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72–104PDF 2011

CHANGING ENERGY MARKETS AND

U.S. NATIONAL SECURITY

HEARING

BEFORE THE

SUBCOMMITTEE ON TERRORISM, 

NONPROLIFERATION, AND TRADE

OF THE

COMMITTEE ON FOREIGN AFFAIRS 

HOUSE OF REPRESENTATIVES

ONE HUNDRED TWELFTH CONGRESS

FIRST SESSION

DECEMBER 16, 2011

Serial No. 112–89

Printed for the use of the Committee on Foreign Affairs

(

Available via the World Wide Web: http://www.foreignaffairs.house.gov/

(II)

COMMITTEE ON FOREIGN AFFAIRS 

ILEANA ROS-LEHTINEN, Florida, Chairman 

CHRISTOPHER H. SMITH, New Jersey 

DAN BURTON, Indiana 

ELTON GALLEGLY, California 

DANA ROHRABACHER, California 

DONALD A. MANZULLO, Illinois 

EDWARD R. ROYCE, California 

STEVE CHABOT, Ohio 

RON PAUL, Texas 

MIKE PENCE, Indiana 

JOE WILSON, South Carolina 

CONNIE MACK, Florida 

JEFF FORTENBERRY, Nebraska 

MICHAEL T. MCCAUL, Texas 

TED POE, Texas 

GUS M. BILIRAKIS, Florida 

JEAN SCHMIDT, Ohio 

BILL JOHNSON, Ohio 

DAVID RIVERA, Florida 

MIKE KELLY, Pennsylvania 

TIM GRIFFIN, Arkansas 

TOM MARINO, Pennsylvania 

JEFF DUNCAN, South Carolina 

ANN MARIE BUERKLE, New York 

RENEE ELLMERS, North Carolina 

ROBERT TURNER, New York 

HOWARD L. BERMAN, California 

GARY L. ACKERMAN, New York 

ENI F.H. FALEOMAVAEGA, American 

Samoa 

DONALD M. PAYNE, New Jersey 

BRAD SHERMAN, California 

ELIOT L. ENGEL, New York 

GREGORY W. MEEKS, New York 

RUSS CARNAHAN, Missouri 

ALBIO SIRES, New Jersey 

GERALD E. CONNOLLY, Virginia 

THEODORE E. DEUTCH, Florida 

DENNIS CARDOZA, California 

BEN CHANDLER, Kentucky 

BRIAN HIGGINS, New York 

ALLYSON SCHWARTZ, Pennsylvania 

CHRISTOPHER S. MURPHY, Connecticut 

FREDERICA WILSON, Florida 

KAREN BASS, California 

WILLIAM KEATING, Massachusetts 

DAVID CICILLINE, Rhode Island 

YLEEM D.S. POBLETE, Staff Director 

RICHARD J. KESSLER, Democratic Staff Director 

SUBCOMMITTEE ON TERRORISM, NONPROLIFERATION, AND TRADE

EDWARD R. ROYCE, California, Chairman 

TED POE, Texas 

JEFF DUNCAN, South Carolina 

BILL JOHNSON, Ohio 

TIM GRIFFIN, Arkansas 

ANN MARIE BUERKLE, New York 

RENEE ELLMERS, North Carolina 

BRAD SHERMAN, California 

DAVID CICILLINE, Rhode Island 

GERALD E. CONNOLLY, Virginia 

BRIAN HIGGINS, New York 

ALLYSON SCHWARTZ, Pennsylvania 

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C O N T E N T S 

Page

WITNESSES 

Mr. Neelesh Nerurkar, specialist in energy policy, Congressional Research 

Service ................................................................................................................... 9

Mr. Robert McNally, president, The Rapidan Group ........................................... 14

Mr. Martin J. Durbin, executive vice president of government affairs, American Petroleum Institute ...................................................................................... 24

Gal Luft, Ph.D., executive director, Institute for the Analysis of Global Security ......................................................................................................................... 30

LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING 

The Honorable Edward R. Royce, a Representative in Congress from the 

State of California, and chairman, Subcommittee on Terrorism, Nonproliferation, and Trade: Prepared statement ................................................... 3

Mr. Neelesh Nerurkar: Prepared statement ......................................................... 11

Mr. Robert McNally: Prepared statement ............................................................. 16

Mr. Martin J. Durbin: Prepared statement ........................................................... 26

Gal Luft, Ph.D.: Prepared statement ..................................................................... 32

APPENDIX 

Hearing notice .......................................................................................................... 52

Hearing minutes ...................................................................................................... 53

The Honorable Gerald E. Connolly, a Representative in Congress from the 

Commonwealth of Virginia: Material submitted for the record ....................... 55

The Honorable Brad Sherman, a Representative in Congress from the State 

of California: Material submitted for the record ............................................... 59

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CHANGING ENERGY MARKETS AND U.S. 

NATIONAL SECURITY 

FRIDAY, DECEMBER 16, 2011

HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON TERRORISM, NONPROLIFERATION, AND TRADE, COMMITTEE ON FOREIGN AFFAIRS, Washington, DC. 

The subcommittee met, pursuant to notice, at 10:12 a.m., in room 

2200, Rayburn House Office Building, Hon. Edward R. Royce 

(chairman of the subcommittee) presiding. 

Mr. ROYCE. This hearing of the subcommittee will come to order. 

The title of this hearing is ‘‘Changing Energy Markets and U.S. 

National Security.’’

Energy has become a national security issue in the United 

States. And one of the realities that we have to explore is the impact that energy has on so much of the trade issues, terrorism 

issues, even the nonproliferation issues. All of these are in the orb 

of the responsibilities of this subcommittee. 

This week the House passed sanctions aimed at Iran’s energy 

sector. A nuclear armed Iran would hugely damage security in the 

Persian Gulf. It is just a reminder to us of the role played by energy, the reality that the United States is in a competitive situation, competing with China. Energy prices in China are 20 percent 

higher than energy prices here in the United States. Yet the question is, going forward, are we going to be able to access energy at 

a lower cost or are we going to foreclose those possibilities? 

We sit here today at this hearing at a time when you already 

have layoffs in the United States related to the Keystone pipeline. 

Last week, 60 Americans lost their jobs as a result of the President’s decision not to give the green light and go ahead with the 

Keystone project. We sit here in the United States today, some of 

my colleagues were recently talking to the Canadian Ambassador 

and Prime Minister Harper, after the President made a decision 

not to go forward with the Keystone pipeline, and that reaction was 

to embrace a long-term strategy of looking to Asia for exports from 

Canada. 

We know Hu Jintao has approached and had a meeting with 

Prime Minister Harper about the idea of having the oil from Alberta shipped not here to the United States but instead transited 

to China to Chinese refineries. And what China seeks here is to reduce its cost of energy. 

We compete with China. It is going to impact jobs in the United 

States if energy costs go down in China as a result and if energy 

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costs go up in the United States. So we have an opportunity. The 

United States has this opportunity, if you read the financial press, 

of being a net fuel exporter if we are able to access—North America 

can do this—if we can access the oil sands from Alberta. If we go 

forward with the Keystone pipeline. For the first time in 60 years 

our country would have the opportunity to be independent of the 

current circumstances where we depend upon the OPEC cartel, 

where we shift our dollars, our petro dollars into that market. And 

we should ask ourselves, at this point in time, are we better served 

recirculating those dollars, sending money to an ally, Canada, 

where 80 percent of what we spend in Canada, according to economists, is spent back here in the United States? Or are we better 

served by closing that option, allowing China and Canada to cement the deal that Hu Jintao is working on, which would allow 

those resources to go instead to China, and to continue to be dependent on sending our petro dollars into Saudi Arabia and into 

Venezuela and to other states that are either unreliable or hostile 

to the United States? 

