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67–226 PDF 2011

S. HRG. 112–35 

ENERGY AND OIL MARKET OUTLOOK 

HEARING 

BEFORE THE

COMMITTEE ON 

ENERGY AND NATURAL RESOURCES 

UNITED STATES SENATE 

ONE HUNDRED TWELFTH CONGRESS 

FIRST SESSION 

TO

RECEIVE TESTIMONY ON THE ENERGY AND OIL MARKET OUTLOOK 

FOR THE 112TH CONGRESS 

FEBRUARY 3, 2011 

( 

Printed for the use of the 

Committee on Energy and Natural Resources 
(II) 

COMMITTEE ON ENERGY AND NATURAL RESOURCES 

JEFF BINGAMAN, New Mexico, Chairman 

BYRON L. DORGAN, North Dakota 

RON WYDEN, Oregon 

TIM JOHNSON, South Dakota 

MARY L. LANDRIEU, Louisiana 

MARIA CANTWELL, Washington 

ROBERT MENENDEZ, New Jersey 

BLANCHE L. LINCOLN, Arkansas 

BERNARD SANDERS, Vermont 

EVAN BAYH, Indiana 

DEBBIE STABENOW, Michigan 

MARK UDALL, Colorado 

JEANNE SHAHEEN, New Hampshire 

LISA MURKOWSKI, Alaska 

RICHARD BURR, North Carolina 

JOHN BARRASSO, Wyoming 

SAM BROWNBACK, Kansas 

JAMES E. RISCH, Idaho 

JOHN MCCAIN, Arizona 

ROBERT F. BENNETT, Utah 

JIM BUNNING, Kentucky 

JEFF SESSIONS, Alabama 

BOB CORKER, Tennessee 

ROBERT M. SIMON, Staff Director 

SAM E. FOWLER, Chief Counsel 

MCKIE CAMPBELL, Republican Staff Director 

KAREN K. BILLUPS, Republican Chief Counsel 
(III) 

C O N T E N T S 

STATEMENTS 

Page 

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

Burkhard, James, Managing Director, IHS Cambridge Energy Research Associates, Cambridge, MA ......................................................................................... 28 

Diwan, Roger, Partner and Head of Financial Advisory, PFC Energy ............... 20 

Jones, Richard H., Deputy Executive Director, International Energy Agency, 

Paris, France ........................................................................................................ 14 

Murkowski, Hon. Lisa, U.S. Senator From Alaska ............................................... 2 

Newell, Richard, Administrator, Energy Information Administration, Department of Energy ..................................................................................................... 4 

APPENDIX 

Responses to additional questions .......................................................................... 65 

(1) 

ENERGY AND OIL MARKET OUTLOOK 

THURSDAY, FEBRUARY 3, 2011 

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

The committee met, pursuant to notice, at 9:33 a.m., in room 

SH–216, Hart Senate Office Building, Hon. Jeff Bingaman, chairman, presiding. 

OPENING STATEMENT OF HON. JEFF BINGAMAN, U.S. 

SENATOR FROM NEW MEXICO 

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

Senator Murkowski is on her way here but was stuck in traffic 

and asked that we proceed without her. 

Let me first just mention, welcome to the committee. We have 

eight new members of this committee in this Congress, and one or 

two of them have come to the earlier hearings we had, but I hope 

several will come to this hearing. Let me just mention who they are 

and welcome them all—Senator Franken, who is here; Senator 

Coons; Senator Manchin; Senator Portman; Senator Lee, welcome 

to the committee; Senator Coats; Senator Paul; and Senator 

Hoeven. So we are glad to have them all on the committee and look 

forward to working with them. 

Let me go through a short statement here, and then we will 

begin our testimony. 

This is an oversight hearing on the energy and oil market outlook for this 112th Congress. As many of you know, we usually try 

to start each new Congress by having a sort of scene-setting hearing of this kind, which will look at the broad energy trends that 

we expect to influence our thoughts on energy policy, also more 

specifically on agenda items that come before the committee during 

this 2-year Congress. 

Today, we will start that discussion by hearing from Dr. Richard 

Newell, who is the Administrator of the Department of Energy’s 

Energy Information Administration. He is going to give us highlights of EIA’s latest short-and long-term energy market forecasts. 

We appreciate him being here. He just returned from a trip to the 

Middle East, I understand, and perhaps he can give us some insights from that trip. 

The committee is a heavy consumer of EIA information and products. So we always appreciate having EIA share its data and its 

analyses with us. 

We also will hear from Ambassador Jones, who is the Deputy Director of the International Energy Agency in Paris. We look for-
2 

ward to discussing IEA’s forecast of total world energy supply and 

demand out through 2035. I would also note that IEA was founded 

as a forum for responding to oil supply disruptions, and it still has 

an important role to play in that capacity. 

Executive Director Tanaka, who was scheduled to be with us, 

found that the current situation in the Middle East required him 

to remain at their headquarters in Paris, but we are in good hands 

with Ambassador Jones, whose impressive resume includes service 

as the U.S. Ambassador in many of the countries in the Middle 

East. Given the current situation that we are seeing internationally, we are especially grateful to him for being here to give us the 

International Energy Agency perspective. 

We are also pleased to have two other very impressive witnesses 

with us, leading experts on energy, both of whom are familiar to 

the committee. They testified in 2008, as we attempted to understand that year’s historic oil price spike. Mr. Diwan is partner and 

head of financial advisory with PFC Energy in Washington, and 

Mr. Jim Burkhard is the managing director of Cambridge Energy 

Research Associates in Cambridge, Massachusetts. So we very 

much appreciate them being here. 

Since the hearing was announced early last week, I think it is 

safe to say that members and witnesses alike have been following 

the developments in the Middle East with much interest. Fortunately, it appears unlikely that the political turmoil will result in 

major disruptions in oil production or transportation. At least at 

this time, that is my impression. 

However, I note that whenever geopolitical events of this type 

occur, it reminds us of our vulnerability to world oil supply disruptions, and it is a spur for us to consider energy policies that help 

to reduce that vulnerability. 

That is why I am particularly glad to see that EIA is forecasting 

a decline in U.S. consumption of imported oil between now and 

2035. Until very recently, reversing the decade-old narrative of 

ever-increasing U.S. dependence on foreign oil seemed all but impossible. We now see that 2005 might well have been the highwater mark in U.S. oil import dependence. 

Increased vehicle efficiency, a transition to increased reliance on 

biofuels, together with gains in U.S. oil production—all of those are 

creating real national and economic security benefits. I am optimistic that further technology advances, both in vehicles and in 

fuels, could make us even less reliant on imported oil than the current forecast predicts. I hope that we in the Congress will have the 

good sense to remain on this path toward increased energy independence. 

Now, with that, let me stop and defer to Senator Murkowski for 

any comments she would like to make before we hear from the witnesses. 

STATEMENT OF HON. LISA MURKOWSKI, U.S. SENATOR 

FROM ALASKA 

Senator MURKOWSKI. Thank you and good morning, Mr. Chairman. 

I was eager to hold this hearing even before the unrest that we 

are seeing in Tunisia and Egypt and how this has grown into the 
3 

international crisis that we are now witnessing. We say this a lot 

in this committee, but I think today’s hearing is particularly timely. 

While we have seen no interruption in the supply of oil, the unrest in North Africa is affecting its price, and that should help us 

understand the costs and the consequences that are associated with 

our current energy policy. 

I think there is strong bipartisan agreement that our Nation is 

far too dependent on foreign oil, and I have always found it unfortunate that agreement seems to end there for so many members. 

I have never been one to deny the critical need for greater energy 

efficiency, for greater investments in alternatives, and for a responsible path forward for a cleaner energy future. This is and will continue to be a major undertaking, and the written testimony that we 

have today reflects that efficiency, biofuels, and other technologies 

will make an important contribution in the coming decades. I think 

that is a good thing, and we will continue to build on it here in 

this committee. 

But I am also quite interested in what we can achieve today, not 

just tomorrow. Despite the unfortunate state of our economy, oil 

prices are near $100 per barrel, and hardly anyone expects a correction back to $50 or even $80. Instead, oil is more likely to stay 

in its current range or trend upwards. 

With imports accounting for more than 50 percent of our supply, 

we are on the verge, once again, of seeing the huge costs that high 

prices hold for our economy. Worst of all, this is a problem that is 

at least partially of our own making. Over the years, our lands 

have been locked up and many of our most promising opportunities 

have been put out of reach. 

The U.S. sits on huge unexplored oil reserves in the offshore, in 

my State of Alaska, in the Rocky Mountain West. We have shale 

formations that aren’t even accessible for research and development right now. At times, our energy policy goes beyond frustrating and becomes simply irresponsible. The American people expect their Government to keep energy affordable, but right now, it 

is failing on that front. 

We as citizens own the oil and the natural gas on Federal land. 

The Government is not a landlord, but a management outfit that 

we allow, through representatives in Congress, to contract for the 

development of these resources for our benefit. When the value of 

these resources is sustained at such high levels and we are overly 

dependent on foreign sources for our supply, there is not much tolerance for keeping them locked up. We essentially have money buried beneath our own soil, but instead choose to hemorrhage nearly 

$1 billion a day out of our economy. 

Now it is not that I expect our Nation to supply 100 percent of 

its own oil. We won’t. It is not that I expect increased domestic production to singlehandedly bring down the price of oil back down to 

our preferred price range. It won’t do that. But I do expect honesty 

in this discussion about what increased domestic production can do 

to protect against supply disruptions, increase our security, restore 

our trade balance, generate Government revenues, and, most of all, 

create jobs. 
4 

The events in North Africa should be a wake-up call to those of 

us who work on energy policy. Civil unrest is a fact of life in many 

of the nations that provide our imports. Iran now holds OPEC’s 

presidency and is perfectly comfortable with $100 oil. An actual 

supply disruption, as opposed to the mere specter of one, would 

likely spike oil prices to levels that will stifle our economic recovery 

and result in genuine hardship for American working families. 

As this committee’s joint background memo quoted from the Bipartisan Policy Center, they said, and I quote, ‘‘A one-dollar 1-day 

increase in a barrel of oil takes $12 million out of the U.S. economy. If tensions in the Mideast cause oil prices to rise by $5 for 

even just 3 months, over $5 billion will leave the U.S. economy. Obviously, this is not a strategy for creating jobs.’’ That is the end of 

the quote. 

That is a tremendous amount of money. Really, we are talking 

about exponentially more when it comes to our deep dependence on 

foreign oil. So, today, I am renewing my call for a realistic and 

truly aggressive approach to the energy challenges we face. For the 

sake of our national security, for the sake of our economy, and for 

the sake of our world’s environment, America should produce as 

much of the oil that it uses as possible. 

It is this balance, in concert with the resulting revenues and the 

ease of manufacturing, that will allow us to truly take control of 

our energy future. I am anxious to work with Senators on both 

sides of this dais to achieve a more appropriate balance in our energy policy, a balance that promotes all forms of energy. 

I thank the witnesses for the testimony that you have presented 

here this morning and look forward to the discussion that we will 

have. 

Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you very much. 

Why don’t we start with you, Dr. Newell? If you could take 8 

minutes or so and give us sort of the main points we need to understand? I would ask the same of each of the other witnesses, and 

we will include in the record your complete written statement in 

each case. 

But Dr. Newell, go right ahead. 

STATEMENT OF RICHARD NEWELL, ADMINISTRATOR, ENERGY 

INFORMATION ADMINISTRATION, DEPARTMENT OF ENERGY 

Mr. NEWELL. Thank you, Mr. Chairman and members of the 

committee. I appreciate the opportunity to appear before you today. 

The Energy Information Administration is the statistical and analytical agency within the U.S. Department of Energy. EIA does 

not promote or take positions on policy issues, and we have independence with respect to the information and the analysis that we 

provide. Therefore, our views should not be construed as representing those of the Department of Energy or other Federal agencies. 

Focusing first on the short-term outlook for oil, EIA expects a 

continued tightening of world oil markets over the next 2 years. 

World oil consumption grows by an average of 1.5 million barrels 

per day in 2011 and in 2012 in our outlook, while supply growth 

from non-OPEC countries averages less than 0.1 million barrels per 
5 

day. Consequently, we expect the market to rely on increased 

OPEC members’ production of crude oil and other liquids and some 

drawdown in inventories to meet world oil demand growth. 

With tighter world oil markets, EIA expects the price of West 

Texas Intermediate crude oil, a key U.S. pricing benchmark, to average about $93 per barrel in 2011, $14 per barrel higher than last 

year’s average. We expect the price to rise to an average of $99 per 

barrel by the fourth quarter of 2012. However, oil price forecasts 

are subject to a great deal of uncertainty. For example, the market 

value of futures and options contracts, which we track closely, is 

telling us that there is about a 1-in-3 chance that the price of oil 

could be above $110 per barrel at the end of this year. 

EIA expects the retail price of regular gasoline to average about 

$3.17 per gallon this year, about 40 cents per gallon higher than 

last year, and $3.29 per gallon in 2012. Prices will be higher than 

this during the peak summer driving season and in certain regions 

of the country, particularly the west coast. There is also a significant chance that gasoline prices could diverge substantially from 

these values, particularly due to uncertainty in oil prices. 

I will now turn to the longer-term energy projections from EIA’s 

Annual Energy Outlook, which we update once each year. The reference case, which we released in December, represents an energy 

future through 2035—so, for the next 25 years—that assumes continuance of current market and technological trends, consumer behavior, and current laws and regulations. It does not include the 

effect of potential future policies that have not yet become law. The 

reference case represents a baseline that is a useful jumping-off 

point for assessing alternatives, and the full outlook, which we will 

release this spring, will include a large number of sensitivity cases 

that examine the impacts of different technological market assumptions and policy assumptions. 

Renewables are the fastest-growing energy source in our outlook, 

albeit from a relatively small base. Total use of renewable fuels 

grows 3 percent per year on average, compared to overall energy 

consumption, which grows only less than 1 percent per year on an 

annual average basis. Growth in renewables results mainly from 

the implementation of renewable fuel standards, which is a Federal 

standard, and also State-level mandates for renewable electricity 

generation. 

Turning to natural gas, the prospects for domestic natural gas 

production have dramatically improved over the last several years 

with the emergence of shale gas production. U.S. shale gas production has increased 15-fold over the last decade, and proved reserves 

of shale gas have tripled over the last few years. This has led EIA 

and other analysts to reassess the U.S. shale gas resource base, 

and in our new reference case just released, technically recoverable 

shale gas resources are more than double what we assumed in last 

year’s outlook. 

As a result, U.S. natural gas production increases 25 percent 

over the next 25 years, and our projections for natural gas imports 

and natural gas prices are, in turn, significantly lower than what 

we had previously assumed. Lower projected natural gas prices, in 

turn, underpin increased natural gas consumption, which rises 17 
6 

percent over the next 25 years, primarily for use in industry and 

electric power. 

Coal is another key source for electricity generation, and coal 

consumption grows gradually throughout the reference case projection, as existing plants are used more intensively and the few new 

coal plants already under construction are completed and enter 

into service. 

Nuclear generating capacity increases by about 10 gigawatts, 

from 101 gigawatts in 2009 to about 111 gigawatts by 2035. This 

includes about 6 gigawatts of new plant additions, with the balance 

coming from upgrades at existing plants. 

Turning back to oil, the reference case crude oil prices continue 

to rise in our long-term outlook as a growing global economy underpins oil demand growth that is more rapid than supply growth 

from non-OPEC producers. By 2035, the reference case crude oil 

price is $125 per barrel in real terms in our outlook. 

Recognizing the possibility of unpredictable changes in energy 

markets and policies, the full Annual Energy Outlook to be issued 

this spring will include a wide range of oil price scenarios that diverge significantly from this reference case assumption. 

Total U.S. consumption of oil and other liquid fuels grows from 

about 19 million barrels per day in 2009 to 22 million barrels per 

day in 2035 in the reference case. This modest growth in the reference case reflects increasing fuel prices and the implementation 

of finalized standards and statutory mandates that drive the fuel 

economy of light-duty vehicles to 35 miles per gallon by 2020. However, pending standards proposed for heavy-duty vehicles and potential changes in light-duty standards beyond 2017 are not reflected in the reference case. 

Virtually all of the increase in liquids comes from biofuels use, 

driven by the Federal renewable fuel standard along with increases 

in natural gas liquids from natural gas production. We expect domestic oil production increases to come from onshore enhanced oil 

recovery projects and shale oil plays. Cumulative offshore oil production in this year’s reference case is lower than in last year’s outlook due to delays in near-term projects, changes in expected lease 

sales, and lower natural gas prices, which tend to be coupled with 

oil production. 

As a result of this increased domestic production and modest consumption growth, we expect U.S. dependence on imported liquid 

fuels to continue to decline. After reaching a high of 60 percent in 

2005, the imported petroleum share of total liquid fuel use fell to 

52 percent in 2009 and continues to decline in our projections to 

42 percent by 2035. 

EIA’s data analysis and projections are meant to assist policymakers in their deliberations and the private sector in making informed decisions. In addition to preparing baseline projections that 

I have reviewed this morning, EIA has also responded to requests 

from this committee and others for analysis of the energy and economic impacts of energy policy proposals. We look forward to providing you with whatever assistance you need in that regard. 

Mr. Chairman, members of the committee, this concludes my testimony, and I look forward to any questions you might have. 

Thank you. 
7 

* Figures 1–13 have been retained in committee files. 

[The prepared statement of Mr. Newell follows:] 

PREPARED STATEMENT OF RICHARD NEWELL, ADMINISTRATOR, ENERGY INFORMATION

ADMINISTRATION, DEPARTMENT OF ENERGY

Mr. Chairman and Members of the Committee: 

I appreciate the opportunity to appear before you today to discuss the energy and 

oil market outlook. 

The U.S. Energy Information Administration (EIA) is the statistical and analytical agency within the U.S. Department of Energy. EIA collects, analyzes, and disseminates independent and impartial energy information to promote sound policymaking, efficient markets, and public understanding regarding energy and its interaction with the economy and the environment. EIA is the Nation’s premier source 

of energy information and, by law, its data, analyses, and forecasts are independent 

of approval by any other officer or employee of the United States Government. The 

views expressed in our reports, therefore, should not be construed as representing 

those of the Department of Energy or other federal agencies. 

The energy projections that I will discuss today are widely used by government 

agencies, the private sector, and academia as a starting point for their own energy 

analyses. EIA prepares both short-term energy outlooks, examining monthly trends 

over the next one to two years, and longterm outlooks, with annual projections over 

the next 20-to-25 years. While I will be focusing primarily on the long-term outlooks 

in my remarks today, I would like to first summarize some key findings from our 

January Short Term Energy Outlook, which includes monthly forecasts through the 

end of 2012. 

THE SHORT-TERM ENERGY OUTLOOK

EIA’s Short-Term Energy Outlook forecasts a continued tightening of world oil 

markets over the next 2 years. World oil consumption grows by an annual average 

of 1.5 million barrels per day through 2012 while the growth in supply from countries that are not members of the Organization of the Petroleum Exporting Countries (OPEC) averages less than 0.1 million barrels per day each year. Consequently, 

EIA expects the market will rely on both inventories and significant increases in 

the production of crude oil and non-crude liquids in OPEC member countries to 

meet world demand growth. While on-shore commercial oil inventories in the Organization for Economic Cooperation and Development (OECD) countries remained 

high last year, floating oil storage fell sharply in 2010, and projected OECD oil inventories decline over the forecast period. EIA expects that OPEC members’ crude 

oil production will continue to rise over the next 2 years to accommodate increasing 

world oil consumption, especially with non-OPEC supplies expected to show limited 

growth. Projected OPEC crude oil production increases by 0.5 and 1.1 million barrels per day in 2011 and 2012, respectively. 

Because of the projected tightening in world oil markets EIA expects the price of 

West Texas Intermediate (WTI) crude oil to average about $93 per barrel in 2011, 

$14 higher than the average price last year (Figure 1).* For 2012, EIA expects WTI 

prices to continue to rise, with a forecast average price of $99 per barrel in the 

fourth quarter 2012. Energy price forecasts are, however, uncertain. Based on futures and options prices as of January 31, 2011, the probability that the monthly 

average price of WTI crude oil will exceed $110 per barrel in December 2011 is 

about 30 percent. 

EIA expects regular-grade motor gasoline retail prices to average $3.17 per gallon 

this year, 39 cents per gallon higher than last year and $3.29 per gallon in 2012, 

with prices forecast to average about 5 cents per gallon higher in each year during 

the April through September peak driving season. There is regional variation in the 

forecast, with average expected prices on the West Coast about 25 cents per gallon 

above the national average during the April through September period. There is also 

significant uncertainty surrounding the forecast, with the current market prices of 

futures and options contracts for gasoline suggesting a 35 percent probability that 

the national average retail price for regular gasoline could exceed $3.50 per gallon 

during summer 2011 and about a 10 percent probability that it could exceed $4.00 

per gallon. 

Domestic natural gas production increased by an average 3.5 percent per year 

over the last 4 years, primarily because of the growth in production from unconventional shale gas resources. The growth in production has contributed to higher inventories, lower natural gas prices, and an increase in natural gas use in the elec-
8 

tric power sector. The projected Henry Hub natural gas spot price averages $4.02 

per million Btu for 2011, $0.37 per million Btu lower than the 2010 average (Figure 

2). EIA expects the natural gas market to begin to tighten in 2012, with the Henry 

Hub spot price increasing to an average $4.50 per million Btu. 

EIA estimates fossil-fuel CO2 emissions increased by 3.8 percent in 2010, after 

falling by 7.0 percent in 2009. Coal-and natural gas-related CO2 emissions rose as 

a result of increased usage of both fuels for electricity generation and higher consumption of natural gas in the industrial sector. Projected declines in coal and natural gas consumption in the electric power sector in 2011 more than offset increased 

consumption of petroleum in the transportation sector (i.e., motor gasoline, diesel 

fuel, and jet fuel). Consequently, forecast fossil-fuel CO2 emissions fall by 0.6 percent in 2011. The forecast resumption of growth in electricity generation and improvement in economic growth in 2012 contribute to a 2.4-percent increase in fossilfuel CO2 emissions. Projected fossil-fuel CO2 emissions in 2012 remain below the 

levels seen since 1999 and 4.4 percent below 2005 emissions. 

LONG-TERM ENERGY OUTLOOKS

International Energy Outlook.—Before focusing on our U.S. Annual Energy Outlook, I want to briefly discuss some highlights of our International Energy Outlook 

2010 (IEO2010), which was issued last May. The IEO2011 will be issued this spring. 

Although the Annual Energy Outlook focuses on our latest thoughts about domestic 

energy markets, it is useful to place this within a global context given the interconnectedness of U.S. energy markets and the broader global economy. 

The United States accounted for one-fifth of the world’s energy consumption in 

2007, but this share is likely to decline over the next two decades. Global energy 

consumption will grow about 50 percent over the next 25 years, with most of the 

growth occurring outside of developed countries, in places like China, India, and the 

Middle East. Energy demand in non-OECD countries is expected to grow over 80 

percent from 2007 levels, and by 2035 China will account for almost 25 percent of 

total world energy consumption. Renewables are the fastest-growing source of world 

energy supply, but under current market and technology trends fossil fuels are still 

expected to meet more than three-fourths of total energy needs in 2035, assuming 

current policies are unchanged. 

Total global liquid fuels consumption projected for 2035 is 110.8 million barrels 

per day, which is 29 percent or 24.7 million barrels per day higher than the 2007 

level of 86.1 million barrels per day. Conventional oil supplies from OPEC member 

countries contribute 11.0 million barrels per day to the total increase in world liquid 

fuels production from 2007 to 2035, and conventional supplies from non-OPEC countries add another 4.8 million barrels per day. World production of unconventional 

resources (including biofuels, oil sands, extra-heavy oil, coal-to-liquids, and gasto-liquids), which totaled 3.4 million barrels per day in 2007, increases fourfold to 13.5 

million barrels per day in 2035. 

Natural gas consumption increases 44 percent globally over the projection period. 

Tight gas, shale gas, and coalbed methane supplies increase substantially in the 

IEO2010 Reference case—especially from the United States, but also from Canada 

and China. 

In the absence of additional national policies and/or binding international agreements that would limit or reduce greenhouse gas emissions, world coal consumption 

is projected to increase from 132 quadrillion Btu in 2007 to 206 quadrillion Btu in 

2035, at an average annual rate of 1.6 percent. China alone accounts for 78 percent 

of the total net increase in world coal use from 2007 to 2035. 

Annual Energy Outlook.—Turning to the Annual Energy Outlook 2011 

(AEO2011), the Reference case discussed today was released in December 2010 and 

is intended to represent an energy future through 2035 based on given market, technological and demographic trends; current laws and regulations; and consumer behavior. EIA recognizes that projections of energy markets are highly uncertain and 

subject to geopolitical disruptions, technological breakthroughs, and other unforeseeable events. In addition, long-term trends in technology development, demographics, 

economic growth, and energy resources may evolve along a different path than represented in the projections. The complete AEO2011, which EIA will release this 

spring, will include a large number of alternative cases intended to examine these 

uncertainties. 

EIA has made numerous updates in developing its AEO2011 Reference case. Several notable changes from the AEO2010 include (1) a significant update of the technically recoverable U.S. shale gas resources, more than doubling the volume of shale 

gas resources assumed in AEO2010; (2) an increase of the limit for blending ethanol 

into gasoline for approved vehicles from 10 percent to 15 percent; (3) incorporation 
9 

of California’s Low Carbon Fuel Standard and other State environmental rules; and 

(4) updates in several key technology assumptions, including the cost of new power 

plants and the cost and sizes of electric and plug-in hybrid electric batteries. 

ECONOMIC GROWTH

Real gross domestic product (GDP) grows by an average of 2.7 percent per year 

from 2009 to 2035 in the AEO2011 Reference case, the same as in the AEO2010 

Reference case. The Nation’s population, labor force, and productivity grow at annual rates of 0.9 percent, 0.7 percent, and 2.0 percent, respectively, from 2009 to 

2035. 

Beyond 2011, the economic assumptions underlying the AEO2011 Reference case 

reflect trend projections that do not include short-term fluctuations. The near-term 

scenario for economic growth is consistent with that in EIA’s October 2010 ShortTerm Energy Outlook. 

It is important to note that one must exercise care in evaluating percentage 

growth relative to 2009 levels throughout the projection results since 2009 was the 

low point of the economic downturn and associated energy consumption. 

ENERGY PRICES

World oil prices declined sharply in the second half of 2008 from their peak in 

mid-July of that year. Real prices trended upward throughout 2009, and through 

November 2010 they remained generally in a range between $70 and $85 per barrel 

before climbing above $90 per barrel. Prices continue to rise gradually in the Reference case (Figure 3), as the world economy recovers and global demand grows 

more rapidly than liquids supplies from producers outside the Organization of the 

Petroleum Exporting Countries (OPEC). In 2035, the average real price of crude oil 

in the Reference case is $125 per barrel in 2009 dollars. 

The AEO2011 Reference case assumes that limitations on access to energy resources in resourcerich countries restrain the growth of non-OPEC conventional liquids production between 2009 and 2035, and that OPEC targets a relatively constant market share of total world liquids production (Figure 4). The degree to which 

non-OPEC and non-OECD countries restrict access to potentially productive resources contributes to world oil price uncertainty. Other factors causing uncertainty 

include OPEC investment decisions, which will affect future world oil prices and the 

economic viability of unconventional liquids. A wide range of price scenarios (from 

$50 per barrel to $200 dollars per barrel in 2035, in 2009 dollars) and discussion 

of the significant uncertainty surrounding future world oil prices will be included 

in the complete AEO2011 publication. 

Prices of motor gasoline and diesel in the AEO2011 Reference case increase from 

$2.35 and $2.44 per gallon (all prices are in real 2009 dollars), respectively, in 2009 

to $3.69 and $3.89 per gallon in 2035. 

The price of natural gas at the wellhead is consistently lower in the AEO2011 Reference case than it was in AEO2010 (Figure 5), because of a revised representation 

of natural gas pricing and a significant increase in estimated technically recoverable 

shale gas resources. The annual average natural gas wellhead price remains under 

$5 per thousand cubic feet through 2022, but rises thereafter to meet growth in natural gas demand and to offset declines in natural gas production from other sources. 

As the shale gas resource base is developed, production gradually shifts to resources 

that are somewhat less productive and more expensive to produce. Natural gas wellhead prices (in 2009 dollars) reach $6.53 per thousand cubic feet in 2035, compared 

with $8.19 per thousand cubic feet in AEO2010. 

The average U.S. minemouth coal price declines somewhat after 2010, as the 

share of highercost coal from mines in Appalachia declines. The Appalachian share 

of total coal production, on an energy content basis, declines from 40 percent in 2009 

to 33 percent in 2016 and 29 percent in 2035. The average, real delivered electricity 

price in the AEO2011 Reference case falls from 9.8 cents per kilowatthour in 2009 

to 8.9 cents per kilowatthour in 2016, reflecting continued low natural gas prices. 

Electricity prices tend to reflect trends in natural gas prices, because natural gas 

represents a large share of total fuel costs, and in competitive areas natural gasfired plants often are the marginal generators. In the AEO2011 Reference case, 

lower natural gas prices lead to lower electricity prices than in the AEO2010 Reference case. Electricity prices in 2035 (in 2009 dollars) are 9.2 cents per 

kilowatthour in the AEO2011 Reference case, compared with 10.3 cents per 

kilowatthour in the AEO2010 Reference case. 
10 

ENERGY CONSUMPTION

Total primary energy consumption, which was 101.7 quadrillion Btu in 2007, 

grows by 21 percent in the AEO2011 Reference case, from 94.8 quadrillion Btu in 

2009 to 114.3 quadrillion Btu in 2035, to about the same level as in the AEO2010 

projection in 2035 (Figure 6). 

The energy intensity of the U.S. economy, measured as primary energy use (in 

Btu) per dollar of GDP (in 2005 dollars), declines by 40 percent from 2009 to 2035 

in the AEO2011 Reference case as the result of a continued shift from energy-intensive manufacturing to services, rising energy prices, and the adoption of policies 

that promote energy efficiency. Since 1992, the energy intensity of the U.S. economy 

has declined on average by 2 percent per year, in large part because the economic 

output of the service sectors, which use relatively less energy per dollar of output, 

has grown at a pace almost 6 times that of the industrial sector (in constant dollar 

terms). As a result, the share of total shipments accounted for by the industrial sectors fell from 31 percent in 1992 to 24 percent in 2009. In the AEO2011 Reference 

case, the industrial share of total shipments continues to decline, but at a slower 

rate, to 21 percent in 2035. 

Population is a key determinant of energy consumption, influencing demand for 

travel, housing, consumer goods, and services. The U.S. population increases by 27 

percent from 2009 to 2035 in the AEO2011 Reference case, and energy consumption 

grows by 21 percent over the same period. Energy consumption per capita declines 

somewhat as a result, declining by an average of 0.2 percent per year from 2009 

to 2035 in the AEO2011 Reference case. 

The fossil fuel share of energy consumption falls from 84 percent of total U.S. energy demand in 2009 to 78 percent in 2035, reflecting rising fuel prices and the impacts of fuel economy standards and provisions in the American Recovery and Reinvestment Act of 2009 (ARRA), the Energy Improvement and Extension Act of 2008 

(EIEA2008), the Energy Independence and Security Act of 2007 (EISA2007), and 

State legislation. 

Total U.S. consumption of liquid fuels, including both fossil liquids and biofuels, 

grows from 18.8 million barrels per day in 2009 to 22.0 million barrels per day in 

2035 in the AEO2011 Reference case. The transportation sector dominates the demand for liquid fuels and its share (as measured by energy content) grows only 

slightly, from 72 percent of total liquids consumption in 2009 to 74 percent in 2035. 

AEO2011 assumes the adoption of fuel economy standards for lightduty vehicles for 

model year 2011, as well as joint fuel economy and greenhouse gas emissions standards set forth by the EPA and NHTSA for model years 2012 through 2016. The fuel 

economy standards increase further through model year 2020 to meet the statutory 

requirements of EISA2007. The Reference case does not assume any further changes 

in fuel economy standards. Some ideas for further standards are discussed in the 

September 2010 EPA/NHTSA Notice of Upcoming Joint Rulemaking to Establish 

2017 and Later Model Year Light-Duty Vehicle Greenhouse Gas Emissions and Corporate Average Fuel Economy (CAFE) Standards. Nor does it include the proposed 

fuel economy standards for heavy-duty vehicles provided in The Proposed Rule for 

Greenhouse Gas Emissions Standards and Fuel Efficiency Standards for Mediumand Heavy-Duty Engines and Vehicles, published by the EPA and the National 

Highway Traffic Safety Administration (NHTSA) in November 2010. Enactment of 

further binding standards would lower the projection for liquid fuels use. 

Biofuels account for most of the growth in liquid fuels consumption, increasing by 

1.8 million barrels per day from 2009 to 2035. The biofuel portion of 2035 liquid 

fuels consumption is 3.9 quadrillion Btu in AEO2011, about the same as in 

AEO2010. Although the situation is uncertain, EIA’s present view of the projected 

rates of technology development and market penetration of cellulosic biofuel technologies suggests that available quantities of cellulosic biofuels will be insufficient 

to meet the renewable fuels standard (RFS) targets for cellulosic biofuels legislated 

in EISA2007 before 2022, triggering both waivers and a modification of applicable 

volumes, as provided in Section 211(o) of the Clean Air Act as amended in 

EISA2007. 

In the AEO2011 Reference case, natural gas consumption rises from 22.7 trillion 

cubic feet in 2009 to 26.5 trillion cubic feet in 2035. The total in 2035 is about 1.6 

trillion cubic feet higher than in the AEO2010 Reference case due to lower natural 

gas prices. 

