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AMERICA’S ENERGY NEEDS AS OUR NATIONAL

SECURITY POLICY

HEARING

BEFORE THE

SUBCOMMITTEE ON ENERGY AND RESOURCES

OF THE

COMMITTEE ON

GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

ONE HUNDRED NINTH CONGRESS

FIRST SESSION

APRIL 6, 2005

Serial No. 109–14

Printed for the use of the Committee on Government Reform

(

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

http://www.house.gov/reform

(II)

COMMITTEE ON GOVERNMENT REFORM

TOM DAVIS, Virginia, Chairman

CHRISTOPHER SHAYS, Connecticut

DAN BURTON, Indiana

ILEANA ROS-LEHTINEN, Florida

JOHN M. MCHUGH, New York

JOHN L. MICA, Florida

GIL GUTKNECHT, Minnesota

MARK E. SOUDER, Indiana

STEVEN C. LATOURETTE, Ohio

TODD RUSSELL PLATTS, Pennsylvania

CHRIS CANNON, Utah

JOHN J. DUNCAN, JR., Tennessee

CANDICE S. MILLER, Michigan

MICHAEL R. TURNER, Ohio

DARRELL E. ISSA, California

GINNY BROWN-WAITE, Florida

JON C. PORTER, Nevada

KENNY MARCHANT, Texas

LYNN A. WESTMORELAND, Georgia

PATRICK T. MCHENRY, North Carolina

CHARLES W. DENT, Pennsylvania

VIRGINIA FOXX, North Carolina

——— ———

HENRY A. WAXMAN, California

TOM LANTOS, California

MAJOR R. OWENS, New York

EDOLPHUS TOWNS, New York

PAUL E. KANJORSKI, Pennsylvania

CAROLYN B. MALONEY, New York

ELIJAH E. CUMMINGS, Maryland

DENNIS J. KUCINICH, Ohio

DANNY K. DAVIS, Illinois

WM. LACY CLAY, Missouri

DIANE E. WATSON, California

STEPHEN F. LYNCH, Massachusetts

CHRIS VAN HOLLEN, Maryland

LINDA T. SANCHEZ, California

C.A. DUTCH RUPPERSBERGER, Maryland

BRIAN HIGGINS, New York

ELEANOR HOLMES NORTON, District of

Columbia

———

BERNARD SANDERS, Vermont

(Independent)

MELISSA WOJCIAK, Staff Director

DAVID MARIN, Deputy Staff Director/Communications Director

ROB BORDEN, Parliamentarian

TERESA AUSTIN, Chief Clerk

PHIL BARNETT, Minority Chief of Staff/Chief Counsel

SUBCOMMITTEE ON ENERGY AND RESOURCES

DARRELL E. ISSA, California, Chairman

LYNN A. WESTMORELAND, Georgia

ILEANA ROS-LEHTINEN, Florida

JOHN M. MCHUGH, New York

PATRICK T. MCHENRY, NORTH CAROLINA

KENNY MARCHANT, Texas

DIANE E. WATSON, California

BRIAN HIGGINS, New York

TOM LANTOS, California

DENNIS J. KUCINICH, Ohio

EX OFFICIO

TOM DAVIS, Virginia HENRY A. WAXMAN, California

LAWRENCE J. BRADY, Staff Director

DAVE SOLAN, Professional Staff Member

LORI GAVAGHAN, Clerk

KRISTA BOYD, Minority Counsel

(III)

C O N T E N T S

Page

Hearing held on April 6, 2005 ................................................................................ 1

Statement of:

Ebel, Robert E., chairman, energy program, Center for Strategic and

International Studies .................................................................................... 72

Hormats, Robert, vice chairman, Goldman Sachs International .................. 54

Sell, Jeffrey Clay, Deputy Secretary, Department of Energy ....................... 24

Woolsey, R. James, former Director of Central Intelligence ......................... 36

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

Ebel, Robert E., chairman, energy program, Center for Strategic and

International Studies, prepared statement of ............................................ 75

Higgins, Hon. Brian, a Representative in Congress from the State of

New York, prepared statement of ................................................................ 6

Hormats, Robert, vice chairman, Goldman Sachs International, prepared

statement of ................................................................................................... 58

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

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

Kucinich, Hon. Dennis J., a Representative in Congress from the State

of Ohio:

Prepared statement of ............................................................................... 9

Prepared statement of Deron Lovaas ...................................................... 15

Sell, Jeffrey Clay, Deputy Secretary, Department of Energy, prepared

statement of ................................................................................................... 26

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

of California, prepared statement of ........................................................... 91

Woolsey, R. James, former Director of Central Intelligence, prepared

statement of ................................................................................................... 40

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AMERICA’S ENERGY NEEDS AS OUR

NATIONAL SECURITY POLICY

WEDNESDAY, APRIL 6, 2005

HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON ENERGY AND RESOURCES, COMMITTEE ON GOVERNMENT REFORM, Washington, DC.

The subcommittee met, pursuant to notice, at 2:05 p.m., in room

2247, Rayburn House Office Building, Hon. Darrell E. Issa (chairman of the subcommittee) presiding.

Present: Representatives Issa, Westmoreland, Marchant, Higgins

and Kucinich.

Staff present: Larry Brady, staff director; Lori Gavaghan, legislative clerk; Dave Solan, Ph.D., Steve Cima, and Chase Huntley, professional staff members; Krista Boyd, minority counsel; and Jean

Gosa, minority assistant clerk.

Mr. ISSA. Good afternoon. A quorum being present, this hearing

of the Government Reform Subcommittee on Energy and Resources

will come to order. I want to thank all of our witnesses for being

here promptly.

A matter of housekeeping. It is likely that we will go an hour

without a vote. If that occurs, we actually will get to hear all of

your testimonies uninterrupted.

I will begin with my own opening statement.

Energy drives the U.S. and world economies. Our prosperity and

way of life are sustained by energy. Affordable, reliable and sustainable energy supplies are essential to our national security and

maintaining our global commitments. In the last decade higher

global demand for energy, particularly oil and natural gas, has led

to disturbing developments. As more nations increasingly depend

on imports to meet their needs, and as the world approaches full

oil production capacity, and some might say exceed, countries such

as China are becoming more aggressive in pursuing energy agreements often with governments unfriendly to the United States.

State-owned energy companies are becoming more assertive on the

international market, creating an additional concern because of a

lack of transparency in the contracting operations. New alliances

and developments indicate a shift in energy geopolitics.

And I might say that there is no question that what was once

known has changed—and I particularly want to hear from Jim

Woolsey, because of his tenure and position at the CIA.

Domestically continuing high oil and gas prices are impacting

families and businesses and could seriously affect our economic

growth. Unlike other periods of price volatility over the last 30-plus

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years, today’s period of price volatility is demand-driven. Because

it is demand-driven, there is no person or group to blame for today’s high prices. To a certain extent we are victims of our own

success in that worldwide economic growth and development are

raising the standard of living, but also dramatically raising the

consumption of energy.

In the second week of this administration, in 2001, with leadership and foresight, President Bush established the National Energy

Policy Development Group and charged the group to develop recommendations for a national energy policy. Based on these recommendations, in the last Congress the House and Senate passed

an omnibus energy bill, but reconciliation did not occur, and the

bill was not enacted.

It is now clear more than ever that we must adopt a comprehensive national energy policy and establish a long-term strategy to

ensure the security of our economy and our national interest. At a

minimum, such a policy must expand domestic opportunities for

production of traditional and nontraditional sources of energy while

expanding conservation and efficiency efforts.

Today we will conduct a frank assessment of energy roles in our

national security. We look forward to hearing from our distinguished panel, and today we are pleased to have the Honorable

Clay Sell, Deputy Secretary of the Department of Energy. Secretary Sell previously served as special assistant to the President

for legislative affairs, with an emphasis on energy; special assistant

to the President for economic affairs, and staff director at the Senate Energy and Water Development Appropriations Subcommittee.

