing]. Remarks.

Senator BIDEN. You’re a good man.

The CHAIRMAN. Genial, or whatever, but——

[Laughter.]

The CHAIRMAN [continuing]. At the same time, ‘‘Let’s get real.

There are impurities with E85. To mix that stuff with what we’re

47

doing would just be terribly disruptive, to say the least.’’ And, furthermore, those who are the most negative on it are not really sure

that this alternative fuel business is not just a fad, ‘‘It’s almost like

the spike to $3, but we’ll get over it.’’ So, therefore, to get serious

about this, they’re not prepared to do that. I have yet to get a single favorable response from any oil company that would put a single tank out there.

I went out to Terre Haute, IN, last July to see the very first tank

put aside two alternatives, with a sign in the middle of the road

that showed that the ethanol would be $1.50, or something of that

variety, as opposed to $2 at the tank that was next to it. And there

was a speedway race driver there, who said, ‘‘We’re going to use

that at the speedway.’’ And so, that was helpful. And 200 people

and the mayor. It was big—for one gas tank. But that doesn’t mean

that it’s spread like wildfire. The 27 I’m talking about are not on

major oil-company lots. They are mom-and-pop variety stores, that,

as a matter of patriotism, have decided to do this. And many are

losing money, for the reasons that I suggested; the ethanol is going

to California to solve MTBE. And the number of flexible-fuel cars

coming in Indiana, we can trace by the hundreds per month, not

by the thousands. That’s the real-life dilemma that——

Senator BIDEN. Right.

The CHAIRMAN [continuing]. You know, we face out here in these

sort of situations.

As you write more about this—and I hope that you all will—and

reflect, if you can, how we solve the political problem—I think, you

know, clearly, we have some opportunities, and we’ll write to the

oil companies again. And Senator Biden and I hope to be more persuasive as we do that.

Senator BIDEN. Thirty seconds to reinforce your point. Our colleague, Senator Carper, when he was Governor, shifted all State

vehicles to alternative fuels, made the farmers in my State very

happy. They thought that was a good idea. People thought that was

a good idea, too, but they can’t go anywhere to get it, except to go

to a government-sponsored facility, and they’re not able to do that,

to the best of my knowledge, now. So, you——

The CHAIRMAN. Why can’t they do that?

Senator BIDEN. Well, I think it’s—the answer is, I don’t know. I

don’t know whether it’s insurance or they’re not—availability or

the physical access. I’m not sure what the reason is, to be honest

with you, until it was raised a moment ago. I mean, I don’t know

what the—I don’t think it’s a policy prescription, but I think it’s

just—I simply don’t know, to be honest with you.

Mr. COPULOS. The answer is really pretty—that’s why we say put

it on the fenceline—the answer is really pretty simple. After 9/11,

they restricted access to military bases to people with an ID card,

retired or active. I happen to have an ID card, so I can get on. If

you can’t, you can’t get on——

Senator BIDEN. This is State-owned. It’s not a military——

Mr. COPULOS. Oh, OK.

Senator BIDEN [continuing]. Facility.

Mr. COPULOS. Well, a lot of times——

Senator BIDEN. Yeah, but——

Mr. COPULOS [continuing]. States all go——

48

Senator BIDEN [continuing]. State—similar, yeah.

Mr. COPULOS [continuing]. They’ll restrict——

Senator BIDEN. I assume that’s the reason. It relates to—and the

argument about, you know, access to, you know, insurance, covering anything that happened to citizen—I don’t know. I truly don’t

know. But it’s worth my finding out, now that I’ve raised it and acknowledged I don’t know.

Mr. COPULOS. Well, that’s amenable to a legislative fix, just like

the warranty issue, but——

Senator BIDEN. Yeah.