Total coal consumption, which was 22.7 quadrillion Btu in 2007, increases from 

19.7 quadrillion Btu (1,000 million short tons) in 2009 to 25.2 quadrillion Btu (1,302 

million short tons) in 2035 in the AEO2011 Reference case. Coal consumption, mostly for electric power generation, grows gradually throughout the projection period, 

as existing plants are used more intensively, and a few new plants already under 
11 

construction are completed and enter service. Coal consumption in the electric 

power sector in 2035 in the AEO2011 Reference case is about 1.3 quadrillion Btu 

(53 million short tons) lower than in the AEO2010 Reference case, however, as a 

result of higher levels of natural gas use for electric power generation due to relatively lower natural gas prices in the AEO2011 Reference case. 

Total consumption of marketed renewable fuels grows by 2.9 percent per year in 

the AEO2011 Reference case. Growth in the consumption of renewable fuels results 

mainly from the implementation of the Federal RFS for transportation fuels and 

State renewable portfolio standard (RPS) programs for electricity generation. Marketed renewable fuels include wood, municipal waste, biomass, and hydroelectricity 

in the end-use sectors; hydroelectricity, geothermal, municipal waste, biomass, solar, 

and wind for generation in the electric power sector; and ethanol for gasoline blending and biomass-based diesel in the transportation sector. Excluding 

hydroelectricity, renewable energy consumption in the electric power sector grows 

from 113.6 billion kilowatthours in 2009 to 261.6billion kilowatthours in 2035. 

ENERGY PRODUCTION AND IMPORTS

Net imports of energy meet a major, but declining, share of total U.S. energy demand in the AEO2011 Reference case. Energy imports decline due to increased domestic natural gas production, increased use of biofuels (much of which are produced domestically), and demand reductions resulting from the adoption of new efficiency standards and rising energy prices. The net import share of total U.S. energy 

consumption in 2035 is 18 percent, compared with 24 percent in 2009. The share 

was 29 percent in 2007, but it dropped considerably during the recession. 

OIL AND OTHER LIQUIDS

U.S. dependence on imported liquid fuels, measured as a share of total U.S. liquid 

fuel use, reached 60 percent in 2005 and 2006 before falling to 52 percent in 2009. 

The liquids import share continues to decline over the projection period, to 42 percent in 2035 (Figure 7). 

In the AEO2011 Reference case, U.S. domestic crude oil production increases from 

5.4 million barrels per day in 2009 to 5.7 million barrels per day in 2035. Production 

increases are expected from onshore enhanced oil recovery (EOR) projects, shale oil 

plays, and deepwater drilling in the Gulf of Mexico. Cumulatively, oil production in 

the lower 48 States in the AEO2011 Reference case is approximately the same as 

in the AEO2010 Reference case, but the pattern differs in that more onshore and 

less offshore oil is produced in AEO2011. 

Onshore oil production is higher in AEO2011 as a result of an increase in EOR, 

as well as increased shale oil production, for which the resource estimate has been 

increased relative to AEO2010. In AEO2011, EOR accounts for 33 percent of cumulative onshore oil production. The bulk of the EOR production uses CO2. For CO2

EOR oil production, naturally produced CO2 or man-made CO2 captured from 

sources such as natural gas plants and power plants is injected into a reservoir to 

allow the oil to flow more easily to the well bore. 

Offshore oil production in AEO2011 is lower than in AEO2010 throughout most 

of the projection period because of expected delays in near-term projects, in part as 

a result of drilling moratoria and associated regulatory changes, and in part due to 

the change in lease sales expected in the Pacific and Atlantic outer continental shelf 

(OCS), as well as increased uncertainty about future investment in offshore production. 

As with natural gas, the application of horizontal drilling together with 

hydrofracturing techniques have allowed significant increases in the development of 

shale oil resources (oil resident in shale rock). With AEO2011 incorporating five key 

shale oil plays (as opposed to two in AEO2010), oil production rises significantly in 

areas of the country where shale oil is being produced, including the Rocky Mountains (primarily from the Bakken shale), the Gulf Coast (primarily from the Eagle 

Ford and Austin Chalk plays), the Southwest (primarily from the Avalon play), and 

California (primarily from the Lower Monterey and Santos plays). 

NATURAL GAS

The emerging role of shale gas resources highlights the outlook for natural gas 

supply. Cumulative natural gas production in the lower 48 States over the projection period in the AEO2011 Reference case is 25 percent higher than in the 

AEO2010 Reference case as a result of greater supply availability from shale gas 

plays (Figure 8). The higher shale gas production and a higher rate of development 

results from the addition of shale gas resources in existing plays that can be produced at prices under $7 per thousand cubic feet. 
12 

In the AEO2010 Reference case, technically recoverable unproved shale gas resources were estimated at 347 trillion cubic feet; in the AEO2011 Reference case 

they are estimated at 827 trillion cubic feet. The revised estimate results from the 

availability of additional information as more drilling activity takes place in both 

existing and new shale plays. U.S. shale gas production has increased 14-fold over 

the last decade, and reserves have tripled over the last few years (Figure 9). 

As a result of updated shale gas resources in existing plays (key additions were 

in the Marcellus, Haynesville, and Eagle Ford plays) and an assumption of increased well productivity for the newer plays, shale gas production in 2035 in the 

AEO2011 Reference case is almost double that in the AEO2010 Reference case. 

There is considerable uncertainty about the amounts of recoverable shale gas in 

both developed and undeveloped areas. Well characteristics and productivity vary 

widely not only across different plays but within individual plays. Initial production 

rates can vary by as much as a factor of 10 across a formation, and the productivity 

of adjacent gas wells can vary by as much as a factor of 2 or 3. Many shale formations, such as the Marcellus Shale, are so large that only a small portion of the entire formation has been intensively production-tested. Environmental considerations, 

particularly with respect to water, lend additional uncertainty. Although significant 

updates have been made to the estimates of undiscovered shale gas resources in 

newer areas, most of the resulting additions are not economically recoverable at 

AEO2011 prices and have little, if any, impact on the projection. 

The Alaska natural gas pipeline, expected to be completed in 2023 in the 

AEO2010 Reference case, is not constructed in the AEO2011 Reference case. This 

change is a result of increased capital cost assumptions and lower natural gas wellhead prices, which hurt the economics of the project over the projection period. Total 

U.S. net imports of natural gas in the AEO2011 Reference case are lower than in 

the AEO2010 Reference case (Figure 10), due in part to stronger North American 

production, less world liquefaction capacity than previously assumed, and increased 

use of LNG in markets outside North America. 

COAL

Although coal remains the leading fuel for U.S. electricity generation, its share 

of total electricity generation is consistently lower in the AEO2011 Reference case 

than in the AEO2010 Reference case through about 2023 (but similar thereafter). 

As a consequence, total coal production is slightly lower in the AEO2011 Reference 

case than in the AEO2010 Reference case. 

As U.S. coal use grows, domestic coal production increases at an average rate of 

0.7 percent per year, from 21.6 quadrillion Btu (1,075 million short tons) in 2009 

to 25.8 quadrillion Btu (1,305 million short tons) in 2035. Production from mines 

west of the Mississippi River trends upward over the entire projection period. Following a substantial decline in output between 2009 and 2015, coal production east 

of the Mississippi River remains relatively constant from 2015 through 2035. On a 

Btu basis, 60 percent of domestic coal production originates from States west of the 

Mississippi River in 2035, up from 50 percent in 2009. 

Typically, trends in U.S. coal production are linked to its use for electricity generation, which currently accounts for 93 percent of total coal consumption. Coal consumption in the electric power sector in the AEO2011 Reference case (21.8 quadrillion Btu in 2035) is about 1.3 quadrillion Btu less than in the AEO2010 Reference 

case (23.1 quadrillion Btu in 2035). For the most part, the reduced outlook for coal 

consumption in the electricity sector is the result of lower natural gas prices that 

support increased generation from natural gas in the AEO2011 Reference case. 

ELECTRICITY GENERATION

Total electricity consumption, including both purchases from electric power producers and onsite generation, grows 30 percent, from 3,745 billion kilowatthours in 

2009 to 4,880 billion kilowatthours in 2035 in the AEO2011 Reference case, increasing at an average annual rate of 1.0 percent (Figure 11). The growth in electricity 

consumption continues to slow due to structural change in the economy away from 

manufacturing and more stringent appliance efficiency standards. The growth rate 

in the AEO2011 Reference case is about the same as in the AEO2010 Reference 

case. 

Although the mix of investments in new power plants includes fewer coal-fired 

plants than other fuel technologies, a total of 21 gigawatts of coal-fired generating 

capacity is added from 2009 to 2035 in the AEO2011 Reference case. Coal remains 

the single largest energy source for electricity generation (Figure 12) because of continued reliance on existing coal-fired plants and the addition of some new plants in 

the absence of an explicit Federal policy to reduce greenhouse gas emissions. Con-
13 

cerns about greenhouse gas emissions continue to slow the expansion of coalfired 

capacity in the AEO2011 Reference case, even under current laws and policies. 

Lower projected fuel prices for new natural gas-fired plants also affect the relative 

economics of coalfired capacity, as does the continued rise in construction costs for 

new coal-fired power plants. Total coal-fired generating capacity grows to 330 

gigawatts in 2035 in the AEO2011 Reference case. 

Compared with the AEO2010 Reference case, electricity generation from natural 

gas is higher in the AEO2011 Reference case, particularly over the next 10 years, 

during which natural gas prices remain low. New natural gas-fired plants are also 

much cheaper to build than new renewable or nuclear plants. 

Nuclear generating capacity in the AEO2011 Reference case increases from 101 

gigawatts in 2009 to 111 gigawatts in 2035, with 6.3 gigawatts of new capacity (5 

new plants) and the balance coming from rerated capacity. Electricity generation 

from nuclear power plants grows 10 percent, from 799 billion kilowatthours in 2009 

to 879 billion kilowatthours in 2035, accounting for about 17 percent of total generation in 2035 (compared with 20 percent in 2009). Higher construction costs for new 

nuclear plants in AEO2011, along with lower projected natural gas prices, make 

new nuclear capacity slightly less attractive than was projected in the AEO2010 

Reference case. 

Increased renewable energy consumption in the electric power sector, excluding 

hydropower, accounts for 23 percent of the growth in electricity generation from 

2009 to 2035. Generation from renewable resources grows in response to key Federal tax credits, but it is lower in the AEO2011 Reference case than in the AEO2010 

Reference case because of lower natural gas prices and somewhat higher costs for 

new wind power plants. The drop in renewable generation relative to AEO2010 is 

seen primarily in lower projections for wind and biomass generation. Growth in renewables is also supported by the many State requirements for renewable generation. The share of generation coming from renewable fuels (including conventional 

hydro) grows from 11 percent in 2009 to 14 percent in 2035. In the AEO2011 Reference case, federal tax credits for renewable generation are assumed to expire as 

enacted. Extension of these tax credits could have a large impact on renewable generation. 

ENERGY-RELATED CARBON DIOXIDE EMISSIONS

After falling by 3 percent in 2008 and nearly 7 percent in 2009, largely driven 

by the economic downturn, projected U.S. energy-related CO2 emissions in the 

AEO2011 Reference case do not return to 2005 levels (5,980 million metric tons) 

until 2027, and then rise by an additional 5 percent from 2027 to 2035, reaching 

6,315 million metric tons in 2035 (Figure 13). Energyrelated CO2 emissions grow by 

0.2 percent per year from 2005 to 2035. Emissions per capita fall by an average of 

0.8 percent per year from 2005 to 2035, as growth in demand for electricity and 

transportation fuels is moderated by higher energy prices, efficiency standards, 

State RPS requirements, and Federal CAFE standards. 

Energy-related CO2 emissions reflect the share of fossil fuels in energy as well as 

the mix of fossil fuels consumed, because of their different carbon contents. Given 

the relatively high carbon content of coal and its current use to generate more than 

one-half of the U.S. electricity supply, prospects for CO2 emissions depend in part 

on growth in electricity demand. After a decline from 2007 to 2009, electricity sales 

resume growth in 2012 in the AEO2011 Reference case, but the growth is tempered 

by a variety of regulatory and socioeconomic factors, including appliance and building efficiency standards, higher energy prices, shifts in housing growth, and the continued transition to a more service-oriented economy. With modest electricity demand growth and increased use of renewables for electricity generation influenced 

by RPS laws in many States, electricity-related CO2 emissions grow by 18 percent 

from 2009 to 2035. Growth in CO2 emissions from transportation activity also slows 

in comparison with the recent prerecession experience, as Federal CAFE standards 

increase the efficiency of the vehicle fleet, employment recovers slowly, and higher 

fuel prices moderate growth in travel. 

Taken together, these factors tend to slow the growth in primary energy consumption and CO2 emissions. As a result, energy-related CO2 emissions grow by 16 percent from 2009 to 2035—lower than the 21-percent increase in total energy use. 

Over the same period, the economy becomes less carbon-intensive, as energy-related 

CO2 emissions per dollar of GDP decline by 42 percent. 

CONCLUSION

As I noted at the outset, while EIA does not take policy positions, its data, analyses, and projections are meant to assist policymakers in their energy deliberations. 
14 

In addition to the work on baseline projections that I have reviewed this morning, 

EIA has often responded to requests from this Committee and others for analyses 

of the energy and economic impacts of energy policy proposals. We look forward to 

providing whatever further analytical support that you may require on energy-related topics. 

This concludes my testimony, Mr. Chairman and members of the Committee. I 

would be happy to answer any questions you may have. 

The CHAIRMAN. Thank you very much. 

Ambassador Jones, why don’t you go right ahead? 

STATEMENT OF RICHARD H. JONES, DEPUTY EXECUTIVE DIRECTOR, INTERNATIONAL ENERGY AGENCY, PARIS, FRANCE 

Mr. JONES. Thank you, Mr. Chairman. 

Just for those who came in late, my name is Dick Jones. I have 

been the Deputy Executive Director of the International Energy 

Agency since September 2008. Prior to joining the IEA, I served for 

32 years as a U.S. diplomat, mostly in Middle East oil producers. 

I was also Ambassador to Kazakhstan. 

I am going to speak to you this morning about international energy trends today and over the next 25 years, focusing on 4 key 

topics: first, recent international oil price increases and their impact; second, the IEA role in emergency response to oil supply disruptions; third, recent developments in gas and coal markets; and 

finally, long-term trends in world energy. 

The price of oil has risen more than 25 percent since last September. This week, ICE Brent has been priced above $100 per barrel for the first time since 2008. Some blame this rapid increase on 

speculation. But recent data for the final quarter of 2010 suggest 

that it was good old supply and demand, with fear over political 

unrest in the Middle East thrown in during the past few weeks. 

Will these high prices last? The IEA is skeptical. The situation 

today differs from 2008 in several key respects. OPEC has 3 times 

as much spare capacity now, has already shown a willingness to 

use it. OPEC production is up by 250,000 barrels, or maybe more, 

since November. OECD’s stocks are also higher. Government stocks 

alone equal 60 days. Refining capacity has improved worldwide. 

However, the Egyptian crisis remains the wild card. If international oil prices do stay at today’s levels for the rest of 2011, it 

would bring us very close to an oil burden equal to 5 percent of 

world GDP, a level that is associated with 3 global recessions in 

the past 40 years. Today’s tensions in the Middle East make it appropriate to review IEA’s role in preparing for and coordinating 

international responses to oil supply disruptions. 

To belong to the IEA, each member country must maintain strategic oil stocks of at least 90 days of net imports. These can be government stocks or commercial stocks, but the government must 

have the legal authority to order their release in an emergency. 

Most countries have a mix of public and private stocks, including 

the United States. 

Stocks can either be in the form of crude oil or refined products. 

Again, many countries have both. However, the U.S. Strategic Petroleum Reserve only holds crude oil. Mr. Chairman, I recall that 

the IEA welcomed your bill in the previous Congress that would 

have changed that. 
15 

In a crisis, the IEA quickly consults with affected member countries, analyzes the likely impact, and then recommends a course of 

action to the group, such as the release of specific amounts of oil 

into the international markets. If an action is approved, we then 

work with the members to ensure that they all do their part. This 

includes regular reporting and consultation until there is an assessment that the disruption is over. 

Outreach to important energy consumers outside of the IEA is 

also vital to managing a supply disruption, given the increasing 

weight that they play in world oil markets. In a crisis, we would 

also consult with important producers, including members of 

OPEC. Ten nonmembers took part in our latest emergency response training exercise, including China, India, and Russia. 

Although serious oil crises have been fortunately rare over the 

past 35 years, in my short tenure at the IEA, I have already seen 

occasions when a public reminder that IEA countries hold emergency stocks helped calm jittery markets. 

Besides oil, natural gas is also now garnering intense interest. 

American companies’ success in producing gas from shale deposits 

is encouraging other countries to look for unconventional gas. Activity is growing in Australia, India, and China, but also in Poland 

and elsewhere. 

Now it is going to probably take several years to know individual 

results. However, it is already clear that by causing a glut in supply, shale gas is shifting patterns of trade, having a major impact 

on gas prices around the world. 

LNG slated to come to the United States is now going to Europe 

and Asia instead. In some markets, spot gas prices have been as 

low as a quarter to a third of oil on an energy basis. This is raising 

competition for pipeline gas, giving consumers in Europe a break. 

Gazprom is not very happy about that. 

More gas also means more natural gas liquids, which are becoming an important factor in oil production at the margin. This is one 

reason why we see the oil market as being relatively well supplied 

for 2011. Abundant gas should help keep oil prices down. Eventually, more gas could even help with coal prices. But right now, coal 

prices are climbing due to strong demand in China and India for 

power generation. 

For all these reasons, the IEA is very excited about gas, and we 

will release a special report on the golden age of gas here in Washington in June. 

2011 is also a time of uncertainty for long-term energy analysts. 

What course will the incipient economic revival take? How will 

Government responses shape markets? In the most recent edition 

of our annual World Energy Outlook, WEO for short, we looked at 

what would likely happen to world energy if current policies continue for the next 25 years. The results were disquieting. 

World energy demand would increase by about 50 percent. Fossil 

fuels would continue to dominate. Although oil use would only increase by a quarter, gas use would increase more than half and 

coal use by closer to 60 percent. 

Growth in all forms of energy is expected to be driven by economic expansion in emerging economies, notably China and India. 

But also the Middle East becomes an important consumption cen-
16 

ter. In fact, China, which only recently passed America as the 

world’s largest energy consumer, is expected to double its consumption by 2035. 

Another feature of this WEO scenario is growing market power 

for OPEC countries. Their oil production is set to increase from 40 

percent of world output today to one half over the next 25 years. 

Moreover, more of the world’s oil production will come from difficult and remote places, which means it will cost more in real 

terms. 

In short, this scenario points to a less secure, more costly, and 

more environmentally harmful mix of energy than we have today. 

To avoid such an untenable energy future, WEO 2010 also contained proposals for an alternative path based on three main elements: first, a strong push to improve energy efficiency; second, 

rapid steps to decarbonize electricity production using renewables, 

nuclear power, and carbon capture and storage; and finally, accelerating the development of advanced vehicle technologies. 

In our view, these steps would help improve lives all over the 

world by enhancing all countries’ energy security, insulating economies from the price volatility inherent in fossil fuel energy markets, and reducing the pollution of our land, water, and air from 

the increased production, transport, and use of fossil fuels that 

would otherwise occur. 

I want to stress, however, that our scenario does not foresee a 

rapid decline in use of fossil fuels, let alone an end to it. Rather, 

we advocate shifting our energy supply to a more varied and, thus, 

a more secure, affordable, and cleaner mix of sources. 

Mr. Chairman, I would like to close with a brief personal comment. Having worked in the Middle East and the former Soviet 

Union and seeing the security, economic, and environmental impacts of the current world energy system firsthand, I am convinced 

that we can do better. 

Thank you very much for your attention. 

[The prepared statement of Mr. Jones follows:] 

PREPARED STATEMENT OF RICHARD H. JONES, DEPUTY EXECUTIVE DIRECTOR, 

INTERNATIONAL ENERGY AGENCY, PARIS, FRANCE

Mr. Chairman, Senator Murkowski, and Members of the Committee, I am grateful 

for the opportunity to come before you today to discuss the views of the International Energy Agency (IEA) on the outlook for, and major trends shaping, global 

energy and oil markets today and over the next 25 years. I hope that my testimony 

will help to inform the important work of this committee as it begins crafting policies in the new Congress. 

A retired American diplomat with experience on Middle Eastern and energy 

issues, I have served as Deputy Executive Director of the International Energy 

Agency since September, 2008. The IEA is an intergovernmental organization that 

acts as an advisor to 28 member countries, including the United States, in their effort to ensure reliable, affordable and clean energy for their citizens. Founded during the 1973-74 oil crisis, the central role of the IEA was and remains to co-ordinate 

response measures in times of oil supply emergencies. As energy markets have 

evolved, however, so has the IEA. Its mandate today also incorporates work on market reform, energy-technology collaboration, climate-change policies and outreach to 

the rest of the world, especially major consumers and producers of energy including 

China, India, Russia and OPEC countries. 

I will use my time this morning to focus on several key areas. The first is an assessment of recent oil price movements, and their potential impact on the global 

economy in the near term. I will follow this with a brief description of the IEA’s 

role in responding to disruptions in the supply of oil. I then wish to touch on market 
17 

* Graphic has been retained in committee files. 

movements for other sources of energy, before speaking about the long term outlook 

for global energy. 

RECENT OIL PRICE MOVEMENTS AND THEIR POTENTIAL IMPACT

Since last September, international oil prices have increased by more than 25%, 

and reached $100 a barrel for the first time in more than two years on Monday. 

It has been claimed by some that speculation on the price of oil was behind this 

rapid rise. However, data on supply and demand fundamentals for the fourth quarter of 2010 that has recently become available points more towards a market tightening due to stronger-than-expected demand in key consumers and a concurrent 

drawdown of commercial oil stocks in OECD countries. Reasons for this growth in 

demand include unseasonal weather patterns and better than expected global economic growth. More recently, it appears that prices were boosted by concern in the 

market that the ongoing demonstrations in Egypt may eventually lead to a disruption of oil shipments through that country or spread to important producer countries 

in the region. 

Although some market observers have previously predicted that a combination of 

more and more demand, an impending scarcity of supply, and high revenue goals 

from producers will keep oil prices at around $100 for a sustained period of time 

in 2011, we do not see the current situation as a vindication of that point of view. 

Were prices to remain at this level for a sustained period of time, however, oil 

expenditures would soon rise as a proportion of GDP, creating an ‘oil burden’ that 

could put a drag on the world economy. (This burden is calculated by analysing 

nominal—as opposed to inflation adjusted—oil expenditures, as a percentage of 

nominal GDP.) In fact, in the past, whenever the oil burden has been calculated at 

5% or more, it is usually associated with an impending economic slowdown (see figure).* 

The rise in prices over the last few months brings the oil burden too close to this 

5% mark for comfort. Fortunately, there are elements of stability in the current 

market, which simply weren’t there in 2008. For example, OPEC has much more 

spare capacity than it did in 2008 and OECD member countries have ample stocks 

of oil. There are already signs that some OPEC producers may be feeding extra supply to the market. Refining capacity is also in better shape than it was in 2008. 

While it’s too soon to be confident, such factors could help cap prices in 2011, by 

ensuring there is a sufficient supply of oil. 

IEA’S ROLE IN RESPONDING TO DISRUPTIONS IN THE SUPPLY OF OIL

Here I would like to note that IEA member countries are well equipped to respond 

to a disruption in their oil supply. As a condition of membership in the Agency, each 

of the IEA’s 28 member countries is required to hold strategic oil stocks equivalent 

to 90 days of its net imports. Since being established in the aftermath of the first 

oil crisis, a fundamental part of our work has focused and continues to focus on 

planning for and helping co-ordinate a collective IEA response to major disruptions 

in oil supply. 

Our work in this area now also includes many countries outside the IEA membership, such as China and India and other countries in Asia, which are also boosting 

their oil stocks or taking other measures to enhance their energy security, and have 

sought our advice. Last November we held our fifth major Emergency Response Exercise in Paris with the active participation of 10 non-Member countries. 

Emergency stocks, now growing in more and more countries, are a vital aspect 

of global energy security, as countries are able to add measured amounts of oil to 

the market in the event of large-scale disruptions to supply over an extended period. 

You will recall that this was last done back in 2005, when oil stocks were released 

after Hurricanes Katrina and Rita ripped through the Gulf of Mexico, damaging offshore oil rigs, pipelines and oil refineries. 

MARKET MOVEMENTS FOR OTHER SOURCES OF ENERGY

Moving on from oil, the IEA also follows the international markets for other major 

fossil sources of energy, where recent developments are also worth noting. 

Recent success with US production of significant amounts of ‘unconventional’ 

sources of gas, mainly from shale deposits, has sparked a flurry of interest throughout the world. Australia is leading the charge, but China, India and Indonesia are 

also seriously investigating their own ‘unconventional’ gas sources. In Europe, work 

is proceeding in Poland and elsewhere. 
18 

Based on current rates of consumption, it is estimated that recoverable conventional gas resources will last around 130 years, but this could be doubled with ‘unconventional’ gas. These resources may also exist in countries which lack significant 

reserves of conventional gas; it is little wonder that the current scramble is now 

firmly underway. 

Soaring production of ‘unconventional’ gas in the US has already led to a sharp 

drop in its need to import gas. This slump in US import demand is having a significant impact on global gas markets which have also been hit by the international 

economic crisis. Meanwhile, ample supplies, mostly from Qatar, of Liquefied Natural 

Gas have been arriving in the market. This has led to a ‘gas glut’—and a diversion 

of LNG cargoes to Europe. Spot prices of gas in Europe consequently have fallen, 

putting downward pressure on the price of gas supplied under long-term contracts 

from Russia. 

This is an example of why the IEA strongly urges countries to make their gas 

markets work as efficiently as possible, efficient markets help promote competition 

among suppliers. This is an important step for maintaining affordable prices. 

In contrast to natural gas, coal prices have been rising, largely because of growing 

demand from China and India. Even though both countries are massive coal producers themselves, and are almost self sufficient in coal, their economic growth is 

so rapid that they must increasingly look elsewhere for additional supplies. 

While their imports are small relative to their total coal use, the amount of coal 

they are looking to import is at such a level that it impacts heavily on the global 

coal trade, affecting traded coal prices sharply. Of course, in many parts of the 

world, because of transport costs and quality differences coal is not subject to global 

price pressures, and as such coal remains a competitively priced fuel, able to supply 

power at affordable prices. 

THE LONG-TERM OUTLOOK FOR GLOBAL ENERGY

Last November, the IEA released the 2010 edition of its World Energy Outlook 

(WEO-2010). There are no ’facts’ about the future, but the report does provide helpful insights into the evolution of our global energy system. Perhaps most importantly it highlights that the energy outlook over the next quarter century hinges 

critically on government policy action, and how that action affects technology, the 

price of energy services and end-user behavior. 

Today we will share some of the key results of our Current Polices Scenario, 

which is comparable to the EIA’s Reference Scenario, in which we assume that government policies continue unchanged. World primary energy demand rises by 47% 

between today and 2035 in the Current Policies Scenario. Fossil fuels (oil, coal and 

natural gas) remain the dominant source of energy during that time, even as cleaner energy sources make gradual inroads. Oil demand increases by 24%, natural gas 

by 56% and, owing to relative abundance and low cost, coal demand increases by 

59%. Electricity demand nearly doubles by 2035. 

Emerging economies are responsible for over 90% of the projected growth in primary energy demand. As a result, the OECD share of global energy demand, which 

declined from 61% when the IEA was set-up in 1973 to around 42% today, falls to 

just 35% in 2035. The surge in non-OECD energy consumption is led by brisk 

growth in China, where demand doubles by 2035, dwarfing increases in any other 

country or region. Over the past year we have witnessed an historic re-ordering of 

energy heavyweights, with China surpassing the United States to become the 

world’s top energy consumer. Remarkably, energy use in China was only half that 

of the United States just ten years ago. This underscores that developments on the 

global energy landscape remain highly sensitive to the various factors that drive energy demand in China, including prospects for economic growth, changes in economic structure and developments in energy and environmental policies. 

World oil demand experiences strong growth over the medium-and long-term. 

Based on preliminary data, we estimate that global oil demand in 2010 reached almost 88 million barrels per day (mb/d), the highest level on record. We project a 

rise to 107 mb/d in 2035, with all of the increase coming from non-OECD countries, 

led by China, India and the Middle East. In OECD countries, oil demand is expected 

to fall with improvements in vehicle efficiency; US demand, for example, is projected 

to drop by 1.7 mb/d, or 10%, between today and 2035. 

Oil supplies will come from an increasingly concentrated group of producers that 

hold the majority of remaining low-cost resources. OPEC’s share of global oil supply 

is set to expand from 40% today to 50% in 2035, as oil production in most nonOPEC countries has peaked (e.g. the United States, the North Sea), or will soon 

peak. These trends occur against the backdrop of an industry in flux. Opportunities 

for international oil companies, which have historically dominated oil sector develop-
19 

ment, are diminishing with the growing role of national oil companies and fewer reserves in accessible basins outside OPEC countries. Oil market challenges are further exacerbated by the prospect of accelerating decline rates for individual oilfields, 

particularly in non-OPEC countries; this includes Mexico—a major exporter of crude 

oil to the United States. To meet new demand growth and offset decline in currently 

producing fields, gross capacity more than six times the current capacity of Saudi 

Arabia will have to be installed by 2035. The world’s total endowment of oil is large 

enough to support the projected growth in output, but it will require substantial levels of investment and development of more technically challenging and unconventional resources. 

The outlook for natural gas demand is particularly uncertain. The gas glut I mentioned earlier could have far-reaching consequences for the entire energy sector. It 

is expected to keep pressure on gas exporters to move away from oil-price indexation, particularity in Europe. Lower prices could lead to stronger demand for gas, 

backing out renewables and/or coal in power generation. To inform the policy debate 

on these issues, the IEA is currently preparing a new report on the ‘‘Golden Age 

of Gas’’ which we plan to release here in Washington in early June. The projections 

in our Current Policies Scenario have profound implications for three elements vital 

to sound energy policy: 

• First, energy security. Without policy changes, fossil-fuels continue to dominate 

the energy mix at the expense of the enhanced security that a more diverse set 

of energy sources would provide. Furthermore, international shipments of energy commodities will have to expand substantially to accommodate the growing 

geographic mismatch between demand and production. While energy supplies 

will become more flexible in some respects (e.g. growing trade of liquefied natural gas vs pipelines), expanding international trade unavoidably increases dependence on physically vulnerable transit routes and infrastructure, which 

poses greater risks in tight markets. 

• Second, economic development. In the absence of policy changes, few meaningful alternatives to oil are expected to be available before 2035. As prices steadily 

rise, importing countries without prospects for new development will continue 

to face higher import bills that pose a mounting and potentially unsustainable 

economic burden. 

• Third, environmental protection. Without new initiatives to slow the growth in 

fossil-fuel use, energy-related air pollution will increase. Emissions of carbondioxide alone will jump from 29 Gt in 2008 to 43 Gt in 2035, an increase of 

45%. According to analysis undertaken for the Intergovernmental Panel on Climate Change, this emissions trajectory could lead to a global average temperature increase exceeding six degrees Celsius. 

These all add up to the conclusion that the global energy system, in which all 

countries are interdependent, faces a future that is increasingly untenable. To continue business-as-usual risks heightened insecurity, increasing economic volatility, 

and irreparable harm to the environment. We truly need a transformation in the 

world’s energy system to a more secure, sustainable model, but of course this is 

much easier to say than it is to accomplish. 

The first step is to understand the extent of the necessary transformation. To help 

with this, the World Energy Outlook also presents a ‘‘450 Scenario’’ which is essentially a roadmap of what needs to be done to move to a truly sustainable energy 

future. To be frank, the scale of the challenge is immense. Carbon intensity would 

have to fall at 2.8% per year through 2020, and then by 5.3% per year until 2035. 

Keep in mind the 1973 oil price shock resulted in a 2.5% improvement in carbon 

intensity—in one year only—illustrating the daunting challenge of achieving those 

levels of improvement each and every year. 

The 450 Scenario confirms that promoting energy efficiency remains the quickest, 

most cost-effective approach to achieving our security, economic and environmental 

goals. This is the lowest hanging fruit we must pick first. A fundamental change 

will also be needed in the power and transport sectors. The global share of renewable-based electricity generation, for example, needs to rise to more than 45% by 

2035—two-and-a-half times higher than today. The share of nuclear power in total 

generation needs to increase by about 50% over current levels. By 2035, electricity 

generation from coal plants fitted with carbon capture and storage (CCS) equipment 

exceeds that from coal plants without the technology. In transport, biofuels and advanced vehicles will need to play a much larger role. By 2035, about 70% of global 

passenger-car sales will need to be advanced vehicles (hybrids, plug-in hybrids and 

electric cars). The benefits of this scenario are not only environmental; it would also 

significantly enhance our energy security by spurring greater diversity in the global 
20 

energy mix, and reducing fuel import dependence. These results will in turn have 

important economic benefits for the vast majority of countries. 

Mr. Chairman, Senator Murkowski, and Members of the Committee this completes my testimony. I would be happy to answer any questions you may have. 

The CHAIRMAN. Thank you very much for your testimony. 

Mr. Diwan, go right ahead. 

STATEMENT OF ROGER DIWAN, PARTNER AND HEAD OF 

FINANCIAL ADVISORY, PFC ENERGY 

Mr. DIWAN. Mr. Chairman, Senator Murkowski, and members of 

the committee, I am grateful to have the opportunity to come before you today to discuss PFC Energy, my company’s view on the 

oil markets. 

I hope that my comments today will help you to understand better the present situation in oil markets, and I am going to focus 

my remarks really on 4 points, in particular on the short to medium term, the next 2 years in terms of oil markets. 