We are also pleased to have the Honorable James Woolsey,

former Director of the Central Intelligence Agency, and a Commissioner to the bipartisan, nongovernmental National Commission on

Energy Policy. He is currently a vice president at Booz Allen Hamilton. His extensive administrative experience also includes time as

Under Secretary of the Navy, general counsel of the Senate Committee on Armed Services, and delegate and advisor for diplomatic

talks to reduce conventional and strategic arms in Europe.

We are also pleased to be joined by Ambassador Robert Hormats,

vice chairman of Goldman Sachs International. The Ambassador

served in a number of administrations, holding positions as Deputy

U.S. Trade Representative, Assistant Secretary of State for Economic and Business Affairs, and senior economic advisor to the National Security Council.

Last and certainly not least, we are joined by Robert Ebel, chairman of the energy program, the Center For Strategic and International Studies. In addition to extensive private sector experience

in the energy sector, he has been advisor to the U.S. Department

of State on energy and diplomatic issues. He also served with the

CIA for 11 years and spent 71⁄2 years with the staff of the Office

of Oil and Gas in the Department of Interior.

We are delighted to have such a distinguished panel, and as is

the custom of this committee, I would yield to the ranking member,

Mr. Higgins, for such time as he may consume.

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

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Mr. HIGGINS. Thank you very much, Mr. Chairman, for holding

this very, very important subcommittee hearing on national energy

policy and national security.

I have two primary concerns. One is it is well established that

our dependence on foreign oil for our national energy needs is a

problem. It is a problem economically, and it is a problem in terms

of national security. And that problem is, I believe, pervasive and

growing. Economically, when the cost of foreign oil increases, historically since World War II our economy is more susceptible, more

vulnerable to falling into recession, which is obviously of economic

concern. Also, with respect to national security, I believe that as

national security concerns are raised about the foreign terrorist

threats, we have to look more at those things, those natural resources that can have a debilitating impact on our economy and,

more importantly, our way of life.

In western New York we are blessed with an abundance of fresh

water. One-fifth of the world’s freshwater supply is found in the

Great Lakes and along Lake Erie. Also, the resources that we get

from that great natural resource is an abundance of hydropower.

In Niagara Falls we have the State’s largest hydroelectric plant.

Our concern regionally moving forward is that plant becomes increasingly threatened by terrorist attacks as an effort to debilitate

our way of life in western New York.

So I am hopeful that during this conference today, during this

meeting today, we will hear from officials who can enlighten us as

to the importance of energy policy, a real energy policy that addresses our national security concerns as well as our economic wellbeing moving forward.

With that, Mr. Chairman, thank you very much.

[The prepared statement of Hon. Brian Higgins follows:]

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Mr. ISSA. Now from our vice chairman, the gentleman from Georgia.

Mr. WESTMORELAND. Thank you, Mr. Chairman. Thank you,

Chairman Issa, for holding this hearing, and I am glad that this

subcommittee is taking a look at the very important link between

our economy energy prices and how national security is affected by

both. I also appreciate the witnesses for taking your time to come

and testify today, and I look forward to hearing what you have to

say.

As I said last time the subcommittee had a hearing, I think the

bottom line to the problems that we are having with our energy is

that we do not have an energy policy, and we desperately need an

energy policy. I know that there have been two or three attempts

made in the past several Congresses to come up with an energy

policy. I also know that the House Energy and Commerce Committee is at the present time marking up the latest version of it.

I am new to the Federal legislative process, but I will tell you

that when I have been in the district for the past 2 weeks over the

Easter break, between doing Social Security hearings, even doing

the town halls, the one thing I heard was about gas prices and the

fact that they have just gone out the roof, and really that nobody

seemed to be addressing it. And I had several people say, I went

to bed last night and gas was $1.92, and I woke up this morning

and it was $1.99. How do gas prices go up that quick? So that is

something that I have to respond to my constituents about what

we are doing about it.

I think what we are going to hear today from this panel’s testimony will bolster the argument even more that what we need is

a national energy policy to set some regulations that we can look

forward to that will guide us in this problem that we have been

having.

Mr. ISSA. I would now ask that each witness and anyone who

might be advising the witnesses please rise for the oath.

[Witnesses sworn.]

Mr. ISSA. The clerk will note that the witnesses affirmed the

oath.

The committee appreciates the substantial written testimony

that each of you has given. As you can imagine, we request it in

advance so that our staffs have carefully gone over it. We undoubtedly have our questions based on your testimonies even before we

get the privilege of hearing them. So although I will not chastise

anyone who reads their testimony, it would be very much appreciated if you would skip through, ad lib, add to, make it as much

those key items you want us to have; and then it is my fervent

hope that we will have a good dialog of real questions to give you

an opportunity for real answers.

Mr. Kucinich, do you have an opening statement?

Mr. KUCINICH. Mr. Chairman, with your indulgence, I do. And if

I could read a few excerpts from it and have it included in the

record, I would be grateful.

Mr. ISSA. Without objection.

Mr. KUCINICH. I want to thank the chairman for holding this

hearing on this critical issue. I think you will find there is widespread agreement on the nexus of energy and national security

8

problems. Unfortunately, there are wide disagreements about the

solution.

The severe U.S. dependency on oil, 60 percent of which is imported, makes our Nation highly vulnerable to economic disruptions. Oil prices raced to all-time peaks this past Monday, climbing

above $58 a barrel, which will send $250 billion a year overseas,

members of the committee. By 2025, U.S. daily oil consumption is

expected to increase by 50 percent to 29 million barrels, 75 percent

of which is expected to grow from overseas.

Now, the effect of oil prices can be directly seen in the escalating gas prices. The U.S. retail price for gasoline climbed to $2.22 cents

a gallon. I am sure some of the members of this committee have

had the experience in the last few days, you go to get a fill-up, we

are paying anywhere from $25 to $30 for a fill-up, and our constituents are paying those prices.

Mr. ISSA. You must have a small tank on your car.

Mr. KUCINICH. I do. I have a Ford Focus.

There is a Goldman Sachs report that we are all concerned about

talking about prices surging as high as $105 a barrel. And based

on that analysis, it is estimated that our prices in this country

could go to over $4 a gallon.

We could come to an agreement on what the problem is and how

we got there, but I would just like to add this. I am concerned

about the administration’s solution that they see it is to increase

the supply of oil by increasing domestic drilling in the Arctic National Wildlife Refuge. The better solution is to reduce demand,

and there are numerous ways that we can increase the efficiency

of the oil we use, use alternative fuels and smarter transportation

choices, and also work to eliminate the price gouging by oil companies. I have a bill I will be introducing to do that, Mr. Chairman.

I want to submit the rest of this testimony for the record and ask

you to do that by unanimous consent.

Mr. ISSA. Without objection, so ordered.

[The prepared statement of Hon. Dennis J. Kucinich follows:]

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Mr. ISSA. For all Members present and their staffs, if the Member is not present, we will hold up the record for 5 legislative days

for opening statements that were not given here and extensions, including extraneous materials, as you see fit.

Mr. KUCINICH. I have also have testimony from the NRDC that

I would like to submit.

Mr. ISSA. Without objection, it will be entered in the record.

[The information referred to follows:]

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Mr. ISSA. With that, Mr. Secretary, you get the opening statement of the people we came to hear rather than yourselves.

STATEMENT OF JEFFREY CLAY SELL, DEPUTY SECRETARY,

DEPARTMENT OF ENERGY

Mr. SELL. Thank you, Mr. Chairman and members of the subcommittee. I would ask that my written testimony be submitted as

part of the record, and I would like to summarize that in about 5

or 6 minutes if that is OK.

Mr. ISSA. That would be excellent, and, without objection, all of

your opening statements will be included in the record in addition

to anything you say here.

Mr. SELL. I am honored to be here before this subcommittee

today. This is my first testimony before Congress since being confirmed as the new Deputy Secretary of Energy. The subcommittee

has asked me to address American energy needs and their influence on national security policy.

Energy is the backbone of our economy, and having a strong

economy is essential to maintaining and strengthening our national

security. Enacting comprehensive energy legislation would be a

substantial step forward in the effort to address our economic and

national security. Secretary Bodman and I are committed to working with both parties and Members of the House and Senate to finally enact energy legislation this year.