We can continue with that trade imbalance with respect to the 

OPEC cartel or we can have our dollars stay at home, not being 

shipped to Saudi Arabia and Venezuela. From the standpoint of 

American jobs, we can create those jobs here or we can create those 

jobs in China. That is our decision. Right now the President is 

making a decision to lay off Americans, and 60 have already been 

laid off as a result of his decision, and instead have those jobs go 

to China. 

You can have American jobs if the U.S. Government and State 

governments will assist. There is a reason why unemployment is 

under 4 percent in North Dakota, and that is because of the booming energy sector there, that is because the administration has yet 

to find a way to shut that down. But not only does that benefit 

North Dakota, it is also benefiting Pennsylvania and other States. 

Greater U.S. manufacturing competitiveness is a major issue for 

us here in the United States. The explosion in natural gas production has given the United States an advantage here, but only if we 

can access that advantage. If we curtail that, if we shut off that 

possibility, then we are not going to be the beneficiaries. Good 

things are only going to happen if those in Washington who make 

these decisions in our State capitals let them happen. 

I am going to go back to the Keystone pipeline, a 1,700-mile extension that would transport 830,000 barrels of oil per day from Alberta to our refineries here rather than in China. By the Chamber’s estimate—we know that the estimate of 20,000 direct jobs—

by the Chamber estimate it is 200,000 indirect jobs in the United 

States. Yet we face delay after delay and now this suggestion of 

delay until the next election. 

Well, the Chinese are not waiting and if the energy isn’t piped 

to Texas refineries and refineries throughout the Midwest it is 

going to go instead to China. 

And I just would conclude with the concept or the argument that 

Prime Minister Harper made after the administration rejected his 

decision. He was very disappointed. And he laid out the argument 

that they would look long range to China and to Asia. And we can 

only hope President Obama drops his opposition. 

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I turn now to the ranking member, Mr. Sherman, for his opening 

statement. 

[The prepared statement of Mr. Royce follows:]


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Mr. SHERMAN. Mr. Connolly. 

Mr. ROYCE. Mr. Connolly. 

Mr. CONNOLLY. Thank you, Mr. Chairman. And I thank the 

ranking member for his graciousness. I want to thank you for the 

opportunity to address energy and national security issues as interrelated. In the promise of the debate about the Keystone XL pipeline rider in the House payroll tax bill, like you, Mr. Chairman, I 

am going to focus my comments primarily on that issue. 

The International Energy Agency recently issued its world energy outlook which contained one notable piece of good news: U.S. 

dependence on foreign and particularly Middle Eastern oil is projected to decline in contrast to China, India and Europe. 

According to the EIA, the primary reason for our dependence on 

foreign oil will decline at the adoption of aggressive vehicle efficiency standards, which will increase corporate average fuel economy standards to 54.5 miles by the year 2025. A projected increase 

in domestic oil production also will make a contribution to reduce 

foreign oil dependence, though according to the EIA that increase 

in production will have a much smaller impact than actual vehicle 

efficiency standards. 

Proponents of the Keystone XL pipeline have argued it will increase U.S. access to Canada oil. While this position has intuitive 

appeal, it deserves further examination. Five major oil pipelines already transport this oil derived from Canadian tar sands into the 

United States. These pipelines now terminate in Oklahoma, Illinois 

and Michigan, providing much of the United States with an ample 

supply of tar sands derived oil. In fact industry analysts note that 

these pipelines have produced an oversupply of oil in some parts 

of our country, creating low gas prices for some Americans at diminished oil company profits. The Keystone pipeline will provide 

an export outlet for Canadian oil, actually reducing supply in the 

Midwest by allowing oil companies to sell at higher priced markets 

elsewhere in the world. 

In the abstract I think members of this committee could address 

that boosting domestic oil production in an environmentally responsible manner would be beneficial insofar as it could reduce our dependence on OPEC oil. We discussed this subject in this committee. 

And as I stated at the time, I support such efforts to boost domestic 

production for domestic consumption. 

Therefore, when legislation to advance the Keystone pipeline 

came to the House floor I introduced, as I said I would, here a simple amendment requiring that oil to be used in America. That 

amendment would have ensured that Americans enjoy affordable 

gasoline and enjoy national security benefits as a result of the tar 

sands oil production. Obviously those benefits evaporate if oil companies simply export Canadian oil to the more expensive markets 

in China or Europe. 

I was surprised and disappointed, Mr. Chairman, that the House 

majority rejected that simple amendment, calling into question the 

motives underlying the push to approve the Keystone pipeline. Alberta Minister Ron Liepert said if there was something that kept 

me up at night it would be the fear that before too long we are 

going to be landlocked in bitumen. 

6

While Canadian oil companies might increase their profits from 

selling oil overseas, such exports come at the expense of American 

consumers and American national security. If we are in conceptual 

agreement that there is a relationship between domestic oil supply 

and national security, then perhaps we should acknowledge that 

hemorrhaging oil overseas would undercut those benefits. 

Proponents of the pipeline have argued it will create jobs. I ask 

unanimous consent to enter into the record a Washington Post Fact 

Check article noting that many job estimates offered by prominent 

elected officials have been wildly exaggerated. 

In reality the pipeline likely will produce at most some 6,000 annual temporary construction related jobs and as few as 50 permanent jobs. Compared to the half million public sector jobs that have 

been lost in the recent recession and nascent recovery, this is an 

anemic job boost at best. 

Irrespective of whether one is a climate change science denier or 

accepter, surely all of us could agree that additional oil transported 

by the Keystone pipeline should stay in the United States and absent legal guarantees likely will not. With that, I yield back. 

Thank you, Mr. Chairman. 

Mr. ROYCE. We will turn now to Mr. Johnson of Ohio. 

Mr. JOHNSON. Thank you, Mr. Chairman, and I would be happy 

to yield back 1 minute of my time to the chairman. 

Mr. ROYCE. I appreciate the gentleman yielding. The difficulty here is that China has already invested $10 billion in Canada’s oil 

sands. Canada’s Prime Minister, as a result of this decision by our 

President, has already said the necessity of making sure that we 

are able to access Asian markets for our energy products is underscored by this delay. 

The question is not if we bring these products to refineries here 

in the United States. The economics are such that—I am just going 

to quote from the Department of Energy. The Department of Energy says that gasoline prices in all markets served by these refineries, because we are talking about the Keystone pipeline project, 

would decrease. Gasoline prices would decrease in the Gulf Coast, 

gasoline prices would decrease in the East Coast, and gasoline 

prices would decrease here in the United States in Midwest. Not 

everybody agrees that having a falling price for gasoline is necessarily—you know, it depends upon your perspective on this. But 

I will tell you this, from a competitiveness standpoint, from a 

standpoint of creating jobs here as opposed as into China, this is 

a very important issue. 

I yield back to Mr. Johnson. 

Mr. JOHNSON. Well, thank you, Mr. Chairman. I also appreciate 

our witnesses being here today. You know, the lack of stability surrounding our energy markets today and the potential for even 

greater instability in the near future will not only continue to stunt 

the growth of our economy, it will jeopardize our national security. 

By importing oil from nations such as Saudi Arabia and Venezuela, 

the West is funding the spread of terrorism and foreign activism 

that stands in stark contrast to our foreign policy objectives. 

But as the world increasingly looks to the West for its energy 

needs we have an opportunity to alter this course and spur growth 

in our struggling economy. Thanks in part to breakthroughs in 

7

safety and technology, the United States is on track to become the 

top global oil and gas producer by 2020. In fact, the U.S. tops Russia, Saudia Arabia, and China in combined energy reserves, including oil, coal and natural gas. 

More than 9.2 million U.S. jobs are dependent on the oil and gas 

industry. And shale is a huge part of our energy potential, particularly in my district of eastern and southeastern Ohio. Exploration 

of Marcellus and Utica shales in this part of the state is a game 

changer, not only for energy development independence but for job 

creation. More than 200,000 jobs are expected to come to Ohio in 

the next 4 years alone as a result of developing these deposits. 