First, when we look at the fundamentals, so the supply demand 

situation, and we look at the oil market right now, the way I would 

describe them is they are well supplied. Demand is rising almost 

exclusively in non-OECD markets in the next 2 years, with the 

depths of the demand not very strong because we are really counting on two areas to grow very strongly, which is China and the 

Middle East and a little bit of the rest of Asia. 

OECD countries are not showing strong demand growth. So, and 

this unbalanced demand, if you want, makes global demand not 

particularly strong. I agree with Dr. Newell, it is around 1.5 million barrels per day in the next 2 years. 

On the supply side, global liquid production—and I would like to 

include crude, gas liquids, and biofuels, all the liquids—have shown 

very strong growth in 2010. It is a record year. The question, is it 

a 1-year wonder, or is it telling us something more? I don’t think 

that we will have such a strong growth in 2011 and 2012, but I 

think 2011 actually will show good numbers, probably close to 1 

million barrels per day for a demand of 1.5 million barrels per day. 

The question is why do we believe that? The beginning of an answer seems to be showing that, actually, high oil prices are having 

an impact on supply for the first time in very long time. We have 

had high oil prices now for almost 8 years, and we start to see supply reacting both in crude, but also, obviously, in natural gas and 

creating a lot of liquids and biofuels to compete with crude oil. I 

will speak a little bit more about that. 

Finally, stocks, worldwide stocks actually are at respectable levels, above historical norms, and in certain areas clearly oversupplied. So if you look at oil markets today, you don’t see visible 

tension in oil markets like we saw 2 or 3 years ago. 

The second point is that not only oil markets are well supplied, 

but we have a very large cushion in terms of spare capacity, probably above 5 million barrels per day. In historical terms, this is a 

very high number and in percentage of demand, it is also a high 

number. We don’t believe that that number will shrink dramatically in the next 2 years. Maybe a million barrels per day, maybe 

a little less, maybe a little more. So what we are describing as a 

well-supplied oil market is not changing dramatically in the next 
21 

2 years unless you have an exogenous factor, a crisis removing supply. 

Moreover, when we look at these numbers, we are not factoring 

Iraq and the potential increase in production and capacity in Iraq 

in these numbers. So outside an exogenous crisis, markets are well 

supplied. 

Obviously, we have a crisis right now, but we don’t have any supply disruption. In a way, what we see in Egypt shows the good and 

the bad in the oil market. It reacts very quickly even if there is 

no supply. But at the end of the day, the reaction, I think, is shortlived and not very dramatic. Basically, prices moved by $5, and already we are starting to lose that as no disruption has occurred. 

At PFC, we do not believe that actually there is a strong chance 

of any disruptions. 

Finally, and probably the most difficult part is to understand 

prices and price formation. I have been looking at oil prices now 

for almost 20 years, and they remain a mystery for me. Because 

when you look at the present situation in the oil market in terms 

of supply, demand, stocks, spare capacity, et cetera, oil price is at 

$90. But you know, 10 years ago, with exactly the same numbers, 

oil prices would have been at $15. Five years ago, they would have 

been at $40. Two years ago, they would have been at $100. 

So the exact numbers do not predict an oil price level. They more 

predict a price path, if you want. So how do we account for having 

oil prices at let us say between $70 and $90 this year with this 

type of fundamentals? I think we really need to look at broader 

issues to understand that, and the one I would like really to talk 

to you today, the one which I think is very important is really the 

margin—the price of marginal supplies. 

Basically, at what price or what price you need to bring new barrels of oil into production. So how high the price has to go to push 

for new investment in more marginal areas. Obviously, you are 

going to invest first in your most profitable potential fields, and the 

more marginal ones come as prices rise. 

The marginal fields in the world right now, being in Canada or 

Brazil or some fields in the United States, requires probably north 

of $70 to be break-even prices. So oil prices only have risen to bring 

more supply to market. OK? Is it $70, is it $80 and $90, I don’t 

know, and I am not sure there is a clear number there. But that 

marginal price is important to bring new supply, and we are in the 

zone which is attracting new supply. 

The second important determinant of oil prices for me is really 

the internal needs of producing countries. It is what the Gulf countries in particular and the OPEC producer require internally to 

balance their budget at the end of the day. It is pretty much their 

only resources. 

When you look at the countries in general and you look at their 

balance of payment, they all have budgeted around $70, $80 oil. So, 

in a way, they believe that is the way the market is going to be 

there, and they are constraining supply to stay close to these 

prices. 

In my view, they are fairly reactive to the marginal price, rather 

than setting it. So, in a way, the OPEC tolerance for high prices 
22 

increase as prices increase rather than as they push prices higher—as the market pushes prices higher, their tolerance increases. 

The third element, which is very important and I came here a 

couple of years ago to discuss, really is the financialization of oil. 

Oil has become an investable asset, like equity, fixed income, gold, 

dollar, or other commodities. The flow of money actually is quite 

important in determining how in the short term price move and determining that price path, and that is quite important. 

We have seen some important changes in the last few months, 

I think, and we can talk more about that in the Q&A. I feel there 

is less ability to increase prices very quickly through just money 

flows. 

I will stop here my comments and probably will come back to 

more during the Q&A, and thank you for giving me the opportunity 

to come and talk about that in front of you. 

[The prepared statement of Mr. Diwan follows:] 

PREPARED STATEMENT OF ROGER DIWAN, PARTNER AND HEAD, FINANCIAL ADVISORY, PFC ENERGY

OIL MARKET OUTLOOK FOR 2011-2012

More than ever, the world is seeing a two-speed economy. Nearly all of the world 

economy is expanding again, but the divergence between recovery in the developed 

world and strong growth in the emerging markets is becoming more pronounced. In 

both Europe and the United States the medium-term outlook remains unexciting— 

the financial crisis that caused the recession is over, but its consequences will persist for years to come. In contrast, emerging markets are contending with the problems of excessively rapid growth—especially as it stokes inflation exacerbated by 

loose monetary policy. Despite concerns over inflation and the potential for monetary tightening in key emerging markets like China, the period through 2012 will 

likely see continued oil demand support that will far surpass any potential OECD 

demand increase. 

Although slowing from the 2.3 mmb/d global oil demand growth realized in 2010, 

PFC Energy forecasts demand to increase around 1.4 mmb/d in both 2011 and 2012. 

Global consumption over this period will be driven entirely by the emerging market 

economies, as economic stabilization also leads to marginal net changes in advanced 

economies’ oil demand. Gains in non-OPEC supplies (including OPEC NGLs) and 

further ramping up of new Iraqi production will be sufficient to meet the bulk of 

this incremental demand. Although there is some projected shortfall in new supplies’ ability to completely satisfy demand requirements, the first half of the year 

will still be characterized by a relative over-supply in physical markets. But the 

tightening of the market by the second half of the year will prove supportive of 

higher prices, reflected in our upward revision in our price forecast for WTI to a 

2011 average of $90.75/b and $96.25/b in 2012, with average quarterly prices reaching the $100/b mark toward the end of this two-year period. 

The growing turmoil in the Middle East is providing a bullish factor for oil markets right now. The instability in Egypt has pushed prices up, but PFC Energy 

views the potential impact on oil supplies as virtually nil, and that includes the 

Suez Canal. Protests have spread across much of North Africa, as well as Yemen, 

but the major oil producing countries of the Gulf states have seen little in the way 

of unrest.. Since Tunisia’s Bin Ali was pushed from office, several governments have 

taken measures to promptly address the food price issue and have re-instated food 

subsidies. Bolstered by strong balance sheets routinely leveraged to lower political 

unrest, and still enjoying the support of many of its citizens, the Gulf countries will 

likely have no difficulty keeping regimes, oil supply, and still ample spare capacity 

intact. And even if in more oil producing North African states the protesters 

achieved a Tunisian style victory, a lack of cohesiveness regarding the next step 

would be unlikely to dislodge the state apparatus, particularly that associated with 

oil production and marketing, or in the case of Egypt, disruption in Suez shipments. 

US ECONOMY SLOWLY GETTING BACK ON ITS FEET

The United States has shrugged off fears of a double-dip recession—GDP growth 

has more or less returned to its pre-recession trend rate of 2.5%—but without recov-
23 

ering to its full potential output. Failure to do that means the economy is producing 

less than it could, and employing less labor as a result. Reengaging these idled resources is the most important policy challenge for the US government, but there 

may be little more that can be done while household and bank finances remain encumbered with debt. This suggests that high levels of unemployment are likely to 

persist for years. 

Even so, there now appears to be a reliable base of private sector support for sustainable growth at these modest employment and capacity utilization levels. For 

nearly two years government transfers staved off a decline in real disposable income, but over the past two quarters underlying real income growth has risen back 

to a 2-2.5% range. At the same time, the personal savings rate has stabilized in a 

range of 5-6% of disposable income, substantially higher than the preceding decade 

but still below the longer-term historical average of 8-10%. Taken together, these 

data point to a sustainable 2-2.5% growth rate in personal consumption—and given 

the 70% GDP share of personal consumption that underpins PFC Energy’s expectation that overall growth will be in the same range. 

Other sources of growth are unlikely to add or subtract much to this underlying 

rate. Business investment has made a strong recovery from the depths of the recession, but appears to have stabilized at a modest 2-3% growth rate. Although capacity utilization rates had risen sharply from record lows, they have lately shown 

signs of stalling out at a level that still leaves significant slack in the economy and 

little incentive for large-scale new investment. Spending by the public sector will almost certainly decline this year, especially at the state and local level. As for trade, 

despite an encouraging rise in exports late last year it is still more likely that the 

deficit will widen than expand, making a net negative contribution to growth. 

Given these considerations, PFC Energy has revised upward its North American 

oil demand growth forecast for 2011 and 2012. After having grown by over 550 mb/ 

d last year (essentially replacing 25% of the cumulative demand lost in 2008-09), 

we are confident that a sustained US recovery would add at least another 175 mb/ 

d to North American demand levels this year (24.1 mmb/d versus 23.9 mmb/d in 

2010). It is our perspective that structural changes to underlying US fuel consumption patterns have not been dramatically affected by higher oil prices in the leadup to the Great Recession, and that unrealized demand for motor fuels remains. Income, more than price, seems to be the driving factor not only for US motorists, but 

for US consumers writ large. 

Indeed, middle distillate demand (i.e., the primary fuels used in commerce and 

air travel) was far more heavily impacted than gasoline, falling at an average rate 

of 7% per year in 2008-09 versus gasoline’s -1.6%. It is notable that gasoline’s 

postrecession recovery has also been less pronounced than that of middle distillates, 

underscoring the relative paucity of non-oil personal transportation alternatives in 

the United States as well as motorists’ preference for gasoline. The contraction in 

2008-09 highlighted the sensitivity of discretionary automotive use, not automotive 

use in general (or even a sweeping change in preference in favor of smaller cars). 

But whereas gasoline demand increased by 1% last year, diesel and jet fuel consumption surged by 3.5%—reflecting improved industrial activity and retail sales. 

Similar to the situation facing the general economy, middle distillates still have a 

long way to go in order to make up for the volumes of demand lost during the recession, and it is unlikely in our view that they will be able to do so by the end of 

2012. 

In addition to the demand recovery gap from middle distillates, other parts of the 

barrel are also unlikely to return to pre-recession levels over the next two years. 

The product categories most likely to be affected are at the heavier end of the spectrum, fuel oil and ‘‘other oils’’ (mainly asphalt). While the structural decline in the 

former has been common knowledge for years, weakness in asphalt is becoming 

more pronounced due to public sector budgetary constraints for transportation investment. This will likely become more pronounced this year as many US states 

struggle to fill widening budget deficits. 

For North America as a whole, stabilized economic conditions mean an improvement in cross-border trade and economic growth. Other localized factors do impact 

our forecast (for instance, the much more fundamentally sound nature of the Canadian economy compared to Mexico’s), but for the region as a whole we see demand 

rising by 225 mb/d in 2011 and 200 mb/d in 2012 (up 70 mb/d and 40 mb/d respectively since our December Global Oil Markets Report). 

EUROPE: PERIPHERY WEIGHS DOWN THE CORE

In contrast to the United States, Europe faces a serious threat to growth from the 

spreading Eurozone debt crisis—which has forced governments to accelerate fiscal 
24 

adjustment even at the risk of undermining a still-fragile recovery. Portugal seems 

almost certain to join Greece and Ireland under an IMF emergency program with 

Spain likely to follow. Promises of austerity and a more buoyant European economy 

have done little to ease the pressure on the weakest governments. Until markets 

believe that their finances are on a sustainable path, they will be unable to raise 

funding without public assistance. 

The result is a clouded European outlook. Most European economies returned to 

growth in 2010, but the peripheral countries have either remained in recession or 

look poised to fall back into it. Adjustment policies in these countries aim to slash 

public spending and promote price deflation, but in weak economic conditions this 

is a guarantee of recession—and a further deterioration in public finances. The combination of state spending cuts and falling wages is already sparking political opposition, and this is certain to grow stronger. Problems in the periphery will hamper 

growth elsewhere, both through reduced trade and renewed financial sector difficulties. This suggests a weak growth forecast even if the Eurozone manages to muddle 

through 2011, but a slide back into recession if the debt crisis spreads beyond Spain. 

A Europe splintered along structural economic fault lines is reflected in oil demand. Whereas the industrial powerhouse of Europe—Germany—continues to truck 

along (pulling Poland and other smaller Central European countries along with it), 

other EU member states have simply stagnated and the socalled ‘‘peripheral countries’’ continue to contract. 

Accordingly, PFC Energy expects the contraction in total OECD European oil 

product demand to bottom out in the second quarter of 2011 before rising to post 

yearly gains in 2012 (posting growth of -20 mb/d and +105 mb/d in 2011 and 2012, 

respectively). In contrast to North America, risks to this forecast are more to the 

downside, especially if the Euro zone financial crisis spreads to Italy and Spain. 

ASIAN DEMAND LEADS THE WAY

A long restocking cycle and easy, if not stimulative, monetary and fiscal policies 

underpinned a generally strong Asian economic performance and increased oil demand throughout 2010. But while China has embarked upon an ambitious attempt 

to re-orient its economy toward consumption-led growth, the majority of Southeast 

Asian economies have simply increased their economic export sector dependence. In 

2011 this business-as-usual approach will result in lower growth for these countries. 

Aside from OECD goods import demand showing little upside for additional expansion and commodities inflation on the rise again, China’s own economic transition 

(which encompasses reduction of both exports and imports) bodes ill for other Asian 

intermediate and capital goods. 

While Japan and South Korea will need to continue emphasizing high-end niche 

markets, Southeast Asia must find avenues for effectively competing or partnering 

with China as well as stimulating domestic demand. But these are long-term processes and even if undertaken in 2011 all signs point to moderating economic growth. 

Even China will see somewhat slower growth, despite its large domestic consumption potential and strong industrial support from import substitution. After the 

country’s GDP expanded by just over 10% last year, slowing growth in industrial 

production, lending, government spending and net exports is likely to reduce growth 

this year to about 9%. One of the key factors for these decelerations is increasingly 

difficult year-on-year comparisons: a weaker first half 2011 for example will find it 

hard to show gains against a strong 2010 base. 

Aside from such accounting, inflationary pressures, particularly in rising food and 

housing prices, may also limit growth. Much of the year-to-year inflation, which has 

now reached 5%, has been a function of declining prices in the prior year period. 

But even as this base effect recedes, inflation is expected to exceed Beijing’s new 

2011 inflation target of 4% and likely stabilize at slightly under 5%. 

The soon-to-be ratified Five-Year Plan (covering the period 2011-2015) goes beyond the emphasis on domestic consumption to an emphasis on several strategic industries, with energy efficiency and alternative energy sources an overriding concern—including an aim to limit the increase of oil consumption. While much of the 

groundwork for implementing these measures will be done during 2011-2012, no significant impacts are expected to appear before later in the five year period. Growth 

in China’s oil consumption is expected to slow in 2011 to 490 mb/d (compared to 

600 mb/d in 2010) and register 540 mb/d in 2012, but these trends reflect primarily 

the general economic conditions (and accounting effects), rather than any significant 

impact from initial stages of re-structuring along the guidelines laid out in the FiveYear Plan. 

As with the global economy more generally, the most pronounced economic and 

oil demand weakness in Asia lies within the advanced economies. But the largest 
25 

factors affecting the outlook for demand in the OECD Pacific region are more 

strongly influenced by developments in China than domestic economic conditions. 

These countries managed to keep demand flat in 2010 due to strong Chinese demand for Japanese and Korean goods in wake of the global restocking cycle as well 

as due to capricious weather. With this support fading in 2011 and a large cut in 

naphtha demand looming (as their petrochemical exports to China are crowded out 

by Chinese domestic production), OECD Pacific oil demand will continue to structurally decline through 2012, registering total losses of 190 mb/d during the forecast 

period. 

Large domestic consumption capacity has also been a driving force for Indian oil 

demand, which is expected to expand by a moderate 95 mb/d and 113 mb/d in 2011- 

2012. Substitution of liquid fuels in power generation and fertilizer feedstocks by 

natural gas, as well as likely monetary tightening will prevent greater demand 

growth. Total Asian oil demand growth to slow to slightly around 500 mb/d and 550 

mb/d in 2011 and 2012, markedly down from the 820 mb/d growth seen in 2010. 

CHALLENGES FOR MIDDLE EAST ENERGY

The Middle East is largely on a strong growth path that should weather even 

stronger than expected economic headwinds. The most salient risks to growth primarily reflect the problems of success. The primary challenges include managing increased power demand, containing inflationary pressures and ensuring sufficient job 

growth for locals, and are largely manageable in the short term. Power demand 

issues were marginally better this past summer, and a strong focus on investment 

in power generation should continue to improve this issue. Chronic unemployment 

in the region is an issue that has been present for years, but a prior baby boom 

will cause these issues to increase in the coming years as the number of new entrants to the labor force peak. 

Within the context of those challenges, 2011 demand growth in the Middle East 

is forecast to be 320 mb/d. This is slightly lower than last year’s 382 mb/d pace, 

but is not reflective of a slowdown in the region. Instead it reflects primarily a deceleration of the increase in demand by Saudi Arabia after changing its policies in 

2008 to emphasize fuel oil (and subsequently, crude) burning for power generation. 

While the effects of the policy change are largely complete, continued increased demand to meet electricity demands will be the primary driver in Saudi Arabia’s 190 

mb/d growth this year. It is anticipated that this summer crude demand for power 

generation will average 886 mb/d and could reach peaks as high as 1,150 mb/d in 

the high heat of the summer. 

This power demand will continue to grow strongly as construction projects are 

still in development throughout the region, with much of the construction activity 

centered in Saudi Arabia and Abu Dhabi—the new home for many of the construction cranes that were previously in Dubai. While most of Dubai’s construction was 

underwritten by foreign debt, the construction boom now underway is largely financed or underwritten by foreign investors, and will allow continued growth in 

gasoil and other construction related fuels. The large financial reserves coupled with 

scant foreign debt for the major oil producers provides the region significant buffers 

from any further shocks to the global system. Consumer demand is also increasing 

as the recovery in car sales for the region is expected to continue, and with it gasoline demand, expected to rise 45 mb/d this year. Transportation demand is also expanding from the increased use of aircraft, a trend occurring globally during this 

recovery, but is even more of a factor for the Middle East as its flight capacity expands and it becomes an increasingly important hub for travel to Asia. This will 

help boost kerojet demand by an estimated 30 mb/d in 2011. 

IRAN’S SUBSIDY REFORM

Iran is a lone growth exception for the region, and it is expected to show another 

year of net demand decline in 2011. These declines are attributed to the strictures 

of an increasingly difficult multi-lateral sanctions program as well as the four-fold 

price increases introduced last December as part of a comprehensive subsidy restructuring. Demand in 2011 is forecast to decline 31 mb/d, with gasoline declining 

an estimated 30 mb/d as Iranians seek out alternative transportation. The alternatives include buses, which have already experienced increases in demand in the 

days after the price increases were announced. This factor that provides one of the 

few bright spots for Iranian demand, with diesel fuel expected to rise 15 mb/d on 

this increased public transportation use. 

Given the relatively staid reception these price increases have had on the population (albeit under heavy police and Basij presence to shut down protests before 

they started) it could be that they will be absorbed with relatively little change in 
26 

the actual appetite for the fuels. However, the lack of any consumer outrage can 

also be attributed to the initial offsetting subsidy payment of $120 (representing 

three months of accrued subsidy payments—in the future these payments will continue to be $40 per month). 

The real effect of this change could be felt in the broader economy as the increased fuel prices translate into decreased consumer discretionary spending, as 

well as increased other costs across the board. President Mahmoud Ahmadinejad’s 

plan seeks to avoid this particular problem with limited allowable price increases 

for businesses most affected by the fuel price increases, which in turn could shrink 

profit margins in other sectors and lead to lower business confidence. In the future, 

if the increased prices are believed to cause long-term economic problems, Tehran’s 

response is likely to raise direct subsidy payments rather than roll back pump 

prices. This is in keeping with Ahmadinejad’s plan to use the subsidy reform as a 

platform to strengthen his position within his political base, the rural poor, and a 

section of the population that saw limited benefits from the old subsidy program due 

to their low fuel consumption levels. 

LATIN AMERICA: AN ECONOMIC RENAISSANCE?

Latin American oil demand in 2010 recovered with a near 300 mb/d increase, a 

pace expected to slow to 230 mb/d in 2011. The deceleration is affected by base effects and changes in the macroeconomic climate, but 2010 was also punctuated by 

a number of significant weather events that increased demand. While the impact 

of such weather events is expected to be diminished this year, current drought conditions in Argentina are likely to negatively affect agriculture output, and by extension diesel demand growth. 

Brazil continues to be the demand linchpin for the region, accounting for 163 mb/ 

d of oil demand growth in 2010, a number that will slow to 120 mb/d in 2011. This 

oil demand growth was supported not just by an expanding economy and increased 

spending, but also a poor sugarcane harvest that pushed motorists to fuel up with 

gasoline C (a gasoline mix with a low, fixed level of ethanol) over hydrous ethanol 

(a straight ethanol product suitable for use in most Brazilians flex-fuel vehicles). A 

near record planting season in the fourth quarter should increase supplies of the 

fuel by the second half of the year, reducing the demand growth from gasoline, barring poor weather. 

As the region has been exposed and profited from the recovery of commodity 

prices, demand support across the barrel has remained strong. Car sales have recovered from the low levels during the recession, fueled in part by tax incentives. But, 

at least in Brazil’s case, the elimination of such incentives caused a downturn in 

sales for only a short period of time before recovering again. It is expected that even 

without such incentives Brazil car sales (now fourth largest in the world) will likely 

reach a new record in 2011. 

SUPPLY GROWTH LARGELY SATISFIES DEMAND

Although oil prices are moving to higher trading ranges on demand and general 

economic optimism, current liquids supply trends suggest that expected demand 

growth in 2011 and 2012 can easily be met from gains in non-OPEC production and 

OPEC gas liquids with only marginal demands on the still substantial OPEC spare 

capacity. Gains in non-OPEC liquids in 2010 are set to come in around 1.0 mmb/ 

d although these increases will likely slow in 2011 and 2012. OPEC gas liquids will 

continue growing in both forecast years as domestic and export oriented gas projects 

reach full operation. And OPEC effective spare crude capacity is currently estimated 

at 5.7 mmb/d, providing the ability to cover any disappointments in non-OPEC performance—or unforeseen supply disruptions—throughout the forecast period. 

PFC Energy forecasts 2011 non-OPEC supplies (including not only crude, but also 

gas liquids and biofuels) will increase by around 540 mb/d—a bit more bullish than 

prior estimates. The crude portion of this gain is 210 mb/d, somewhat lower than 

2010’s 640 mb/d increase. Most of this stems from the expectation that US crude 

output will decline rather than increase in 2011 as output drops in the Gulf of Mexico owing both to a lack of additional planned new projects as well as the drilling 

moratorium. Further adding to the slowdown will be smaller gains in Russia and 

China as new project start-ups are fewer in number exerting less of an upward pull. 

The year 2012 is forecasted to show only a 60 mb/d gain in total non-OPEC production. The key reason for the drop is a 230 mb/d decrease in crude supplies as 

ongoing depletion in most countries will offset gains in those few that are adding 

to production. Key oil plays showing increases over the next two years include Canada’s oil sands, Brazil’s deepwater, Colombia’s Llanos basin, Ghana (the Jubilee 

field that started mid December) and Oman (Oxy’s Mukhaizna project). But these 
27 

gains combined cannot offset declines in the United States, North Sea and Mexico 

as well as numerous smaller producers in Latin America, MENA and the Far East. 

The other two elements of non-OPEC supply, gas liquids and biofuels, continue 

to show gains in both forecast years. Gas liquids (condensates and NGLs) should 

move up by around 175 mb/d in 2011 and 125 mb/d in 2012. They are increasing 

simply from the many countries pursuing gas projects to meet domestic energy demand. But the largest increase in 2010 and expected for 2011 is the United States. 

Both from increases in natural gas output as shale gas development continues 

(seemingly regardless of the weak price environment) and the incentive to look for 

areas with liquids rich gas (given strong oil prices that push up liquids values well 

above natural gas values) the country should see about a 100 mb/d increase in 2010 

followed by 40-50 mb/d in 2011 and stabilizing in later years. 

Biofuels will add another 150-160 mb/d per year in the forecast years. As in the 

past, the two main sources of biofuels output growth will be the United States and 

Brazil. After seeing an increase in ethanol production estimated at 160 mb/d in 2010 

(a good 70% of 2010’s global increase in biofuels output), gains in the United States 

will moderate to the 40 mb/d range unless a blend rate above the current 10% is 

approved. Current restrictions approving a higher ethanol content for late model 

cars only makes it infeasible to implement at the retail level. Brazil should see 

steady annual growth of 40-50 mb/d as well. Other areas of the world are expected 

to add 40-50 mb/d per year, mainly biodiesel in Europe and Southeast Asia. However, with recent concerns over renewed food price inflation and intermittent support from governments, these assumed gains are far from locked in and could ultimately come in under our current estimate. 

OPEC non-quota-constrained gas liquids are making an impact on global balances, although somewhat haltingly due to construction delays and lengthy commissioning times. After adding an estimated 415 mb/d to supplies in 2010, OPEC gas 

liquids should see additional growth averaging about 420 mb/d in both 2011 and 

2012. Qatar is the key contributor, stemming from expansion of its LNG industry 

that is nearing completion. As the trains reach full operational output in 2011 gas 

liquids will continue to grow. Another important contributor will be start-up in 2011 

of Shell’s Pearl GTL project whose first phase will throw off another 70 mb/d of gas 

liquids. Saudi Arabia and the UAE are the other main contributors as both countries pursue oil and gas projects that will lead to increases in condensates and 

NGLs. 

At one time, Iran was expected to see equal if not larger gains in gas liquids output, but delays to the country’s South Pars project schedule stemming from ongoing 

sanctions suggest minor gains over the next couple of years. This compares to the 

steady increases seen over the past decade, when the first of the now completed first 

eight phases of South Pars went into service. Kuwait is also being held back from 

further development of its sour and high pressure gas reserves until agreements are 

reached with foreign companies that can assist with the technical challenges of such 

development. 

OPEC: BOTH THE CALL AND ACTUAL OUTPUT TO REMAIN STEADY

This expansion of global liquids outside of quota constrained OPEC crude reached 

1.4 mmb/d in 2010 covering almost 60% of the robust demand growth (+2.3 mmb/ 

d). Similarly, non-OPEC liquids plus OPEC NGLs should cover about 1.0 mmb/d of 

2011’s 1.4 mmb/d demand increment, or about 70% of expected demand growth. The 

call on OPEC should begin to rise more significantly in 2012, when projected gains 

in total non-OPEC liquids should net only 0.5 mmb/d, or roughly 35% of incremental 

demand. Based on this supply and demand path, 2012 could see the first major increase in the call on OPEC crude totaling almost 1.0 mmb/d. after a relatively minor 

0.5 mmb/d increase in 2011. 

This does not however suggest a material tightening of supply conditions is in the 

offing. Capacity expansions in Saudi Arabia as well as maintained production restraint throughout the Gulf Arab and North African member states leave effective 

spare capacity at 5.7 mmb/d. Both absolute and relative spare capacity are at levels 

not seen since the 1990s—an era of very weak prices. But a combination of operational flexibility and strategic considerations—both at the commercial strategic 

level of the operating national oil companies as well as in the political perspectives 

of the member states—means that such high levels of spare capacity will not play 

the same bearish role it has in the past. 

However it is not only quota members who are increasing capacity, but Iraq as 

well. PFC Energy’s forecast sees Iraqi production rising 380 mb/d by year end 2011 

and a similar amount by year end 2012. And progress is being made. ENI announced in early December that it was now in the cost recovery and fee payment 
28 

phase with the Zubair field, triggered when production hit 10% above the initial output rate of 183 mb/d. And BP announced this week that the 10% threshold on the 

1.077 mmb/d Rumaila field has been met as well. Assuming that existing export infrastructure is improved, these projected additional incremental volumes coming in 

2011 should be able to reach market. In addition to increases in Iraq southern volumes, we are still holding to our assumption that Kurdistan exports will re-start 

and average about 70 mb/d for the year. For 2011, Iraq’s annual average output 

should move up by about 400 mb/d, with a similar increment expected in 2012. 

STOCKS AND BALANCES SHOW TIGHTENING

Between non-OPEC and OPEC the world is well supplied with liquids. Even if 

2011 or 2012 demand proves more robust than thought, supplies should readily be 

available to cover increased crude needs at OPEC’s discretion depending on price 

and actual global stock changes. The unexpectedly sharp increase in 2010 oil demand—and third quarter draws from total commercial stocks—has lessened PFC 

Energy’s concerns over impending stock builds in the first half of 2011. This is reflected in a substantial upward revision to our 1Q11 price outlook ($92/b for WTI). 

However, the early part of this year nevertheless still features not insignificant 

builds of nearly 1.0 mmb/d. A near-term continuation of oversupply conditions (albeit greatly reduced from our previous estimates) suggest prices may still weaken 

on a fundamentals basis over the second quarter ($86/b). From then onward our 

global supply/demand balance points to continual price increases through the end 

of the forecast period, eventually averaging $100/b in 4Q12. 

Despite the projected rise in prices, PFC Energy does not see OPEC substantially 

raising production in the next several months. Even with concerns of long term demand destruction and worries of another price spike potentially derailing the global 

economic recovery, the results of rising prices so far have not shown strong oil prices 

to be particularly pernicious. Furthermore, the global overhang of oil products has 

only just begun to recede, making risks to the downside from adverse change in the 

fundamentals less of a threat. Saudi Oil Minister Ali Naimi’s characterization of 

$90/b as the new fair oil price was less a statement on the Kingdom’s targeting of 

such a price level, but rather that current prices were achieved primarily as a result 

of a healthy return of demand. The pull of consumption on prices therefore also 

guards against threats that rising oil prices could de-rail the economy. OPEC is likely comforted in this assessment by the judgment that rising nonenergy commodity 

prices produced little noticeable drag on economic performance in 2010. While general inflationary troubles could translate into economic and political problems over 

time, for the moment OPEC’s concerns may turn to favoring further nominal price 

increases, even if only an attempt to preserve the purchasing power of the 

dollardenominated barrel. And perhaps most fundamentally of all, the cartel may 

be willing to resume its prior stance of taking pro-active steps to guard against 

downside price risks and address upside demand surprises reactively—a position 

that helped generate the historic boom in oil prices from 2004. 

[All tables and graphs have been retained in committee files.] 

The CHAIRMAN. Thank you very much for your testimony. 

Mr. Burkhard, go right ahead. 

STATEMENT OF JAMES BURKHARD, MANAGING DIRECTOR, 

IHS CAMBRIDGE ENERGY RESEARCH ASSOCIATES, CAMBRIDGE, MA 

Mr. BURKHARD. Thank you, Mr. Chairman, other members of the 

committee. We really appreciate the opportunity to share some 

thoughts with you about energy and oil in particular. 

Oil prices and gasoline prices are, as we all know, very visible. 

Millions of people see them every day when they fill up at the 

pump. It was just 2 1⁄2 years ago when we saw oil above $140, and 

then it was just 2 years ago when oil prices sunk close to $30 a 

barrel. These swings have had a great impact on Americans and 

the economy. 

Oil prices are on the rise again, and it is raising questions yet 

again about the impact on the economy and why are we seeing 
29 

these kind of prices? The turmoil in Egypt raises the question 

about geopolitical stability of world oil supplies. 

Now what is happening in Egypt is part of a broader story, something we would refer to as a global redesign. A global redesign is 

what we describe as a period of change, deep change of the formal 

and informal mechanisms that shape and manage international relations. 

There is no blueprint for this global redesign, but it is clear that 

the pace, the distribution of economic growth is affecting the global 

balance of economic, political, and military power all at a time 

when the world faces extraordinary questions about macroeconomic 

management, security, and energy. Oil demand, supply, and price 

are key variables that will shape this redesign, and energy overall 

will play a significant element. 

The political upheaval in Egypt has provoked anxiety in oil markets. The oil market is always fearful when there is a threat to big 

oil exporters in North Africa and even bigger ones clustered in the 

Persian Gulf. Egypt is not a major exporter. It is, in fact, a slight 

importer. But about 2 to 4 percent of global supplies does transit 

Egypt, and what happens in Egypt obviously has an impact beyond 

its borders in the Middle East. 

So oil prices are considerably higher. But looking back at what 

has happened over the last decade, it goes beyond just concerns 

about stability in the Middle East. There are many reasons that explain what has happened. But perhaps the most important, the 

core of what has happened is the stunning increase in income and 

GDP in China, India, and other emerging markets. 