President Bush believes that a sound energy policy must meet

four major objectives while upholding our responsibility to be good

stewards of the environment.

I’m sorry Mr. Kucinich has left. In his opening statement he suggested a choice that the administration was for more production,

and others were for demand reduction. I wish it were that simple,

but it is not. We need both, and we need new technology as well,

and that is what the President’s comprehensive energy proposal involves.

The first objective of the President’s energy plan is to promote

and improve energy conservation and efficiency. Ways to achieve

this include, for example, providing tax incentives which we have

proposed to promote the use and development of hybrid and fuel

cell vehicles as well as supporting increased efficiency standards

for consumer products.

A second objective of a sound energy bill addresses both economic

and national security concerns by increasing production here at

home. The need is clear. Over the past 3 years America’s energy

consumption has increased while our overall domestic energy production has actually decreased.

I commend the Congress for taking action last year to address

this problem through passage of the Alaska Natural Gas Pipeline

Act and for steps taken this year already that may lead to production on the north slope of Alaska inside ANWR.

Another action to increase production here at home involves nuclear power, which can generate huge amounts of electricity without ever emitting air pollution or greenhouse gases. The President

has called for an expansion of this alternative source to the Nuclear Power 2010 Initiative, which will ensure nuclear power is

available for generations to come.

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Also, any discussion of increasing domestic production must always begin with a firm commitment to America’s most abundant

energy resource. That is coal. As such, the President and Secretary

Bodman have been clear that our Nation’s extensive use of coal

must not be a detriment to the environment. That is why the Clean

Coal Power Initiative and the development of FutureGen technology to create electricity and hydrogen with zero emissions are

so vital to ensuring efficient coal production in an environmentally

responsible way.

The third objective of a sound energy bill is to diversify our energy supply by developing alternative sources of energy. And this

is—I want to briefly elaborate on this. Our transportation sector is

highly dependent on hydrocarbons, on fossil fuels. Over the long

term the President’s vision is to dramatically reduce the dependence of the transportation sector on fossil fuels by moving to hydrogen fuel cell vehicles. That is a long-term goal. It is the most substantial policy proposal in place to significantly reduce our dependence on fossil fuels in the transportation sector.

But over the near term, we need to do some other things. We

need to reduce demand by increasing fleet fuel efficiency, by moving toward hybrid vehicles; and we also need to increase supply,

that is in traditional drilling, but it is also in the greater use of

biomass, agrifuels such as biodiesel and ethanol.

The Hydrogen Fuel Initiative is very important. The President has committed $1.2 billion over the next 5 years to develop the

technologies that are critical to our ability to realize that vision

over the next 15 years. Also, technological advancements in providing clean renewable energy sources such as wind, solar, and biomass are being made every day, and we need to support that effort

as part of our energy diversification policy.

The fourth and final objective of a sound energy bill is to find

better, more reliable ways to deliver energy to consumers. The Federal Energy Regulatory Commission has recently taken steps to address this objective by moving forward with regulatory action to accommodate the importation of liquefied natural gas. Also, on the

electricity side, transmission lines are deteriorating as the amount

of energy they support continues to grow. These strains on the system lead to higher prices and bottlenecks in delivery, and when

just one piece of the power grid fails, it can instantly affect millions

of people over thousands of miles, as we saw in the blackout of

2003. I know, both Chairman Issa and Mr. Higgins, your constituents have individually witnessed those types of blackouts.

The President has called for mandatory reliability standards and

a modernization of the grid to address these problems.

In sum, the President has set big goals for our energy policy. If

Congress enacts energy legislation that meets the President’s four

objectives, then we will have gone a long way toward meeting

America’s energy needs and strengthening America’s national security.

Once again, I appreciate the opportunity to testify before you

today. I look forward to your questions and further discussion.

Thank you.

Mr. ISSA. Thank you.

[The prepared statement of Mr. Sell follows:]

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Mr. ISSA. Thank you for being the first of my witnesses to be

under 10 minutes, which is a guideline that we always hope is

achieved.

Mr. SELL. Mr. Chairman in my previous life, I used to sit on the

back row behind the dais, and I also appreciated a short opening

statement.

Mr. ISSA. We will try to give the other half the same consideration, which is the short real questions rather than long statements, when it gets to be our turn.

And with that we turn to Mr. Woolsey. I hate to say it, Mr. Woolsey, but as a former Director, do we still address you as Director?

Mr. WOOLSEY. Mr. Chairman, I will answer to most anything.

After having been CIA Director, anything that is not outright scabrous or scatological is just fine. Jim is fine.

Mr. ISSA. Thank you very much. Please take all the time you feel

you need, but we would like to get to questions as soon as possible.

STATEMENT OF R. JAMES WOOLSEY, FORMER DIRECTOR OF

CENTRAL INTELLIGENCE

Mr. WOOLSEY. Thank you, Mr. Chairman. I am representing the

National Commission on Energy Policy today of which I was 1 of

the 16 members. I am going to focus on oil security. That was our

first chapter, and it was a very heavy part of our focus, and it is

in many ways separable from the electricity issue, because only 2

percent or so of our electricity is produced from oil, whereas in the

1970’s we could—by using renewables or nuclear power, we could

reduce our oil consumption coming down from 20 percent of our

electricity being produced by oil. Today one could have windmills,

photovotaics, or nuclear power plants on every hill in the Nation,

and it wouldn’t really have any particular impact on our oil dependence except for a new development relating to plug-in hybrids,

which I will get to in a moment.

I think there are at least seven major reasons why dependence

on petroleum for the lion’s share of the world’s transportation fuel,

and it is not just ours, it is the world’s, creates very special dangers. First of all, the transportation infrastructure is deeply committed to oil and built around oil in this country and in most countries, and as a result, one cannot substitute other fuels in the short

run if oil prices go through the ceiling, as they are in the process

of doing.

One conclusion we grew from that in the Commission was that

any new types of vehicles and any new types of fuels really ought

to be compatible with the existing energy infrastructure, and we,

therefore, focused on two approaches: One, increasing fuel efficiency by using currently available technologies that are compatible

with the existing infrastructure, such as hybrid vehicles and increasingly, I believe, plug-in hybrid vehicles since they can use gasoline or ethanol, in time certainly diesel; and second, by utilizing

alternative fuels that are affordable, that are available now or in

the very near future, and that can be used also within the existing

infrastructure. Cellulosic ethanol and compatible biodiesel are the

two that we concentrated on, not hydrogen. We say quite explicitly

that we do not expect hydrogen fuel cells to have any substantial

impact on oil use in the next 20 years.

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The second major point is that the greater Middle East is going

to continue to be the low-cost and dominant petroleum producer for

the foreseeable future. It holds about two-thirds of the world’s proven oil reserves and, of course, is the low-cost producer. This puts

the Middle East and Saudi Arabia in particular in the driver’s seat

with respect to oil prices for a long time.

Third, the petroleum infrastructure is highly vulnerable to terrorist and other attacks. In the Middle East al Qaeda has called

for worldwide attacks on the petroleum infrastructure. The opening

scenario of Robert Baer, a former CIA officer’s book, ‘‘Sleeping With

the Devil,’’ includes a 747 being flown by a terrorist into the sulfur

clearing towers near Ras Tanura in northeastern Saudi Arabia,

taking some 6 million barrels a day out of production for a year or

more. That devastates the world economy.

Fourth, the possibility exists that under regimes that could come

to power in the greater Middle East, we could have embargoes or

disruptions of supply. The current governments there may have an

incentive to sell what they can, but you don’t have to sell very

much if you want to live for most purposes in the seventh century.

And bin Laden has stressed that he would advocate major reductions in oil shipments from the Middle East.

Fifth, wealth transfers from oil have been used, and they continue to be used, to fund terrorism and its ideological support

through wealthy families in the region of the Gulf, many in Saudi

Arabia, and also because of the funds that have gone to the

Wahhabi movement and sect in Saudi Arabia.