There is a major growth in development happening now in America’s energy sector, something that can turn our economy around 

and bring hundreds of thousands of jobs to Americans in need of 

a paycheck. However, high tax rates and excessive government regulation have the very real potential to destroy these robust ambitions. We have seen this most recently in the administration’s refusal to approve the Keystone XL pipeline. This project is a nobrainer for job creation that would also significantly decrease our 

dependence on hostile foreign sources of oil. There is no logic to the 

administration’s insistence on refusing a permit for this project. 

The United States doesn’t have to be on the receiving end of 

OPEC’s decisions. We have great potential and all the resources we 

require to secure our own energy needs. We can actually be the nation leading the global energy transition to the West. The question 

is will we have the leadership to take control of our future and 

make this a reality. 

Thank you, Mr. Chairman, and I yield back. 

Mr. ROYCE. Mr. Sherman. 

Mr. SHERMAN. Thank you for holding these important hearings. 

The effect of energy on our national security cannot be overstated. 

I know that most of the comments here have been about the Keystone pipeline. I think these hearings are far, far broader and the 

impact of energy on our national security is far more significant 

than this one pipeline. 

To address this pipeline, I think we have to take a look at the 

environmental concerns about how that pipeline should be built, 

the route it ought to take, and why it is bypassing the markets of 

the Midwest to go down to Texas, which is the one part of the 

United States that already has more oil than it can consume. 

I realize that there are some in the environmental movement 

who believe that if this pipeline is built then the carbon atoms on 

the petroleum under the ground of Canada will not be burned, 

mixed with oxygen atoms and sent into our atmosphere. I think the 

other opening statements have made it clear that at some point 

Canada will find a way to exploit this resource whether it is 

through the United States or through the port of Vancouver into 

the world markets. 

However, we shouldn’t think that that is automatic or easy or 

that Keystone is going to go away next week. There are environmentalists in Canada. I have met them, and they are no more excited about the building of an east-west or pipeline through Canada 

than our American environmentalists for the Keystone pipeline. 

8

Energy really comes down to two separate issues or somewhat 

separate issues, and that is how do we generate the electricity and 

how do we move our vehicles. This is sometimes lumped together 

as one issue as if we have a national security crisis, how are we 

going to generate electricity. No, we have a world environmental 

crisis and global warming when we burn coal, which we do to create about half of our electricity. So one energy market is for electricity and the other is for moving vehicles, and it is moving vehicles that has been the national security crisis because the world 

hasn’t found a better system yet than petroleum and the petroleum 

for reasons that have not been explained to me is in all the wrong 

places, at least that which was exploitable by the technology existing heretofore. 

Crude oil prices have almost quadrupled since the year 2000. They now stand at $94. OPEC’s is now being headed by a senior 

commander of the Revolutionary Guard Corps of Iran. I think this 

illustrates the fact that we do are have a national security problem 

when it comes to vehicle propulsion. 

I have been a strong supporter of international and domestic research. As to cooperation with other countries, we have as one 

model the U.S.-Israel Energy Cooperation Act, in which both countries put up the same amount of money for joint research projects 

and both countries have a strong incentive to wean the world from 

petroleum. 

In contrast, the Subcommittee on Asia and the Pacific had hearings in a $4 million program to give foreign aid to China to help 

it with its energy problems and to help it meet its carbon emission 

objectives. I think Chinese carbon is a Chinese problem, and last 

I checked they have enough dollars to pay for any American technology that they think necessary to deal with the issue. 

So I look forward to hearing from our witnesses chiefly as to how 

we are going to propel our vehicles without propelling to greater 

power the enemies of the United States, and finally I want to echo 

the gentleman from Virginia that a pipeline that bypasses America’s Midwest markets and takes oil to ports in the United States 

for possible export may not be the best way to assure our national 

security. 

I yield back. 

Mr. ROYCE. I thank the gentleman. And we will go now to our 

panel. Mr. Neelesh Nerurkar is an energy specialist at the Congressional Research Service, where he helps members, and our 

staff understand the complexity of energy markets and energy security and international energy issues. And prior to being with 

CRS he analyzed global energy markets for a major energy company. 

Mr. Robert McNally is the founder and the president of Rapidan 

Group, an independent energy consulting firm. He has served several positions in the energy industry, and in the previous administration, Mr. McNally served as senior director for International Energy on the National Security Council. 

Mr. Martin Durbin is the executive vice president for government 

affairs at the American Petroleum Institute. He is responsible for 

their policy. They have 450 members, ranging from the largest oil 

and natural gas companies to small and independent companies. 

9

He worked on the Hill as a staff member in both the Senate and 

the House. 

Mr. Gal Luft is executive director of the Institute for Analysis of 

Global Security, a think tank focused on energy security, and he 

serves as an adviser to the United States Energy Security Council 

and is cofounder of the Set America Free Coalition. 

We welcome all of the witnesses to the subcommittee. You all 

have 5 minutes to complete your written testimony, which we have 

for the record. We will start with Mr. Nerurkar. 

STATEMENT OF MR. NEELESH NERURKAR, SPECIALIST IN 

ENERGY POLICY, CONGRESSIONAL RESEARCH SERVICE 

Mr. NERURKAR. Thank you, Chairman Royce, Ranking Member 

Sherman, and distinguished members of the committee. My name 

is Neelesh Nerurkar. I am an energy specialist at Congressional 

Research Service. CRS appreciates the opportunity to testify about 

how energy markets are changing. Note that CRS takes no position 

on the policy questions posed by these developments. 

I will discuss three main points from my written testimony: How 

markets are changing, how this affects oil concerns, and how this 

affects a broader set of issues. 

First, rapid, energy-intensive economic growth in developing 

countries has raised global energy demand in recent years. Economic growth is the main driver of energy demand. Energy production has been unable to keep up with this demand at previously 

prevailing prices. This contributed to rising energy prices, particularly for oil, and gave rise to energy security and economic concerns. 

Energy production is capital intensive. Projects have long lead 

times and can face policy and geopolitical constraints. 

Oil prices fell with the global economic downturn in 2008 but has 

subsequently rebounded. Demand from developing countries has 

pushed global oil consumption to new highs in 2010 and 2011. 

Higher prices in turn have motivated investment, technology development and policy incentives, which have contributed to increasing energy supplies particularly from new, complex or expensive resources around the world. A number of examples come from the 

United States and elsewhere in the Western Hemisphere; for instance, U.S. tight oil and shale gas production, U.S and Brazilian 

ethanol production, Brazil’s offshore pre-salt resources and Canada’s oil sands. 

Turning to the oil market, the world consumes 88 million barrels 

a day of oil and related liquid fuels. Forty percent of that is met 

with oil from OPEC, which includes major oil producers in the Middle East, Africa and South America. The world’s largest non-OPEC 

oil producers are Russia and the United States. 

The United States is also the world’s largest oil consumer and 

largest importer. Net imports meet 45 percent of U.S. oil consumption, but this is down from a peak of 60 percent in 2005. Net imports have declined by 4 million barrels a day in 6 years. Nearly 

half these declines can be attributed to lower consumption, a result 

of the economic downturn, and higher oil prices. The rest is due to 

higher domestic production of oil and other liquid fuels, particularly onshore crude oil and ethanol. 

10

The largest crude oil production increases have taken place in 

North Dakota and Texas. Tight oil production in North Dakota’s 

Bakken formation has rapidly increased in recent years, enabled by 

technology advances in horizontal drilling and hydraulic fracturing.Ethanol production has been supported by Federal policy 

and higher gasoline prices. Among the largest declines in U.S. production have been in Alaska and California. 

Despite lower U.S. imports, U.S. imports from Canada have increased by 20 percent between 2005 and 2011 aided by growth in 

oil sands output. Accounting for about a quarter of U.S. imports, 

Canada is now our largest foreign source of oil. Meanwhile, though 

import volumes from OPEC have fallen, OPEC countries continue 

to account for half of U.S. net imports. Most of that, however, 

comes from OPEC members outside the Persian Gulf, such as Venezuela and Nigeria for example. 