We all know this, but looking at some of these statistics really 

just shows how stunning this is. In the last decade, GDP per capita 

in China is up 235 percent, 235 percent. In India, it is up 176 percent. That is from 2000 to 2010. Stunning. 

Rarely, if ever, have we seen living standards for so many rise 

so quickly. This is due, to some extent, to the breath-taking spread 

and success of market-based decisionmaking in nearly every corner 

of the world. 

Now, some of the growth of the past decade was based on misplaced exuberance, and we still are grappling with that painful 

aftermath. But the broad trends of rising global prosperity are intact. Just look at how successful the economies of India and China 

have been since 2008. 

Over the last decade, demand in emerging markets has increased 

about 12.2 million barrels per day. That is roughly equivalent to 

the entire production capacity of Saudi Arabia. That is what has 

happened in emerging markets. Again, at the core of this, the higher incomes, aspirations for higher living standards. There are other 

factors as well that have played into this. Roger went into a few, 

and I will amplify some of those. 

One on the supply side, the law of long lead times. It can take 

anywhere from a couple of years to more than a decade to bring 

on a new oil field. You don’t develop and bring on a new field overnight just because the price went up. 

Also, high industry costs. This was perhaps arguably the second 

most important trend in the oil markets over the past decade. 

From 2005 to 2008, according to the IHS CERA Upstream Capital 
30 

Cost Index, which is sort of a consumer price index for the oil industry, in that short time period, 2005 to 2008, the cost of developing a field doubled on average around the world. So, in other 

words, a company had to pay double in 2008 in order to develop 

the same barrel of oil that compared to 2005 prices. 

Other factors as well, oil has become the new gold. It is a financial asset in which investors take positions based on their expectations of the value of the dollar, inflation, and global oil demand and 

supply. The role of financial players has gotten a lot of interest 

over the years, especially in 2008, and they can accentuate a given 

price trend. But the primary reasons of price trends are rooted in 

the fundamentals of supply, demand, industry costs, and geopolitics. 

So what does this all mean for today and the future? One, it is 

a reminder that the oil market is a reflection of the world. That 

means prices go up and down in response to what is happening 

around the world. But perhaps more importantly, what does this 

mean for the future? 

In 2010, there is about 1 billion members of what you could call 

the global middle class. That is people who live in countries with 

per capita GDP of $10,000 or more. About a billion. By 2030, so in 

20 years, that will have grown to about 2.5 to 3.5 billion people in 

the global middle class. So a billion today, over the next 20 years, 

2.5 to 3.5 billion people in countries with per capita income of 

$10,000 or more. That means more oil, more oil demand. 

There is a strong case for prices, for oil prices to be above levels 

we have seen for most of the past 20 to 30 years. This will reflect 

continued prosperity around the world. It will foster innovation and 

efficiency. Does it mean prices are inevitably going to continue to 

rise and rise? No. There are some factors that will offset that. 

One is the view that has been voiced already is peak demand in 

the OECD—Europe, North America, South Korea, Japan, Australia. We do believe that oil demand in the OECD peaked in 2005, 

petroleum-based oil demand, and it will not exceed that level again. 

Fuel economy, biofuel mandates, demographics, the global health 

boom has turned into a global aging boom. That tends to lower oil 

consumption. 

All of this figures into the changing balance of power, this global 

redesign. There is no blueprint for how this is going to unfold, and 

there will be, of course, times of turmoil, which we are seeing today 

unfold in Egypt. To conclude, the energy prices, and especially oil, 

will continue to reflect the shifting fortunes of the global economy 

and geopolitics. 

Thank you. 

[The prepared statement of Mr. Burkhard follows:] 

PREPARED STATEMENT OF JAMES BURKHARD, MANAGING DIRECTOR, IHS CAMBRIDGE

ENERGY RESEARCH ASSOCIATES

It is an honor to speak on the energy and oil market outlook before the US Senate 

Committee on Energy and Natural Resources of the 112th Congress. It is very timely for the Committee to assess the current situation. I hope to provide a framework 

that will help to understand what we are seeing in world oil markets—and why. 

It was just two and a half years ago that oil surged to over $140 a barrel and just 

two years ago that it sank close to $30 a barrel. These swings had great impact on 

the economy and on the American people. Prices that were in the high $80s and 

low $90s have surged once again on the upheaval in Egypt. Once more there are 
31 

1See the Multiclient Study IHS CERA Energy Scenarios. 

questions about the impact of oil on the overall economy—and why we are seeing 

these kind of prices. The turmoil in Egypt has raised anew the concerns about the 

geopolitical stability of world oil supplies. Egypt is an important transit point for 

delivering Middle East oil to the global market via the Suez Canal and the Sumed 

pipeline. In recent years, combined oil flows from the canal and the pipeline have 

ranged from 1.7 million barrels per day (mbd) to 3.3 mbd. The high end of this 

range is equivalent to about 3.8 percent of world oil production. 

The pace and distribution of economic growth is affecting the global balance of 

economic, political, and military power—all at a time when the world faces extraordinary questions about macroeconomic management, security, energy, and the environment. The world is in the midst of what we refer to as a ‘‘Global Redesign’’— 

a period of change for the formal and informal mechanisms that shape and manage 

international relations.1 Oil demand, supply, and price are key variables that will 

shape this redesign—as will energy overall. 

Oil prices are in a range considerably higher than in the past. There are many 

reasons, but the most important reason of all is the change in the world economy 

and rise of major new, dynamic growth centers. Oil is our largest source of energy— 

about 37 percent of total US energy—and is essential to personal mobility, commerce, and trade. Its price reflects the global economy—the ups and downs, the surprises, and shifting expectations about geopolitics, technology, and economic growth. 

US ROLE IN THE OIL AND GAS INDUSTRY

The United States plays a major role in the oil and gas industry. We are the largest consumer of oil and gas in the world, but what is perhaps less recognized is the 

key role on the supply side. The United States is the world’s largest producer of natural gas, the third largest for oil, and number two for coal. The United States is 

also a big producer of renewable energy. It is the largest biofuel producer in the 

world and has a growing portfolio of wind and solar power generation capacity. Oil 

and gas production plays an important role in the economy of producing areas of 

the United States. For example, in four states along the US Gulf of Mexico—Louisiana, Texas, Alabama, and Mississippi—the offshore oil and gas industry accounts 

for nearly 400,000 jobs that generate $70 billion in economic value. This does not 

include the jobs created in Pennsylvania, Connecticut, Ohio, and a number of other 

states that provide equipment and services to the offshore industry. 

Domestic energy production is dynamic—its size is not simply a legacy of past investments. A recent ‘‘game-changing’’ development is the revolution in unconventional gas production in the United States. The unlocking of ‘‘shale gas’’ was led by 

the innovation and risk-taking of American companies. Innovation in gas extraction 

has also resulted in higher oil production. In 2009 the US recorded the largest increase of oil and gas production in the world—a growth trend that continued in 

2010. 

Another striking development of the past few years is the increasing integration 

of the US and Canadian energy markets. Canada leads development of the oil 

sands—an important component of global oil supply growth. The oil sands have 

made Canada the largest supplier—by far—of foreign oil to the United States, and 

this source has become part of the fabric of our continental energy security. Since 

2000 Canadian oil sands output has more than doubled—from 600,000 barrels per 

day (bd) to 1.4 million barrels per day (mbd) in 2010. Total Canadian oil exports 

(crude oil and refined products) to the United States are 2.5 mbd, about double the 

number two supplier, Mexico. Canadian oil accounts for 21 percent of our total oil 

imports. 

WHAT SHAPES OIL PRICES?

The US energy industry is a substantial investor, supplier, and employer, but it 

is also part of a larger and increasingly global market. Oil is the most global of energy markets and exemplifies a dynamic, flexible, and competitive trading system. 

The price of oil—and particularly of gasoline—is highly visible. We see it every time 

we fill up at the pump. But the factors that shape the price are often not as readily 

visible as the brightly lit signs listing the price of a gallon of gasoline. 

Electric power bottlenecks in China have, at times, contributed to greater use of 

oil in that country for backup power generation, boosting oil demand. This was one 

of the reasons that pushed oil demand up 9.7 percent in China last year. This created a volume gain of 810,000 bd, which was one of the largest recorded gains in 

a single country in the past several decades. Rising global steel costs for the petroleum industry—up 122 percent since 2003—are an example of what may appear to 
32 

2 Emerging markets are generally defined as countries outside of North America, Europe and 

OECD members in Asia (Japan, South Korea, Australia and New Zealand.) 3The OECD is the Organization for Economic Cooperation and Development. 

be an obscure industrial trend, but one that has contributed to much higher costs 

to develop new oil fields. China’s demand dynamics and the trend in steel costs are 

just two of many examples of how developments around the world influence what 

Americans pay at the pump, but which don’t come to the attention of most consumers. 

Crude oil is fungible. This means, for example, that a barrel of oil produced in 

Africa can be refined anywhere in the world into gasoline, diesel, and jet fuel. Price 

signals help determine where to ship more or less oil. Nearly all the world’s oil sales 

are directly linked or influenced by one of two ‘‘benchmark’’ crude oils: West Texas 

Intermediate (WTI) in Cushing, Oklahoma, or Brent in the United Kingdom. The 

price of a specific crude oil will vary from these benchmarks by as little as a few 

pennies or by as much as a number of dollars, depending on its quality and the cost 

of transporting it to a refinery. The futures markets for both WTI and Brent are 

well developed with large daily trading volumes. 

Flexibility and capability to allocate supply in response to price signals are the 

foundation of the oil market—and explain how it has withstood economic shocks, demand spikes, and supply outages. But with flexibility and responsiveness comes exposure to a broad array of forces of change around the world. These forces can both 

lower and increase the price of oil. A very recent example is the unrest in Egypt. 

While not a major producer itself, Egypt is a key oil transit point and an influential 

country in the world’s most important oil producing region. 

Dawn of a New Age 

The past decade was an exceptional time in the oil market. For a generation— 

up until 2003—oil prices generally hovered from $10 to $30 per barrel. A $5 to $10 

shift in the price of oil was an extraordinary development. But this all changed over 

the next several years as oil prices rose from an annual average of $26 in 2002 to 

an all-time annual average high of nearly $100 in 2008. The period of 2003 to 2008 

was the ‘‘dawn of a new age’’ in oil and energy markets. The driver was the unprecedented increase in income and gross domestic product in Asia, Latin America, the 

Middle East, and other emerging markets. Rarely, if ever, have living standards 

risen for so many across the globe in such a short time. Per capita economic output 

in China soared 235 percent between 2000 and 2010. India’s per capita output rose 

176 percent. 

Poverty reduction, rising income, and aspirations for higher living standards 

mean more oil demand—and this is what we have seen over the past decade. Oil 

demand increased 42 percent in emerging markets from 2000 to 2010—a volume increase of 12.2 million barrels per day.2 This is roughly equivalent to the entire production capacity of Saudi Arabia. But in contrast to emerging markets, demand in 

developed markets—Europe, North America, and OECD members in Asia—was 

lower in 2010 than in 2000.3 The contrasting demand patterns reduced the developed markets’ share of world oil demand from 63 percent in 2000 to 53 percent by 

2010. But the volume growth in emerging markets more than offset the decline in 

developed markets. World oil demand in 2010 stood at 87.3 mbd—an all-time high. 

After two years of falling world oil demand, 2010 registered the second largest gain 

in more than three decades. Emerging markets were, again, the main driver of this 

growth. 

Oil Supply: Law of Long Lead Times 

Demand trends are a critical piece of the oil price story, but there are others as 

well. On the supply side the oil industry is ruled by the law of long lead times. The 

time it takes to explore for and discover oil, develop a field, and deliver the oil to 

market can range from several years to more than a decade, depending on the size 

and location of the resource base, the reservoir characteristics, and the business environment. Rising oil prices encourage more investment in oil production, but long 

lead times mean there is often a mismatch between a surge in demand and when 

investment in a new oil development leads to additional supply. New fields cannot 

be developed overnight. 

Higher Industry Costs 

As oil prices rose and investment in new supplies increased for much of the past 

decade, so did demand for the people and equipment needed to find, develop, and 

produce oil. But the previous legacy of more than two decades of low oil prices and 

industry consolidation meant a ‘‘missing generation’’ in the energy chain—a genera-
33 

* Graphic has been retained in committee files. 

tion of engineers, scientists, and others who skipped entering the petroleum industry. As a result, shortages of equipment and personnel dramatically raised the cost 

of developing an oil field. The IHS CERA Upstream Capital Costs Index—sort of a 

‘‘consumer price index’’ for the global oil industry—illustrates the cost pressure. 

From 2005 to 2008 our cost index doubled. In other words companies had to budget 

twice as much in 2008 as they did in 2005 to develop a barrel of oil. Adding to the 

cost pressure were increasingly heavy fiscal terms on oil investments in the form 

of higher taxes and greater state participation globally in oil projects. Costs did decline slightly in the aftermath of the Great Recession and subsequent fall in oil 

prices; but since the middle of 2010 costs have been on the rise again and currently 

stand close to the cost peak of 2008 (see Figure 1).* 

The Role of Global Financial Dynamics 

Oil has long figured into the workings of financial markets. Since the 1978 launch 

of the first heating oil contract on the New York Mercantile Exchange, it has been 

possible for investors to buy and sell oil contracts without being an active participant in the physical oil business. Such ‘‘noncommercial’’ market participants are essential to any futures market. In exchange for providing price certainty to a producer or consumer of oil, a trader has the opportunity to turn a profit—or a loss— 

from future price changes. 

Financial market investors—including those in oil futures—represent a broad 

spectrum of investors with different time frames and motivations. They allocate capital based on current and expected global demand for oil and other commodities. 

Also, since oil is priced in US dollars, changes in the value of the dollar can and 

do influence the price of oil. Oil has become ‘‘the new gold’’—a financial asset in 

which investors stake positions based on their expectations of the value of the dollar, inflation, and global demand and supply of oil. The role of noncommercial investors can accentuate a given price trend. However, the primary reasons for price 

movements in recent years are rooted in the fundamentals of demand and supply, 

geopolitical risks, and industry costs. 

THE PRICE OF OIL: A REFLECTION OF THE WORLD

The story of the price of oil over the past decade is a reflection of the changes 

in the world. At the core is the breathtaking spread and success of market-based 

decision making in nearly every corner of the world that has allowed hundreds of 

millions of people to benefit from expansion of trade and investment. In the future 

historians may look back at the early part of the 21st century as an extraordinary 

period of wealth creation in today’s emerging markets. To be sure, the Great Recession revealed that some of the growth of the past decade was based on misplaced 

exuberance—and we are still grappling with the painful aftermath. But the broad 

trend of rising prosperity around the world is still intact—a trend borne out by the 

impressive performance of the Chinese and Indian economies since 2008. 

The Outlook: A Boom in the Global Middle Class 

Financial market dynamics, industry cost trends, innovation, and the pace of investment will continue to influence the price of oil. But ultimately the level of oil 

demand is likely to exert the greatest impact. 

In the past two decades the population of countries with per capita income of less than $10,000 was booming. Now many of those countries are well on the way to entering the ranks of the global middle class. In IHS CERA’s latest energy outlook, 

we project over that the next 20 years an unprecedented number of people will enter 

the global middle class—countries with per capita incomes above $10,000. The global middle class will rise from less than a billion people in 2010 to between 2.7 and 

3.5 billion in 2030. More people will be able to purchase a car, travel by plane, and 

consume electricity generated by coal, gas, nuclear, and renewable sources. When 

it comes to rising economic power, China and India garner much of the attention— 

and rightfully so given their massive populations. But this story will also unfold 

elsewhere in the world in parts of Africa, Latin America, and the Middle East. 

Does this mean that rapidly rising oil prices are inevitable for years to come? 

There is a strong case for historically high oil prices continuing for a number of 

years to come. But higher fuel economy standards, demographics, and oil substitutes 

will soften and perhaps even offset some of the upward pressure on oil prices. For 

example, IHS CERA believes that aggregate oil demand in developed markets 

peaked in 2005 and will not exceed that level again. Higher fuel economy standards 

adopted in American, European, and Japanese markets will steadily soften demand 

as more efficient vehicles enter the fleet. Also biofuel mandates will continue to dis-
34 

place oil products—principally gasoline. Lastly, aging populations in many countries—including China—is another factor that will tend to slow the pace oil demand 

growth. Looking further ahead, electric vehicles hold promise and may become increasingly competitive with conventional cars powered by internal combustion engines. 

On balance world oil demand will continue to increase, but not necessarily at 

breakneck speed. Oil prices are likely to remain well above the levels seen during 

most of the past 30 years, but it will reflect a continued rise in global prosperity 

and also foster efficiency and innovation. There is no blueprint for the Global Redesign. There will, of course, be times of tumult. Energy prices, and especially for oil, 

will continue to reflect the shifting fortunes of the global economy and geopolitics. 

The CHAIRMAN. Thank you very much. Thank all of you for your 

excellent testimony. 

Let me start with a couple of questions, and Dr. Newell, can you 

just elaborate a little bit on your testimony about what is going to 

happen with the percentage of oil that we have to import over the 

next 25 years as you see it? I do think your testimony, it seems 

to be very different from what we have historically heard here in 

this committee, which is that imports have gone up and will continue going up. 

This is consistent with what Mr. Burkhard just said, that the 

level of imports peaked in 2005? Is that your position? Maybe you 

could elaborate on that? 

Mr. NEWELL. Yes. 2005 and 2006 were about the same, at 60 percent of overall liquid fuels consumption. It has come down since 

then, and a good part of that has to do with the economic downturn. When you have a decline in domestic oil consumption needs, 

that tends to come first out of imports. So, that is one of the things 

that has led to that significant downward shift over the last several 

years. 

But we see that declining to 42 percent by the end of our projections. If you actually look at overall petroleum supply, which includes both imports as well as domestic production, that is about 

flat over our projection. But there is an increase in overall consumption of liquid fuels. That is being met by natural gas plant liquids, which are domestically produced. When you produce natural 

gas, you can get liquids out of that as well, which can displace conventional oil. Also biofuels, which increases in our projection. 

There have been a number of different factors that have led to 

this change. One is more moderate consumption growth, which I 

could attribute to two factors. One is the increase in fuel economy 

standards that we have seen over the last several years, both for 

light trucks first and then for light-duty vehicles. We also have 

higher fuel prices, which leads to a market incentive for folks to 

choose a more fuel efficient car next time they go out to buy one. 

Same thing for trucks. 

As I mentioned previously, on the supply side, we have an increase in natural gas liquids associated with our increased expectations for natural gas production, and we have the increase in 

biofuels due to the renewable fuel standards. So all of those factors 

together have led to a declining need for imports of oil. 

The CHAIRMAN. Ambassador Jones, let me ask you, I think you 

made the statement that the growth in gas production or gas supply is having a downward or exerts a downward pressure on the 

price of oil? I thought I heard you say that. Could you explain that 

a little more? Are you talking about the fact that production of gas 
35 

does result in some gas liquids being produced and that is a factor, 

or are there other things going on there that we need to understand? 

Mr. JONES. That was the thrust of my remarks. A lot of the shale 

gas plays in the United States produce the unconventional gas, are 

fairly wet and are producing more natural gas liquids. So natural 

gas liquid production in the U.S. has increased, which is one of the 

reasons why U.S. oil production hasn’t gone down as rapidly as 

maybe some people thought it would. 

That is true worldwide as well. Particularly in OPEC countries 

that are producing large amounts of natural gas, a lot of that gas 

is fairly wet, which means it has large amounts of NGLs mixed 

with it. The NGLs are separated out, and they are included in 

crude oil production or they are sold like crude oil. 

In fact, the increase in OPEC NGL production is interesting because NGLs are not subject to the OPEC production restraints. So 

a country like Qatar that produces a lot of gas, producing a lot of 

natural gas liquids, can sell those, and it doesn’t appear as part of 

its quota. But yet it has a real impact on the oil market. That was 

what I was referring to when I said it can help keep prices down. 

The CHAIRMAN. OK. Let me just ask in general, you know, I 

think we are aware that this discovery of all this new natural gas 

in this country and now, more and more, in other places around 

the world has pretty dramatically changed the expectation for what 

the long-term price of gas might be. That, of course, impacts on decisionmaking with regard to new nuclear plants, with regard to renewable generation, with regard to a lot of things. 

Dr. Newell, could you give us some insights as to what you see 

happening there? 

Mr. NEWELL. Yes, that is correct. One of the implications of our 

reassessment of the shale gas resource base has been the significantly lower prices that we are projecting. So the average wellhead 

price of natural gas in our projection doesn’t get above $5 per million Btu until after 2020, which is significantly lower than what we 

had in previous years. 

It gradually increases over that. But still, even toward the end of the period, it gets up to about $7. You may recall a short time 

ago it was at least a couple of dollars per million Btu higher than 

that. 

So the implications are that in the electric power sector, relative 

to other technologies, I mean, natural gas has had over the last 

decade or more several other advantages in terms of low capital 

costs, quick construction, and lower conventional pollutant emissions as well as lower CO2 emissions, which aren’t currently subject to regulation, but do enter into decisionmaking. 

So, those other advantages that natural gas has, coupled with 

these now lower prices, do tend to tilt the balance even more toward natural gas. In terms of the capacity additions that we see 

in our projections, the majority of those new capacity additions are 

also for natural gas. The second-biggest source of new capacity additions would be renewables. 

Another factor that is useful to keep in mind is we reassessed 

our power plant costs this year, and several of those went up. Some 

came down. Natural gas was roughly the same as what we had 
36 

been previously assuming. The overnight capital costs for nuclear 

and coal plants, which are much more capital-intensive—large, 

more complex projects—went up significantly, 20 to 30 percent. Renewables and wind went up a little bit, but not quite as much as 

coal and nuclear. 

So, there have been a number of things that have changed over 

the last several years that tend to point to natural gas in the electric power sector. So we are projecting more natural gas consumption in electric power, particularly over the next decade, than we 

were last year. 

The CHAIRMAN. Thank you very much. 

Senator Murkowski. 

Senator MURKOWSKI. Thank you, Mr. Chairman. 

Mr. Newell, yesterday the Department of Energy released a finding stating that the construction of an oil pipeline out of Canada 

into the United States would reduce our dependence on Middle 

Eastern oil. Would you agree with the Department of Energy’s findings there? 

Mr. NEWELL. I have briefly reviewed the study that you are referring to, which was conducted in the context of the Keystone XL 

pipeline. Whether or not that pipeline exists, one question is 

whether or not the oil would be produced. That is one question. 

That study seemed to suggest that it would be produced regardless 

of whether there was a pipeline, and it would likely be exported to 

the west, to Asia, as opposed to south to the United States. 

In terms of U.S. imports, that study concluded the oil would most 

likely come from Canada, rather than come from the Middle East, 

because we have had declines and are expecting further declines in 

heavy crudes from Mexico and from Venezuela, which have been 

historically sources of that crude oil. Because we have complex refineries that can use that heavy oil in the United States, we can 

refine this Canadian oil, and the most likely substitute would be 

Middle Eastern oil. 

Senator MURKOWSKI. Then let me ask you in the reverse, our 

concern up north in Alaska is the continued viability of the TransAlaska pipeline, the TAPS. As you know, the throughput is declining to what we believe is dangerously low levels, and if we don’t 

take some very serious steps in the very short term to add more 

oil into that line within the next few years, there is a real chance 

that it could be inoperable shortly after that. 

So the question to you, and anybody else that might choose to 

jump in, is, the economic impact, the national security, the traderelated consequences that would result if we take TAPS Offline, 

and our Nation is in a situation where we are no longer receiving 

that 10 percent of domestic crude supply that we have been receiving for approximately the past 30 years. 

If we lose a large-diameter pipeline like we have up north that 

brings crude into the lower 48, what is the economic impact of this? 

Mr. NEWELL. I will just make a brief comment, which is that in 

our projections, the oil flowing through TAPS does continue to decline, as it has over the last several years. Toward the end of our 

projection, it starts to get to a level where my understanding is the 

pipeline would stop operating. Two hundred thousand barrels per 
37 

day is roughly my understanding, and it does get to that level toward the end of the projection. 

So at least through the year 2035, we don’t anticipate that it 

would close. But after that, clearly, that looks like it is on the 

longer-term horizon. 

Senator MURKOWSKI. Let me ask about capacity because several 

of you have discussed this, and Mr. Diwan, I think you stated that 

it is your understanding that there is a relatively large cushion, 

was the term that you used, of about 5 million barrels per day. I 

am told that it may be 5. It may be 6. 

The question is, and as we look to what is going on in Egypt and 

the uncertainty and the instability there, we look at what is available in terms of spare capacity and suggest, that can help insulate 

us from supply shocks, from the price shocks because we have got 

that spare capacity. How accurate do we really believe our numbers 

are when we are talking about this spare capacity? Do we really 

know? How verifiable is it? 

Mr. DIWAN. We have a good idea. We don’t have an exact number, and this is why I think we all hedged a little bit. It is probably 

closer to 6, but I like to say it is north of 5. 

A large part of it is in Saudi Arabia. This capacity is new. It has 

been added in the last 3 years. So for once I would say that we 

know actually that there is a large amount of spare capacity available in Saudi Arabia. They have a production capacity probably 

close to 12.5 million, and they are producing 8.5 million. 

So most of the spare capacity in the world is in one country, but 

that is the nature of what spare capacity is. It is a Middle Eastern 

concept. 

Senator MURKOWSKI. Doesn’t that give us less assurance. When 

we are talking about the concerns that we are seeing in the Middle 

East right now, to know that you have most of your spare capacity 

located in one country, what kind of assurance does that give us? 

Mr. DIWAN. The problem with the concept of spare capacity almost is an oxymoron. Only certain countries are willing to invest 

to create capacity and not produce it. These countries are probably 

5, OK, and they are all in the Persian Gulf. 

This is their raison d’etre almost geopolitically is to be able to 

provide that spare capacity if something happens. I don’t know a 

single oil company in the world—Exxon, Chevron, any international oil company—which is willing to have capacity which is 

not producing. So the concept of spare capacity is focused on the 

Middle East at the end of the day. 

So I have more assurance than I have 3 years ago that we know 

that Saudi Arabia did invest tremendously to increase capacity, 

and they have shown that they can produce more than what they 

are producing now. So, in a way, spare capacity as a number, I am 

more confident about it than I was 3 years ago because we have 

seen higher production numbers. We have seen a large amount of 

investment. 

So is it 5? Is it 4? Is it 6? I don’t know. But it is a large number. 

Senator MURKOWSKI. Thank you, Mr. Chairman. 

The CHAIRMAN. Senator Wyden. 

Senator WYDEN. Thank you, Mr. Chairman. Thank you to the 

panel. 
38 

I want to look at the issue of the role that the financial markets 

are playing with respect to oil prices. I was really struck—on Tuesday, the Wall Street Journal ran a column in what is called ‘‘Heard 

on the Street’’ that was entitled ‘‘Unrest Pits Oil Bulls Versus the 

Gold Bugs.’’ In effect, they were talking about which area made 

more sense to put your bets on. Should you put your bets on oil 

or gold? 

Mr. Burkhard, you said something that I have not really heard 

witnesses talk about here in the Senate Energy in the past, and 

that is acknowledging the role that the financial markets are playing in oil prices with your statement where you say oil has become 

the new gold. 

So my question, beginning with you, Mr. Diwan, you say that the 

big oil producers are not going to be affected by what happened in 

Egypt and Tunisia. I assume we are talking about the Saudis. My 

question to you would be do you believe that the recent price increases, like the $5 a barrel increase in oil in a matter of days, do 

you think that is due to supply and demand? 

Mr. DIWAN. No. Because we haven’t seen a supply disruption. 

But markets do anticipate. Correct? I mean, this is what they do. 

They want to price risk. 

So the way I look a little bit at oil market, and I came here and 

in the House to talk about this financialization of oil in the last 3 

years, money flows is like the steroids in the system. It comes, it 

rushes in. It has a very big impact. Sometimes it is lasting. Sometimes it is not. 

Clearly, when you have a situation like you had in Egypt, people 

do try to cover or speculate or invest. But the broader question that 

you ask is how important are these financial players in the oil market? They are very important. Oil has become more than a commodity. It has become an asset class, and the last 3 years have 

shown that. 

We have seen the money flow being the key determinant of short-term oil price changes. Does it determine the price is at $90 

or $70? In the long term, it doesn’t. The fundamentals will. But 

these price movements, which are very jerky, have—I mean, I look 

very closely at oil prices, and most of the time, the only correlation 

we can have has to do with dollar value, with gold, with exchange 

rates, with equity rather than short-term moving the fundamentals. So the short-term moves are very much financialized. 

Senator WYDEN. Over the years serving on this committee, I 

have walked away with the judgment that you usually don’t see a 

single factor dictating oil prices. 

Mr. DIWAN. Yes. 

Senator WYDEN. I don’t think you see just one. But clearly in 

past debates, I think short shrift has been given to this question 

of financial markets, and you just said this recent short-term increase was not due to supply and demand. That suggests to me 

that looking at the markets and the role of speculation is going to 

be increasingly important. 

I think you touch on that, and you touch on that as well with 

respect to your views, Mr. Burkhard. So that takes us back to you, 

Mr. Jones, because you don’t think that the markets are really 

what this is about. You make it clear that you think this is about 
39 

supply and demand, that the price increases in oil recently have 

been driven by the situation in Egypt. Let me get you, so you can 

put it in your words what you think of what Mr. Diwan and, to 

some extent, what Mr. Burkhard have said. 

Mr. JONES. The short answer is that I think I agree with a lot 

of what they said. I think that what my testimony was focused on 

was the actual run-up in prices since last September, and we saw 

a lot of tightness in the market. There was more demand. 

The big news of 2010 was a more rapid resurgence in OECD 

country demand than was expected, and particularly in the last 

quarter. So, that is what got the prices moving up. 

Now in the current situation where there is a crisis in the Middle 

East, as Mr. Diwan said, markets don’t only look at what is happening today. They look at what they think might happen tomorrow, and that is where you get expectations in. So, I don’t think 

there is necessarily a disagreement between us. 

Senator WYDEN. If you look at your prepared testimony and you 

looked at Mr. Diwan’s prepared testimony, there is a sharp difference. You play down the question of anything other than supply 

and demand. You are saying that markets are driving this, and the 

price of oil is driven essentially by the supply and demand question. Mr. Diwan is saying, look, we are not seeing any changes in 

supply and demand. 

That is why I got into the question of financial markets. This is 

complicated stuff. We understand it. I am just concerned your approach gives short shrift to the possibility of speculation and the 

financial markets. Mr. Diwan, I think, puts it in the appropriate 

context that there are a variety of factors, but we shouldn’t dismiss 

the question of markets. 

When the Wall Street Journal is running articles talking about 

what you ought to put your bet on in the future, that ought to be 

a wake-up call that the Congress ought to start putting some attention on those issues. 

My time is up, Mr. Chairman, and I thank you. 

The CHAIRMAN. Senator Coats. 

Senator COATS. Thank you, Mr. Chairman. 

The CHAIRMAN. Welcome to the committee. 

Senator COATS. I appreciate that. Because this is my very first 

committee meeting, I don’t begin to have the experience or the 

background of my predecessors who have already spoken. So I am 

not exactly sure who to address my questions to, but I will let you 

decide who wants to respond. 

Just two areas I would like to pursue. One is the energy security 

area. The gist of what was said here is that there seems to be a 

fairly high level of confidence relative to the flexibility of the supply lines and the capacity production and so forth. So an unrest or 

an interruption of supply, transmission of supply in one part of the 

world or from one source could easily be compensated for by increasing production or supplying through another area. 

My question is, not going to the specific, but to the general, do 

you, like the military—does anybody ‘‘red team’’ these things? Do 

you have books on the shelf that say, you know, if this pipeline is 

shut down in the Caspians, this is what we ought to do, or this is 

where we should go? Is there a body of study and analysis that we 
40 

turn to when things like threats to the Suez Canal, threats to certain pipelines, political unrest somewhere in the world? 

What is the level of analysis that has been undertaken, and what 

is the level of confidence that we can adjust to these kind of things? 

There is always this uncertainty out there about it is not factored 

in with conventional wisdom as to supply and demand and availability and price and so forth. I am not sure who needs to answer 

that, but Ambassador? 

Mr. NEWELL. I will start, and then I will turn it over to Dick 

Jones. So, within the U.S. Government, the answer is yes. There 

is very good coordination within the Department of Energy, among 

different elements. The Energy Information Administration, which 

I head, works with the Office of Policy and International Affairs, 

which interfaces with the International Energy Agency. 

We also work with the Office of Electricity Delivery and Energy 

Reliability, which, in the event of things like hurricanes or pipelines going down, tracks those events very closely. In fact, right 

now, they are focused on the winter storm issue in the Midwest because that has electricity ramifications. 

In the current context of something like the situation in the Middle East, we are also in close contact with the National Security 

Council and other Government agencies, providing whatever analysis or background information that is necessary to help people understand the level of spare capacity on the supply side, which we 

have also talked about. Another issue that comes up when you are 

talking about, for example, Egypt, is different transit points. There 

is a pipeline called the Sumed pipeline which crosses there, as well 

as the Suez Canal. One thing to keep things in context, is that 

about 3 million barrels per day transits the canal and pipeline, but 

about 45 million barrels per day of oil moves around the world 

through marine transit. So, as a fraction of that, it is quite small. 

There is about 10 percent spare capacity currently available in marine shipping for oil. So, these are the kind of issues that we track 

very closely. In the event of some kind of a disruption, then the 

U.S. has a Strategic Petroleum Reserve which could be called upon, 

as well as other reserves. That is the context in which we then 

start to coordinate with the International Energy Agency. 

So I will turn that over to Dick Jones. 

Mr. JONES. Thank you very much, Richard. 