Alexei, who understands these numerical issues about costs and

Wahhabi spending better than anyone I know, says that some $85

to $90 billion, that is with a ‘‘B,’’ have been spent by the Saudis

in the 30 years spreading Wahhabi beliefs around the world, into

the madrassahs of Pakistan, the textbooks of Indonesia, even into

mosques in the United States. That doctrine is hostile, angrily hostile, to Shiite and Sufi and most other Muslims, to Jews, to Christians, to women, to modernity and to much else.

That doctrine, I believe, serves almost in the same way that the

angry German nationalism of the 1920’s and 1930’s served as the

ground in which nazism grew. Certainly not all Wahhabis or young

men who have been to Wahhabi school become members of al

Qaeda or terrorists, but that is the soil in which Islamic terrorism

grows, and we are paying for it very substantially ourselves.

Six, the current account deficits for a number of countries create

risks ranging from major world economic disruption to deepening

poverty for developing countries. We borrow about $13 billion a

week in the United States from the rest of the world to finance our

consumption, and something over $2 billion a week that we borrow

is over oil.

Finally, global warming gas emission from oil use, of course, create at least the risk of climate change. In the Commission we focused on the importance of trying to come up with solutions that

would save substantial amounts of oil. At least one we looked at

passed our screen would save at least a million barrels a day by

2025. We looked at cost, administrative complexity and political

feasibility.

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The solution we hit on was to go to a substantial increase in the

CAFE standards, but to do so in a very different and far more flexible way than has been the case in the past for CAFE, and also to

give American industry and American labor assistance in meeting

some of these targets.

We proposed, first of all, with the CAFE standard increase a

safety valve mechanism in which the government could make extra

CAFE compliance credits available to manufacturers at a predetermined price so that if the cost of reducing emissions exceeded estimates, it would not be a penalty to the manufacturers.

With respect to manufacturer incentives, we proposed credit

amounting to about 50 percent of the capital investment that would

be required for manufacturers in this country, both foreign and domestic companies, all manufacturers in this country, to make the

investments necessary to produce modern diesels and to produce

hybrids and plug-in hybrids, and this totaled some $1.5 billion over

10 years, but it was more than recovered, in our assessment, by increased tax receipts as a result of maintaining domestic manufacturing jobs.

One thing that we focussed on very much was safety. There has

been for a long time a major argument against improved CAFE

standards by saying you are going to force people into small, unsafe

vehicles. The interesting things about hybrid gasoline electrics, in

our assessment, is—and we took the four hybrids, the Ford Escape,

the Honda Civic, the Honda Accord, and the Toyota Highlander,

that today have counterparts in regular gasoline-burning internal

combustion engines. In each case not only did the hybrid achieve

substantial fuel savings, but greater horsepower at the same size.

So this is not, not, not a proposal to drive people into smaller cars

than they want to be in or into less well-performing cars than they

want to be in. The hybrid gasoline technology does not make one

make that choice.

I would add that in the Rocky Mountain Institute’s recent report,

‘‘Winning the Oil End Game,’’ the importance of construction using

very strong carbon composites for vehicles is pointed out. That

holds also the advantages of having lighter but even stronger vehicles, even safer vehicles with substantial fuel savings.

I want to stress that with respect to hybrids, the recent book,

‘‘The Bottomless Well,’’ by Mr. Huber and Mr. Mills, point out the

following: With today’s nickel-metal-hydride batteries that are in

hybrids, one can get about 6 miles of electrical propulsion by plugging in overnight and getting power from the grid to top off the

battery. So one can go about 6 miles before the hybrid gasoline

electric feature cuts in. With lithium batteries, which are relatively

new in technology, that number is 20 miles before one has to use

the gasoline electric feature.

Today in the United States residential electricity costs are 8.5

cents percent kilowatt hour. And in places that have differential

costs at nighttime, it is 2 to 4 cents per kilowatt hour. Two cents

per kilowatt hour electricity equates to 12-cent-per-gallon gasoline.

That means that it is available in technology that is now being

used, hybrid technology, by people in their garages themselves converting them to plug-in hybrids so they can top off with electricity

from the grid. They are able to get transportation for maybe half

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or more of their vehicle use at the equivalent of 12-cent-per-gallon

gasoline.

I think once the advantages of plug-in hybrids are clear, then the

financial incentives that one might need in order to help manufacturers get over the first step, that is hybrids are several thousand

dollars more expensive to produce than other vehicles, will be

something that American consumers should be very interested in.

I will close, Mr. Chairman, simply by saying, because I see I am

over my time, that cellulosic ethanol, ethanol from agricultural

waste and prairie grass, and biodiesel from animal waste, used

tires and other organic compounds, as a result of new technological

work with genetically modified biocatalysts for cellulosic ethanol,

and with respect to thermal processes for the creation of biodiesel,

make those two fuels which are compatible with the existing infrastructure able to be produced, we believe in the Commission, relatively soon, considerably sooner than hydrogen fuel cell vehicles

and hydrogen facilities for fueling, and should mark, together with

hybrid gasoline electrics and advanced diesels—those two fuels

should be, from our point of view, a major thrust of emphasis by

the government as it moves into gasoline substitutes and other

automotive power in the 21st century.

Thank you, Mr. Chairman.

Mr. ISSA. Thank you, Mr. Director.

[The prepared statement of Mr. Woolsey follows:]

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Mr. ISSA. I would note that Mr. Marchant, a Member from Texas,

has arrived. Your opening statement will be put in the record without objection, and then there will be time for you to provide the

equivalent, if you would like, in addition to questioning.

Ambassador, again, we are moving at a snappy pace. If you make

it a triple play, I will just be shocked.

STATEMENT OF ROBERT HORMATS, VICE CHAIRMAN,

GOLDMAN SACHS INTERNATIONAL

Mr. HORMATS. I’ll do my best.

Thank you, Mr. Chairman. Let me make a few general points.

One, I find myself very much in agreement with the other members of this panel. America’s significant dependence on imported oil

constitutes a major source of economic and security vulnerability.

Particularly because a growing portion of U.S. imports comes from

politically unstable parts of the world.

Now, in the early part of my career, in the early part of the

1970’s, I was Dr. Kissinger’s economic advisor on the NFC staff

when we had our first embargo, 1973, 1974. And at the time it

seemed to me that was a wake-up call, or at least should have

been, about our vulnerability. It turned out it was not.

And I have a chart here which illustrates the various periods of

time over the last 35, 40 years when there have been supply disruptions of various types, and we have done very little; a lot of

rhetoric, but no consensus in this country and very little bold action. And since the 1970’s when I thought we would have an energy

policy, tragically we have not been able to come up with a bold

enough one. As a result we are far more dependent on Middle East

oil now than we were during the 1973, 1974 embargo; a painful

conclusion to reach, but unfortunately that’s the reality.

The other part of the problem is that it is not only the United

States that has become increasingly vulnerable; many other parts

of the world are also very vulnerable to supply disruptions. Many

of these countries are, in fact, more dependent on imported oil than

we are, and if there were disruptions in the supply, many of our

major trading partners, many of our major allies would be hurt

even more than we would be, which would affect our exports and

our security in an indirect sense.

The difficulty that we have is when we have a crisis, Americans

tend to focus on the crisis. They reduce consumption, and then once

the crisis is over, we revert back to gas guzzlers. We pay very little

attention to production, conservation, efficiency and all those

things, and this is why it’s so hard to get a policy in concrete, because when the crisis passes, people pay very little attention to it.

And the tragedy is the longer the impasse lasts, the greater the

U.S. dependence becomes.

And Jim Woolsey clearly has illustrated the kind of risks there

are to oil capabilities in various parts of the world; that people

such as bin Laden and other jihadists clearly want to drive the

United States out of the Middle East by attacking facilities where

Americans and foreigners are playing a key role, and undermine

the oil infrastructure there, believing that it will bring down many

of these governments and cause the kind of disruption in oil markets that will lead to major problems for a lot of countries, and

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then, as Jim indicates, take them over. And this, I think, is an

enormous risk.