There are a broader set of issues to consider here. I will briefly 

cover three. First, the impact of high energy prices, investment, 

technology development and policy incentives aren’t limited to oil. 

They are also driving, for instance, rapid growth in renewable electricity generation. Also, drilling technology innovations have increased unconventional natural gas supplies and helped keep U.S. 

natural gas prices low. Shale gas has dramatically changed the 

U.S. natural gas outlook, so much so that some companies considering new liquefied natural gas exports. Other countries are looking to see if they can replicate the U.S. shale gas experience. 

Second, some energy sources involve environmental and fiscal 

tradeoffs. For example, the use of hydraulic fracturing to recover 

natural gas and oil has raised concerns about water resource risks, 

and some are concerned about the greenhouse gas emissions and 

ecosystem impacts from oil sands production and transport and refining. There are also fiscal tradeoffs where new energy resources 

require government support; for instance, the tax credit for ethanol. 

Finally, the oil market is globally integrated and oil market 

events anywhere can affect prices everywhere. For example, even 

though the United States imported little oil from Libya, the crisis 

there contributed to higher oil costs here whether that oil was imported by ship, by pipeline or produced at home. Foreign oil market 

disruptions could continue to affect U.S. oil prices even if the U.S. 

were to produce as much it consumed. 

In conclusion, rapid energy intensive economic growth from developing countries contributed to energy price increases, which in 

turn enabled new sources of energy supply growth. However, some 

of those sources have higher commercial, environmental and fiscal 

costs. Domestic oil supply growth is reducing our need for imports, 

but we remain connected to a global oil market where supply disruptions can continue to cause economic and energy security concerns. 

I thank you for the opportunity to appear before the committee, 

and I am happy to address your questions. 

[The prepared statement of Mr. Nerurkar follows:]

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Mr. ROYCE. We thank you again. We go to Mr. McNally. 

STATEMENT OF MR. ROBERT MCNALLY, PRESIDENT, THE 

RAPIDAN GROUP 

Mr. MCNALLY. Chairman Royce, Ranking Member Sherman, 

members of the committee, thank you for allowing me to testify. I 

would also like to make three points, drawing on my testimony 

submitted to the record. 

One, new energy supplies in our hemisphere will have real benefits if we allow them to be produced. Two, even if we produce more 

oil and gas here, we will still be connected to a global oil market 

and will have vital national security interests in and around the 

Persian Gulf. 

Three, the risk of oil price spikes must not and need not be an 

excuse to avoid interrupting Iran’s oil exports. The loss of Iran’s exports can be offset by tapping strategic reserves and increasing production in Saudi Arabia. A nuclear Iran would pose far greater and 

longer lasting risks of oil price spikes. 

To the first point, potential new and U.S.-Western Hemisphere 

oil and gas supplies could confer real benefits, but whether we realize them will depend on future regulatory and fiscal policies. Those 

benefits include lower import dependence, which would strengthen 

our economy’s resilience to disruptions and reduce our need to borrow abroad. New supplies anywhere outside the Middle East reduce, all else equal, reduce our vulnerability to disruptions in that 

volatile part of the world. Down the road we may be able to use 

vast new shale gas deposits to displace oil imports, through fleet 

electrification, natural gas vehicles, to revitalize our domestic 

chemical sector, and via exports help reduce Russia’s leverage over 

Western Europe. 

But second, even if we sharply reduce our oil import dependence 

our economy and national security will remain tightly linked to the 

global oil market, especially the trends and events in the Persian 

Gulf. Oil is a fungible commodity that is widely traded in a global 

market. As my colleague said, a disruption or price shock anywhere 

means a price shock everywhere. 

Lower oil import dependence improves our economic resilience, 

but will not insulate us from shocks. EIA projects our oil imports 

will fall to about 42 percent of demand by 2035. Oil imports were 

36 percent of demand in 1973 when we had the first oil price 

shock. 

The Persian Gulf now amounts to 16 percent of our crude oil imports and is expected to stay around that level through 2035. Even 

if we didn’t import a drop from the Middle East, our vital national 

interest there would remain. The Middle East and the Persian Gulf 

is and will remain the world’s most important energy region. As of 

2009 it held 56 percent of global proven oil reserves, nearly all of 

those in the Persian Gulf. EIA projects Middle East share of global 

oil production will rise from 28–31 percent by 2035. With a higher 

market share and higher prices, Middle Eastern oil producers are 

going to earn trillions and trillions of dollars in revenues. We must 

remain engaged in that region partly to ensure that windfall is not 

spent to threaten us or our allies. 

15

Another interest is to make sure that China and India’s soaring 

dependence on Middle East oil flow, mentioned earlier, does not 

lead to strategic competition or conflict. The International Energy 

Agency sees China’s import dependence headed over 84 percent 

and India’s over 92 percent by 2035. 

U.S. foreign policy can and should aim to share the costs, burdens and responsibilities of protecting the Gulf and sea lanes with 

other friendly and capable importers. Such cooperation exists to 

some extent already, such as with multi national anti-piracy patrols. But for the foreseeable future only the United States can play 

the role of guaranteeing the stability of the Persian Gulf. 

And this brings me to my last point. The Iranian regime’s pursuit of nuclear weapons poses a grave, clear and present danger to 

our national security, including the risk of economically damaging 

oil price spikes. We, especially you, face a dilemma. Only interrupting Iran’s crude oil exports is likely to change Tehran’s behavior, but that step could cause oil price spikes that could hurt importers of Iranian crude and even our motorists. Iran exports about 

2.2 million barrels a day; total spare capacity in the world is about 

3 million barrels a day. As my colleague said, earlier this year we 

found out what happens when we lost 1.7 million barrels a day—

gasoline prices went up to $4 a gallon. 

The alternative to biting oil sanctions, military options would 

also cause price spikes. And if biting oil sanctions or military options are not used, Iran will probably get nuclear weapons. This 

outcome poses the biggest and most enduring risk, not only to our 

national security, but also of oil price spikes. Some believe a nuclear armed Iran could be contained and deterred as the Soviet 

Union was during the Cold War. Even if containment worked, it is 

a costly and dangerous strategy. The early decades of the Cold War 

were violent and nearly catastrophic. I doubt oil prices will remain 

stable after Israel, Saudi Arabia and Iran test nuclear weapons and 

state their retaliatory doctrines, much less continue to fight proxy 

wars and conflicts arising from millennia of religious, ethnic and 

cultural hostility. 

Iran’s pursuit of nuclear weapons is likely to raise oil prices one 

way or the other. Officials could manage this oil price risk by 

adopting what I call a quarantine-and-release strategy. We would 

halt most, if not all, of Iranian’s oil exports while offsetting the 

supply loss with a drawdown in strategic stocks and higher Saudi 

production. 

Strategic stocks are large, secure and located in consuming regions. They are an important tool that can protect the economy 

while we raise the cost on the Iranian regime for its illegal and 

dangerous nuclear weapons quest. Short of a military action, quarantine-and-release may be the last option to avoid a nuclear Iran, 

which would pose the biggest risk to our national security as well 

as to oil prices. 

Thank you. 

[The prepared statement of Mr. McNally follows:]

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Mr. ROYCE. Thank you. Mr. Durbin. 

STATEMENT OF MR. MARTIN J. DURBIN, EXECUTIVE VICE 

PRESIDENT OF GOVERNMENT AFFAIRS, AMERICAN PETROLEUM INSTITUTE 

Mr. DURBIN. Good morning, Mr. Chairman, Mr. Sherman, and 

members of the committee, and thank you for the invitation to testify this morning. 

As the title of the hearing implies, there is no question that global energy markets are changing. While API members continue to 

operate and invest around the world, there is growing recognition 

that a rebalancing of the energy markets is occurring and that due 

to enormous new potential reserves, both onshore and in the deep 

water, and due to geopolitical stability, the Western Hemisphere is 

quickly becoming a much bigger player on the global energy stage. 