Mr. COPULOS [continuing]. Getting back, if I can, for a second, to

the base point, I had said in my testimony that the fact that twothirds of our oil is used in the transportation sector means onethird isn’t, and we really need to look at that. And, yeah, there are

couple of things. For example, there is a—several—but one technology I’m aware of, because I’ve looked at recently, it takes waste

wood, turns it into a fuel oil that’s perfect for—a perfect replacement for number 6—zero sulphur, zero knocks, and so on. This is

a company that is Canadian. Right now they’re taking all of the

dead wood from the pine bark beetle infestation. They’re getting

ready to convert that into oil substitute up—it is an oil, actually.

We have a Clean Forest Program. We’re taking enormous

amounts of dead wood out of the forests and we’re piling it up. And

guess what? It’s a fire hazard. Instead of piling it up, you could

take that, all of that, and convert it into oil. And the nice thing

about this particular unit is, it’ll handle 400 tons a day economically—it’s economic in that size—which means that you can put a

lot of little ones around our public forests, take all that oil, which

right—all that wood, which, right now, we’re paying $20 a ton to

haul away, and I don’t know what we’re paying to get rid of it after

that, or at least have it in dumps, and turn that into a boiler fuel

that’s so good that Alcoa, in Canada, has agreed to buy every bit

of this they can get, because they had environmental problems with

their stacks and their smelters, and this is going to lower emissions

enough that they can meet Canadian standards.

The CHAIRMAN. Yes, sir.

Dr. HUNTINGTON. This issue that we’ve been talking about for

most of the morning really comes down to whether people have the

perception that these problems are real or not. And, actually, that’s

an issue that people at Stanford are beginning to look at—not myself, but other people who are trained and thinking of people’s psychology and how do they learn about these problems. And so, hopefully this research will come out with some interesting, useful information.

As I think about the problem—and I admit, it’s a very simplistic

way of thinking about it, it seems that we were successful in putting in fees on sulphur dioxide emissions, a number of years ago.

What’s different about that, as compared to higher gasoline prices

or a gasoline tax, is, that the consumer sees the gasoline tax directly, but does not see sulphur dioxide emissions fees. The utilities

squabble about them but they basically make the adjustment, and

then they pay the higher cost. They charge the higher electricity

price to the consumer, and the consumer pays the bill without carefully checking the bill. They’re not as aware of the additional costs.

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And so, following up on this point—suppose you took Gary’s suggestion of a very small tax, initially, that would rise gradually. If

you put a fee in there that wasn’t so visible, but did affect prices

paid by anyone who used fossil fuels, perhaps as a fee that was

based on the carbon content, you could almost make that work,

much like the sulphur dioxide emissions fees, and it wouldn’t be

quite as a direct charge, that people wouldn’t be coming up to you

at cocktail parties and saying, ‘‘Why did you raise my fee?’’

In the automobile sector, the one thing we have done is the corporate automobile efficiency standards or CAFE. I think that measure also works in a similar way. It forces automobile companies to

make more expensive automobiles, perhaps, than they want to, if—

particularly on the vehicles which have to meet those standards. If

you combine CAFE standards with a little more flexibility, as proposed previously by the National Academy of Sciences, you could

allow the trading of credits that would allow people to focus their

attention on those vehicles that really could meet the standards

less costly than others. Again, it wouldn’t look like a direct tax to

people. It has the nice advantage of being flexible. These kinds of

policies are, more or less, ways of not hitting the consumer full on

and saying, ‘‘You are going to pay a higher tax.’’ Such policies perhaps could be done for gasoline. They certainly have been done on

other types of problems.

The CHAIRMAN. Well, we thank all three of you for your very

thoughtful papers and the facts that you have included, which will

be a part of this record, and which we will try to transmit to our

colleagues. We ask for your help in responding to additional questions that we have, and those of other members who were not able

to attend, so that we may have as complete a hearing record as

possible for those who are interested in this subject. And we hope

that many are. I thank each one of you for your preparation and

for being so forthcoming in your responses.

Senator BIDEN. Gentlemen, thank you very much.

The hearing is adjourned.

[Whereupon, at 11:49 a.m., the hearing was adjourned.]

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