I think it’s important to realize that we’re almost certainly more

vulnerable today to oil price disruption and oil supply disruption

than we have been at any time since the early 1970’s. I think this

is important to bear in mind. This is not business as usual. This

is not just another crisis. The risk of supply disruption now is the

highest it has been since the 1970’s because we know that these

radicals are directly targeting in a systemic way the suppliers and

the supplies that are so vulnerable to the United States.

Now, what is the problem? There are various aspects of the problem. I think it’s important to understand what’s happened. We had

a period of time in the 1970’s—and I have a chart that is somewhere in your—in the testimony I have given, I think it’s page 8

or page 9, which illustrates the fact that during the 1970’s, we had

considerable investment in oil. I think it’s page 9. It indicates that

during the 1970’s, we did have a lot of investment.

In the 1980’s, there was very little new investment, and in much

of the 1990’s, there was very little investment. If you go particularly from 1992 to the year 2000, very little new investment in the

energy sector not just in the United States, but around the world.

As a result we are dealing with the rapidly rising demand for oil

up against a series of capacity constraints, capacity constraints in

drilling, capacity constraints in refineries, a whole range of capacity constraints.

The other part of the problem is that we are simply in the

United States running out of available hydrocarbons that can be

made available in a relatively inexpensive way. There are in the

shale of the Rocky Mountains some great opportunities, Wyoming

in particular, the Green River valley. There is a lot of opportunity

there, but it tends to take a high price and the confidence that the

price will remain high to get it out. Canada, there is a lot of capacity. There is a lot of potential in Alaska. Building the Alaskan pipeline is extremely important, and it is extremely important to move

very quickly in part because the Canadians are interested in building the McKenzie Valley pipeline, as you may know. And given the

supply of metals and the ability to produce pipes and get laborers,

it’s awfully hard to build two of those big pipelines at the same

time. You run up against constraints. So moving ahead on Alaska

does seem to me to be very important in part because we do have

capacity in North America. We have potential capacity. It’s a matter of making potential capacity real capacity.

Jim has pointed out, I think very importantly, that there are

other elements, too, that can be tapped. Biomass is a very important aspect of a potential source of energy, and I have read his

Commission report. I think it is terrific and has a lot of very constructive ideas.

Another point we need to bear in mind about security, since that

is the focus here, is that since oil supplies tighten, there are oil exporters who have a greater opportunity to exert leverage over oil

importers. Russia, for example, has a great ability to exercise leverage over Western Europe, which is a big user of Russian oil and

gas; Venezuela, Iran, a whole host of countries; and we also get a

number of countries like China which are trying to secure supplies

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around the world by buying oil facilities and buying properties. So

in a world where energy supplies are tight, there is an opportunity

for a lot to go on, particularly in terms of oil suppliers using their

leverage.

Let me make a couple of other quick points. One is this is not

going to go away quickly. We are not going to see a dramatic reduction in the price of oil, as some people predict. And if you want one

indication of that, it is what is called on the market sort of longdated contracts, which are 5 and 10 year contracts. Traditionally

the price of those contracts throughout the whole period of the

1980’s and the early part of the 1990’s hovered around $18 to $20.

Now they’re around $45, $50, or a little bit less in some cases, a

little bit more in others, but they are around the $45 level as a sort

of base, which suggests that the market is not anticipating that

these prices are going to be out any time soon, that they will stay

up. So while people look at this and say, well, there’s a lot of speculation here, from time to time perhaps there is a speculation on a

given day or a given week, but that is not the fundamental problem.

The fundamental problem, Mr. Chairman, is the problem that

you outlined at the outset, and that is there is relatively little new

capacity being laid on, and there is a big increase in demand in

China, the United States and many other parts of the world. China

is really the big marginal buyer, and if it weren’t for China, prices

may be a little bit lower, but we would still have this big imbalance

of supply which has been constrained by insufficient investment

and demand which is going up very, very rapidly.

I think if you look at the market and you look at these long-term

expectations in the market, and Chairman Greenspan, I believe, referred to it yesterday, those prices are likely to stay high for a long

time, which leads us to conclude we can’t expect some miracle to

lead to price declines, and the price should be high enough to

incentivize a lot of new production. The problem is a lot of people

on the production side are very cautious about putting large

amounts of money into new capacity because in the past they have

been through periods where price has been high, and then it’s declined, and they’ve invested a lot of money, and some of it has been

lost.

Let me just make a couple of quick other points to conclude with

respect to the kind of remedies that are appropriate to deal with

this situation. We have to look at oil primarily as a transportation

fuel. Virtually 80 percent of oil in this country is used for transportation, either automobiles, gasoline, diesel fuel or jet fuel. So we

really are not going to be able to deal with it, and Jim pointed this

out a moment ago, to deal with the question of the demand.

The coalition has come up with some very good ideas. I won’t repeat those with respect to biomass, but there are a number of other

areas that I will just touch on very quickly.

Increased use of nuclear power. There are opportunities that

didn’t exist several years ago. Research funds for new technologies,

wind, hydro, solar; incentives to increase use of mass transportation; methods of changing car-buying habits including allowing

energy-efficient cars to use HOV lanes, giving them a discount in

inspection fees while hiking inspection fees for inefficient vehicles;

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discounts on EZ Pass; avoidance of regulatory tax incentives for

fuel-inefficient SUVs.

These are just a few thoughts. I will conclude with 15 seconds

left. Thank you very much, Mr. Chairman, for the opportunity.

Mr. ISSA. Thank you.

[The prepared statement of Mr. Hormats follows:]

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Mr. ISSA. Ambassador, I particularly thank you for alluding to a

piece of legislation recently passed by the Congress with my name

on it. The hybrid being allowed by States to be put into HOV lanes

previously has been, as bizarrely as it seemed, mandated that you

couldn’t do it without Congress’ consent rather than at least allowing the States that flexibility.

Mr. HORMATS. It’s a far better solution than, for instance, a gasoline tax, because this really is something people want. If they can

get into HOV lanes, it saves them a lot of time. It is a great idea,

and I commend you for it as someone who would like to use it in

New York.

Mr. ISSA. As an owner of two hybrids, I have also pledged not

to use that newfound ability to go into those lanes. Just to be

McCain-esque, you create it, but you don’t dare use it yourself, or

it will look politically opportunist.

Mr. Ebel, these gentlemen have all set a high mark for putting

an awful lot of information in 10 minutes. It’s a challenge.

STATEMENT OF ROBERT E. EBEL, CHAIRMAN, ENERGY PROGRAM, CENTER FOR STRATEGIC AND INTERNATIONAL

STUDIES

Mr. EBEL. I understand, Mr. Chairman. I feel like the bases are

loaded, I’m batting cleanup, and I’m supposed to hit a home run.

So we’ll see what happens.

Let me begin by noting that national security in today’s context,

national security and energy security are so closely intertwined

that it’s inconceivable we should consider them as separate issues.

First, what do we mean by national security? I would suggest

that the best answer, at least in my judgment, was provided a

number of years ago by the eminent American diplomat George

Kennan, who offered perhaps the least complicated definition. National security means the continued ability of this country to pursue its internal life without serious interference.

Well, then what is meant by energy security? I think for the

American consumer, and I suspect consumers everywhere, the answer is simple. He has only two concerns, price and availability. If

the price is acceptable, and he can buy as much gasoline or as

much fuel oil as he would like, then what is the problem, you

might ask. Certainly the consumer cares little if at all as to where

the oil he consumes comes from. Those are issues deferred to the

wisdom of our government. But importing countries hold a different

view from consumers. Policies adopted by importing countries

stress security of supply through diversity of supply, through diversity among the kinds of fuels we consume and as well how the foreign oil and gas makes its way to our markets.

Oil-exporting countries, on the other hand, seek security of markets, as has been alluded to. Why should we invest in the expansion of our oil-producing capacity, they ask, if we are uncertain as

to whether there will be a market for this new oil? So unfortunately, adherence to this philosophy can only ensure a continued

tight market and price volatility.