Yes, just the IEA looks at the world, and we work with the 

world. We have 28 member countries. Obviously, the United States 

is one of the most important member countries that we have, but 

it is not the only one. 

So when we are looking at the world situation, particularly if we 

see a potential crisis brewing or potential disruption, we begin consulting with the countries that would be the most likely to be affected. That would include the United States, but it wouldn’t be 

limited to the United States. We do much of the same work that 

Richard was describing, we do internationally. We then provide information to our member countries to keep them abreast of developments in the situation. 

Also I mentioned we have emergency response training exercises. 

Those training exercises are based on case studies, scenarios, and 

we don’t make them up. We look at the real world and we say, for 
41 

example, if there is a disruption here. Then we let teams come 

from our member countries and from the nonmember countries, 

and we have several teams working on the same problem. 

Then we see what they come up with, and we then debate whether or not this person’s response or that team’s response was the 

best one, or if there was one that was better and so on. That way, 

we all learn at the same time. We learn about the specifics of the 

issues, but we also learn about different points of view and how to 

work with one another, and that comes into quite a bit good use 

when we have a real crisis. 

Mr. BURKHARD. One good example in the past that is instructive. 

In 2005, when we had Hurricanes Katrina and Rita, they took out 

a large amount of U.S. refining capacity. Gasoline prices went up 

in the United States, and that sent a market signal to the rest of 

the world to send gasoline to the United States. 

So the flexibility of the oil market was important there, but also 

IEA members at that time, particularly in Europe, were offering 

their strategic gasoline reserves to the market, which also helped 

to calm it. So I think that very real, fairly recent example of market signals combined with the insurance, so to speak, of what the 

IEA members provide was a good example of crisis management. 

Mr. JONES. If I could just add one thing? Our focus has been on 

oil because we were founded in the wake of the 1973–1974 oil crisis. But in recent years, we are focusing more and more on other 

forms of energy as well. So, for example, we now also are doing 

work on natural gas security, particularly pipeline security, which 

is very important to our European members, and we are also looking at electricity grids and how they can be made more secure. 

So we are branching out beyond oil to natural gas and electricity. 

The response that Jim just mentioned was coordinated by the IEA. 

Senator COATS. Mr. Diwan, did you have any comment? 

Mr. DIWAN. No. I want to build on what Jim said. The market 

responds quickly. I mean, price signals change. When you have disruption some places, prices go and you arbitrage. The only problem, 

it takes time to transport oil. 

So the system takes time to get back in shape, but we have seen 

it, crisis after crisis anywhere in the world, that you have enough 

spare refining, shipping crude. Right now, we have spare of everything that you can adapt. Just takes time because it is slow to 

adapt. You know, oil is bulky to transport and store and refine. 

Senator COATS. Thank you. 

Mr. Chairman, I want to get off to a good start with the Chairman. So I notice my time has expired and gone over time. So I 

won’t ask my second question. 

The CHAIRMAN. You set a very good example for this committee. 

We appreciate it. 

[Laughter.] 

Senator COATS. Thank you. 

The CHAIRMAN. Senator Franken. 

Senator FRANKEN. Thank you, Mr. Chairman. 

I would like to welcome my new members—not my new members, the new members to the committee, of which I am one. While 

Senator Hoeven was Governor of North Dakota, they discovered 

and developed tremendous oil resources there. In fact, some in 
42 

North Dakota say he created them. I would like you to come over 

in Minnesota and do the same, if you could. 

But I want to turn to renewables because that is something we 

do really well in Minnesota. Dr. Newell, we need to be open to a 

diverse array of options as we think about energy policy. But as 

you say in your testimony, renewables seem to be where the largest 

growth is in the next 25 years. Is that right? 

Mr. NEWELL. Yes, that is correct. They have by far the fastest 

rate of growth. 

Senator FRANKEN. As I said, in Minnesota, we are a national 

leader in renewables, especially wind and biofuels. We are 

transitioning to renewables fast, largely due to policies like the renewable energy standard, 25 percent renewables by 2025. I am 

proud to say that Minnesota utilities met their 2010 targets under 

the RES. 

In the EIA reference case scenario, we see a pretty bleak picture 

for renewables in 2035, only about 10 percent of our energy mix by 

2035. Now I recognize that this scenario assumes no change in our 

national energy policies moving forward. Dr. Newell, what factors, 

in your view, both policy and other factors, could most help grow 

the U.S. renewables sector to a much higher percentage than those 

projections for 2035? 

Mr. NEWELL. The key issues that have affected the growth in renewables over the last several years and that I would anticipate 

would affect it over the next several years are several fold. One is 

on the purely economic side, the cost of renewable technologies. 

Were those to come down from where we are currently forecasting, 

either due to faster innovation than we are expecting or additional 

research and development effort, that could bring those costs down, 

in which case they would be more competitive with other technologies for power, such as natural gas, coal, nuclear, and so on. 

The other key policies that tend to support renewables are policies such as the production tax credit for wind, which does expire 

in our reference case, because that is what it does in current law. 

But you actually see a kink in the curve when it does expire. So 

that is clearly sending a signal that were it not to expire, that 

would have a significant impact, and we have run alternative policy cases that demonstrate that. 

The renewable fuel standard for transportation fuels also has a 

big impact. But that is in our reference case and grows very considerably because that are under current statute and ongoing regulations that is already in law. So those are some of them. There are 

a number of other tax credits on solar and so on, which also expire 

at some point in time. Were those to—— 

Senator FRANKEN. I am sorry to interrupt. 

Mr. NEWELL. Yes. 

Senator FRANKEN. We have countries like China that are aggressively pursuing these, right, like solar and wind? 

Mr. NEWELL. Yes. That is definitely correct. There are a number 

of European countries doing that and also particularly China has 

been investing heavily really in all sources of electricity production. 

They have phenomenal growth, and so they are investing in solar, 

in wind. They are also investing a lot in coal and nuclear. So they 

are really kind of all-out on all fronts. 
43 

Senator FRANKEN. Let me go to Ambassador Jones. I notice that 

you talked about three areas you would like to go—a strong push 

in efficiency, to decarbonize electricity, and create advanced vehicles. 

So, let us talk about those. How do you decarbonize electricity? 

Mr. JONES. I mean, promotion of renewables is one way to do 

that because they obviously don’t burn fuel. But you can also—— 

Senator FRANKEN. They don’t burn carbon? They don’t add carbon? 

Mr. JONES. They don’t add carbon. But there are many other 

ways, and for example, you can have a coal-fired power plant running on biomass instead of on coal. You can have a coal-fired power 

plant with biomass and carbon capture and storage, and then you 

are actually taking CO2 out of the air. 

Senator FRANKEN. Right. 

Mr. JONES. So there are a lot of different technologies that are 

available. The question is what is economic and what is appropriate to the political and the physical characteristics of the country? For example, a lot of countries are pushing ahead with nuclear 

power, and other countries have decided not to do any nuclear 

power for political reasons because of concerns, obviously, on nuclear proliferation, spent fuel, and things like that. 

But there is a whole mix of approaches you can take, and we advocate a broad spectrum of technologies, depending on the endowment of the country. For example, some countries would be wasting 

their money if they invested in wind power because they just don’t 

have the wind resources. Similar with solar power. 

So we think that where it makes sense, a country should invest 

in renewables. Where renewables are not an option, they should invest in carbon capture and storage if they want to get the full lifetime out of existing power plants or use biomass to fuel those 

power plants, or they should invest in nuclear. It depends on the 

country. 

Even in the same country, different regions will be different. 

Senator FRANKEN. I know I am over my time. But I just want 

to say in summary that these projections to 2035, that is a fairly 

long way out. 

Mr. JONES. Twenty-five years. 

Senator FRANKEN. We can definitely—you say it, and you added 

a personal note, which is that we can do better. I would like to add 

the same personal note and just say that those three efforts—a 

strong push for efficiency, decarbonizing electricity, and advanced 

vehicles, which I assume mean electric cars, maybe LNG cars, anything else I am—— 

Mr. JONES. Hybrids—plug-in hybrids, all electrics. CNG is a possibility, especially for large transport, buses, and so on. 

Senator FRANKEN. I thank you all for your testimony. Mr. Diwan, 

I just wanted to ask one last little thing? Did you, at one point, say 

‘‘oil prices are a mystery to me?’’ Did I miss that in your testimony? 

Mr. DIWAN. No. The more you know, the less you know after a 

while. 

Senator FRANKEN. OK. That really made me feel good. 

[Laughter.] 

Senator FRANKEN. Thank you, Mr. Chairman. 
44 

The CHAIRMAN. Thank you. 

Senator Hoeven, welcome to the committee. 

Senator HOEVEN. Thank you, Mr. Chairman. 

Good to be with you. I would like to thank both you and Ranking 

Member Murkowski for holding this hearing today and say that I 

very much look forward to working with you on the Energy Committee and, of course, with our fellow members. Not only the Senator from our neighbor State, Senator Franken, but Senator 

Manchin and I go back, I don’t know, 6 years or more working as 

fellow Governors, and worked on energy issues and worked through 

the National Governors Association. 

So I very much look forward to working with you on these important issues, the energy challenges that face our country, and I see 

it as an incredible opportunity. Senator Franken was kind enough 

to refer to some of the progress we have made in energy in North 

Dakota, and we do produce a lot more oil and gas. We are over 100 

million barrels a year now. 

Ten years ago, though, we were not producing much oil, and we 

were, in fact, declining in our oil production. Frankly, oil companies, if they hadn’t left the Williston Basin, they were leaving. 

We worked very hard. Of course, a lot of the talk at that time 

was that companies weren’t going to do exploration in the continental United States. They were still doing some great work up in 

Alaska, but really were going to other places around the globe for 

not only their exploration activities, but also production and refining as well. 

So we worked very hard to create the right kind of business climate that would stimulate not only oil development, but other 

types of energy development as well. The clean coal technologies, 

renewables, wind, biofuels, we are making a lot of progress. It is 

not just about producing more energy that we ship to great States 

like Minnesota and other places—electrons, as well as oil and gas 

and biofuels—but it is very important for our economic growth and 

for job creation. 

So I see that same opportunity for our country. My question to 

you is what should we do? What should this Congress do to stimulate energy development in all sectors? What is the most effective 

things we can do to stimulate energy development in this country 

across sectors, without picking winners and losers? I mean oil and 

gas. I mean electricity from coal, hydro, other sources. Biofuels, 

wind, nuclear, you name it. 

But across all sectors, what are the things that we can do that 

will be most effective as a Congress to stimulate energy production 

in this country? I would particularly like you to focus on nonrevenue measures because we find ourselves with a bit of a budget 

challenge these days. So particularly the measures that don’t cost 

money. 

So I am not talking about direct subsidy and so forth, but the 

kind of legal, tax, and regulatory measures we can put in place to 

stimulate energy development most effectively. I would like each of 

you to respond to that, if you would? 

Mr. BURKHARD. I will start off. I will steal a phrase from a book 

of our chairman Dan Yergin. When Churchill 100 years ago 

switched the Royal Navy from coal to oil, he said security is in di-
45 

versity and diversity alone. So in terms of pursuing different strategies, a singular approach probably isn’t the most appropriate fit, 

but multidimensional policies that focus on supply and demand. 

Some of the trends and places you alluded to, Senator, if they 

continue, they will help both on the demand and the supply side. 

North Dakota is one of the key reasons why in 2009 the United 

States had the greatest increase in oil and gas production anywhere in the world. The United States did in 2009. In 2010, that 

growth trend continued, and that is due to what is happening in 

North Dakota, but also Pennsylvania, other relatively new players 

on the oil and gas side. 

In terms of continental energy security, let us not forget about 

Canada. When we think of foreign oil, we think of something distant, far away, unknown. I don’t think of Canada that way. Twenty-one percent of our oil now comes from Canada. It is by far the 

biggest oil supplier. 

So thinking about continental energy security, if the same trends 

in oil and gas continue, that will play an important role. On efficiency, the fuel economy standards that were renewed, strengthened in 2007 and then again in 2009, I believe, they are going to 

play a very large role in keeping U.S. oil demand below the 2005 

peak. 

So I think consistency in the long-term approach and a multidimensional approach on demand and supply is something to consider. 

Senator HOEVEN. What percent of our petroleum consumption is 

provided by the U.S. and Canada together? Do you know? 

Mr. BURKHARD. Canada is about 2.5 million barrels per day. U.S. 

oil, it is roughly probably half. Maybe a little bit more, the U.S. 

and Canada combined total. 

Senator HOEVEN. But of our total consumption, of our total consumption, what percentage do we cover between the U.S. and Canada? It is higher than people realize, right? 

Mr. BURKHARD. It is probably half. 

Senator HOEVEN. Fifty percent? 

Mr. BURKHARD. Maybe a little bit more, 50 to 60 percent. If you 

include Mexico, it is even higher. If you look at North American energy security meaning Mexico, Canada, the U.S., you are looking 

at 70, 75 percent, something around there. 

Senator HOEVEN. Seventy-five percent. 

The CHAIRMAN. Anybody else have a quick answer, and then—— 

Mr. DIWAN. No, I just wanted to point to a slight contradiction. 

Senator HOEVEN. If you want, you can say the top 3 things so 

I don’t violate my timeline. But—— 

The CHAIRMAN. Yes, we have gone over the time. 

Senator HOEVEN [continuing]. Name 1, 2, or 3 things that would 

really make a difference, in your opinion. 

Mr. DIWAN. The cheapest barrel of oil is an efficient car, all 

right? I mean, this is how you reduce your demand, and it is probably cheaper than producing a new barrel of oil. 

But I just wanted to point a slight contradiction. I mean, if North 

Dakota has seen its production increase, and it is a great thing, it 

is because we have very high oil prices. So it is the economics 

which are answering. We always knew about the reserve in the 
46 

Bakken, but they were never economical. When prices reach a certain trigger, technology was able to come and change that supply 

function. So having $3 gas and having high production in Dakota 

goes together. 

Senator HOEVEN. No question, but the new technologies were 

vital and will continue to be vital in order to produce it economically—— 

Mr. DIWAN. Absolutely. 

Senator HOEVEN [continuing]. Even down to a barrel price of 

maybe $50 a barrel. 

Mr. DIWAN. Absolutely. So, efficiency, technology, and I would 

say a regulatory framework, which is look at the long term and 

allow the diversification across energy sources. 

The CHAIRMAN. We have two Senators here who haven’t yet 

asked their first round, and then we will come back around, and 

we can get more response to that in the second round perhaps. 

Senator Udall. 

Senator UDALL. Thank you, Mr. Chairman. 

Good morning, gentlemen. Thanks for being here today. 

Let me start by speaking to the profits of the oil companies. It 

has come to my attention that Exxon just announced that its profits for the last part of 2010 were over $9 billion. It is a 50 percent 

increase from earlier in the year. Exxon is not alone. Most, if not 

all the major oil and gas companies are going to report huge profits 

for 2010. 

Mr. Diwan and Mr. Burkhard, what will the major U.S. oil companies like Exxon do with these record-setting profits? For example, how much of those net profits would you estimate that the 

major U.S. oil companies are investing, or will invest, in domestically produced clean and renewable fuels, the price of which are 

not set by OPEC? 

Mr. BURKHARD. I think some context for that, one, oil companies 

are price takers, not price makers. The revenues reflect the global 

oil markets. In terms of their spending, oil companies, the very 

large oil companies, their capital expenditures in a given year can 

range from roughly $15 billion to $25 billion. 

So it is a treadmill that they are on to constantly reinvest because they have fields that are at plateau production or declining. 

So it is a massive capital-intensive business where you have $15 

billion, $20 billion, $25 billion of CAPEX are what we are seeing 

right now. A lot of these companies are part of this what we call 

‘‘the shale gale,’’ the unconventional gas revolution in the United 

States, and gas is a lower carbon content fossil fuel. So that is 

playing a big role. 

Senator UDALL. So you see them moving some of those profits 

into development of gas reserves? 

Mr. BURKHARD. Yes. 

Senator UDALL. Mr. Diwan. 

Mr. DIWAN. I mean, they are oil and gas companies, first and 

foremost. So they invest in oil and gas. 

If you look at the broad trend in terms of capital flow, the United 

States has seen a lot of investment. The global industry is coming 

back to the United States, and that is a big development over the 
47 

last 2, 3 years. Obviously, it has to do everything with the shale 

gas, but also the onshore oil potential in places like the Bakken. 

So the United States, because of technological change and the 

high oil prices, have been able to attract a lot of capital. A lot of 

these oil companies who have been looking abroad for years to be 

able to add to their reserves are coming back to the United States. 

They are not the most nimble companies. They are very large. So 

they tend to be second and third movers, rather than first movers. 

The small companies, the muscle, the economic muscle here have 

already created the resources. Now the oil companies are going to 

develop them. 

In terms of their investment in other technologies, it is really research and development. They are not biofuel companies. They are 

not solar companies. They will not become solar companies. So they 

are what they are. 

Most of their investment go back into massive projects where the 

treadmill that Jim is talking about is very important. The decline 

rates are very steep in the oil fields that they bring. They are probably 10, 15 percent, sometimes north of that. So, in a way, these 

companies are constantly seeing their base resources disappearing. 

So they need absolutely to invest, and that treadmill is only getting 

faster. 

Senator UDALL. So you see them playing an important role in 

continuing to produce secondary, tertiary oil from such fields. But 

the advances in biofuels and clean energy will come from other sectors as well and from other entrepreneurs, other businesses, other 

business models? 

Mr. DIWAN. I think so. I mean, that is the model. These companies are not the most nimble for these things. 

Senator UDALL. The demand for oil is driven mostly by our transportation sector. I think, what, 70 percent of domestic oil demand. 

I am directing this at the panel. Do you have a sense of what 

percentage of our transportation sector would have to be fueled by 

electricity, natural gas, or some other alternative fuel in order for 

us to achieve energy independence in the transportation sector? In 

other words, at what point could our domestic supply of oil fulfill 

our domestic demand? 

Ambassador Jones, if you want to take that question for the 

record, too, I would be more than happy to work with you. 

Mr. JONES. I don’t think it is something that we have actually 

sat down and tried to calculate. You could probably do a back-ofthe-envelope calculation in terms of imports and how much share 

they are and figure it out. But Richard, you might have done something? I don’t know. 

Mr. NEWELL. Yes. We have not analyzed that particular question. But under existing laws and market trends, while there is a 

decline in net petroleum imports, it is still quite sizable even 25 

years from now. If one imagined what would be the kinds of actions 

that could change that, one would be declining consumption because declining consumption tends to come first out of imports. 

Then, substitution of the remaining consumption toward something that is not imported, which if it is electricity, electricity tends 

not to be imported. So any domestic source of electricity would do 

that. If it was domestically produced biofuels, that would do that. 
48 

But one would have to analyze a particular proposal in order to— 

most anything you look at is potentially achievable. It depends on 

what kind of actions one is willing to take to achieve it. 

Senator UDALL. Thanks to the panel. 

The CHAIRMAN. Senator Manchin. 

Senator MANCHIN. Mr. Chairman, thank you. Thank all of you 

for being here. 

I am sorry. Some of us had to go back and forth to committee 

meetings. So if I repeat something or might have missed something, I am very sorry for that. 

The State of West Virginia, as you know, is an energy producer, 

always has been for many, many years. We just have a hard time 

understanding without an energy policy in this country and what 

you just told us about, the dependency we are going to have on foreign oil, the security of the Nation being at risk because of our dependency on foreign oil, the uncertainty in the Middle East right 

now, and the growing uncertainties that could even make us more 

vulnerable, and our economy, how it is tied so tight, and you are 

telling me our dependency will grow and not become more independent. 

In our little State, we have an energy portfolio. We try to use everything we have. We have developed our shale gas, natural gas, 

as you know, in the Marcellus shale. We have a tremendous abundance of coal. We have biomass. We have a tremendous wind operation in West Virginia, which very few people know, and we have 

done everything we could with hydro. 

What I don’t understand is that of all the energies you are talking about, there are subsidies, and I think that is what the Senator 

from Colorado was talking about. The subsidies of energy, whether 

it would be to oil, gas, wind, solar, biofuels, ethanol. The only energy source which is the greatest source that we have as far as we 

are dependent on right now is coal. It doesn’t get a penny of subsidies. 

But it has been villainized by this administration and so many 

people, and it is the one we depend on the most that gives back 

more than what it takes. I can’t figure it out. 

I mean, we are trying to use it in so many different forms, in 

supercritical heating and things of this sort. We are running into 

roadblocks with the EPA from every turn that we go. We are trying 

to use it in conjunction with our natural gas productions and trying 

to look at the changing and the fleet, especially our commercial 

fleet to compressed natural gas I think is a very doable. 

Do you all have a comment on why that one source of energy, 

which is the most depended upon in this Nation, has no types of 

subsidies, but the others demand so much subsidies? Does anybody 

want to answer that? 

Mr. NEWELL. I guess I would just say that Congress makes these 

policies, and so I don’t have any particular—— 

Senator MANCHIN. Do you all have a comment? Basically, do you 

think it is kind of off balance that 50 percent of our energy comes 

from the coal, which we have depended on for hundreds of years. 

No subsidies, not one penny of subsidies. But then oil—and I heard the profits of, what, $9 billion of profits—and the subsidies from that, subsidies from the tight sands of 
49 

natural gas, subsidies on a gallon of ethanol, and everything else. 

Does it not make a little bit of—— 

Mr. NEWELL. The one remark I will make is that we have been 

requested to do an analysis of energy subsidies by the House, and 

that is underway. We will be issuing that report sometime in the 

next few months. 

Senator MANCHIN. You compare that toward the coal that gets 

no subsidies. Will you compare it against what type of energy this 

country receives and depends upon without any investment except 

the market forces? 

Mr. NEWELL. Yes. It is a broad study that covers all manner of 

energy subsidies. 

Senator MANCHIN. The dependency that we have had on foreign 

oil and the uncertainly in the Middle East, I know you all have 

talked on that a little bit. I have noticed, Mr. Newell, you have 

talked about the price of a barrel of oil and the uncertainty, not 

really knowing where it is going. What do you anticipate as far as 

we, as a Nation, are able to take care of the dependency, independency as far as from our own domestic production? Is there any of 

you believe that we can become independent with the current policies? 

Mr. BURKHARD. Senator, just on the coal question, I am not an 

expert in subsidies. But what is perhaps little noticed in some 

areas, the last decade, the strongest energy source in terms of demand growth has been coal around the world. That is due to what 

has been happening in China and India. 

China, India, and the U.S. are among the top resources—— 

Senator MANCHIN. The rest of the world is using it more, and we 

are villainizing it more. 

Mr. BURKHARD. It is a cornerstone of global energy supply in this 

country and certainly in China and other major players. 

Senator MANCHIN. Do any of you all believe that we can become 

energy independent? 

Mr. DIWAN. Why do we need to become energy independent? We 

are not independent of pretty much anything. We believe all in free 

trade. We all have Italian ties, Chinese shirts, Chinese computer 

chips in our computers. We import everything, and we export everything. Oil shouldn’t be that different, and energy in particular. 

So—— 

Senator MANCHIN. You don’t believe that we should try to become—— 

Mr. DIWAN. I don’t think it is a key issue. It is a global commodity. It is globally priced. If we can import it, we can import it. 

Senator MANCHIN. Do you all believe that it ties to the security 

of the Nation? 

Mr. DIWAN. It has a security aspect, but it is not the only one. 

There is an economic aspect. 

Senator MANCHIN. Sure. 

Mr. DIWAN. What it costs to fuel this economy is a key issue. 

Mr. BURKHARD. I would just add energy security and energy 

independence aren’t—you know, there are differences between the 

two. If energy security is the objective, that may lead to different 

outcomes, different decisions than energy independence. 
50 

Senator MANCHIN. Basically, those of us who lived through the 

1974 oil embargo and saw what it had done and how it crippled 

the Nation, and at that time, I think we tried to take the position 

we would be energy independent by a very short period of time, by 

2000. Of course, that came and gone. 

So you all are not tying the security of this Nation toward the 

independency that we could do with more domestic production of 

all of our resources? 

Mr. BURKHARD. The increase in continental production, in Canada and the United States, it has been a source of economic growth 

in the places where it has taken place. So it is important in job creation, and it does play an important role at enhancing global energy security and, consequently, U.S. energy security. The growth 

in U.S. gas production and oil production is an important component of that overall security story. 

Senator MANCHIN. I will save that for a second round. Thank 

you, sir. 

The CHAIRMAN. Senator Coons, welcome to the committee. 

You are the only one here now who hasn’t asked a first round 

of questions. Did you have questions you want to ask in this first 

round, and then we will do another 5-minute round? 

Senator COONS. Thank you, Chairman Bingaman and Senator 

Murkowski. 

I am grateful for the opportunity to join you. I apologize for my 

lateness. As is so often the case, there were other committees. Judiciary Committee just reported out an important patent bill that I 

think will help contribute to the role that I also view this committee as having a central place to play in, which is sustaining 

America’s leading role in innovation and then making sure that we 

work together to develop the energy technologies of the future. 

I was interested in the testimony of several of the members of 

the panel. Dr. Newell, what changes do you expect to see going forward that are based on energy efficiency? 

I may have missed that since I was not here. But in what I read 

I didn’t see a clear trajectory on what we could achieve in terms 

of savings due to energy efficiency standards. As that is something 

we expect to take up shortly, I would be interested in your views 

on how important that might be to America’s energy future. 

Mr. NEWELL. Sure. Thanks for that question. 

When we look out over the next 25 years, there is a substantial 

decline in the growth of energy consumption we expect to have 

from the historic situation for a number of different reasons. If one 

looks at structural change in the economy, there is a significant 

change toward a more service-oriented economy, which tends to 

moderate the rate of energy growth. 

We have done some analysis that suggested our consumption is 

going to be a third lower simply because of structural changes in 

the economy, which lowers the overall energy intensity of the economy. We have also done analysis that looks at changes in the energy efficiency of particular technologies, and that further lowers 

energy consumption about 13 percent from where it otherwise 

would be. That is already built into the reference case projection 

that I mentioned. 
51 

Now those changes in efficiency come from a number of different 

places. One is efficiency standards that have already been promulgated or that manufacturers and the Department of Energy have 

agreed to. There have been some recent standards there which are 

built into our forecast. 

Market prices also play a role in reorienting consumers toward 

more energy-efficient appliances. You also have voluntary programs 

like the Energy Star labeling program, which provide information 

to people to help them understand what the energy consumption is 

from their appliances. These also tend to affect consumer behavior. 

In terms of disentangling the effect of these difference pieces, it 

becomes quite complex. I mentioned some of the things we have 

done. The other thing that enters in is fuel economy standards for 

automobiles, which I mentioned. 

We do include in the reference case the standards through the 

year 2016, which get the fuel economy of the light-duty vehicle fleet 

up to 35 miles per gallon. But in our reference case, fuel economy 

actually continues to grow beyond that up to 38 miles per gallon 

by 2035, purely due to market incentives. 

So once these technologies are built into automobiles, the next 

time a manufacturer introduces a new model, those new technologies would tend to be included in those new models. Given 

higher projected oil prices, that would tend to provide an incentive 

for consumers. 

So there are a number of different policy and market incentives 

that are directing the economy to more energy efficiency. Although 

energy consumption still grows, it grows by a significantly lower 

rate than what we have seen historically. 

Senator COONS. Thank you. If I could, one other question to Ambassador Jones? 

You expect electric and plug-in hybrids to make up to 70 percent 

of new car sales in 2035, if I am not mistaken, under one of the 

scenarios. Tell me what technology developments you think are 

critical to achieving that, what policies we should be pursuing to 

help ensure an American leadership role in that, and what are the 

different policy scenarios that you think would deliver the biggest 

advantages for us in terms of deploying that fairly significant percentage participation? 

Mr. JONES. I think the technology that needs the most work on 

is battery technology, storage. Increasing the energy density of batteries to allow the vehicles to have greater range. One of the key 

points that people always raise with electric vehicles is their lack 

of range, the fact that the speed with which they can be recharged, 

how often they need to be recharged. 

Now, in point of fact, studies have shown that, for example, 

BMW is developing electric vehicles, and they brought a fleet of 

electric BMWs and they let people drive them for a year, and they 

followed their use. They actually found that most people didn’t 

really need to recharge their car more than 2 or 3 times a week, 

and it was very easy. After a few weeks, they realized this, and 

they liked the vehicles. 

But there is a lot of acceptance, that public acceptance is the real 

problem. But that can be overcome with better battery technology, 
52 

cheaper battery technology. But that is the key thing. Most of the 

rest of it has already been developed. 

Senator COONS. Thank you very much. 

Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you very much. 

Why don’t we do our second round here? Senator Murkowski, did 

you have questions? 

Senator MURKOWSKI. Yes, thank you. 

Mr. Newell, I want to confirm that within your projections, you 

do not include any assessments as to Alaska natural gas being part 

of the mix within the projections through 2035. Is that correct? 

Mr. NEWELL. Yes. That is correct. That tends to depend heavily 

on the Alaska natural gas pipeline. 

Senator MURKOWSKI. Yes. 

Mr. NEWELL [continuing]. Our assessment is that the capital 

costs have increased, and domestic lower-48 gas prices have come 

down. So, that pipeline through—at least through 2035—is not currently in the projection. That is correct. 

Senator MURKOWSKI. I just wanted to confirm. Let me ask more 

generally then, in terms of your assessments as they might relate 

to the Arctic as a whole, not necessarily just to the U.S. Arctic and 

what may or may not develop offshore there, but as you know, we 

have the BP-Rosneft deal that is at play in the Arctic. 

Do you include these prospects in your assessment, either the 

BP-Rosneft deal or just anything in the Arctic? I think we recognize the potential for the reserves up there, but do you anticipate 

in your forecasts seeing anything coming out of the Arctic? 

Mr. NEWELL. I would have to go back and look at the specific results that we currently have. But areas that are open for lease sale 

would enter into our projections at some point. There have been 

changes over time in terms of what areas, at least around Alaska, 

have been open. I think that has even recently changed. So I would 

have to go back and see exactly. But, yes, we do assess those areas 

for sure. 

[The information referred to follows:] 

The Energy Information Administration’s global liquids production projections, as 

published in the Annual Energy Outlook 2011, reflect oil production in offshore 

Alaska but not in Arctic regions other than Alaska, and therefore do not include any 

production potential as a result of the BP-Rosneft deal. Although oil is already being 

produced offshore in the Alaska Arctic, additional oil production from undiscovered 

offshore fields is not projected to commence until after 2030. In the Annual Energy 

Outlook 2011 reference case, oil production from new Alaska offshore fields in the 

Arctic reaches 200,000 barrels per day in 2035. 

Regardless of the EIA projections, Shell Oil is making a concerted effort to drill 

exploration wells in both the Beaufort and Chukchi Seas. If Shell found sufficiently 

large oil reservoirs at either location that would justify their commercial development, then new offshore oil fields in the Alaska Arctic could be in production by 

2020. 

Senator MURKOWSKI. Let me ask, a question for the whole panel. 

We talk a lot about the reserves worldwide and what the U.S. consumes. The commentary is that the U.S. consumes a quarter of the 

world’s oil, but we only have 3 percent of the world’s reserves. I 

have some issues with how this is stated. 

First of all, the 3 percent figure, as I understand it, only speaks 

to proven reserves, which is to say that they have already been 

drilled there. It doesn’t reflect any of the unexplored areas, wheth-
53 

er we are talking Arctic offshore or whether we are talking Atlantic, Pacific coast, Eastern Gulf, much of the deep water. 

So I guess the question to you all would be, first, how important 

is it to actually know what our oil reserves amount to? Secondly, 

if we here in the United States were to prove up our reserves, not 

use them for production, but just provide for that assessment, and 

we were to do so within the next 5- to 10-year horizon here, what 

does this do to the percentage of global reserves that we know in 

terms of our percentage of consumption here in the United States? 

How does that even out? Again, I am curious to know how important is it to know exactly what we have in terms of reserves? 

Mr. Burkhard, why don’t we begin on your end? 

Mr. BURKHARD. Reserves are an important figure, but there is no 

global, uniform standard that countries around the world adhere 

to. So it is a figure that is used a lot, but it has an uncertain definition globally. 

One quick example, the Canadian oil sands. If you include the 

Canadian oil sands, Canada has the second-largest oil reserves in 

the world after Saudi Arabia. If you don’t include the oil sands, 

which some don’t, it falls down quite a bit. 

Perhaps a more relevant example of the resource bases is production as opposed to reserves because the reserves depend on future 

investment and activity and fiscal terms, a whole host of factors. 

The U.S. is the third-largest oil producer in the world, and it is the 

largest gas producer. 

Senator MURKOWSKI. But what you are saying is we don’t have 

a uniform definition as to how we are defining reserves, and that 

doesn’t allow us to do an apples-to-apples comparison. Is that correct? 

Mr. BURKHARD. U.S. companies do adhere to a common standard, 

but—— 

Senator MURKOWSKI. Right. But outside of the United States? 

Mr. BURKHARD. Right. 

Senator MURKOWSKI. Mr. Diwan. 

Mr. DIWAN. Yes. I mean, in some places, it is a political number. 

Senator MURKOWSKI. Yes. 

Mr. DIWAN. In other places, it is an economic number. At dif- ferent prices, you have more or less reserves. At $100 oil, you have 

more reserve than at $10 oil because you can exploit these resources and move them to reserves. 

So I think, overall, it is not a key criteria. When you look at oil 

companies, their reserves always seems very limited. I mean, the 

United States has basically 10 years of reserve ahead of us for the 

last 50 years. So it is not a completely meaningful number. There 

is definitional issues, and it is also how we prove and how you book 

reserve, which is another factor which is complicating. 