For today’s purposes, however, I will limit my comments to opportunities we have to enhance our energy and national security right 

here in North America. 

In some parts of the U.S., as has been noted already, oil and natural gas development is booming. While total U.S. crude oil production has remained constant since 2010, Gulf of Mexico, offshore and 

Alaskan production has dropped. This has been offset mainly by increased production onshore in North Dakota and Texas, almost exclusively on non-Federal land. This increase in domestic onshore 

production along with an overall drop in demand has allowed U.S. 

imports to decline during this period. 

The fact is we are in an enormously energy rich nation, and we 

should be taking better advantage of those domestic energy resources. To highlight this point, the international energy consulting 

firm, Wood Mackenzie, calculated the benefits of expanded domestic development earlier this year in a study conducted for API. It 

concluded that America’s oil and natural gas industry can create 

1.4 million new jobs by 2030. One million of those could be created 

in just the next 7 years. 

The same study showed that allowing greater production in the 

U.S. can generate an additional $800 billion to Federal and local 

treasuries by 2030. That won’t erase our debt, but it is a nice down 

payment. It doesn’t end there. In 2010, our industry directly contributed more than $470 billion to the U.S. economy in spending, 

capital investments, wages and dividends. That is more than half 

the size of the 2009 Federal stimulus bill. But this stimulus happens every year without an act of Congress and with no cost to the 

taxpayer. 

The Keystone XL pipeline is a perfect example of an energy 

project that will also enhance our national security. Now in its 

fourth year of review, Keystone XL will create thousands of good 

paying jobs for American families. And as the labor unions, whose 

members will directly benefit from this project testified last week, 

it is more than a pipeline. It is a lifeline, and it is time to put the 

safest, most highly trained and productive workforce to work on 

this project. 

It is also worth noting that the Keystone XL pipeline will not 

only be an outlet for the oil sands in Canada, but for the increased 

25

production that we are seeing in the Upper Plain States in North 

Dakota and Montana. 

But looking to Canada, it is about more than just one pipeline 

project. Eighty thousand Americans are currently employed because of Canadian oil sands. And according to the Canadian Energy Research Institute, we stand to create an additional 500,000 

American jobs by 2035 and spur $775 billion in economic activity. 

Already there are at least 2,400 companies in 49 States involved 

in developing oil sands either by providing the supplies and services in Canada or expanding our pipeline and refinery systems here 

in the U.S. 

Another fact, and I believe as the chairman noted, for every dollar the U.S. spends on Canadian products, including oil, Canada returns 90 cents through purchases of U.S. good and services. We 

simply don’t see that level of return with other trading partners. 

But we also have to think more broadly about our energy future. 

DOE’s Energy Information Administration forecasts that worldwide 

consumption of energy is expected to grow nearly 50 percent by 

2035 and the U.S. will require 20 percent more energy. They also 

project that renewables will meet only 13 percent of that energy demand while oil and natural gas will continue to supply about 55 

percent. 

But the choice is not between fossil fuels and renewable fuels. 

We are going to need all of it. In fact our industry and our member 

companies have invested more in zero and low carbon energy research than the Federal Government and nearly as much as all 

other industries combined. So growing renewables will continue to 

be important, but secure sources of oil and natural gas will be essential. 

Canada is already our number one supplier of imported oil and 

with projects like Keystone we have the ability to significantly increase our Canadian imports, which is already making up for declines in imports from Mexico and Venezuela. Cambridge Energy 

Research Associates projects that Canada could supply 5 million 

barrels of oil a day to the United States in 2030, or one in four barrels Americans expect to consume. By expanding our access to domestic energy resources, strengthening our energy partnership 

with Canada, and increasing our domestic biofuels use, it is possible that we could produce all of America’s liquid fuel needs by 

2026. 

So in closing, oil and natural gas will continue to be critical to 

meeting our energy needs. We can choose to safely and responsibly 

produce more North American energy, creating hundreds of thousands of jobs and generating billions of new revenue for our Government, or we can stand on the sidelines and watch as other countries produce those resources that we will then have to purchase. 

Thank you, Mr. Chairman. 

[The prepared statement of Mr. Durbin follows:]

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Mr. ROYCE. Thank you. Mr. Luft. 

STATEMENT OF GAL LUFT, PH.D., EXECUTIVE DIRECTOR, 

INSTITUTE FOR THE ANALYSIS OF GLOBAL SECURITY 

Mr. LUFT. Morning, Mr. Chairman, members of the committee. 

I am honored to represent here the United States Energy Security 

Council, which includes former Secretaries of Defense, State, Interior, Transportation, Homeland Security, Agriculture, Navy and Air 

Force, former Chairman of the Fed, Alan Greenspan, three former 

National Security Advisers, Directors of CIA, flag officers, and 

former retired executives from Lockheed Martin, Shell Oil and 

Kraft Foods. All of them are concerned about our growing dependence on petroleum and the impact on our national security and economic well-being. 

As was mentioned before, earlier this year the Department of Energy announced that U.S. imports of petroleum declined from 12.5 

million barrels a day in 2005 to 8.6 million barrels of oil this year. 

U.S. import dependency dropped from 60 percent to 46 percent. 

Now this 31 percent reduction in our level of imports in just 7 

years is a remarkable achievement. Some of this is due to the recession, but most is due to, as mentioned, fuel efficiency and even 

more importantly significant ramp-up in domestic production enabled by technology. 

So far so good, but here is the rub, when America’s oil imports 

dropped our foreign oil expenditures climbed by almost 50 percent, 

from $247 billion in 2005 to $367 billion this year. The share of oil 

imports in the overall trade deficit grew from 32 percent in 2005 

to 51 percent this year. Worst of all, the price of gallon of gasoline 

increased by 65 percent. So despite the lower demand, U.S. drivers 

spent this year on gasoline more than in any other year before. 

So, yes, we have become more self-sufficient and more efficient, 

but at the same we became poorer and deeper in debt. We are becoming more so-called energy independent, but less prosperous. 

What is wrong with this picture? Clearly something is wrong 

with our method. Being self sufficient in oil does not shield an 

economy from oil shocks. When the price of oil spikes, it spikes for 

everyone. Only 9 percent of our oil use comes from the Persian 

Gulf, yet the economy is always very vulnerable when things happen there. As long as oil remains the only source of energy to participate in the transportation fuel market, those who control the 

lion’s share of production and reserves will rule the day. I am particularly referring to OPEC, which despite the control of 79 percent 

of global conventional oil reserves produces today almost the same 

number of barrels they did 30 years ago, even though the world 

economy more than doubled since. 

The Arab Spring created a situation in which the GCC government have gone into major liabilities to the tune of about $150 billion keeping the people happy so they don’t end up like Mubarak 

and the other leaders. 

Who is paying for this? We pay for this. And I find it to be sad 

that while we have this conversation in the United States about reducing entitlement programs to hard working Americans, we are 

funding entitlement programs in Saudi Arabia, Kuwait, and the 

United Arab Emirates. 

31

What is wrong with our method is that we fail to address the 

root of our energy vulnerability, and that is oil’s virtual monopoly 

over transportation fuels. This monopoly is enabled by the fact that 

for the most part our automobiles are blocked to fuels not made 

from oil. Since 2005 roughly 100 million new petroleum only vehicles roll over U.S. roads, each with an average lifecycle of 15 years. 

But allowing this to happen we effectively locked ourself to petroleum for the next 2 decades with all the implications. 

Congress can break this virtual monopoly with a stroke of a pen 

by enacting the Open Fuel Standard Act introduced earlier this 

year. This 2-page bill would ensure that cars sold in the United 

States are open to fuel competition so that drivers can compare 

prices per mile and on-the-fly choices between gasoline or diesel 

and a whole variety of non-petroleum fuels. 