Does diversity of supply provide the assurances we need, we

seek? Not at all, because diversity of supply does not protect us

from price volatility. We need to remind ourselves from time to

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time that the United States does not stand in isolation from the

world oil market. We are vulnerable, as are all exporting and importing countries, to any event, anywhere, any time that impacts

on supply and demand. When the price of oil goes up, it goes up

everywhere.

The question then arises what could we do, what should we do

so as to be able to place our oil and our natural gas future back

into our own hands? Well, we all know that last year was a year

of surprises for the world oil sector, surprises that came because

we sharply underestimated the growth in demand for oil in China,

unexpected robust demand here at home. At the same time there

are another group of other events, real or anticipated, that played

out in a way that equally pressured oil supply. We had political uncertainties in Venezuela. We had civil war and strikes in Nigeria.

We had the unfulfilled promise of Iraq. We had problems in Russia

and possibility of terrorist acts in Saudi Arabia. Then along came

a hurricane in the gulf coast, which took as much oil off the market

as all these other supply factors combined. Additionally, we had to

measure these factors against the disappearance of spare producing

capacity worldwide.

Now, Mr. Chairman, what do all these factors have in common?

Let me emphasize that these factors were and remain outside our

control, and, with only minor exceptions, steps that might be taken

to resolve them are essentially outside our control as well.

Every energy decision we make as individual consumers, every

energy decision taken by our government has a tradeoff. These

tradeoffs carry their own risks and costs. The public needs to understand that there is no energy option, and that includes renewable forms of energy, that can be described as risk or cost-free.

Do we ever stop to consider whether these costs and risks justify

the actions we would take? We are now confronted by the real impact of NIMBY-ism, don’t build it in my backyard. We have a

shortage of essential energy infrastructure, with that shortage in

its own way propping up current prices. Is this tradeoff acceptable?

Is it in our national interests? If, for environmental reasons, we

can not drill in geologically attractive but unexplored areas, what’s

the tradeoff?

Confronted with rising demand, we don’t turn to demand management, we turn to imports. We find ourselves increasingly reliant

on the ability and willingness of others to meet that rising demand.

Our energy problem cannot be solved by concentrating just on the

supply side; neither can successful resolution be secured by concentrating on efficiency, conservation and renewable forms of energy. What’s the best means to achieve a secure and sustainable

energy future? What policy options should we be looking at?

Specific demand management recommendations should be adopted, including the use of mandates, commercial incentives and joint

government/industry cooperation and coordination. Change our

consumption patterns, accelerate the development and application

of new technologies promoting clean fuel, streamline permitting

and siting regulations, and, last of all, educate the consumer.

What should be done to increase the availability of secure, affordable and environmentally benign domestic and foreign fuels? Accelerate technology development and make that technology available

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worldwide. Encourage alternative and nonconventional energy

forms and their integration into a comprehensive energy delivery

system. Reassess the management and use of inventories, and employ international diplomacy as the tool supporting the preceding

options.

Mr. Chairman, the question arises as to whether or not energy

supply and demand should be managed differently than in the past

as part of a larger effort to return to the consumer acceptable control over his energy future. A healthy economy supportive of a lifestyle that many have come not only to enjoy but to expect should

reflect an energy supply that again is available, affordable, secure

and environmentally benign.

Are these criteria beyond reach, or are they just beyond reach of

current energy policy? If we do not respond appropriately to these

challenges, we risk being confronted by a future that is increasingly uncertain and defined by factors beyond our control or influence.

Thank you, Mr. Chairman.

Mr. ISSA. Thank you, Mr. Ebel.

[The prepared statement of Mr. Ebel follows:]

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Mr. ISSA. We have done a wonderful job of getting a lot of testimony in a short period of time. I will lead off by setting a good example for my colleagues. I am going to limit myself to just one

question that I think I heard again and again in one way or the

other from each of you, and I just want a confirmation and as short

as possible of what I think I heard, which was that there is no one

solution, it has to be multiple energy sources, and it has to be multiple efforts at conservation. Included in that, I believe there was

a pretty universal statement that attacking the oil problem is going

to require perhaps not the old CAFE approach, but a new CAFE

approach, one that has incentives and perhaps even funding to help

us use less oil in our primary area of using it, which, of course, is

internal combustion engines that move things down the road. Can

I get a confirmation that there is no disagreement with this panel

on that?

Thank you. Mr. Secretary.

Mr. SELL. Mr. Chairman, I think you have summarized well the

testimony that we gave; and I concur in your conclusions, specifically on CAFE.

One of the recommendations of the President’s national energy

policy was we requested of the Congress in fact more flexibility in

order to set policies and increase fleet efficiency. We did increase

the standard as it related to light trucks about a year ago or perhaps 2 years ago. But, as you are well aware, the politics in the

Congress have severely restricted the ability to do anything on passenger vehicles or to move to a more flexible approach on CAFE

standards. We would like to have that flexibility, and I think a new

approach would be helpful in that regard.

Mr. ISSA. Thank you.

Mr. Director.

Mr. WOOLSEY. Mr. Chairman, yes. The Commission supports

flexible CAFE standards in the sense of being—manufacturers

being able to trade credits among different types of vehicles and

among one another, much more flexible than the current standards. And, as I mentioned, this feature of a safety valve would

mean that if one, say, set at slightly more than $55, which is the

penalty that is required today for a vehicle, when a manufacturer

has a fleet that exceeds the CAFE standards or doesn’t meet the

CAFE standards, it is—1 mile per gallon per vehicle is $55. If you

take that or something slightly more as a transferrable fee, then

we in the Commission would set a ceiling, let us say $60 per mile

per gallon per vehicle.

So, in the first instance, if Maserati wanted to exceed in the aggregate the CAFE standards, they could go to Toyota, which is not

exceeding the CAFE standards, and buy credit. But to get new

credits Maserati would never have to pay more than $60 from the

government.

That feature of a safety valve, which we also have with respect

to carbon emissions in the electricity part of our report, we believe

offers an opportunity for consumers, for corporations, for labor to

all come together and say we don’t have to guess exactly what the

cost is going to be to get mileage improvements. We may be right.

We may be wrong. If we are on the low side, then there is one consequence. If we are on the high side, there is another. But, in any

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case, it is never going to cost the manufacturer more than X dollars

to get new credits from the government. And with all of that flexibility we were able to come together—corporation representatives,

labor representatives, environmentalists representatives, odd ducks

like me—on a single report.

Mr. ISSA. Thank you.

Mr. HORMATS. Yes. I am not an expert in this area, but I did

read Jim’s Commission’s report, and it did strike me as a reasonable consensus. And I think that is the interesting point about it.

As Jim pointed out, it is very hard—it has been traditionally very

hard to get agreement up here on this; and I think if you have all

these various elements who have an interest in reaching agreement, that is really an important step forward. And I find myself

as, again, not an expert on it but someone who is impressed with

the fact that they were able to get this broad-based consensus,

which is what is desperately needed to get anything moving in this

area.

Mr. EBEL. Mr. Chairman, this country consumes about 9 million

barrels of gasoline every day out of a world total of oil consumption

of 80 million barrels of oil a day. If we are going to do something

about the oil problem in the United States, it has to begin with the

internal combustion engine. We have had some ideas placed on the

table this afternoon which work in that direction, but I think they

need a little push, a little shove down the road.

I had the opportunity Friday to drive a fuel cell car manufactured by a Japanese company. I won’t say which one it was. It was

not Toyota. It was Honda.

Mr. ISSA. I am glad you didn’t say who it was.

Mr. EBEL. It slipped. It is a 2005 model. I checked the tailpipe.

Water was coming out of the tailpipe. You couldn’t hear the motor.

Acceleration was great. And I asked the engineer, what is the cost

of this car? It was a million and a half dollars. When do you expect

mass production; 15 to 20 years. So we have to find something between now and then if the then is the hydrogen fuel cell.

Thank you.

Mr. ISSA. Thank you.

With that, I would yield to the ranking member, Mr. Higgins, for

his questions.