Senator MURKOWSKI. Is there an effort within the EIA that takes 

what you have globally and tries to come up with a commonality 

and looking to not necessarily redefine, but to just make sure that 

you are doing a same comparison when it comes to understanding 

what the global reserves are? 

Mr. NEWELL. For the United States, it is, I think, relatively well 

defined in the global sense. But we have been asked on other occasions by other Members of Congress to try and dissect and put on 
54 

an apples-to-apples basis, as much as is possible, and we can share 

that with you. 

It is a challenge. We rely on sources, as others do. The U.S. Geological Survey is very important in this area, the Oil and Gas Journal also. But as was stated, you have to treat different estimates 

from different places with different degrees of surety. 

To get to your question, I think in terms of how it would impact, 

for example, the work that EIA does, the thing that matters most 

over a 20-, 30-year time horizon is even beyond reserves. Because 

as was mentioned, reserves only prove up maybe a decade or so of 

production. Beyond that, it is the technically recoverable resource 

base that becomes even more important. But reserves are important in the near term because they speak to areas that companies 

have demonstrated and taken the effort to say that they can 

produce economically under current prices and technological conditions. So it is relevant for near-term projections. 

I think from the grand scheme of things, if one was to more carefully assess the U.S., it could change. In terms of the global balance, though, I think it is unlikely to change in terms of sheer 

magnitude just because so much of both reserves, and then also beyond that, recoverable resources, are outside of North America. I 

think that basic high-level U.S. context would not change significantly based on that. 

If I may just say one thing to respond to a couple of questions 

posed earlier? Is that—— 

The CHAIRMAN. Yes, go right ahead. 

Mr. NEWELL. One minute. Senator Hoeven had asked what percent of our petroleum consumption comes from Canada and the 

United States. The U.S. is the source of about 48 percent of our liquid fuels consumption, and Canada would add about another 12 

percent. So you would get up to 60 percent if you added those 2 

together. 

The other thing for the record I just want to state is that my tie 

is hand-tailored in the United States of America. 

[Laughter.] 

The CHAIRMAN. You are a rare individual, but we are glad to 

know that. 

Senator MURKOWSKI. Thank you. 

The CHAIRMAN. Senator Portman, you have not had a chance to 

ask any questions. All of us have had at least one round of questions. So why don’t you go ahead with your questions? Welcome to 

the committee. 

Senator PORTMAN. Thank you, Mr. Chairman. I appreciate your 

welcoming me, and it is good to be here with a few of my colleagues. 

I apologize that, as a new member, I am still trying to figure out 

how to be at 3 different hearings at the same time. In this case, 

I didn’t get the chance to hear all of the interesting testimony. I 

did read some of it. 

I hope this question is not one that has already been addressed, 

but my focus would be on the economy and the impact of your prediction of increased demand and, therefore, increased cost of oil. I 

looked at some of your data indicating that we are going to be ap-
55 

proaching $100 a barrel in the next couple of years if your projections are correct. 

I know we are not looking at the economic analysis here as much 

as pricing and supply, but have you looked at the impact on U.S. 

economic growth during that period, assuming that your projections are correct on the increased cost of oil? 

Although we are producing a lot domestically, as you just said in 

response to Governor Hoeven’s question, obviously, as Egypt and 

other countries experience issues that affect the cost of oil, what 

will the impact of that be, and has that been calculated into your 

projections on the cost of oil over the next couple of years? 

I open it up to any and all of our witnesses today. 

Mr. NEWELL. Sure. I can respond. Both our short-term and our 

longer-term outlook really take assumptions of both U.S. domestic 

and global economic growth as an input into that analysis, but it 

does take account of oil prices within that. One question is if there 

were to be changes in oil prices, what could be the potential ramifications for the U.S. economy? 

This is a complex question, but let me give some thought to it. 

Other things equal, every $10 per barrel increase in the price of oil 

tends to add about $40 billion per year to our oil import bill. Since 

imports are subtracted from gross domestic product, this tends to 

weigh on gross domestic product. So every $10 per barrel increase 

in the price of oil may lower GDP by 0.2 percent or so. That is one 

way to look at it. 

Now a key issue, though, is what is causing the price increase? 

If it is demand-side economic growth that is causing the price increase, along with that economic growth—which may be coming 

from abroad—our exports may be increasing because China or 

other countries may demand more materials, more equipment from 

us. 

So, demand-side increases in prices can be consistent with continued global economic growth. The place that tends to be more of 

a concern is if it is a supply side shock to oil that causes prices to 

increase, which pretty unambiguously tends to be a more significant headwind for the economy. 

The one other point that I will mention is it also depends upon 

the state of the economy into which this oil price change is entering. If you are in a situation of a weakened economy or if you are 

in a situation where things like monetary response would not be 

sufficient, then you could be in a more problematic situation. 

Our sense of the current situation is that a lot of the price increase right now is demand driven, and so that is consistent with 

continued economic growth. We don’t see that, at least at this 

point, providing a significant headwind for the U.S. economy. 

Senator PORTMAN. I noted in your testimony you also, though, 

said that the demand side dynamic here is driven primarily by 

emerging economies. You cited China and India and Brazil. So, our 

experience certainly in the last couple of years is, is those countries 

have increased their economic growth and have continued to grow. 

It hasn’t reflected on a change in our balance of trade in terms of 

the export-import issue you talked about or our economic growth 

certainly in 2009, going into 2010. 
56 

But I appreciate your answer, and I hope that these very important energy inputs are being taken into account as we look at what 

the economic forecasts are going forward. Any other responses from 

the panel? 

Mr. BURKHARD. Very briefly, it is an excellent question, tough to 

answer because there is no magic price that elicits a response on 

the part of consumers or governments. Certainly, there are psychological points. When oil hits $100, when the price of gasoline hits 

$3, or if it were to go up to $4, you will see the higher it goes, the 

stronger the reaction will be. 

But that is in the United States, but oil is priced differently, different areas around the world. Some consumers are shielded from 

high prices, others exposed to it. So the reaction globally is very 

uneven. 

Senator PORTMAN. Any other responses? 

Mr. JONES. Yes, just picking up on the global response, I mean, 

a lot of countries are less well positioned than the United States 

to handle high prices, and they are price takers. It will have an impact on their economies. 

I mean, I had a chart in my testimony where I talked about the 

oil burden. Basically, at $100 oil, you are getting up to about 5 percent of world GDP going for oil imports. In the past when that has 

happened, it has been a harbinger of a recession. 

Whether or not it would occur this time, nobody knows. But if 

that price were sustained for all of 2011, we would have concerns 

of the economic impact. 

Mr. DIWAN. There is one last element which is important, which 

is the value of the dollar. Because a lot of countries pay for oil in 

dollar, and if dollar is rising or the declining also have an impact 

into that equation. 

Senator PORTMAN. Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you. 

Senator Wyden. 

Senator WYDEN. Thank you, Mr. Chairman. 

Mr. Burkhard, I want to continue this line of questioning that I 

began with the whole question of financial markets and what is 

going on in the Middle East and this time turn to the question of 

oil that is now in storage. If you take a look at the EIA figures, 

the Energy Information Agency figures on inventory, what they 

show is there are people out there who have been holding a lot of 

barrels of oil in storage significantly above the normal inventory 

levels, sometimes tens of millions of barrels. 

Now, through the summer, as the prices climb, the petroleum in 

storage also climb. When the oil was sold off at the end of the year, 

prices dipped. Now we have this whole array of immense challenges, obviously, in the Middle East. Mr. Diwan said that that is 

unlikely to actually impact oil supply, but oil in storage is rising 

again at levels well above normal inventory levels. 

So my question to you is break down for us what all this buying 

and holding and storage is all about. Because it suggests to me, 

picking up on the theme that you touched on earlier, oil in storage 

is also part of the oil as new gold, which is going to be driving investors staking out positions in the years ahead that brings a new 
57 

element of speculation into this debate that we are going to have 

to concentrate on. 

So break down for me what you think this set of changes in storage is all about. 

Mr. BURKHARD. Part of the oil storage story over the past year 

is investors, companies are responding to market signals because 

the oil market in the U.S. has been generally in a state of 

contango. Now, what the heck is ‘‘contango’’? 

Contango is where the price to buy a barrel today is let us say it is $90. In the futures market, it means that 6 months from now, 

a year from now, that price could be $95 or $100. So that means 

if I buy a barrel of oil today at $90, I lock in the price to sell it 

at $95, 6 months down the road, I can lock in a return. 

So, investors have been responding to that contango environment 

in the oil price. What it is generally signaling is the market’s expectation that supplies, oil supplies will be more valuable in the future. So buy today will pay you more later because the market 

thinks it will be more valuable. 

One of the drivers of that—not the only one, but an important 

one—was last year, in 2010, we saw the second-largest increase in 

oil demand globally in more than 30 years. So this sense that the 

oil market will become tighter over time is one of the factors that 

explains the behavior in this contango-type environment. 

Senator WYDEN. We are going to have to get into contango because I will tell colleagues—Senator Murkowski, I don’t think you 

were here when I laid out this point that the Wall Street Journal 

talked about. At the beginning of the week, they ran their ‘‘Heard 

on the Street’’ column that had a title ‘‘Unrest Pits Oil Bulls 

Versus the Gold Bugs,’’ basically making the discussion for the future essentially where people are going to make their bets. 

Obviously, these issues with respect to how oil and gas prices get 

set are complicated, difficult kinds of questions. But to me, these 

questions that are finally making the pages of the Wall Street 

Journal are ones that have gotten short shrift, and that is why I 

think Mr. Burkhard, Mr. Diwan have given us a lot of valuable information. 

Mr. Jones, I appreciate your moving toward Mr. Diwan’s position 

because when I read your prepared statement, I saw a sharp difference between what you were saying and what Mr. Diwan was 

saying that, to me, undervalues how important this financial market issue is going to be as we try to get into these questions. 

Mr. Chairman, I thank you for this additional round because I 

think oil in storage represents yet another iteration of what Mr. 

Burkhard calls the new gold because this is going to be part of 

what drives the debate about financial assets and where they are 

headed in the future and one I certainly am going to spend a lot 

of time on. 

So I thank you. 

The CHAIRMAN. Thank you. 

Senator Hoeven, did you have additional questions? 

Senator HOEVEN. Thank you, Mr. Chairman. 

This follows a little bit on my earlier question. You talked about 

looking at supply in this country in a continental way with Canada 

and Mexico, talked about efficiency, talked about technology. Of 
58 

course, Mr. Diwan said, well, you know, price drives that. That is 

important and true in many respects. It is interesting, though, once 

that technology is out there and deployed, of course, it tends to 

bring down the price at which you can produce oil or gas or most 

any other energy at a lower threshold, which is very important for 

our production going forward. 

So, with that in mind, I want to ask and maybe start with Mr. 

Diwan because, I mean, obviously, it is price driven. But we need 

to find ways to deploy technology that helps us produce more energy in environmentally sound ways and work to bring that cost 

down. So how do we do that? Maybe talk in terms of countries 

around the world that are doing some things that we should be 

looking at doing, and I am really talking from the production side. 

Most of your projections you talk about the demand side, which 

I understand. China’s incredible growing demand, India, so on and 

so forth. But from the production supply side, talk a little bit about 

that. Who is doing things to produce more? Who is using technology in new and innovative ways that is going to really have an 

impact going forward and, again, something that we can look at? 

Mr. DIWAN. The good new here is really the bright, shiny example of how economics work and incentive works and price works is 

the United States. What we have seen in the United States over 

the last 5 years is phenomenal. 

Gas prices increased, and this increase in gas prices have triggered a technology called breakthrough. We knew about the shale 

gas. We had an idea a little bit how to go about it. But what happened in the United States in terms of breaking the code, if you 

want, and being able to produce that gas and now extending that 

technology to oil is just phenomenal. 

Most oil companies, the large oil companies, the large national 

oil companies drill very few wells every year, and they tend to do 

a lot of experimentation in labs, et cetera. In the United States, it 

is very different. You have a very large entrepreneurial sector, both 

of oil companies and service companies. They don’t go into labs and 

think about 3 years how we are going to drill that well. They go 

and they drill it. 

The wells are fairly small. The investments are fairly small. Capital is available. Risk capital is available. They basically try and 

try and try and try. 

What we have seen in the gas world is we brought all these ingredients together—capital, technology, experimentation, resources—and we broke the code of the shales. That has tremendous 

application globally, and that what we have seen since is because 

of that, the natural gas supply increased, gas prices went down. So 

you have that surplus of capital, technology, people, material, 

wells, et cetera, and it shifted to oil. This is how we have seen now 

this tremendous development in onshore oil in the United States, 

which was a dead sector 10 years ago, and it was perceived as a 

dead sector with very little future. 

A year and a half ago, we were talking about what is happening 

in the Bakken. Now we are talking about what is happening in the 

Eagle Ford, what is happening in Colorado. So it expanded very 

quickly. At these prices, you can experiment. You can try. 
59 

After all, I think over 80 percent of oil wells drilled in the world 

every year are drilled in the United States. So this is where you 

experiment and where this experimentation goes. So the question 

right now is how much the experimentation made in the United 

States can branch out and go and have impact on other resources 

that we know exist, but we couldn’t get out because prices were too 

high. We didn’t have the technology, et cetera. How much we can 

replicate the example of the United States in terms of technology 

and success. 

That is really the big question, both for gas and for oil. 

Senator HOEVEN. I think it is interesting the way you describe 

it and, right, breaking the code in terms of producing these different types of energy because it also, over time, brings the price 

down. So other thoughts on what we can do to continue that kind 

of entrepreneurial development here? 

Obviously, price is one. But the regulatory environment? What 

else? I mean, are there other things companies are specifically looking for or that you are seeing having a real impact on production 

around the world? 

Mr. NEWELL. I will just expand a little bit on what was said. We 

are currently at EIA going beyond the domestic assessment of 

shale gas and broadening that internationally to assess the potential for shale gas development globally. 

We are working on that. That, depending upon what we find 

there, would tend to enter into our international energy outlook, 

which we also produce each year. Some of the main prospects there 

that we already see certainly include Canada. It clearly has shale 

gas basins, which, in effect, extend upward from ours across the 

border. 

Also, China and some parts of Eastern Europe seem to be promising places. But my sense is this has been very much driven by 

market response to high prices that existed at one point, which 

then encouraged the application of certain technology, and then 

there was innovation in that technology. 

The CHAIRMAN. Any other final comment on this? 

Mr. JONES. I was going to ask the Senator, you only focused on 

oil and gas. Are you talking about technologies in general? Because 

there are a lot of examples of innovative policies, for example, that 

are being deployed in Europe and elsewhere on renewable energy. 

Senator HOEVEN. I really was interested in other energy sectors 

as well, including renewables. But I do see that I am past my time. 

So out of deference, Mr. Chairman, I will relinquish back. 

The CHAIRMAN. Did you want to make a short response—— 

Mr. JONES. Yes. Just shortly, I mean, there are a lot of things 

like feed-in tariffs, for example, or portfolio standards that are used 

in various places. But the key thing seems to us to be clear, consistent policies that are as technology neutral as possible, but that 

also take into account the development stage of the technology. 

A lot of technologies need a hand up, so to speak, to get across 

what is called the ‘‘valley of death’’ between the R&D of the development of the technology and the full commercialization of it because you have got get economies of scale. So, those are areas 

where some countries have demonstrated how to get across that 
60 

valley by supporting companies at a key stage of the development 

of their technologies. 

Senator HOEVEN. Mr. Chairman? So, if you had some of those examples, I would love to get them from you. Any that you think 

have been particularly effective in stimulating production. 

Thank you, Mr. Chairman. 

The CHAIRMAN. All right. 

Senator Franken. 

Senator FRANKEN. Thank you, Mr. Chairman. 

Senator Manchin asked why there weren’t subsidies for coal, and 

none of you seemed to want to answer that. I don’t know if it was 

a rhetorical question, but it seems that coal is doing pretty well 

without subsidies. It is very plentiful. It is very cheap, relatively, 

and relatively, compared to other fuels, kind of dirty and, therefore, 

we don’t subsidize it. 

But speaking of subsidies, President Obama has called for kind 

of a suite of cuts in subsidies and tax preferences for oil companies. 

What effect, Dr. Newell, do you think that such a cut would have 

on domestic oil production or gasoline prices? 

Mr. NEWELL. We haven’t specifically evaluated the Administration proposals for changes in those tax incentives. 

Senator FRANKEN. OK. Fair enough. 

In a 2009 statement to the Senate Finance Committee—and I 

have this is right here—Alan Krueger, Assistant Secretary for Economic Policy and chief economist at the Treasury Department, 

said, and I quote, ‘‘Because we expect little or no effect on the 

world supply of oil, removing these subsidies would have an insignificant effect on world oil prices.’’ 

He goes on to say that the decrease in domestic production due 

to these cuts would be less than 0.5 percent. Even in the long 

run—this might sound rhetorical, but anyone wants to pick up on 

it—doesn’t this sound like an industry that doesn’t need tax benefits and subsidies to survive? Anybody? 

Mr. BURKHARD. One thing to keep in mind as you discuss the future of the fiscal terms that govern oil and gas companies—and 

again, I am not an expert on subsidies. So, but one aspect to keep 

in mind is American oil and gas companies are competing in a very 

competitive global marketplace. How they are taxed here or at 

home can affect how they can compete against companies from 

Asia, Europe, or other places. 

So I don’t have a specific answer, but I think having that global—— 

Senator FRANKEN. The largest 5 oil companies in the last decade 

have made over $1 trillion in profits. 2010 profits were double that 

of 2009. Now we have seen ads from these companies talking about 

how much they are doing to invest in alternative energy production. You see it all the time. They are feel-good ads, I think. 

I remember I felt great about BP because it had the little green 

thing. It was beyond petroleum. I think everyone in America 

thought like, ‘‘BP, that is the future. Boy, that is great.’’ I loved 

those ads. Then we learn that BP had like the worst safety record 

of any of these oil companies. 

So these ads, I am wondering how much really are these companies doing, investing in alternative energy? I mean, Mr. Diwan, you 
61 

said that oil and gas companies are in the business of oil and gas. 

Isn’t this really what they are doing negligible? 

Mr. DIWAN. They are oil and gas companies. I repeat that. There 

is a scale issue. These are huge companies. I mean, Exxon is the 

largest company in the world. Chevron is $200 billion capitalization. The renewables business is very small. 

So even if they are doing a lot, it would not be material for the 

companies. 

Senator FRANKEN. But it would be material for the world of renewables? 

Mr. DIWAN. Correct. But they are companies. I mean, they have 

a mission, and that is what they are doing. 

The scale issue is that you wouldn’t expect these large companies 

to be the key innovator, investor, et cetera. I mean just from an 

economic perspective. So we can’t ask them to be what they are 

not. They might pretend to be something that they are not, but 

that is a different issue. 

Senator FRANKEN. OK. So you can’t ask them to be what they 

pretend? 

Mr. DIWAN. Yes. 

Senator FRANKEN. OK. I will write that one down. 

But going back, Mr. Burkhard, to my question, you were saying 

that they have to compete on a world basis. They are doing unbelievably well, right? 

Mr. BURKHARD. They—— 

Senator FRANKEN. That is a relative term, ‘‘unbelievably.’’ But they are doing very well. I mean, if Exxon makes $9 billion this 

quarter, that is—do they really need these subsidies? Do they really need these tax preferences? 

Mr. BURKHARD. I mentioned earlier that oil companies are price 

takers and not price makers. There, the level of their revenue, 

which is large, the level of their capital expenditures is large. 

When prices are high, that we see what the results are. So they 

are a reflection of what has been happening in the global oil market. 

Last year, we saw Chinese oil demand grow 10 percent, 10 percent in 1 year from China. 

Senator FRANKEN. So I think your answer to my question is, no, 

they don’t really need these subsidies. So that is what it sounds 

like. That is my interpretation. You don’t have to nod or agree. But 

for the record, he wasn’t nodding. 

[Laughter.] 

Senator FRANKEN. Thank you, Mr. Chairman. 

The CHAIRMAN. Senator Coons. 

Senator COONS. Thank you, Mr. Chairman. 

I would like to follow up on the colloquy with both Senator 

Hoeven and Senator Franken. Ambassador Jones, you were talking 

about, I believe, the valley of death and other nice ways to describe 

the challenges of early stage commercialization and scale-up of innovations. 

To the exchange you just had with Senator Franken, Mr. 

Burkhard, there is a real question in my mind about the appropriate role of the Federal Government in either subsidizing ongoing 

oil and gas exploration and development or alternative energy tech-
62 

nologies. The projections that are made in the World Energy Outlook for the makeup of the total sort of global energy picture in 

2035 is a bracing reminder that this is largely a petroleum-based 

economy and will remain so for much of the next few decades. 

You mentioned in the conversation with Senator Hoeven, he 

asked for some insights about how we could be more effective, what 

other countries are doing. I would welcome input from any member 

of the four who are in front of us, the panel, how we are most likely 

to be successful in securing capital investment and job growth in 

the United States as renewable energy technologies scale up. 

Given the numbers you gave, it seems to me as if wind and hydropower have the largest potential, and solar comes next. Admittedly, they are small in scale in the global economy. But there is 

a great deal of interest in them in most of our home States. 

So, the question is if we have to choose between continuing essentially to expend Federal dollars in subsidizing oil and gas development, drilling, distribution or in providing subsidies that will encourage and accelerate the development of renewables, how can we 

have the best bang for the buck in terms of employment and deployment, the creation of jobs in the United States and the deployment of technologies that have positive long-term opportunities for 

us? 

I also just wanted to clarify something. I assume, from some of 

these projections about the renewables sector, that most of the 

growth will come outside the United States, that the actual use of 

renewable source energies will be mostly in China and less in the 

United States. But I may have misread that in the materials I 

looked at before coming today. 

So I would appreciate your wading through the complicated question. I would be happy to focus it if any of you want to take a particular piece of it. 

Mr. NEWELL. I will just quickly respond to the last part of your 

question in terms of the magnitude of renewable energy deployed 

into the United States relative to the rest of the world. You are correct, but the U.S. is a small fraction of the entire world. 

So, one would expect that—— 

Senator COONS. We tend to forget that. 

Mr. NEWELL. Yes. So the other key factor there is that the U.S. 

need for energy is growing much more slowly than it is in other 

parts of the world. So, key factors are how big we are currently, 

and the growth is predominantly elsewhere in terms of energy consumption. So, that really does reorient both energy consumption as 

well as different types of energy supply. Growth is in other parts 

of the world. 

Our assessment looking out over the next 25 years is that energy 

consumption by the OECD countries, of which the United States is 

one, is growing modestly-roughly flat whereas overall energy consumption globally will have perhaps 50 percent growth over the 

next 25 years. So, very significant global growth, most of it outside 

of OECD. 

Senator COONS. I assume also some of it in countries that don’t 

have an existing power distribution system or grid so that renewables may grow more rapidly in remote parts of the world where 

there is no existing infrastructure so that you are literally leap-
63 

frogging the existing largely petroleum-based infrastructure in the 

United States. 

Ambassador. 

Mr. NEWELL. That has certainly been one of the interests in solar 

energy technology and other distributed energy generation, yes. 

Mr. JONES. I just would like to add to Richard’s comment that 

there is probably a lot of headroom still left for expansion in energy 

consumption overseas, especially in China. Because even with all 

the growth that they have seen, I think China’s per capita energy 

consumption is like a third of the OECD average. So they can keep 

growing for a long, long time. 

That is, I think, what is going to drive the development of energy 

consumption. The energy industry, technology, everything is going 

to be driven because you have got a huge mass of people there that 

have—basically, their growth has become self-sustaining. They are 

no longer dependent on imports, and their disposable income has 

risen dramatically, as we heard, and they have got a lot more development to undertake, and they are going to do it. It is going to 

change the world. 

They are not alone. India is the same. Maybe not quite as far up 

the development scale as China, but they are also going through 

this. So that is why in the International Energy Agency, we are 

very concerned about the growth in the technologies they use. If 

they use coal, we really are going to have a tremendous increase 

in carbon dioxide in the atmosphere, for example. 

It is not just carbon dioxide, it is other pollutants associated with 

coal. Those pollutants can cross the Pacific Ocean. So we are very 

concerned about how China and India satisfy their insatiable appetite for energy over the next 2 to 3 decades. It matters a lot for our 

welfare here. 

Even though we are not consuming increasing amounts of energy, if they are, it is going to affect our environment. It is going 

to affect our prices and our economy. 

The CHAIRMAN. Any other comment anyone wanted to make in 

answer to this? 

Let me then see, Senator Murkowski, did you have additional 

questions? 

Senator MURKOWSKI. No, Mr. Chairman. 

The CHAIRMAN. Senator Coons, did you have additional questions? 

Senator COONS. No, Mr. Chairman. 

The CHAIRMAN. Thank you all very much. I think it has been a 

useful hearing, and we appreciate your expertise and your time 

today. 

Thank you. That concludes our hearing. 

[Whereupon, at 11:55 a.m., the hearing was adjourned.] 

(65) 

APPENDIX 

RESPONSES TO ADDITIONAL QUESTIONS

DEPARTMENT OF ENERGY, 

ENERGY INFORMATION ADMINISTRATION, 

Washington, DC, July 25, 2011. 

Hon. JEFF BINGAMAN, 

Chairman, Committee on Energy and Natural Resources, U.S. Senate, Washington, 

DC. 

DEAR MR. CHAIRMAN: On July 22, 2011, you were provided answers to 47 questions submitted by Senator Sanders, Murkowski, and Cantwell following the February 3, 2011, testimony by Richard Newell before the United States Senate Committee on Energy and Natural Resources. 

The Department of Energy provided answers to questions outside of the U.S. Energy Information Administration’s purview. Specifically, Senator Murkowski’s question number three {Liquid Fuel Imports) directed to Dr. Richard Newell and questions one (US Energy Companies Versus National Oil Companies), three (Major Oil 

Discoveries), four (Crisis-Drive Energy Policy), five (Clean Energy Standard), seven 

(Foreign Oil Dependence), 12 (Impact of Federal Policies), and 13 (Modular Nuclear 

Reactors) directed at all panelists. Senator Cantwell’s question 4a (Effect of New 

Production Technologies on Prices), 8 (Implications of Business as Usual) and 11 

(How to Increase Energy Diversity) asked of all witnesses. 

Sincerely, 

HOWARD K. GRUENSPECHT, 

Acting Administrator. 

RESPONSES TO QUESTIONS FROM SENATOR SANDERS

CLEAN ENERGY STANDARD

Question 1. The President has proposed a ‘‘clean energy standard’’ that would require 80 percent of our electricity to come from ‘‘clean’’ sources by 2035. Based on 

the Energy Information Administration’s resources and data, if such a policy was 

established and it permitted natural gas, nuclear, and coal with carbon capture and 

sequestration to qualify either in whole or in part for credits toward the 80 percent 

goal, what impact, if any, would this standard have on renewable energy production 

from wind, solar, geothermal, and biomass? 

What are your projections for solar in particular under such a standard; would 

we be likely to see any significant solar energy deployment under this standard? 

What percentage of ‘‘clean energy’’ in 2035 do you foresee, under the new standard, 

as coming from solar, both photovoltaic and concentrated solar. 

If such a policy included a tier system, whereby at least one tier of the 80 percent 

requirement (perhaps 25 percent) was stipulated for renewable energy production, 

would that serve to increase projected renewable energy deployment under this 

standard? 

Answer. The clean energy goal proposed by the President has not yet taken the 

form of a specific legislative proposal. Without the specific structure of a proposed 

policy, EIA cannot provide reliable estimates of its potential impacts. 

In the past, however, EIA has analyzed several legislative proposals for renewable 

portfolio standards, renewable energy standards, clean energy standards, and similarly-structured policies to require minimum shares for specific generating resources. Through these analyses, EIA has found that numerous policy details can 

significantly influence the impact of the policy on key indicators such as the generation mix, cost to consumers, cost to industry, and even achievement of the targeted 

generation share. These key parameters include the existence and level of any limits 

on the price of renewable/clean energy credits; exemptions for certain classes of util-
66 

ities or exclusion of certain generation from requirements of the program; the ability 

to ‘‘bank’’ early compliance credits; and the existence of ‘‘credit multipliers,’’ ‘‘setaside’’ targets, and tiered compliance systems that incentivize specific technologies 

within the suite of eligible technologies. However, since the broad outline of the 

President’s proposed goal is different from the proposals previously analyzed by 

EIA, one should be cautious in relying on earlier analyses for guidance on the new 

goal. When this goal is more completely specified as a policy proposal, EIA will be 

in a better position to evaluate its potential impacts. 

OIL AND EFFICIENCY

Question 2. As you know, the current greenhouse gas and fuel economy standards 

will take us to roughly 35.5 miles per gallon for cars and light trucks by 2016, and 

the Administration has announced plans to develop new standards through 2025. 

What would the impact be on oil consumption and greenhouse gas emissions in the 

United States if the Administration announced a new standard of 60 miles per gallon by 2025, as has been encouraged by a bi-partisan group of Governors and a 

number of retired senior military officers, and which is still somewhat less ambitious than the announced standards for fuel economy in Europe? How many barrels 

of oil would we save compared to business as usual? 

Answer. EIA has not performed a specific analysis of increasing light-duty vehicle 

fuel economy to 60 miles per gallon by 2025. Our forthcoming Annual Energy Outlook 2011 (AE02011), to be released this spring, will include alternative scenarios 

of increased light-duty vehicle fuel efficiency. 

SOLAR

Question 3a. Does EIA have a projection for when residential and commercial 

solar photovoltaic energy will reach grid parity in cost for a significant segment of 

electric customers in the United States (such as 20 percent or 50 percent of electric 

customers)? 

Answer. EIA does not have a projection for when the price of residential and commercial solar photovoltaic energy will be at or below the retail price of electricity 

from the grid for a significant number of electric customers. The cost of electricity 

from the grid varies significantly across the Nation. Also, grid electricity and electricity produced by on-site photovoltaic systems are not identical products, since the 

former is generally available to follow load requirements while the latter follows the 

availability of the intermittent solar resource. 

In EIA’s Annual Energy Outlook 2011 Reference case, near-term average growth 

in residential and commercial solar photovoltaic generation is 26 percent per year 

from 2010 through 2016 while the 30-percent Federal investment tax credit is available. From 2017 through 2035, after the Federal tax credit for residential systems 

expires as currently scheduled and the business investment tax credit returns to its 

permanent 10-percent level, average annual growth in residential and commercial 

solar generation slows to 1 percent per year, even as technology costs are projected 

to decline. The rate of adoption after 2016 indicates that purchasing electricity from 

the grid is projected to remain the economic choice for most residential and commercial customers in the United States through 2035. 

Question 3b. How would it impact EIA’s projections for solar energy deployment, 

as compared to business as usual, if solar energy reached parity with the price of 

electricity from the grid in 50 percent of the United States by 2013? 

Answer. EIA has not analyzed a scenario with the price of solar energy at or 

below the price of electricity from the grid in 50 percent of the United States by 

2013 and cannot provide estimates of the potential impacts of this specific scenario. 

EIA’s Annual Energy Outlook 2011 (AE02011) Reference case provides an illustrative example of the impacts that solar costs can have on projected deployment. 

In the Reference case, electricity prices to residential and commercial consumers are 

expected to remain stable through 2035 in real terms. Near-term average growth 

in residential and commercial solar photovoltaic generation is 26 percent per year 

from 2010 through 2016 while the 30 percent Federal investment tax credit is available, as is currently scheduled. From 2017 through 2035, after the Federal tax credit for residential systems expires and the business investment tax credit returns to 

its permanent 10-percent level, average annual growth in residential and commercial solar generation slows to 1 percent per year, even as technology costs are projected to decline. The full release of the AE02011 will contain a number of additional cases that assume lower technology costs or extended incentive policies for 

solar energy. These cases can be used to better understand the potential deployment 

of these technologies under more favorable conditions than may be found in the Reference case. 
67 

GREEN JOBS

Question 4. Do you have data on solar photovoltaic energy and wind energy utilized in this country that includes breakdowns for country of manufacture of solar 

panels and wind turbines by year, and job creation related to solar and wind manufacturing, installation, and maintenance in the United States? If you do not have 

this type of data, can you inform the committee whether you could supply such data 

and whether you plan to, similar to your efforts in documenting manufacturing of 

geothermal heat pumps? 

Answer. EIA collects some data on the import of solar PV generating equipment 

to the United States if it passes through a U.S. manufacturer. In 2009, U.S. PV 

manufacturing companies reported shipments of 987 MW of solar photovoltaic 

equipment, including cells and modules, and 587 MW of imported solar photovoltaic 

equipment. During that year, U.S. solar PV manufacturers also reported solar photovoltaic exports of 462 MW. While EIA does not collect import or manufacturing 

data for the wind industry, a report released by Lawrence Berkeley National Laboratory in August of 2010 indicates that in 2009 the U.S. imported 39 percent of 

wind turbine equipment on an equipment-cost basis. 

Although EIA collects import and export data on shipments of photovoltaic equipment from U.S. manufacturers, and while this data can be useful in illuminating 

gross trends in equipment sourcing for this market, this data can only provide limited insight into the actual point-of-origin composition of the installed photovoltaic 

capacity market. In the current market, component manufacturing activities may 

occur in different locations for the same finished, installed module. Even core components like the photovoltaic cells can pass through several locations, perhaps with 

initial cell casting in the United States, shipment to a foreign facility for assembly 

into a finished module, and re-shipment to the United States for integration with 

other components into a final installed system. EIA does not track the movements 

of specific shipments, and thus cannot disaggregate the specific path-of-travel of any 

given module. Neither does EIA track photovoltaic modules to the final point-of-installation, and thus cannot provide installed module locations or other statistics on 

installed capacity for most photovoltaic modules. Finally, EIA does not track shipments that do not have a domestic manufacturing component, and may miss modules that are entirely manufactured overseas and shipped to U.S. installers without 

passing through a U.S. manufacturer along with way. 