As I indicated in my written testimony, the Open Fuel Standard 

would also open the door to methanol, which is an alcohol fuel that 

provides the most economic way to introduce our abundant natural 

gas resources as an alternative to petroleum in the transportation 

sector. 

Mr. Chairman, this time 200 years ago Napoleon was preparing 

his army to march into Russia. At the time salt was the most important strategic commodity by virtue of its monopoly over food 

preservation. Salt deposits conferred national power and wars were 

even fought over the salt. Salt was the Achilles heel of Napoleon’s 

war machine. Its status as a strategic commodity ended with the 

invention of alternative ways to preserve food, like canning and refrigeration. Napoleon’s disastrous Russia campaign was the last 

time in history that salt played a role in world politics. 

Today we consume and import more salt than ever. Yet I doubt 

that anybody in this room is concerned about our salt dependence 

or where our salt is coming from. Petroleum today occupies the 

same strategic ground that salt did. With a simple legislative fix, 

at a zero cost to taxpayers, the U.S. Congress can deliver to oil the 

same fate that humanity delivered to salt. So let’s get it done. 

Thank you, Mr. Chairman.

[The prepared statement of Mr. Luft follows:]

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Mr. ROYCE. Thank you very much, Dr. Luft. 

Let me open with a few questions for our panel. In the near future, China is going to make up a third of the world’s oil demand 

growth, and that need has driven their foreign policy around the 

world. We have seen that whether it is in Sudan or in Burma or 

in Central Asia. We have seen some of the consequences because 

it is all about resources for Beijing. And I would add where China 

goes corruption often follows in terms of their attempts to have access to this. 

Now they are in our hemisphere. Now China is here. They have 

established a working group on energy, and Chinese companies 

have invested $10 billion in Canada’s oil sands. Now this is my 

perspective on this, but it seems to me that the Obama administration has laid out a welcome mat for China with respect to the Keystone pipeline project and the decision not to go forward. I base 

that partly on the reaction in Canada, or if any of the members of 

the press would like to talk to the Canadian Embassy about this, 

this really pained the Canadian Government. 

Just days after the Obama administration announced the Keystone delay, Canadian Prime Minister, Stephen Harper, met with 

China’s Hu Jintao. Harper was painfully blunt. What he said was, 

‘‘This does underscore the necessity of Canada making sure that we 

are able to access Asia markets for our energy products.’’ That was 

his quote. And those remarks spurred headlines around the world. 

Reuters said, ‘‘Asia a priority for Canada after U.S. delays Keystone.’’ And the Wall Street Journal: ‘‘Canada shops oil after pipeline halt.’’ And it is a halt. 

I had a press conference not long ago with the representative of 

the pipeline company, the company that is making that pipeline. 

He said last week they laid off 60 of their employees and there are 

more layoffs coming as a consequence of this decision. And indeed 

there are now Canadian proposals to dramatically increase the capacity for oil from Alberta to reach the Canadian West Coast in 

order to be shipped to China. 

These plans are being set with a view toward diversifying away 

from an unreliable partner, the United States. And instead they 

are looking at China. And this is all being planned with a longterm focus on the Chinese market in mind. 

Now, Mr. Durbin, Canada is not waiting around. I wonder if you 

share my concerns and I would ask how accessible is Canada’s Alberta oil market to the Chinese market? 

Mr. DURBIN. Mr. Chairman, thanks for the question. I am not 

sure I can give you a clear answer on accessibility of China to the 

Canadian market other than to say, as you pointed out, they made 

significant investments in the oil sands. I don’t think that is any 

surprise. It has been pointed out that Canada has an enormous resource that they are sitting on top of. They are going to find a way 

to get this to market. 

I think our focus, and certainly at API we shared disappointment 

with the decision to delay the pipeline, but we are today utilizing 

oil sands and Canadian energy resources to a great extent, and I 

think it is in our national interest, our energy interest, our security 

interest to enhance that even more. And so there is no question 

that Canada is going to find outlets for the oil sands crude. And 

42

we believe there are just too many benefits from a job creation, economic growth, energy security, and national security to bypass that 

opportunity. 

Mr. ROYCE. Well, let me follow up with a quote from the U.S. Department of Energy, a study that they commissioned, and this was 

their conclusion. ‘‘If pipeline projects to the [British Columbia] 

coast are built, they are likely to be utilized. This is because of the 

relatively short marine distances to major Northeast Asia markets 

and future economic growth there.’’ And because of ‘‘increasing 

ownership interest by Chinese companies, especially in oil sands 

production. Such increased capacity would alter global crude trade 

patterns. [Canadian crudes] would be ‘lost’ from the USA, going instead to Asia. There they would displace the world’s balancing 

crude oils, Middle Eastern and African predominantly OPEC 

grades, which would in turn move to the USA. The net effect would 

be substantially higher U.S. dependency on crude oils from those 

sources versus scenarios where capacity to move [Canadian] crudes 

to Asia was limited.’’

So we have a choice, and I would ask you, do you share this analysis that Canadian oil in these words could be ‘‘lost’’ to China? 

Mr. DURBIN. The DOE report is a concern. Again, our broader 

concern has got to be can we better control our energy future. And 

the resources we have available to us from Canada is one of the 

critical paths we have to take going forward to again retain that 

control. 

Mr. ROYCE. Well, you said in your testimony we have a simple 

choice before us. I think it is a pretty straightforward one. 

I will go to Mr. Sherman now. Thank you. 

Mr. SHERMAN. Thank you. Mr. Durbin, would Keystone be willing to build the pipeline if American law prohibited the export of 

the petroleum that was brought to us through that pipeline? 

Mr. DURBIN. Mr. Chairman, I obviously can’t speak for TransCanada. I know they testified to some of this last week as well, 

they only move the product. They are——

Mr. SHERMAN. Would the American Petroleum Institute support 

a statute that provided the pipeline could be built, perhaps with 

some additional environmental safeguards, but prohibited the export of the oil carried by that pipeline? 

Mr. DURBIN. No, sir, I don’t think API would support that. 

Mr. SHERMAN. So basically you are not here to give us energy security, you are here to try to let some oil companies make some 

money by building a pipeline. 

Mr. DURBIN. No, sir, I don’t think that is right. 

Mr. SHERMAN. Well, you don’t create energy security by having 

Canadian oil exported to Europe as opposed to exported to Japan 

through the United States. 

Mr. DURBIN. But I disagree with your premise. 

Mr. SHERMAN. Well, the fact is if the proponents of the pipeline 

and the industry itself insists on the right to export, if the plan is 

to build a pipeline bypassing our interior markets in the Middle 

West and bringing it to a port well equipped for export, it sure 

looks like export. 

43

Mr. DURBIN. If you look at the refineries in the Gulf Coast that 

have invested billions of dollars to be able to process crude oil here 

in the United States——

Mr. SHERMAN. I am sure that it won’t be refined and exported. 

Mr. DURBIN. The United States continues to be the largest market for gasoline and diesel. So all of the incentive is to have the 

jobs here, the investment here, but again it is a global market. 

Mr. SHERMAN. I would like to have the gasoline here. 

Mr. DURBIN. I believe you will. 

Mr. SHERMAN. That doesn’t seem to be the plan. If the pipeline 

was to U.S. markets in the Middle West we wouldn’t have this 

issue. We wouldn’t be talking about aquifers in Nebraska and there 

wouldn’t be the risk of export. 

Mr. DURBIN. Mr. Chairman, it was defined already——

Mr. SHERMAN. Reclaiming my time, I want to turn to—first, I 

need to put a few things in the record. Without objection, I would 

like to put in the record material provided by the Sierra Club, the 

Wilderness Society, a statement by Dr. Albersworth of the Wilderness Society and a report from Oil Change International concerning 

the pipeline. 

Back when I was chairman I would say without objection, so ordered. 

Mr. ROYCE. Without objection. 