Mr. HIGGINS. I have no questions. Thank you.

Mr. ISSA. How about the gentleman from Texas?

Mr. MARCHANT. Thank you very much. It is pretty unusual to

have a panel before you that two people on the panel have degrees

from Texas Tech.

Mr. ISSA. It is not unusual to note it, though, is it?

Mr. MARCHANT. It is good to see you. Just a couple comments.

Just recently in our Dallas Morning News we had—one of our respected personal financial analysts had basically wrote a story that

discouraged anyone from buying a hybrid because he did this calculation of the cost for the hybrid and then the cost of the savings

in miles per gallon and then basically came to the conclusion that,

you know, no one really should buy one because of that.

The interesting part of the testimony today is the part that I

have never seen interjected, and that is the cost, the low cost of the

electricity that you can achieve there. I never see that in any of the

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calculations, and I think that is an interesting fact that needs to

be in the public domain.

Mr. WOOLSEY. Congressman, a standard hybrid such as the Prius

that I drive gets about 50 miles per gallon. Of course, it switches

back and forth, just like the chairman’s hybrids, between gasoline

and electric power; and it charges the battery as it decelerates. And

it depends. That financial analyst must not have been thinking at

all about bin Laden or the Middle East or any of that. Because if

he assumes a perfect market in oil that nobody is going to interfere

with, then there may be something to the proposition that the

added couple thousand dollars cost of a hybrid to 3,000 is not worth

it.

But there are some answers. One is what you referred to, which

is adding this plug-in feature so that one can use grid electricity

for short trips and thereby, instead of a 50 mile a gallon car, you

have a 100 mile a gallon or more car, at least as far as petroleum

fuel is concerned. And the electricity that you are getting off the

grid is 12 to 25, maximum probably 50 cent per gallon gasoline

equivalent. So that ability to have a plug-in feature seems to me

to be right at the heart of the attractiveness of hybrids.

Now there are complexities here. The nickel metal hydride batteries, it wears batteries down a bit to charge them and so one

probably needs a few more batteries in the vehicle. That would increase the cost. So some of the home tinkerers who are turning

their hybrids into plug-in hybrids may be doing something that

makes their warranty not as good, for example.

But these are relatively small technical problems to overcome,

even moving to advanced lithium batteries, compared to the extraordinary requirements of moving to something like hydrogen

fuel cells which, you know, as was said up here a minute ago, is

going to take many, many times a reduction in cost more than just

a couple or $3,000. We are talking about going from $1 million

more a car to something affordable. And I think that we have a

chance here with advanced diesels, which soon will be able to meet

our Tier 2 standards that came in 2004.

Europe is very heavily into diesels now, and we are somewhat

more demanding on particulate emission standards than Europe.

But the new diesels are very close to meeting our new standards.

New diesels and hybrids, including hybrids with a plug-in feature,

if incentivized by government policies seem to me to be just a natural.

In Texas, the Austin utility, which is owned by the city of Austin,

has taken the lead in going around to other city-owned utilities

around the country and started going to the Big Three in Detroit

and saying we, the utilities, will give a $1,000 credit for the purchase of a plug-in hybrid because we want to be able to sell power

at night when we need to sell it, off peak power, and we would be

delighted to give everybody who buys a plug-in hybrid $1,000. You

are a third of the way toward the consumers’ credit that you need

right there from utilities.

Mr. HORMATS. Can I just add a couple points?

One, there is an additional advantage to the hybrid; and that is,

because you get so many more miles to the gallon, you don’t have

to stop and fill up as much. So there is a time advantage.

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Second, an analyst who comes to that conclusion misses a broader point, and that is we have a structural supply demand imbalance. So oil prices are going to stay high for quite some time. If

you thought perhaps the price was going to come down to $15 or

$10, then maybe—but I didn’t see the article, so maybe the economics works. But if you think oil prices, as I do and as the market

does, thinks oil prices are going to remain very high for a period

of time and may get higher and are subject to a lot of disruption,

then it does seem to me you want to have a car that is very efficient and you can get more miles to the gallon when you fill your

tank up.

And the third, to the extent there is some price discrepancy, as

this person pointed out, that is why you do things like open up the

HOV lanes or make it cheaper to buy E-ZPass membership if you

have an energy efficient car or do things like a lower registration

fee for energy efficient cars and a higher one for less efficient cars.

So there are things that can be done to give these cars at least

a temporary incentive. Once the volume begins to pick up, the price

will come down, as for everything. And we have seen that. So there

is room for public policy here to help the transitional process along.

Mr. MARCHANT. Thank you, Mr. Chairman.

Mr. ISSA. Well, you guys may get off really, really easily here.

But I do have a second round, a couple of questions.

One of them that I kind of warned about ahead of time with the

Secretary—and Ambassador I don’t think I gave you a full heads

up, but it was covered in your testimony—the windfall profits history, the 1979 to 1988 period. Oddly enough, your graph on page

9 shows that the peak of R&D was almost exactly when we put in

the windfall profits tax, and from there it dropped precipitously.

Mr. SELL. Correct.

Mr. ISSA. I am concerned, and Mr. Kucinich unfortunately was

not able to stay, but he alluded to his legislation from the previous

Congress that he plans on reintroducing, which would enact a

windfall profits tax. So I think it is fair on his behalf and on mine

to bring up the subject and say, what is the history of the windfall

profits tax of 1979? And if not a windfall profit like that one, then

since you have all alluded to incentives and each of you has come

up with ideas and some positive ones, what do we do to ensure at

this high level, one in which $8 a barrel oil is being taken out of

the ground and being sold at $56 a barrel, what do we do to ensure

that production rises so that, if that is not the correct supply, demand, that we reach that correct supply, demand equilibrium at

some time in the future? In any order.

Mr. SELL. Mr. Chairman, I do appreciate the early warning on

the question.

I think in the way you asked the question lies the answer: We

should ask about the windfall profits tax, would it help, would it

help the situation, the problems that have been described here

today. And the view of the administration is it would not help. We

believe in the power of competitive markets. It is incumbent upon

the government to ensure the marketplace works. We think market

forces, when working properly, determine an appropriate profit;

and so a profit tax we think is anti-competitive and therefore bad

for the consumer. I do believe that $58 oil is a sufficient incentive

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for dramatic increases in production, and I think we will see that

materialize over time.

One situation that we have gotten into over the last decade is it

now takes much longer for new reserves to be developed than it did

in the past. In the past, you could typically count on a 2 or 3-year

cycle, and now it is as long as 5 or 10 years to bring a new production on line. But today’s prices do incentivize that.

On the domestic side, there are additional things we can do. We

can open up new areas to access, and we can also streamline the

permitting process. And, in some cases, we have increased royalty

benefits due to producers in portions of the Gulf of Mexico. So there

are some things that we can do on the domestic side, but the administration does not believe a windfall profits tax is an appropriate policy.

Mr. HORMATS. I find myself very much in agreement with Secretary Sell on this. I do not think a windfall profits tax is appropriate. It is—the point that you raised in this chart demonstrates

is that it really—I am not sure what the goal of it would be. The

goal of American policy should be to increase production and not

to impose incentives that takes money away from producers, it

seems to me.

I actually have just been finishing up a book on how we financed

America’s wars in the past, from revolution on, and during World

War I and World War II we did have excess profits taxes. We were

in war situations then where people were making money from munitions, so there was a feeling of public—that fairness would require you to take some of that money away because there was sort

of a windfall as a result of that. It wasn’t a very effective way of

doing it, but it looked like it would satisfy public opinion.

In this case, it seems to me it is a bad kind of signal to send.

The objective—and Secretary Sell put it very well. The goal is to

have them utilize their profits to produce more energy, not just

gasoline, not just hydrocarbon fuels, but a whole range of other

fuels. And I would make a couple points.

One, I mentioned in Canada you have the oil sands. In Alaska

you have a whole slew of potential production areas in the north

slope. You have Wyoming, the Green River Valley. Plus, and I

think it is another element to touch on here, and that is abroad

there are a lot of opportunities.