Although the researchers at Lawrence Berkeley National Laboratory have access 

to different data sources for their estimate of wind equipment imports, they also report problems with accounting for cross-national, multi-stage manufacture of this 

complex product. 

EIA survey respondents report over 14,000 jobs in 2009 in photovoltaic manufacturing. EIA does not have sufficient data on wind or solar distribution and installation industries to estimate industry employment. Employment estimates for specific 

industries are usually provided by the U.S. Bureau of Labor Statistics, which collects primary labor survey data and is better equipped than EIA to provide industry-specific estimates of U.S. employment trends for other manufacturing, distribution, and installation activities. 

RESPONSES TO QUESTIONS FROM SENATOR MURKOWSKI

CELLULOSIC FUELS

Question 1. It appears that your agency has forecast continued—and significant— 

shortfalls in cellulosic biofuels production. Can you explain where cellulosic technology is today, why it has been so slow to take off, and how far below our targets 

we may be in 2022? What will it mean for the Renewable Fuel Standard if we continue to fall so acutely short of its annual production mandates? 

Answer. A review of the industry reveals several significant factors that have contributed to the delay in available advanced biofuels production. Studies show that 

capital costs have risen significantly above the original expectations for these technologies. In addition, biomass feedstock costs have also been substantially higher 

than originally expected and process yields have not achieved goals. At least 6 

planned facilities have delayed startup by 6 months or longer, while only 3 plants 

have reached the startup phase—with many more awaiting financing. Many in the 

industry face important financial, legal, and technological issues that have yet to 

be resolved. 

A direct consequence of the slow market penetration of the technology is the requirement that EPA make available for sale cellulosic biofuel credits at costs significantly below the current production cost for the cellulosic biofuels. If this were to 

continue, EPA would need to evaluate whether to utilize the discretion authorized 
68 

by Paragraph (7) of section 211(o) of the Clean Air Act to also reduce the advanced 

and total schedules which would ultimately delay the timetable for attainment of 

the total volume target for renewable motor fuels under the Renewable Fuel Standard. 

EPA REGULATIONS

Question 2. Understanding that proposed legislation and regulations are not incorporated into the agency’s forecasts. [sic] Now that the EPA’s climate regulations 

have begun to go into effect, will those be included in your agency’s work? Is it possible for EIA to model those regulations? Can you tell us anything about what you 

expect their costs to be, on energy prices or for our economy as a whole? 

Answer. While EPA is developing regulations pertaining to greenhouse gas (GHG) 

emissions from power plants and other large sources, together with the states, it 

has not released specific standards for different plant types. Without such standards, EIA cannot effectively model any impacts of EPA’s proposed regulations. EIA 

is monitoring EPA’s progress in developing the rules, and when more information 

on the specific standards is available, we will adjust our analysis accordingly. 

EIA does try to capture current market behavior with respect to concerns about 

GHG emissions and their potential regulation in its modeling. In order to account 

for the uncertainty surrounding investment decisions in GHG-intensive technology, 

and to reflect current market behavior, EIA assumes a 3 percent increase in the cost 

of capital for new coal-fired power plants and other GHG intensive technologies, 

which is one of the reasons that relatively few new coal-fired power plants beyond 

those already under construction are added in the AE02011 Reference case projections. In addition, 10 states in the Northeast are required to meet the requirements 

set by the Regional Greenhouse Gas Initiative (RGGI) and this is represented in the 

EIA analyses. 

LIQUID FUELS IMPORTS

Question 3. Your agency has forecasted that liquid fuels imports will decrease by 

just a fractional amount over the next 25 years, from 9.7 million barrels a day last 

year to 9.4 million barrels a day in 2035. Assuming that accounts for higher fuel 

economy standards and the emergence of advanced vehicles and biofuels. Can you 

describe any other actions we might take, such as increasing domestic oil production, that would cut our foreign oil dependence? 

Answer. The EIA projections you refer to represent a ‘‘business as usual’’ forecast 

that includes existing policies but not new initiatives. In March, the President laid 

out a bold goal of cutting goal imports by one-third by the year 2025, relative to 

2008. To achieve that goal, the Administration is committed to expanding the safe 

and responsible production of domestic oil and natural gas; improving the efficiency 

of our vehicles; and promoting innovation in new technologies like advanced biofuels 

and electric vehicles. 

US ENERGY COMPANIES VERSUS NATIONAL OIL COMPANIES (NOCS)

Question 1. Can you describe how U.S. oil and gas producers operate with any 

disadvantages relative to National Oil Companies such as the OPEC owner companies? 

Answer. National oil companies (NOCs) now control over three-quarters of the 

world’s oil reserves. The OPEC NOCs have the obvious advantage that the bulk of 

conventional oil resources are located in their home countries and they usually have 

exclusive access to these oil reserves. About 40 percent of the world’s current production comes from OPEC and this oil is relatively inexpensive to produce. How 

OPEC manages its supply has an important impact on world markets. OPEC is capable of expanding their low-cost production and OPEC has historically played a 

role in adjusting supplies of oil in response to growing demand. 

OIL MARKETS

Question 2. If only about 3 percent of the world’s oil travels through the Suez 

Canal and the SUMED pipeline, yet we are seeing some influence on the global 

commodity price resulting from the instability around the Suez, does this indicate 

seemingly small disruptions, real or potential, can have comparatively large impacts 

on global markets? 

Answer. The market impact of such a supply disruption can go beyond volumetric 

loss. Although Egypt is not a large exporting country, it is important to the oil markets for several reasons: as a transit corridor, because of its very high profile in a 

broader region—the Middle East and North Africa—that is of critical importance to 
69 

energy markets, and because of the risk of unrest rippling through the rest of the 

region. Earlier this year, as unrest mounted in Egypt, the market grew concerned 

that oil traffic though the Suez Canal and the Sumed (Suez-Mediterranean) pipeline 

might be halted. The market also became increasingly concerned about the risk that 

unrest and potential disruptions could spread—as eventually happened in Libya. 

Also, even though the disruption occurred against a context of relatively comfortable 

spare oil production capacity, and total Organization for Economic Cooperation and 

Development (OECD) oil inventory levels are generally comfortable by historical 

standards, the latter were not evenly distributed throughout the world and were 

markedly tighter in Europe, the primary market for Libyan crude, than in North 

America, The European Brent crude oil market had been tightening before the start 

of unrest. 

At the same time, there is not enough surplus capacity to offset an unlikely scenario where the oil supplies would be halted in the countries in the Middle East 

and North Africa where political protests have taken place. These countries produce 

a combined 30.4 million barrels per day of petroleum liquids, or 35 percent of the 

world’s total supply. In addition, these countries have virtually all of the world’s 

spare production capacity. Because of the large amount of global oil supplies produced in these areas, markets have been concerned that political protests in the 

Middle East and North Africa could potentially have large effects on world oil markets. 

MAJOR OIL DISCOVERIES

Question 3. What was the impact on global investment and markets when the 

Tupi field was discovered off Brazil in 2006, and how does the addition of a multibillion barrel discovery impact the host nation and the industry? 

Answer. The first discoveries in the pre-salt area offshore Brazil were located in 

the Tupi field in the Santos Basin in late 2006. Petrobras {Brazil’s state-owned oil 

company) confirmed that the Tupi field alone holds 5-8 billion barrels of light grade 

crude oil and is at a depth of three miles below the surface of the ocean. With an 

estimated potential of 50-80 billion barrels of oil equivalent in the pre-salt area (due 

to its geologic location under a cap of salt), Brazil’s oil production potential represents one of the most significant finds in the industry over the last three decades. 

President Dilma Rousseff is deeply involved in setting Brazil’s policies on oil production. 

Impact on global investment and markets 

Brazil is producing approximately 100,000 barrels per day this year in the presalt area. Production could reach 1 million barrels per day by the middle of this decade. Brazil’s oil production has risen steadily in recent years, and the country has 

recently become a net oil exporter. The new pre-salt discoveries are world class and 

some analysts believe Brazil has the potential to become a significant exporting 

country. However, considerable challenges must still be overcome in order to bring 

these reserves to market. The difficulty of accessing reserves, considering the large 

depths and pressures involved with the pre-salt oil production, represent significant 

technical hurdles that must be overcome. Further, the scale of the proposed expansion in production will also stretch Petrobras’ exploration and production resources 

and Brazil’s infrastructure, as well as its financial capacity to meet investment demands. 

Many countries, either through direct negotiation with the Brazilian government 

or through their respective National Oil Companies (NOC) or conglomerates, are aggressively seeking access to these new resources. 

CRISIS-DRIVEN ENERGY POLICY

Question 4a. The Outer Continental Shelf Lands Act was implemented after the 

Arab oil embargo and subsequent price controls and economic shocks of the 1970’s, 

as was the authorization of the Trans-Alaska Pipeline System. Are these patterns 

of crisis and response an unavoidable trend in U.S. energy policy? 

Answer. The United States has naturally paid increased attention to energy policy 

after particular events such as the oil embargo of 1973 and other periods of sharply 

increased energy prices. Nonetheless, important energy initiatives have been enacted in more normal times due to continuing concerns on the part of the Congress, 

the Administration, the States, U.S. industry, and the public. Examples of important policy initiatives that have been enacted without any shocks to the energy supply system include the Energy Policy Act of 2005 and the American Recovery and 

Reinvestment Act of 2009 (ARRA). ARRA included more than $80 billion for increasing generation from renewable energy sources; expanding manufacturing capacity 
70 

for clean energy technology; advancing vehicle and fuel technologies; and building 

a bigger, better, smarter electric grid, all while creating new, sustainable jobs. Other 

examples are described in the following answer. 

Question 4b. Is the U.S., in your group’s view, more proactive or reactive in its 

energy policy? 

Answer. While an answer necessarily has a subjective element, there are reasons 

to believe that the United States has become more proactive in its energy policy 

compared to past years. For example, there have been other reasons besides high 

energy prices to develop advanced energy technologies. Concerns over climate 

change have motivated clean energy policies even when energy prices have been 

low. Often, environmental and energy security concerns line up to redouble our energy policy efforts. We achieve both objectives, for instance, when we improve energy efficiency. New requirements for higher motor-vehicle efficiency and low-emission biofuels fuels are moving the transportation sector away from oil dependence 

while also reducing greenhouse gas emissions. 

CLEAN ENERGY STANDARD

Question 5. Should we learn a lesson from the Renewable Fuel Standard, which 

has fallen short of expectations, when considering an aggressive electricity mandate 

like the one the President is calling for? How likely is it that we will create unforeseen problems if we put a CES in place? To name just one example, will transmission problems—and our inability to add significant amounts of renewable energy 

to the grid—become the new ‘‘blend wall’’? 

Answer. The President’s Clean Energy Standard is designed to achieve the deployment of clean energy technologies as cost-effectively as possible. Rather than picking 

winners and losers among technologies, the CES would include a very broad range 

of energy sources, including renewable (like wind, solar, hydro, and geothermal) as 

well as nuclear, efficient natural gas, and clear coal. To address your specific question on the issue of transmission needs under a CES, the amount of new transmission that would be needed relative to the transmission needed under ‘‘ business 

as usual’’ is difficult to predict, given that the CES does not choose among clean 

technologies. To the extent that expanding renewable energy generation creates 

needs for new transmission infrastructure, the Administration is working hard to 

address those needs. For example, the President’s FY 2012 budget proposal includes 

two new Energy Innovation Hubs, one devoted to Smart Grid Technologies and Systems and another to Energy Storage, technologies that can ease the integration of 

variable renewables into the electric grid. This is in addition to the research and 

development work in these areas already funded by the Department of Energy in 

its Office of Science, Office of Electricity Delivery and Energy Reliability, and Office 

of Energy Efficiency and Renewable Energy. Moreover, the Administration recently 

announced the creation of a Renewable Energy Rapid Response team to address 

barriers to the permitting and siting of renewable projects, including transmission 

lines. 

ALTERNATIVES TO OIL

Question 6. How substantial of an impact do you believe advanced biofuels, electric vehicles, and other technologies will have on petroleum consumption by 2020? 

By 2030? 

Answer. The Annual Energy Outlook 2011 Reference case projects that advanced 

biofuels will displace 300,000 barrels per day of crude consumption by 2020 (3 percent of projected refinery crude inputs) and 830,000 barrels per day by 2030 (6 percent of projected refinery crude inputs). Although sales of plug-in electric vehicles, 

which includes battery electric vehicles and plug-in hybrid electric vehicles, increase 

over the projection period and reach 2 percent of new light vehicle sales by 2030, 

they account for less than 1.5 percent of all light-duty vehicles in use by that time 

and have only a modest impact on light-duty vehicle petroleum demand. Hybrid vehicles, diesel vehicles, and other advanced conventional vehicle technologies (e.g., 

turbo charging and light weight materials) are projected to make more significant 

contributions to fuel economy improvement in the Reference case projection. The cumulative effect of increased use of biofuels, advanced biofuels, and fuel economy improvements results in a slight decline in light-duty vehicle petroleum demand from 

current levels over the Reference-case projection period, despite the significant increase in the number of vehicles and vehicle miles of travel. 

FOREIGN OIL DEPENDENCE

Question 7. If Congress had allowed the Coastal Plain of ANWR and other parts 

of Alaska to be opened to production, in 1995 for example, we would be producing 
71 

domestic oil at a considerably higher rate. What would that mean for our nation’s 

energy security? Would we be more protected, or less protected, from civil unrest 

in Egypt, Jordan, and other parts of the Middle East? In the event of a supply disruption abroad, would we be better equipped, or less prepared, to deal with import 

shortages? 

Answer. The amount of oil produced would depend on a number of economic, geologic and technical factors, with production not occurring until about ten years after 

the beginning of exploration. The most recent USGS evaluation of potential oil reserves from the area occurred in 1998. USGS estimated a 95 percent probability 

that at least 5.7 billion barrels of technically recoverable undiscovered oil are in the 

ANWR coastal plain and a 5 percent probability of at least 16 billion barrels. The 

mean estimate was 10.3 billion barrels. 

Based on these estimates, EIA has conducted several analyses of the potential annual production from this area. In its most recent analysis in 2008, EIA concluded 

that the opening of the ANWR 1002 Area to oil and natural gas development was 

projected to increase domestic crude oil production starting in 2018 (assuming exploration started in 2008). In the mean resource case, production peaks at 780,000 barrels per day (bpd) in 2027 and declines to 710,000 bpd by 2030. 

According to the EIA’s 2008 analysis, additional oil production resulting from the 

opening of ANWR would be a small portion of total world oil production. Based on 

the most recent estimates of U.S. production and imports from the EIA Annual Energy Outlook 2011, ANWR production of approximately 750,000 bpd could potentially displace between 8 and 9 percent of U.S. oil imports annually or about 1 percent of world production. The impact on world oil prices—and therefore U.S. crude 

oil and gasoline prices—would be correspondingly small; in the mean resource case, 

EIA estimated a reduction in low sulfur, light crude oil prices of $0.75/barrel (translating into less than 2 cents per gallon of gasoline). As a result the opening of 

ANWR would have little effect on U.S. energy security in terms of our vulnerability 

to high world oil prices. 

Because oil is priced in a global market, however, the opening of ANWR would 

have little effect on the consequences of political unrest or a supply disruption in 

the Middle East. The main impact of these events would likely be higher oil prices 

worldwide, which would adversely impact the economies of all oil-consuming nations, including the United States. That is why the President is committed to reducing our nation’s overall consumption of oil, for example through increased vehicle 

efficiency, at the same time that it is taking steps to promote safe and responsible 

oil and gas development and alternative fuels. 

PROJECTED OIL PRICES

Question 8. In a hypothetical scenario of September 2012, with unemployment 

down to 8%, the economy growing at greater than 3% each quarter, and world markets on the upswing, where would you forecast the price of oil? 

Answer. In EIA’s March’s Short-Term Energy Outlook, U.S. gross domestic product (GDP) growth for 2011 and 2012 was 3.2 percent and 2.8 percent, respectively, 

with the unemployment rate averaging 9.0 and 8.5 for 2011 and 2012, respectively. 

EIA projects U.S. liquid fuel consumption to increase by an average 130,000 barrels 

per day in 2011 and a further 190,000 barrels per day in 2012, while world consumption grows by roughly 1.6 million barrels per day in each year. The price of 

West Texas Intermediate crude oil is projected to be $102 in 2011 and $105 in 2012. 

With the somewhat higher domestic economic growth and lower unemployment 

rate posited by your question, a modest further increase in U.S. liquid fuels consumption would be expected but the effect on oil prices would be small given that 

the consumption increment is a very small fraction of projected world oil demand. 

OFFSHORE MORATORIUM

Question 9. How does the amount of oil that could be taken offline by unrest in 

the Middle East compare to the amount of production that will be lost because of 

the absence of new exploratory permits in the Gulf of Mexico, and the absence of 

resumed exploratory operations? 

Answer. The impacts on Gulf of Mexico (GOM) production associated with the 

stoppage, now ended, of deepwater development and exploration drilling in the 

aftermath of the April 2010 Macondo well blowout involve significantly lower volumes than the losses of production from the Middle East and North Africa that are 

the current focus of oil market attention. For example, roughly 1.5 million barrels 

per day of crude oil supply has been shut down since March 2011 due to the conflict 

in Libya. EIA’s July 2011 Short-term Energy Outlook (STEO) assumes that only 

half of this production will be restored by the end of 2012. Because of the large 
72 

amount of global oil supplies produced in the Middle East and North Africa (about 

30.4 million barrels per day), markets continue to be concerned that political protests in these, regions could potentially lead to further disruptions that could have 

large effects on world oil markets. 

In contrast, oil production in the Federal GOM is forecast to be close to its 2009 

level in 2010 once final information from the Bureau of Ocean Energy Management 

is incorporated in EIA’s data. While EIA’s expects Federal GOM production to decline in both 2011 and 2012, the change from the 2009 level, at 0.07 million barrels 

per day in 2011 and 0.17 million barrels per day in 2012, is much smaller than the 

Libyan outage, and not all of this change can be directly attributed to the stoppage, 

now ended, in deepwater drilling following the Macondo well blowout. 

ECONOMIC RECOVERY

Question 10. Adam Sieminski, the Chief Energy Economist for Deutsche Bank, recently wrote that ‘‘We estimate that a 10 dollar rise in the oil price subtracts approximately 0.5 percentage points off U.S. growth.’’ Do any of you agree with Mr. 

Sieminski’s assessment? Would this calculation change if the US supplied 60% of 

its own oil as opposed to importing 60% of its oil? 

Answer. Some caution should be used when attempting to estimate the response 

of the U.S. economy to an oil price change. The magnitude of macroeconomic impacts depends on the magnitude of the price shock, its persistence, and the relative 

importance of oil to the economy. A major challenge to estimating the magnitude 

of oil price shocks on the economy is that some historically large oil price increases 

have been accompanied by other macroeconomic factors and policies that have also 

impacted aggregate demand. That said, EIA’s analysis suggests a lower impact of 

oil price increases on the U.S. economy, implying a rough rule of thumb that each 

$10 per-barrel increase in the price of oil lasting for one year would reduce gross 

domestic product by about 0.2 percent in that year, as well as in the following year. 

The magnitude of the impacts on the U.S. economy depends upon how long the 

oil price increase lasts, whether the change in the oil price is gradual, the oil price 

level when the price change occurs, and the availability of substitutes to oil. Economic impacts vary depending on whether the oil price change results from supply 

constraints or from increased demand due to robust economic and income growth. 

The impact on the economy also depends on pre-existing economic conditions including the rate of inflation, interest rates, and monetary policy. 

These results would change if the U.S. were not a net oil importer. Since the 

United States imports a large percentage of its oil, the terms of trade (the volume 

of exports needed to purchase a given volume of imports) deteriorate when the price 

of oil increases because U.S. consumers pay more for the same amount of oil and 

are therefore less able to purchase other goods. 

PRICE INCREASES

Question 11. The head of the Bipartisan Policy Center noted earlier this week that 

‘‘A one-dollar, one-day increase in a barrel of oil takes $12 million out of the U.S. 

economy. If tensions in the Mideast cause oil prices to rise by $5 for even just three 

months, over 5 billion dollars will leave the U.S. economy.’’ Do any of you disagree 

with that assessment? 

Answer. In 2010, U.S. net crude oil imports averaged around 9.2 million barrels 

per day and net petroleum product imports averaged 0,4 million barrels per day, 

for a total of 9.6 million barrels per day. Assuming the average level of imports did 

not change in response to the price increase or other factors, a one-dollar increase 

in the price of oil would cost about $9.6 million dollars per day in increased import 

costs. Again, holding constant the volume of imports, a $5-per-day increase would 

amount to an increase of about $48 million per day and result in a cumulative $4.4 

billion in increased import costs over a three-month period. 

IMPACT OF FEDERAL POLICIES

Question 12. What role does the federal government’s stimulus policies, and the 

Federal Reserve’s second round of quantitative easing, have played in boosting commodity prices? Have these policies boosted the price of oil, and, if so, by how much? 

Answer. The price of oil and other commodities is determined by many factors related to current economic and market conditions, as well as expectations about future conditions. Some major factors affecting current oil prices are expectations 

about the global economic recovery, the growth rate of Asian demand, and whether 

OPEC producers will be willing or able to meet demand growth without increased 

supply from non-OPEC producers. 
73 

1Department of Energy—Recovery and Reinvestment webpage, at http://www.energy.gov/recovery/vehicles.htm, accessed Feb 16, 2011. 2Federal Reserve of New York, Operating Policy: Statement Regarding Purchases of Treasury 

Securities, at http://www.newyorkfed.org/markets/opolicy/operatinglpolicyl101103.html, 

accessed Feb 16, 2011. 

The American Recovery and Reinvestment Act of 2009 (ARRA), the cornerstone 

of the federal government’s stimuluS policies, includes measures that provide both 

upward and downward pressure on oil prices. Two overall aims of ARRA are to create new jobs and save existing ones, as well as to spur economic activity and invest 

in long-term growth. Historically, increased economic activity has been linked to oil 

demand. Promoting economic growth provides upward pressure to current prices 

through expectations of higher future oil demand. 

Measures funded by ARRA provide downward pressure on oil prices by reducing 

U.S. consumption of oil. The Department of Energy (DOE) is investing in energyefficient and advanced vehicle technologies (hybrids, electric vehicles, plug-in electric hybrids, hydraulic hybrids, and compressed natural gas vehicles) that will reduce petroleum consumption by displacing conventional gasoline-and diesel-powered 

vehicles. DOE is also investing ARRA funds to support increased production and use 

of biofuels to directly displace petroleum products.1

According to the Federal Reserve’s Statement Regarding Purchases of Treasury 

Securities, the second round of quantitative easing aims to ‘‘promote a stronger pace 

of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate.’’2 As noted earlier, expectations of improved economic recovery provide upward price pressure on oil prices as economic activity is commonly 

linked directly to oil consumption. 

MODULAR NUCLEAR REACTORS

Question 13. What role do you believe small modular nuclear reactors will have 

in meeting the global demand for electricity? What countries are moving forward 

with this technology and what countries are interesting in acquiring these reactors? 

Answer. Small Modular Reactors (SMRs) could play a significant role in meeting 

the global demand for electricity. Many countries desire to pursue or expand nuclear 

energy programs and would see value in pursuing SMRs because of their potential 

benefits, such as lower capital costs, greater flexibility in siting due to lesser cooling 

requirements, ability to support smaller electrical grids, capability to replace fossil 

plants that have existing electrical infrastructure, and the lower risks of construction delays. Argentina, Japan, Korea, Russia, and the United States are moving forward in the development of SMR technology. Based on statements by representatives at international forums such as IAEA interactions, the following countries also 

have indicated interest in SMRS: Bangladesh, China, Estonia, Ghana, Indonesia, 

Jordan, Kazakhstan, Kenya, Malaysia, Mongolia, Morocco, Namibia, Nigeria, Russia, Senegal, Singapore, Sri Lanka, Switzerland, and Venezuela. 

OIL SPILL REPORT

Question 14. Have you reviewed the recommendations made by the Presidents’ Oil 

Spill Commission? Have your conducted any analysis on the impact those recommendations, if fully implemented, would have on domestic oil production, our import levels, and the global price of oil? 

Answer. EIA’s Annual Energy Outlook 2011 Reference case includes only current 

laws and regulations and thus our projections do not include recommendations of 

the President’s Oil Spill Commission. 

CHINA

Question 15. Can you shed light on what China’s energy picture really looks like, 

not just for renewable energy, but also its future demand for oil, natural gas, and 

coal? 

Answer. In the long-term, EIA projects all forms of energy will grow substantially 

to meet China’s future demand. Between 2007 and 2035, China’s renewable energy 

consumption alone more than quadruples according to the International Energy 

Outlook 2010 (1E02010), EIA’s latest assessment of world energy markets. China 

remains among the world’s fastest growing regional markets for wind power expansion, with its total net wind-powered generation projected to increase from 6 billion 

kilowatthours in 2007 to 374 billion kilowatthours in 2035. Nonetheless, 

hydroelectricity remains China’s largest source of renewable energy and, even in 

2035, wind generation is only 30 percent the size of hydroelectric generation. 
74 

Although China’s is poised for a substantial rise in renewable energy use, fossil 

fuels will likely be used to meet much of the country’s future long-term energy 

needs. Oil, natural gas, and coal still account for 86 percent of China’s projected 

total energy use in 2035 in the 1E02010 Reference case, a decrease from its 2007 

share of 93 percent. With its large domestic reserves, coal remains China’s largest 

energy source throughout the projection, fueling both electric power and industrial 

sector requirements. Though the Chinese government intends to consolidate the coal 

sector by focusing on larger, more efficient mines, coal use grows at an annual average rate of 2.9 percent and roughly doubles by 2035 in the 1E02010 Reference case 

projection. Significant changes to existing law or technological breakthrough could, 

however, change this Reference case outlook. 

Liquid fuels demand also increases rapidly, primarily to fuel China’s growing 

transportation sector needs, rising in total consumption by 2.9 percent per year in 

the forecast period of the 1E02010. Natural gas, though a small contributor to China’s fuel mix in absolute terms, is expected to be the fastest-growing fossil fuel during the forecast period, increasing 5 percent per year and doubling its share of the 

overall energy mix. 

In the short term, China’s oil consumption is projected to continue to grow during 

2011 and 2012, with oil demand reaching almost 10.4 million barrels per day (bbl/ 

d) in 2012. The anticipated growth of 1.2 million bbl/d between 2010 and 2012 represents about 38 percent of projected world oil demand growth during the 2-year 

period according to the March 2011 EIA Short-Term Energy Outlook. 

EFFECT OF DOMESTIC DRILLING ON GAS PRICES AND FOREIGN OIL DEPENDENCE

Question 1a. In response to the recent political unrest in the Middle East, and 

rising oil prices, we have heard familiar calls to expand domestic drilling in the 

United States—including offshore and in the pristine Arctic National Wildlife Refuge (ANWR)—typically with the claim that such actions will lower gasoline prices 

or reduce our dangerous over-reliance on foreign oil. 

An Energy Information Administration (EIA) study from May 2008 projected the 

effects on oil prices of drilling in the Arctic National Wildlife Refuge. According to 

EIA’s projections, in the most optimistic case, drilling in ANWR would reduce crude 

oil prices by approximately $1.44 per barrel. I understand this would translate to 

approximately 3 to 4 cents per gallon of gasoline at the pump about 20 years from 

now. 

It seems that EIA has found that drilling offshore would have a similarly negligible effect on prices. EIA issued an analysis in 2009 that examined the impact 

of maintaining the historical moratorium on drilling off the Atlantic, Pacific, and 

Eastern Gulf of Mexico. According to that analysis: ‘‘With limited access to the lower 

48 OCS...there [would be] a small increase in world oil prices... The average price 

of imported low-sulfur crude... is $1.34 per barrel higher, and the average U.S. price 

of gasoline is 3 cents per gallon higher.’’ 

Mr. Newell, does EIA still stand by the findings in these recent reports? 

Answer. EIA would not expect the overall findings in the aforementioned analyses 

of opening ANWR or maintaining the historical moratoria on drilling off the Atlantic 

and Pacific coasts and in the Eastern Gulf of Mexico (GOM) to change significantly 

if the analyses were to be updated. The results in both of these analyses reflect the 

significant amount of time that would be required for these sources to add to global 

oil supplies and the likelihood of offsetting demand and supply responses over an 

extended period. 

Question 1b. Even if every acre of the United States were open to oil drilling both 

on and offshore would that lower gasoline prices today? Or in 2 years, 5 years, 10 

years, or 20 years? 

Answer. Although near-term production from areas that have already been leased 

can be highly sensitive to the pace of drilling activity, opening access to drilling on 

every acre of the United States not currently open to leasing would not necessarily 

have an impact on production and prices in the short-term. Before any drilling in 

such areas can begin, at a minimum, leases must be purchased, environment impact 

studies performed, and drilling permits submitted and approved. In the undeveloped 

areas of the offshore, the lead time between leasing and production is 5-10 years, 

depending on water depth and proximity to existing infrastructure. In the aggregate, by 2030 greater access to Federal lands and waters could increase crude oil 

production by about 1 million barrels per day (excluding oil shale) with ANWR accounting for most of the increase at about 700,000 to 800,000 barrels per day. The 

remaining volume is from the Gulf of Mexico. Regarding oil shale, the primary constraint to production is the rate of technological progress, particularly with respect 

to developing a commercially-viable in-situ production process. In the Annual En-
75 

ergy Outlook 2011 Reference case, large-scale oil shale production is projected to 

begin in 2029 and reach 135,000 barrels per day in 2035, however, small-scale mining and retorting of oil shale on private lands could occur earlier. 

Because oil prices are largely determined by the international market, the substantial lead time for new Federal leasing to result in new production allows for demand and supply responses over an extended period that can significantly offset the 

impacts of production from newly-leased areas. As a result, the longer-term impact 

of increased domestic oil production on gasoline prices is expected to be modest; a 

few cents per gallon in 2035. 

Question 1c. EIA predicts that oil imports in 2035 will be about the same level 

as they are today. Is there any way that domestic drilling could significantly impact 

that level of dependency? 

Answer. U.S. dependence on imported liquid fuels, which reached 60 percent in 

2005 and 2006 before falling to 52 percent in 2009, is expected to continue to decline 

to 42 percent by 2035 as a result of increases in biofuels, natural gas liquids, domestic production from onshore enhanced oil recovery projects (primarily carbon dioxide 

flooding), shale oil plays, deepwater drilling in the Gulf of Mexico, and consumption 

increases that are moderated by fuel economy standards. More rapid technological 

improvements and wider application of existing technologies to emerging oil plays, 

as well as increased access to domestic oil resources in Alaska and the Outer Continental Shelf, could further reduce dependence on imported liquid fuels. 

Question 1d. Would a permanent moratorium on drilling offshore the West Coast 

of the United States have any impact on future oil prices or the prices consumers 

pay at the gasoline pump? 

Answer. A permanent moratorium on drilling offshore the West Coast of the 

United States is not expected to have a significant impact on gasoline prices. In addition to the more general points made in the response to question lb, the Bureau 

of Ocean Energy Management, Regulation and Enforcement has indicated that 

there is low resource potential in that offshore region. 

RESPONSES TO QUESTIONS FROM SENATOR CANTWELL

IS OPEC ABLE TO OFFSET ANY INCREASED DOMESTIC DRILLING

Question 2. A number of experts have argued that any price impact of increased 

domestic production can be easily offset by OPEC. According to another EIA factsheet: 

One of the major factors on the supply side is OPEC, which can sometimes exert significant influence on prices by setting an upper production 

limit on its members, which produce about 40% of the world’s crude oil. 

OPEC countries have essentially all of the world’s spare oil production capacity, and possess about two-thirds of the world’s estimated crude oil reserves. 

Is it true that OPEC, by modestly curtailing its output, has the power to offset 

any downward pressure that a marginal increase in US oil production might otherwise produce? 

Answer. EIA agrees that OPEC could modestly curtail crude oil production to offset increased U.S. oil production. This would eliminate the downward price pressure 

of increased U.S. oil production. However, it could also reduce OPEC revenue because of lower production by its members, which may affect some OPEC member 

countries’ willingness to reduce production. It should also be recognized that, as was 

the case during 2007 and early 2008, OPEC spare capacity could fall to lower levels, 

reducing the ability of OPEC member countries to influence world oil prices by controlling production. Under such circumstances, OPEC countries may not want to 

curtail their production in response to higher U.S. production. 

In the past, OPEC has demonstrated the ability and willingness to reduce production to limit price declines. In the fall of 2008, in response to rapidly falling world 

oil prices, OPEC reduced its target oil production from 29.7 million barrels per day 

(bbl/d) to 24.8 million bbl/d, or a targeted drop of 4,8 million bbl/d over a period of 

3 months. Actual output from OPEC, including from Iraq, fell from 31.4 million bbl/ 

d in October 2008 to 28.9 million bbl/d in February 2009, a reduction of 2.5 million 

bbl/d in less than 4 months. OPEC nations’ government control of oil production levels, combined with their relatively low cost to develop and maintain production capacity, provides them with the ability to enact such significant supply reductions. 

In contrast, during periods of significant non-OPEC supply expansion and ample 

OPEC spare capacity—such as during much of the 1990s—OPEC’s pricing power 

has been much lower. 
76 

EFFECT OF SPECULATION ON OIL PRICES

Question 3a. Several of the [sic] testified that the oil price movements can be explained by supply and demand fundamentals and these explain the upward pressure 

we’ve seen in recent months. We often hear about the lack of a ‘‘conclusive’’ smoking 

gun that links oil price spikes to speculation in the derivatives markets. 