Mr. SHERMAN. I would also like to put on the pipeline an excellent article by Dr. Luft, who is here, in Foreign Policy Magazine 

dealing with how the anti-Russia vestige of our State Department 

has caused it to embrace pipelines designed to get natural gas to 

Europe and that natural gas may eventually come from Iran. It is 

a fascinating article about how Iran’s economic situation will be 

perhaps dramatically improved over the next decade or so as they 

are able to export this natural gas to Europe as a direct result of 

U.S. policy. And if I have time I would like to ask you some questions about that, but I want to shift to something else and that is 

the open fuel standards. 

When open fuel standards means ethanol, I am not all that excited. Turning corn into fuel is one of the reasons we have such 

high food prices around the world, and it hasn’t really been an alternative. But we have huge natural gas deposits in North America. What would be the—first of all, how much more would an open 

fuels standards car cost to manufacture? And second, what is the 

technology to fuel such a vehicle with natural gas? 

Mr. LUFT. The open fuel standards is not a fuels bill. It does not 

support or endorse any fuel. It is a bill that is designed to deal with 

the fact that cars today are blocked to competition, okay? 

Mr. SHERMAN. It is an automobile standards bill. 

Mr. LUFT. Exactly. 

Mr. SHERMAN. So how much more would the auto companies 

charge us for the cars? 

Mr. LUFT. It depends on the technology. If they choose to do elec- tric vehicles, it will be $10,000. If they do choose to do flex fuel vehicles, it will be something in the order of $100 or less. So for $100 

or less your car will be able to run on gasoline, but also a variety 

of alcohols. Now ethanol is only one of them, but what we do see 

the potential it is for methanol. Methanol, as MIT just concluded 

44

in its report, is the most economic use of natural gas is if you convert it into liquid fuel called methanol. The spot price of methanol 

today is about $1.13 a gallon. If you convert it to gasoline on energy equivalence, it would be significantly cheaper than gasoline at 

the pump. So if there is a fuel that can compete against gasoline 

and it is made from domestic natural gas, why not allow it to compete, why block it from the market. 

Now, interestingly, it is the oil and gas industry that I think 

could benefit a lot from this bill because natural gas prices are very 

low today. And the reason they are very low is that there is no demand. We are producing more and more, but there is no way that 

we can absorb it because our utilities just don’t absorb it fast 

enough. 

Mr. SHERMAN. And so if basically this could very much help domestic oil and gas industry producers, it would be competition for 

the international oil industry. Mr. Durbin, where are you on open 

fuel standards? 

Mr. DURBIN. I haven’t had a chance to even look at it. It is the 

first I have heard of the idea. It sounds interesting. 

Mr. SHERMAN. I commend you for proposing the idea, but is the 

idea of requiring this E85—I forget what the logo was of General 

Motors—there are a lot of flexible fuel standards automobiles on 

our roads. And I look forward to getting Mr. Durbin’s organization 

to comment on them. And I yield back all the time I don’t have. 

Mr. ROYCE. Mr. Johnson, please. 

Mr. JOHNSON. Thank you, Mr. Chairman. Let’s see. Mr. McNally, 

this week the House passed two bills to strengthen sanctions on 

Iran, House Resolution 2105 and 1905. In addition, the House 

passed the defense authorization bill, H.R. 1540, which included a 

provision to sanction entities that do business with the Central 

Bank of Iran. 

What has been the effect of sanctions imposed thus far in Iran’s 

oil industry and what else can we do to prevent a nuclear weapons 

armed Iran without disrupting oil markets? 

Mr. MCNALLY. Thank you for the question. The Obama administration should be commended for strengthening sanctions against 

Iran, including on the oil industry, and urging other countries to 

do so. As a result, Iran has had to work harder to sell its oil. It 

has had to circumvent banks and find go-betweens and give easier 

credit, and we have made life a little more difficult for Iran to sell 

its oil. However, it is still doing so. It still exports about 2.2 million 

barrels a day. 

In my view, the legislation that has been worked on here is still 

too weak. It gives the President two easy outs to avoid sanctions 

that would crimp Iran’s oil exports significantly. It gives a national 

security out and it also gives an out where if the President says 

there is not sufficient supply to offset the loss of Iran there would 

be a waiver. 

My message to you is with tight spare production capacity in the 

world, at most 3 million barrels a day. That is the EIA estimate. 

It is probably very high, many folks in the private sector are much 

lower. But at 3 million barrels a day and expected to stay fairly 

low in the coming years, the market will always be too tight to risk 

crimping Iran’s oil exports. 

45

In my view, that is why we must neuter that argument and look 

to welcoming the President’s decision to use the strategic stocks to 

offset the supply loss from Iran. So in my view, in short, I think 

sanctions so far have been too weak. We have been playing pattycake and we need to start playing hardball. 

Mr. JOHNSON. Thank you for that. The United States has long 

banned Iranian oil imports, and there have been calls for the EU 

to do the same. What would be the impact, in your opinion, of a 

European Union ban on Iranian oil products—or imports, I am 

sorry? 

Mr. MCNALLY. In my view, that would, because Europe only accounts for over 450,000 barrels a day of Iran’s total 2.2 million barrels a day of exports, I think that if Europe were to ban the imports you would see a rearranging of flows. It would be a great day 

for Russia because those Greek refiners who have been taking in 

Iranian crude would look to Russian exports to replace those barrels. So there would be a rearranging of flows. And it would probably lead to some higher costs for European consumers, although 

again, the Europeans could lower their strategic stocks to have a 

stock draw to offset that. 

The Iranians would have to sell their oil cheaper into Asia. The 

Chinese are hard bargainers, and when the Iranians showed up 

with these stranded barrels that they had been selling to the 

Greeks but now no longer could, Iran would have to probably accept a discount. So Iran would lose some of the revenue that it currently earns on its exports because it would sell it into a smaller 

market that was aware that those barrels were sort of blocked from 

Europe. So it would crimp Iran, it would make life a little more difficult, it would cut into revenues somewhat. 

Mr. JOHNSON. What was the effect of our ban on global markets? 

Mr. MCNALLY. Our ban of Iranian imports? 

Mr. JOHNSON. Yes. 

Mr. MCNALLY. No effect that I am aware of. 

Mr. JOHNSON. No effect? 

Mr. MCNALLY. Yes. 

Mr. JOHNSON. Okay. With that, I think I will yield back the remainder of my time to the chairman. 

Mr. ROYCE. Thank you. I just would follow up on that question 

to Mr. Durbin. Again, we had the study from the Department of 

Energy that said gasoline prices in all markets served by the Gulf 

Coast and the East Coast refineries would decrease, including the 

Midwest. I am perplexed on the question of the Midwest. I assume 

that part of the answer is that the excess refining capacity must 

be in the Gulf. 

Mr. DURBIN. Correct. 

Mr. ROYCE. And the Midwest must be running at full throttle. So 

if you dictated that all the Alberta oil capacity go to the Midwest 

refineries they wouldn’t be able to handle the excess; is that the 

issue here? 

Mr. DURBIN. Well, and again, the Midwest refineries are currently processing oil sands crude oil. So yes, this does provide 

greater flexibility and greater diversity of supply in the Gulf Coast 

refineries to serve our domestic market. 

46

Mr. ROYCE. So the problem is that you have got limited refinery 

capacity around the United States. I know that is the problem in 

California. And we won’t—the government will not allow new refineries to be built easily, past experience. So the question is getting 

it to the refineries with excess capacity here in the United States 

to serve the domestic market. 

Mr. DURBIN. Correct. 

Mr. ROYCE. I see. Well, let me go to Mr. Connolly. 

Mr. CONNOLLY. Thank you, Mr. Chairman. 

Mr. Durbin, I found myself mostly in agreement with your opening statement. And I think, to be intellectually honest, I think you 

are right. If the goal is to lessen our reliance on foreign oil, especially from areas of the world that are problematic for lots of different reasons, frankly everything has got to be on the table. That 

doesn’t mean we have to approve everything, but it does mean, intellectually to be honest, everything has got to be examined forthrightly on its merits. And so I applaud you for that principle because I think that ought to guide what we do. And frankly with respect to me anyhow on the Keystone pipeline, it is not an ideological issue for me. 