One of the goals should be to increase production here across the

board in various kinds of new and old sources but also to help diversify global production of energy. That means, I think, working

with groups like the World Bank and other institutions to improve

the investment environment in a wide range of countries that have

the capability of supplying more oil but don’t because either their

investment environment is so adverse to people who want to put

money in they don’t have proper regulations, they don’t have proper transparency, the state controls too large a portion of their oil

infrastructure. So it should be a global and a domestic process as

well. The more diversification in oil supplies the better, because it

is a global market. And none of these things would be advantaged

by an excess profits tax.

Mr. EBEL. The Ambassador raised a very important point. A

major problem facing the international oil companies today is acVerDate 11-MAY-2000 11:29 May 16, 2005 Jkt 000000 PO 00000 Frm 00091 Fmt 6633 Sfmt 6633 D:\DOCS\20688.TXT HGOVREF1 PsN: HGOVREF1
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cess. Where do you go to find the new oil you need to offset the

oil you produced last year? Where do you go? West Africa? Venezuela? Iran? Iraq? Libya? Russia? Azerbaijan? Karzakstan?

You can’t really go into the Persian Gulf because those resources

are held by the national oil companies. In fact, over 70 percent of

all the oil reserves are in the hands of national oil companies, and

they are going to develop them themselves at the pace that they

decide upon. They are going to be responding to market developments. They are not going to be ahead of the market.

And what does that tell us? That we are going to have some difficult times ahead, unless you would have a collapse in the Chinese

economy or the Indian economy or even here at home. That is the

only way you are going to get a short-term decline in prices, is on

the demand side.

Mr. ISSA. Oddly enough, we were having that discussion before

the committee hearing. There is an obvious way that we will get

that: If the U.S. economy collapses, then China’s economy will collapse. So we have that to look forward to. It is not what I am hoping for.

I am not here to give testimony, but uniquely—although, by the

way, I also am a Clevelander by birth, so I have managed to be

at two electrical power dropouts, the Cleveland side of me, where

my family called and said, you know, is this a California curse you

have bestowed on us, when it happened. And, of course, being from

California, I have seen what happens when you don’t have excess

capacity.

One of my questions, I am very interested in what I like to call

mineral energy, which people always ask what it is and I say, well,

it is nuclear. But it is a mineral, after all. It usually gets a laugh,

not in such a serious situation.

But we don’t have the diversity of one of the No. 1 ways of forming electricity. It is not 2 cent electricity, but it is not too far from

it if we do it right. There are no new license requests. There is no

next generation of nuclear power. I have been to companies, I have

seen their proposals for the next generation, but nobody is funding

it. We are not putting a new nuclear power plant on line. We are

not even putting a decent-size research operation on line just to

test the true proof of concept of, can they produce clean electrical

energy with very reduced byproducts. And I am particularly sensitive to that since I sit on the other subcommittee that yesterday

dealt with the Yucca Mountain and that stalled process.

So even though this hearing has concentrated a great deal on petroleum, I think it is pretty obvious that not addressing nuclear

guarantees that we will be addressing some hydrocarbon. And, you

know, in California we have switched to almost all natural gas. As

a result, natural gas will be the subject of another hearing that we

will talk about how are we going to get natural gas. And places like

Qatar and so on today would love to supply it to us, but what if

that supply gets cutoff?

If any of you want to deal with—I see you do.

Mr. WOOLSEY. I will try to say a quick word about nuclear power.

Our Commission report advocated resuming substantial research

and development and work on nuclear power for electricity precisely because of its cleanliness and the fact that it doesn’t put

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global warming gasses into the atmosphere. One does have a fuel

disposal issue, which is a substantial problem that has to be dealt

with.

But I wanted to also note that we also focused on some of the

new clean gasification technologies for coal, integrated gasification

combined cycle. I think there are about eight plants in the world

now that use that, and one or two others. The advantages there are

with some new types of coal gasification, the CO2 comes off at a

different temperature than the combustion; and that means the

carbon is easy—relatively easy to capture. Once the cost of sequestration in geological formations is affordable and one can be assured that it works, then those several types—not all, but those

several types of new coal gasification technologies are also not only

clean but also can be made into something that sequesters carbon.

So, in a sense, they become as desirable in most ways as nuclear,

solar, wind, etc. So both nuclear and the new coal gasification technologies were very favorably regarded by the Commission.

Mr. EBEL. Let me make two points on nuclear. One is that the

United States gets about 20 percent of its electric power from nuclear power stations. Fifty percent of the fuel burned in those nuclear power stations comes from Russia. Now why in the world

would we put ourselves in a position of depending upon Russia for

such a vulnerable situation?

That brings to my point that I raise in my testimony on tradeoffs. There is a tradeoff here, and the tradeoff is that we decommission nuclear warheads in Russia and use the fuel for our nuclear

power plants; and, to date, I think well over 8,000 nuclear warheads have been decommissioned. So when you tell this to the

American audience and you say is that kind of tradeoff in our national interest, the answer is yes.

The second point——

Mr. ISSA. So you are advocating that we develop the next generation and take those warheads and turn them into energy?

Mr. EBEL. Absolutely. Well, the goal is to take out 12,000, I believe. We are moving toward that goal.

The second point is, Mr. Chairman, if you were addressing an

American audience anywhere in the United States, I think you

could get agreement that nuclear power is the only nonpolluting

form of primary energy that we have. I think all the hands would

go up and say, yes, we support it. And then you would say, that

is good, because the reason I am here is to find a site for a new

nuclear power plant, and I found one about 15 miles down the

road. Now, can I have your permission to build it? Of course not.

So it is a siting, permitting problem that we face, not only just the

disposal of the spent fuel.

Mr. HORMATS. That is exactly the problem. Unfortunately, no one

wants it near them. I do think nuclear—the technology has come

a long way.

The issue you get in addition to the disposal issue and the citing

issue is the terrorism issue. As Congressman Higgins will know, we

near New York City have had a constant running battle about a

particular nuclear power plant in which the people around want to

get closed and occasionally picket. It hasn’t been closed, and basically it has passed the safety tests, but it is a controversial issue

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because of the concern that after September 11 someone is going

to run a big airplane into it and blow it up.

In addition to dealing with all the other issues, you have to make

sure that these are hard and to the point where there is no question about vulnerability, that they are invulnerable to attack; and

this adds yet another threshold that makes it more difficult and

adds to the not-in-my-backyard question.

I would just like to segue from that to another issue, just to

touch on for a moment, because we have alluded to it very briefly,

but it is a similar issue, and that is LNG imports, which are an

opportunity for the United States. And there is a more diversified—there are a lot of additional suppliers of LNG around the

world. It is one more part of a sound diversification strategy.

We have four import terminals now. There is an opportunity—

you will see from this map there are four little red dots, and all

these yellow dots essentially are potential places where you can put

it up. But the same problem occurs: one, people don’t want it near

where they live; and, two, there is a risk that some people perceive

that someone could blow it up. And the siting issue in many of

these things, where it is good for the country, the region that is

given the opportunity, shall we say, to have it doesn’t really want

to take advantage of that opportunity and fears putting it near

where they live.

Mr. ISSA. We have done a good job here. I am going to make my

closing statement, which is I have the San Onofrie nuclear power

plant in my district. I had approximately 80 percent in my district

in a poll respond that they would support additional reactors at

that existing site. So perhaps the NIMBYism comes when you are

asking for a new site more than when you have an existing site

with a good record.

You are going to waive? OK. Having no other questions except

all of those we will followup with you endlessly, I want to thank

the panel for being here. I want to thank the majority and minority

staff for not only arranging such a great panel to be here but, in

all candor, suggesting a lot of good questions, and we got through

some of them.

I hope that you will accept our next invitation. This is not a subject on which we are going to have one hearing and move on. This

is one that we want to stick with until it is resolved to a bipartisan

conclusion.

With that, this meeting is adjourned.

[Whereupon, at 3:30 p.m., the subcommittee was adjourned.]

[The prepared statement of Hon. Diane E. Watson follows:]

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