But in the spirit of being intellectually honest a couple of points. 

Does TransCanada now have a terminus in Vancouver? 

Mr. DURBIN. In Vancouver? 

Mr. CONNOLLY. Yes. Is there not a pipeline that ends in Vancouver? 

Mr. DURBIN. I don’t know whether TransCanada has a line. 

Mr. CONNOLLY. Well, are not tar sands product in fact transshipped to the port of Vancouver? 

Mr. DURBIN. I don’t know. I don’t know. 

Mr. CONNOLLY. Mr. Nerurkar. I have a map here that says there 

is. 

Mr. NERURKAR. There is one pipeline that runs to the Canadian 

West Coast from the Alberta oil sands right now. I believe it has 

around 300,000 barrels a day of capacity. 

Mr. ROYCE. I know that California gets some capacity. 

Mr. DURBIN. Okay. And there are proposals for expansion. 

Mr. CONNOLLY. Exactly. And is the purpose of that Vancouver 

terminus at least in part for the purpose of export and is not a domestic threat? 

Mr. DURBIN. Correct. 

Mr. CONNOLLY. And some of that export goes to Asia, is that not 

correct? 

Mr. DURBIN. I don’t know that. I don’t know the flow. 

Mr. NERURKAR. There is some going to China and other places. 

Mr. CONNOLLY. Yes. So the idea is that because of the delay Canada is now looking at the Chinese market, that is not true. As a 

matter of fact, they have been in the China market, and the reason 

to look at the China market has nothing to do with the delay; it 

has to do with the fact that China is the fastest growing market 

in the world and has enormous potential. And if you are an oil exporter, if you are in that business, that is certainly a market you 

are going to look at, isn’t it? 

Mr. DURBIN. Yes. And I believe I have said that as well. 

47

Mr. CONNOLLY. Of course. Thank you. Well, you didn’t assert 

that, the chairman did in his poster. 

Mr. ROYCE. If the gentleman would yield. 

Mr. CONNOLLY. Yes. 

Mr. ROYCE. It was not me asserting it, it was the Prime Minister 

of Canada asserting it and it was the employees at the Canadian 

Embassy who asserted. But I would be happy—let’s put back up 

the quote of the——

Mr. CONNOLLY. Reclaiming my time, Mr. Chairman. 

Mr. ROYCE. You can have your time back. I am just going to put 

the quote up from the Prime Minister of Canada. 

Mr. CONNOLLY. Reclaiming my time, Mr. Chairman. The Canadian Government knows how to communicate with the United 

States Government, and frankly that is not through a hearing of 

this subcommittee. So if they want to formally communicate to the 

United States Government their concerns about the pipeline or the 

Chinese market they know how to do that. 

But I thank the chairman and was happy to yield. 

The proposed terminus at Port Arthur, Texas, this is what I am 

stuck on, Mr. Durbin, in the spirit of being intellectually honest. 

TransCanada has a different business model where it has actually 

limited contracts to long-term contracts, including with two major 

exporters. And the retrofitting or building of new refineries clearly 

seems to be for export, not for the domestic market. Why would we 

build new refineries in Port Arthur, Texas if the purpose was solely 

for domestic consumption? Why not do it in the Midwest, where we 

already have pipelines and product is already coming into the 

United States such that we have a glut in that area. And Keystone 

itself has pointed out that if we don’t do something to alleviate that 

glut, prices will fall. If we do do something to alleviate that glut 

like the pipeline, they actually say in their application papers 

prices, unlike what the chairman indicated, will actually rise per 

barrel of heavy crude. 

Why would we have a terminus at Port Arthur, Texas if the purpose weren’t clearly for export? Maybe not exclusively, but just like 

the Vancouver terminus it is for export. 

Mr. DURBIN. Because the refining capacity in the Port Arthur 

area and the contracts they are putting in place with refineries 

throughout that area and continuing to do so, that is where the capacity is. The idea is we should be siting new refineries. 

Mr. CONNOLLY. But Mr. Durbin, in the spirit of your testimony, 

which I commend, of intellectual honesty, don’t we have to concede 

that the purpose of putting the terminus at Port Arthur is inter 

alia for export? 

Mr. DURBIN. I just want to say it is not the purpose. 

Mr. CONNOLLY. I said among other purposes, inter alia, it is for 

export. 

Mr. DURBIN. And I acknowledge that we are dealing with a global market. 

Mr. CONNOLLY. Yes, you did. 

Mr. DURBIN. And right now we are exporting. 

Mr. CONNOLLY. But Mr. Durbin——

Mr. DURBIN. We are exporting some refined products now. 

48

Mr. CONNOLLY. Mr. Durbin, you will also concede, will you not, 

that the arguments used in favor of the pipeline have exclusively 

been about enhancing the domestic supply here in the United 

States? No one has talked in favor of the pipeline in the Congress 

about global market and we have to do our share by building a 

pipeline and expanding refinery capacity to enhance exports to 

other countries. 

Mr. ROYCE. The time has expired. Mr. Duncan. 

Mr. CONNOLLY. I thank the chair. 

Mr. DUNCAN. Thank you, Mr. Chairman, and thanks for having 

this hearing. I think it is very timely. And I will go back to what 

we heard earlier in the year from one of the defense leaders of the 

country when he said that there can be no national security without energy security. I believe that energy is a segue to job creation, 

and that is what this Congress needs to be talking about, and that 

is what we hear the other side trying to talk about a lot is jobs, 

creation of jobs. The Keystone XL pipeline is a job creator. It creates refining jobs and it creates construction jobs. And I am not too 

young to remember an impact that the Alaska pipeline had on employment in this country as we developed the Alaska pipeline to 

meet our energy needs. It is a prime example of what we can do 

with XL, Keystone XL pipeline and produce jobs. 

All Canadian oil, whether it is used in this country or shipped 

around the world, is exported oil from Canada. It is exported to the 

United States from our largest trading partner, someone we should 

be trading with every opportunity we get. We should be utilizing 

hemispheric resources. The American public is frustrated when 

they are paying over $3 a gallon at the pump knowing that we 

have got the resources in this country and in the Western Hemisphere with friendly countries like Canada that can supply the resources that we need. They are frustrated when they see this government standing in the way. 

Mr. ROYCE. One minute remains in the vote. 

Mr. DUNCAN. Just I want to give Mr. Durbin an opportunity to 

respond to Mr. Sherman if you didn’t with the balance of my time. 

Mr. DURBIN. Thank you, Mr. Duncan. And again, we said from 

the beginning we are exporting product now. So certainly the addition of Canadian crude into our market, into our refineries, is simply providing more supply diversity, and allowing us to produce the 

fuels that we need here, and when it makes sense we are certainly 

going to be able to export products as well. We import and export. 

But more importantly, the Canadian crude coming into the Gulf 

Coast refineries is replacing crude oil that we had been bringing 

in from Venezuela and Mexico. Venezuela is sending more of its 

product overseas to Asia and elsewhere and Mexico’s production is 

simply on the decline. And we need to replace that, and this not 

only replaces it, we will end up being able to get even more. And 

it does improve our overall energy and national security. 

Mr. ROYCE. As we adjourn, let me just close with the comment 

again of the Prime Minister of Canada. This was several days after 

the Obama administration announced the Keystone delay. The 

Prime Minister, Stephen Harper, had had a face-to-face meeting 

with China’s Hu Jintao and afterwards to the press these were his 

words: The decision by the United States, ‘‘This does underscore 

49

the necessity of Canada making sure that we are able to access 

Asia markets for our energy products.’’ I think that is pretty 

straightforward. 

We stand adjourned. Thank you. 

[Whereupon, at 11:20 a.m., the subcommittee was adjourned.] 

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