However, as you may know, the recently-passed Dodd-Frank Act requires the 

Commodities Future Trading commission (CFTC) to establish rules to eliminate excessive position limits. Unfortunately, 180-day deadline for those rules has passed 

and the regulatory process of establishing position limits is still in the early stages, 

and the limits are planned to be phased in over time. 

Can the witnesses please comment on the likelihood of seeing a huge oil price 

spike this summer of the magnitude that we saw in the summer of 2008? 

Answer. In July 2008, the WTI futures price rose to an all-time high, in both real 

and nominal terms. A review of information from both the financial and physical 

markets suggests the futures market is pricing in only a low chance of the July futures contract exceeding the $145 price level seen in July 2008. As of March 25, the 

futures market for North Sea Brent crude oil is pricing in a 7 percent probability 

that the July contract will exceed price levels seen in 2008 and a 2 percent chance 

for the similar WTI contract. Several key fundamental factors of the oil market also 

are drastically different from 2008 and may help explain this result. First, using 

EIA estimates, OPEC spare production capacity is projected to be 2.7 million barrels 

per day higher in the first half of 2011 than in the first half of 2008. Second, crude 

oil inventories in the United States are near historic highs. Lastly, world economic 

growth, which is an indicator of oil demand growth, is expected to average 3.6 percent in the first half of 2011. This is below the 4-6 percent growth that the world 

economy saw from 2005 through first quarter of 2008. Thus, there is considerably 

more ‘‘slack’’ in crude oil production and inventory levels compared to 2008 and 

lower projected demand. These factors support the market’s opinion of a low probability of seeing a sharp rise in oil prices this summer; however, geopolitical events, 

weather, or other unforeseen events could increase the chance of prices rising rapidly. 

Question 3b. Do any of the witnesses believe that putting some limits on excessive 

speculation reduces the changes of rapid rise in oil prices similar to the summer 

of 2008? 

Answer. Position limits on energy futures, which are in the process of being developed by the Commodity Futures Trading Commission pursuant to last year’s DoddFrank financial reform legislation, are intended to prevent one entity from obtaining 

an undue influence on a market. EIA has not evaluated the specific consequences 

of position limits on oil price movements. Nonetheless, the effect of position limits 

on future price movements will depend in part on the degree to which prices—in 

the absence of such limits—would be driven by the actions of individual market entities or rather by broader market trends and behavior. 

Question 3c. Recent years have provided us with plenty of fresh evidence that 

markets are susceptible to irrational behavior, both exuberance and fear. We have 

seen this not only in energy markets, but in financial markets in general, whether 

for securities, home mortgages, or other commodities. Can you please comment on 

how, and whether, your organizations attempt to incorporate market forces into 

your energy pricing models? 

Answer. EIA examines supply, demand, economic growth, futures markets, and 

other market forces, as well as other analysts’ forecasts, in its energy pricing analyses. EIA also quantifies the uncertainty, or risk, in the market by using ‘‘implied 

volatilities’’ derived from the NYMEX options markets to construct confidence intervals around the NYMEX crude oil futures prices. The confidence intervals are essentially a way of assessing the market’s uncertainty around the current price paths, 

and thus, take into account all factors, including ‘‘non-fundamental’’ factors. Information from futures trading is also used to calculate probabilities of prices exceeding certain levels. These probabilities are included in a supplement to EIA’s ShortTerm Energy Outlook. 

EFFECT OF NEW PRODUCTION TECHNOLOGIES ON PRICES

Question 4a. There seems to be some disagreement on whether investment in developing new production technologies ends up reducing the price of fossil fuels. We 

have heard a great deal about how oil and gas production is a capital intensive business that requires significant investment in new technologies to access new resources, whether those are unconventional resources, such as oil sands or shale, or 

hard to access resources, such as ultra-deepwater drilling. 
77 

3The Bakken Formation of the Williston Basin is a success story of horizontal drilling, fracturing, and completion technologies. EIA, Technology-Based Oil and Natural Gas Plays: Shale 

Shock! Could There Be Billions in the Bakken? 4 EIA estimates U.S. natural gas production from shale was 3,110 billion cubic feet (bcf) in 

2009 out of a total U.S. marketed natural gas production of 21,604 bcf. Oil production from the 

Bakken formation by the end of 2010 reached 458,000 barrels per day, outstripping the capacity 

to ship the oil from the region. (Bentek Energy) By comparison, in November 2010, total U.S. 

crude oil production was 5.595 million barrels per day. (EIA) 5 AE02011 Early Release, 2035, lower-48 states. 

6 EIA, AE02011 Early Release. 

7The Annual Energy Outlook 2004 projected that, by 2025, 7.2 TCF, or 22%, of domestic consumption, would be met by natural gas imports. 8Wall Street Journal, February 26, 2010, Oil Industry Booms—in North Dakota 

9 Ibid. 

10 Business Week, June 2, 2010, Production Costs Climb for Canadian Oil Sands, Companies 

Say 

Does investment in developing such hard-to-access resources result in lower fossil 

fuel prices? Or does it simply enable the production of harder to access and more 

expensive resources, thereby ensuring that oil and natural gas will only continue 

to flow as long as global prices remain high? Are you concerned that the U.S. is 

locking itself into dependence on a resource that is destined to get more and more 

expensive over time? 

Answer. Private and national oil companies are using advanced technologies to 

bring unconventional oil and natural gas resources to market.3 There is no question 

that with these new technologies oil and natural gas prices are lower than they otherwise would be. No technology, of course, will be employed if it has a cost of production greater than expected market price. In the United States the expanded use 

of horizontal drilling and hydraulic fracturing technologies in tight sands and shale 

deposits have had very large impacts on U.S. natural gas supplies and they are beginning to have a noticeable impact on U.S. oil supplies.4 As there is not a worldwide natural gas market, beyond LNG, there can be considerable disparity of natural gas prices across different regions of the world. 

Price is the market equilibrium of supply and demand. Improvement in production technology increases the technically recoverable resource. Reserves are determined by what portion of the technically recoverable resource is economical to 

produce. Producers use future price projections to evaluate what production technologies and resource plays are likely to result in the greatest return on investment. 

Technological advances have lowered the cost of resource access and production 

for shale gas, shale oil and oil sands. EIA projects a doubling of natural gas production from shale gas formations and 20 percent higher natural gas production.5 These 

represent substantial improvements compared with the production and price forecasts in the EIA Annual Energy Outlook 2010 (AE02010) Reference case.6 The improvement in the U.S. natural gas outlook is much greater when compared to the 

widely held expectation of earlier years that the United States would have to rely 

on LNG imports.7

For oil produced from shale formations, company announcements and industry reports have noted that technology developments have reduced drilling time to an average of 24 days to drill a well in 2010, down from 56 days in 2006.8 The technology 

developments have made accessible new areas that were previously marginal drilling and exploration opportunities and made wells profitable at prices as low as $50 

a barrel, down from $80 three years ago according to market analysts.9 For oil 

sands, technological developments are helping to hold down rapid increases in labor 

and capital costs which have pushed break-even prices to $60-$80 per barrel according to industry sources.10 These cost reductions are typical after advanced technologies are first deployed. Through a process often referred to as ‘‘technology learning,’’ new technologies usually achieve a steady reduction in cost with expanded 

commercial deployment. As other unconventional technologies are deployed to develop harder-to-reach oil and gas resources, we can expect that this process of technology learning will continue with each new innovation. 

It is less important whether the cost of unconventional oil and gas development 

is ever competitive with the easy-to-reach oil and gas resources of the past. The real 

test is whether they remain competitive in the oil and gas markets of the future. 

The investments being made by private and national oil companies indicate a high 

degree of confidence that they will, although there is always the possibility that oil 

or natural gas prices could fall sufficiently to make these investments unprofitable, 

at least temporally. These risks are not fundamentally different than those that 

have to be considered by any investor. 
78 

Question 4b. Do you believe there is now a new normal for fossil fuel prices? Just 

a decade ago OPEC had a $22 to $28 a barrel target range. In 2004 Ali Naimi, the 

Saudi oil minister, called $30 to $34 a barrel a ‘‘fair and reasonable price’’ for oil. 

Why is the world now so willing to accept considerably higher levels of fossil fuel 

prices? 

Answer. Recent statements from OPEC members have identified ‘‘fair and reasonable’’ price levels significantly higher than the price range they discussed a few 

years ago. Saudi Minister Al Naimi stated in January 2011 that a $70-$80 oil price 

range was fair for the world market. Some OPEC members appear to be targeting 

price levels even higher than indicated by his statement. In January of this year, 

Iran, Libya and Venezuela (all members of OPEC) identified $100 a barrel as a fair 

market price. 

Rapidly rising oil consumption in non-OECD (Organization for Economic Cooperation and Development) countries is one important reason for higher oil price levels. 

Oil consumption in non-OECD countries soared 40 percent from 2000 to 2010, an 

absolute increase of approximately 12 million barrels per day (bbl/d). Developing 

countries often see a smaller demand response to higher prices due in part to the 

widespread existence of oil product subsidies. OECD countries, on the other hand, 

had decreasing oil consumption during the last decade, which fell from 48 bbl/d in 

2000 to less than 46 bbl/d in 2010. On the supply side, oil producers are exploring 

and developing reserves in more costly areas, including deep water and oil sands. 

The combination of rising demand and more costly supply has been the major factor 

in price levels beyond those seen a decade ago. 

ROLE OF ENERGY EFFICIENCY

Question 5a. Can you please talk about the role of energy efficiency standards— 

for lighting or vehicles or otherwise—in your reference case? What assumptions are 

made as to how future efficiency standards enacted via legislation or a rulemaking 

process will impact future fossil fuel consumption levels? 

Answer. The Annual Energy Outlook 2011 Reference case includes, for light-duty 

vehicles, the attribute-based Corporate Average Fuel Economy (CAFE) standards for 

model year (MY) 2011 and CAFE and greenhouse gas emissions standards for MY 

2012-2016 as promulgated by final rulemakings. The MY 2011 minimum fuel economy requirement increases from 25.6 mpg in MY 2010 to 27.3 mpg in MY 2011 and 

to 34.1 mpg in MY 2016. CAFE standards are assumed to further increase in the 

Reference case to a combined 35 mpg for MY 2020 as mandated by the Energy Independence and Security Act of 2007. In the Reference case, CAFE standards are held 

constant in subsequent model years, but the minimum requirement is exceeded over 

the projection period due to the continued adoption of advanced technologies, with 

new vehicle fuel economy reaching 37.8 mpg by 2035. 

The Annual Energy Outlook 2011 Reference case also includes energy efficiency 

standards for residential and commercial equipment that have been promulgated by 

the U.S. Department of Energy, legislated by Congress, or agreed upon by manufacturers and other interested parties. Many major end-use devices in buildings are 

covered by efficiency standards. When a new or revised standard goes into effect, 

equipment that does not meet the efficiency standard is assumed by EIA to be no 

longer available. Impacts on future fuel consumption increase over time as wornout equipment is replaced and equipment is purchased for new buildings. In the industrial sector, minimum efficiency standards for motors also reduce fuel consumption. In the Reference case, increased energy efficiency lowers energy consumption 

about 13 percent from where it otherwise would be in 2035. The full AEO, to be 

released this spring, will include a range of sensitivity cases that alter the assumptions about energy efficiency improvements and consider the impact of extensions 

of energy efficiency policies. 

Question 5b. There have been recent legislative proposals to overturn the U.S. 

lighting efficiency standard enacted in the Energy Independence and Security Act 

of 2007. I have seen analysis showing that this single policy will result in the 

United States foregoing the need for 30 additional large power plants and consumers will collectively save more than $10 billion on electricity bills each year. Do 

you agree with that analysis and how would repeal of this lighting standard affect 

your long-term modeling results? 

Answer. By 2020, residential lighting technologies in the Annual Energy Outlook 

2011 (AE02011) Reference case are three times more efficient than those marketed 

today due to lighting standards in the Energy Independence and Security Act of 

2007. EIA has not analyzed the lighting standards in isolation. However, average 

annual lighting use per household falls 622 kilowatt-hours (kWh) between 2011 and 

2025 in our projections, from 1,757 kilowatt hours (kWh) to 1,135 kWh. Projected 
79 

lighting energy use for all 135 million U.S. households in 2025 is 153 billion kWh 

in our Reference case projection. If per-household lighting energy use in 2025 remained the same as in 2011, projected aggregate electricity use for residential lighting would be about 84 billion kWh higher in 2025. While translating this into the 

number of power plants potentially avoided is complicated, if one were to assume 

that on average each gigawatt of capacity generates about 6 billion kWh, the 84 billion kWh reduction in lighting use would eliminate the need for about 14 gigwatts 

of new capacity or about 28 500-megawatt generating units. Regarding electricity 

bill savings, this amounts to about $9 billion per year in lower electricity bills when 

priced at the AE02011 residential electricity prices of 10.5 to 11 cents per kWh, although this does not include the additional up-front cost for more expensive lighting. 

U.S. OIL DEMAND CURVE

Question 6a. I found one of the most interesting trends across your collective forecasts is the flat, or even declining, demand for oil in developed countries, including 

the United States, over the next 25 years. 

Mr. Burkhard’s testimony notes that CERA believes aggregate oil demand in developed markets peaked in 2005 and will not exceed that level again. 

The IEA predicts U.S. oil demand will drop by 10% by 2035. 

The EIA reference case predicts that total liquid fuel consumption in the U.S. will 

increase 17%, to 22.0 million barrels per day, but all of that increase will come from 

biofuels. Oil demand appears essentially flat or falling. 

If Congress and the Bush and Obama Administrations had failed to enact these 

policies, how likely is it that forecasted U.S. oil demand would be falling over the 

next 25 years? 

Answer. If vehicle fuel economy standards had not been increased during the past 

decade and policies that support and/or require biofuels production and consumption 

had not been enacted, then U.S. total liquids consumption would be higher than the 

22 million barrels per day in 2035 projected in EIA’s Annual Energy Outlook 2011 

Reference case. Without these policies, U.S. biofuels production and consumption 

would be lower and thus oil consumption would be increasing instead of being essentially flat. 

Question 6b. If Congress and the Administration had failed to enact these policies, 

what would you anticipate would be the effect on global oil prices in 2035, compared 

with your reference case? 

Answer. If these fuel economy and biofuels policies had not been enacted—which 

effectively reduce demand for oil—then global oil prices would be higher in 2035 

compared with the $125 per barrel (2009 dollars) in the Reference case. 

MEETING RENEWABLE FUELS TARGETS

Question 7a. I am discouraged by EIA’s prediction that the market will be unable 

to meet the targets set forth in the RFS-2, which is the revised Renewable Fuels 

Standard that Congress passed 2007. 

That standard mandates production of thirty six-billion gallons of biofuels a year 

by the year 2022, sixteen billion gallons of which must be of ‘‘cellulosic’’ origin. 

Your agency’s analysis states that: ‘‘EIA’s present view of the projected rates of 

technology development and market penetration of cellulosic biofuel technologies 

suggests that available quantities of cellulosic biofuels will be insufficient to meet 

the renewable fuels standards targets for cellulosic biofuels before 2022.’’ 

In EIA’s analysis, what are the primary barriers to achieving the RFS targets? 

Are they on the supply side—simply producing enough fuel? Or are there also barriers on the demand side—creating an adequate distribution infrastructure and 

enough flexible fuel vehicles on the road? 

Answer. The expected shortfall in meeting the cellulosic biofuels targets primarily 

reflects high production costs and technological challenges that are exacerbated by 

current market and regulatory conditions. Some observations that support this 

statement include: 

• Technological progress on process yields and scaling up designs has been observed to be slower than initially anticipated. At least 6 planned facilities have 

delayed startup by 6 months or longer, while only 3 plants have reached the 

startup phase—with many more awaiting financing. • Many in the industry have been observed to face important financial, legal, and 

technological issues that have yet to be resolved. Recent bankruptcy, plant closure, and repeatedly missed production goals are examples of serious setbacks 

for companies identified by the EPA as potential cellulosic suppliers in 2011. 

• The recent financial downturn has also been cited by technology developers as 

a reason for the reduction in private investment in the technology. Studies show 
80 

that capital costs have risen significantly above the original expectations for 

these technologies. In addition, biomass feedstock costs have also been substantially higher than originally expected and process yields have not achieved 

goals. 

The slow market penetration of the technology has led to the EPA granting waivers for large shares of the cellulosic biofuels mandates for 2010 and 2011. This in 

turn has made EPA cellulosic biofuels credits available to obligated parties at a cost 

significantly less than the current production cost for the technology. 

On the demand side, EIA’s projections do not assume a near-term infrastructure 

constraint in marketing the ethanol that is produced. The majority of U.S. corn ethanol production and smaller volumes of imported ethanol and cellulosic ethanol are 

assumed to be absorbed in E10 and recently-approved E15 gasoline blends. In addition: 

• After the E15 blend pool is saturated by 2020, new volumes of ethanol are assumed to be sold as E85—with the partial resolution of some infrastructure barriers—and Flex-Fuel Vehicles are assumed to be more widespread. 

• E85 is assumed to be sold at a discount factoring in its lower energy density 

compared to motor gasoline, with E85 selling for $2.87 per gallon vs. $3.64 per 

gallon for gasoline in 2030. E85 volumes thus increase from 0.1 billion gallons 

in 2020 to over 9 billion gallons at the end of the forecast (2035). 

A number of next-generation biomass-to-liquid technologies, including clean diesel 

fuel produced from cellulosic biomass, are assumed to be ‘‘drop-in’’ fuels that can 

be distributed and consumed using existing infrastructure and vehicle fleets and do 

not face significant infrastructure hurdles. These fuels contribute to the overall level 

of cellulosic biofuels in EIA’s projections. 

Question 7b. Does EIA’s analysis include cellulosic biofuels other than ethanol? 

For example, does it include the possibility that the RFS-2 mandate might be met 

with other cellulosic fuels such as methanol? 

Answer. The majority of cellulosic biofuel consumption growth is projected to come 

from cellulosic ethanol. However, the Annual Energy Outlook 2011 Reference case 

also projects the penetration of Biomass-to-Liquids (BTL) technologies that use cellulosic biomass to produce other motor fuels. These next-generation technologies 

yield fuels that can be distributed and consumed using existing infrastructure and 

vehicle fleets. 

While methanol is not an approved RFS-2 pathway for direct use in transportation fuels under current rulemakings, EPA has indicated that it would allow cellulosic Renewable Identification Numbers (RINs) to be generated for qualified cellulosic methanol feedstock used in biodiesel production based on its ethanol-equivalent 

energy value (approximately 0.75 RINs per unit of methanol or 0.1 RIN per gallon 

of biodiesel). Since volumes are expected to be very small and are currently only 

being produced in testing phases, the AE02011 does not explicitly model a cellulosic 

methanol RFS credit. 

Question 7c. Do you believe there will be enough flexible fuel vehicles available 

in America in 2022 to be able to consume biofuels production mandates in the RFS2? 

Answer. The Annual Energy Outlook 2011 Reference case projects that 41 million 

flex-fueled vehicles will be on the road in 2022, representing about 16 percent of 

the total light-duty vehicle stock. These flex-fueled vehicles could consume 27.5 billion gallons of E85 in 2022, if fueled entirely by that fuel. The actual ethanol content of E85 fuel varies by region and season and typically averages well under 85 

percent, with petroleum gasoline making up the difference. Using the assumption 

that 75 percent of E-85 is actually ethanol, if all flexible fuel vehicles were fueled 

with E85 nearly 21 billion gallons of biofuels could be consumed. Biofuels are also 

blended into motor gasoline and diesel fuel, with ethanol blending into motor gasoline being by far the most significant. Ethanol can be blended into motor gasoline 

to up to 10 percent of volume and up to 15 percent of volume for light-duty vehicles 

from model year 2001 and later. The Annual Energy Outlook 2011 Reference case 

projects that over 17 billion gallons of ethanol will be blended into motor gasoline 

in 2022. If sufficient production was available, ethanol blended into motor gasoline 

and E85 consumed in flex-fueled vehicles could in principle reach approximately 38 

billion gallons by 2022, surpassing the total 36-billion-gallon RFS-2 mandate. 

IMPLICATIONS OF BUSINESS AS USUAL

Question 8. One thing I found lacking from most of the analyses was any kind 

of discussion of their broader implications. For example, what kind of world will we 
81 

live in 2035 if the forecasts contained in the reference cases prove accurate, a world 

that consumes 107 million barrels of oil per day. 

. . . I completely agree. Energy policy raises complex questions of equity and justice. I believe that too often people who point to the unsustainable nature of our 

energy system are labeled as ‘‘anti-growth’’. For all our sakes, I hope we can begin 

to move beyond such characterizations, and start talking about policy that can foster 

both growth and sustainability. 

Would you please comment on the implications of continuing our business as 

usual trajectory (i.e. the trajectory outlined in the EIA reference case)? 

Answer. The Energy Information Administration (EIA) includes information regarding the economic and energy implications of the Annual Energy Outlook Reference case. The broad implications are summarized below. 

The U.S. real gross domestic product grows by an average of 2.7 percent per year 

from 2009 to 2035 in the Annual Energy Outlook 2011. The Nation’s population, 

labor force, and productivity grow at annual rates of 0.9 percent, 0.7 percent, and 

2.0 percent, respectively, from 2009 to 2035. Assuming no changes in policy related 

to greenhouse gases, carbon dioxide emissions grow slowly, but do not again reach 

2005 levels until 2027. 

Although energy-intensive industries are expected to recover rapidly from the recent recession, long-term growth is slowed by increased competition from overseas 

manufacturers and a shift in U.S. manufacturing toward higher-value consumer 

goods which are less energy-intensive to manufacture. Net imports of energy meet 

a major, but declining, share of total U.S. energy demand. The projected growth in 

energy imports is moderated by increased use of biofuels (much of which are produced domestically), demand reductions resulting from the adoption of new efficiency standards, and rising energy prices. Rising fuel prices also spur domestic energy production across all fuels, particularly natural gas from plentiful shale gas resources, and temper the growth of energy imports. 

It is important to note that the EIA Reference case is based on current laws and 

regulations and thus does not assume new policies, such as increased fuel economy 

standards, changes in access policy for domestic resource development, a Clean Energy Standard, or any new climate change policies. This practice is necessary to provide a clear reference point and to avoid speculative policy assumptions, and it 

serves as a starting point for analysis of potential changes in energy policies, rules, 

or regulations through the uses of alternative modeling cases. The EIA Reference 

case therefore is meant to provide an outlook where the assumptions and implications are clearly understood, but not necessarily as the world might unfold. 

INVESTMENT LEVELS NEEDED IN NEXT HALF CENTURY

Question 9. Has EIA done a comparable analysis [of the amount of worldwide investment that might be required over the next half-century to prevent energy shortages and greenhouse gas emissions from undermining global economic growth] that 

could be used for comparison [with the TEA figure of $45 trillion]? 

Answer. EIA has not developed an estimate of the future investment required in 

the world energy supply infrastructure nor has it considered how such an estimate 

might be affected by policies to limit greenhouse gas emissions. There are few publically-available sources of international statistics that would allow EIA to confidently make such estimates. In general, worldwide statistics on the costs associated with installing energy infrastructure are costly and difficult to obtain. Thus, 

without making heroic assumptions about current and future global costs associated 

with an array of potential energy infrastructure projects, EIA would be unable to 

derive such estimates either in the present or in the long-term future. However, 

EIA’s U.S. Annual Energy Outlook Reference case projections and additional analysis cases provide extensive information regarding U.S. energy infrastructure requirements. 

IMPACT OF GREENHOUSE GAS REGULATIONS

Question 10. Now that the Environmental Protection Agency has begun to implement regulations to limit greenhouse gas emissions from stationary sources, how 

has that impacted EIA’s modeling results? What assumptions has EIA incorporated 

into its modeling runs to account for these EPA regulations in terms of greenhouse 

gas emissions reductions relative to 2005 levels? If EIA has yet to incorporate these 

new regulations, does the agency plan to in the future? 

Answer. While EPA is developing regulations pertaining to greenhouse gas (GHG) 

emissions from stationary sources, it has not released specific standards for the various types of power plants and energy-using industrial facilities. Without such 

standards, EIA cannot effectively model the impacts of EPA’s proposed regulations. 
82 

EIA is monitoring EPA’s progress in developing the rules, and when more information on the specific standards is available, we will adjust our analysis accordingly. 

EIA does try to capture current market behavior in its modeling with respect to 

concerns about GHG emissions and their potential regulation. In order to account 

for the market’s uncertainty surrounding investment decisions in GHG-intensive 

technologies, EIA assumes a 3 percent premium in the cost of capital for new coalfired power plants and other GHG-intensive technologies, which is one factor that 

leads to few new coal plants beyond those already under construction being added 

to the AE02011 Reference case projection. In addition, 10 states in the Northeast 

are participating in the Regional Greenhouse Gas Initiative (RGGT) cap and trade 

program and this is represented in the EIA analyses. Most states participating in 

the program have already met their state level caps. 

HOW TO INCREASE ENERGY DIVERSITY

Question 11a. A common theme across all the witness testimony is that global energy demand is increasing and fossil fuel prices are likely to continue to increase. 

So it seems like if the U.S. continues to ignore this problem, the economic and security impacts will be significant. The witnesses also all seem to agree that diversifying America’s sources of energy is a key way to mitigate these harmful impacts. 

What are the most economically efficient policies to increase U.S. energy diversity 

without the need for government to pick technology or special interest winners or 

losers? 

Answer. The most effective policies are those which clearly define the attributes 

or requirements that the Nation wants to achieve to address energy security, economic growth, and climate change. A technology-neutral approach, such as the 

Clean Energy Standard (CES) proposed by President Obama in the State of the 

Union, which seeks to double the share of electricity from clean energy sources by 

2035 to 80 percent, is an example of such a policy. Under a CES, as proposed by 

President Obama, any technology that uses energy in a clean, efficient way will 

have the opportunity to advance. 

The President has also outlined a portfolio of actions which, taken together, could 

cut U.S. oil imports by a third by 2025. These include programs that would increase 

the fuel economy of our cars and trucks, put one million electric vehicles on the road 

by 2015, and increase the use of nonpetroleum fuels. 

Question 11b. Do you agree with many energy experts who argue that a predictable price on carbon designed in a way that minimizes price volatility is the most 

economically efficiency and technology neutral way to realize greater energy efficiency and diversity? 

Answer. A predictable, long-term price on carbon that minimizes volatility is one 

way that the actual costs of fuels usage can be reflected in their prices and one way 

to transform the energy system toward cleaner and more secure energy sources. 

However, other policies can assist in this transition in a cost-effective and technology neutral way. For example, the President’s proposed Clean Electricity Standard would create a broad, technology-neutral incentive to transform the power sector, and many other policy options exist to increase the efficiency of energy consumption in end-use sectors. 

Question 11c. Are there links between policies to reduce greenhouse gas emissions 

and increasing energy diversity? If such policies are successful in significantly reducing world demand for fossil fuels, what impact on future prices is that likely to 

have? 

Answer. Policies that reduce greenhouse gas emissions will generally lead to 

greater deployment of cleaner and more secure energy technologies. If the transportation sector, for instance, gradually transitions away from petroleum through electrification, it will be important to encourage cleaner sources of electricity to maximize the environmental benefits of this transition, and the diversity of the energy 

supply increase as a result. Such transformation could be achieved through policies 

like the President’s proposed Clean Energy Standard, coupled with policies to promote electric vehicles. If global fuel consumption declines, this would put downward 

pressure on global prices for such fuels, but the actual outcome will also depend on 

trends in global supply. 

RESPONSES OF RICHARD H. JONES TO QUESTIONS FROM SENATOR CORKER

Question 1. Your organization has looked extensively at fossil fuel consumption 

subsidies. Does the U.S. pay any consumption subsidies and if so, how much, and 

how is that related to the price consumers pay for petroleum? 
83 

Answer. Using the price gap methodology, which compares international market 

prices for fossil-fuels with end-use prices paid by consumers, the IEA does not measure any fossil-fuel consumption subsidies paid by the United States. The United 

States does, however, administer a targeted program to assist low-income households with immediate home energy needs through the Low Income Home Energy 

Assistance Program (LIHEAP). This is not captured by our measurement approach 

since it does not affect the pricing of energy products, but it does support fossil-fuel 

and other energy consumption. 

Question 2. If we were to look at all the costs paid by the U.S. Government to 

manage supply lanes and ensure the safe transport of crude, what would the true 

price of petroleum be? Are these costs reflected in any way in the price that consumers pay, and what would happen to the price per gallon of petroleum if these 

support measures were to be eliminated? 

Answer. Crude oil prices comprise many elements, ranging from short term market fundamentals, oil refining bottlenecks, perceptions of future supply/demand, 

macro and micro-financial influences and geopolitical risks. To the extent that the 

protection of supply lanes lowers the perception of risk in producing or transit areas 

it would also lower the international crude oil price. One can only guess at the extent to which this component of international prices might change if sea lanes were 

not kept clear, but ceteris paribus, were less resources dedicated to ensuring the secure movement of oil supplies, then crude prices might well rise. 

RESPONSES OF RICHARD H. JONES TO QUESTIONS FROM SENATOR MURKOWSKI

SUEZ CANAL

Question 1. You said in a recent interview with the Financial Times that you’ve 

heard reports of ‘‘difficulties in providing security for some of the crews passing 

through the Suez Canal. And of course, if there is a blockage of the Suez Canal, 

that would be cause for concern.’’ Can you tell us what, exactly, you’ve heard about 

security concerns in that region? Do they remain? 

Answer. The Suez Canal is a choke point for transport of many commodities, including crude oil and petroleum products. The blockades in 1956-1957 and 1968- 

1975, when some 10% of global oil trade passed the Suez Canal, caused oil prices 

to spike and triggered economic downturn. Therefore oil market participants are 

still closely watching the Suez Canal and react nervously to any news of interruptions. Times have changed however. The introduction of Very Large Crude oil Carriers (VLCCs) in the early seventies resulted in more crude oil transport around 

Cape of Good Hope of Africa, so nowadays less than 1% of the crude oil production 

is transported through the Suez Canal, in almost balanced quantities going north 

and south. So the cause of concern is not so much a loss of crude oil supply (in fact 

no oil would be lost, but transportation time and costs would go up), but the Suez 

Canal is in the heart of the Middle East, the dominant oil producing region, and 

any increased tension in the Middle East results in nervousness on the oil market. 

For example, the specific press reports referenced in the FT interview turned out 

not to be significant. 

SUBSIDIES

Question 2. Your organization has been quite active in opposing fossil fuel consumption subsidies. Do you believe the U.S. government offers any fossil fuel subsidies? What are they and what would be some of the consequences if these were 

removed? Would you describe LIHEAP—financial assistance for heating oil purchases—as the sort of consumption subsidy which IEA supports ending? Between 

consumption subsidies and production incentives, which result more directly in increased consumption of fossil fuels? 

Answer. The US government offers some fossil-fuel subsidies; most are on the production side. Although not captured by our methodology for measuring fossil-fuel 

consumption subsidies, where we compare international market prices for fossil 

fuels with end-use prices paid by consumers, the targeted Low Income Home Energy 

Assistance Program (LIHEAP) supports fossil-fuel and other energy consumption. 

We do not recommend phasing out subsidies that are well-targeted and assist the 

poor with the most basic of energy needs. 

The IEA has not attempted to quantify US subsidies to fossil-fuel production, but 

these do exist within our broad definition of energy subsidies which is ‘‘any government action that lowers the cost of energy production, raises the price received by 

energy producers or lowers the price paid by energy consumers’’. Instruments used 

to confer support to fossil-fuels production are often tax incentives, including for the 

US: limiting taxable income based on percentage depletion of oil and gas reserves, 
84 

allowing the expensing of intangible drilling costs, and domestic manufacturing deductions. The IEA has not tried to measure the effect on energy production of phasing out these subsidies, although they would increase costs for producers to some 

extent. 

US ENERGY COMPANIES VERSUS NATIONAL OIL COMPANIES (NOCS)

Question 3. Can you describe how U.S. oil and gas producers operate with any 

disadvantages relative to National Oil Companies such as the OPEC owner companies? 

Answer. IOCs (including US companies), which have traditionally dominated the 

global oil and gas industry, are increasingly being squeezed by the growing power 

of the national companies and by dwindling reserves and production in accessible 

mature basins outside OPEC countries. The main advantage held today by NOCs 

over IOCs is access to reserves. We may see stronger partnerships between the national and international oil companies in the future to ensure adequate oil and gas 

supplies in the long term. The mutual benefits that could accrue are compelling: the 

national companies control most of the world’s remaining reserves, but in some 

cases lack the technology, capital and/or skilled personnel to develop them efficiently; the international companies are opportunity-constrained, but have the finance and management skills, and technology to help national companies develop 

their reserves. 

OIL MARKETS

Question 4. If only about 3 percent of the world’s oil travels through the Suez 

canal and the SUMED pipeline, yet we are seeing some influence on the global commodity price resulting from instability around the Suez, does this indicate that 

seemingly small disruptions, real or potential, can have comparatively large impacts 

on global markets? 

Answer. It is true that because both the supply and demand for oil are slow to 

respond in the short term to changes in international prices, so relatively minor dislocations of supply or demand can have an exaggerated impact on price. But events 

in Egypt this last month have had an impact that went far beyond concerns over 

Egyptian infrastructure and transit routes. Concerns about contagion of political instability for the rest of the MENA region, where much of the world’s oil and gas 

resources are concentrated, likely played at least as much of a role in influencing 

prices. 

MAJOR OIL DISCOVERIES

Question 5. What was the impact on global investment and markets when the 

Tupi field was discovered off of Brazil in 2006, and how does the addition of a multibillion barrel discovery impact the host nation and the industry? 

Answer. The Tupi discovery has consolidated Brazil’s position as one of the three 

main contributors to non-OPEC supply growth over the next decade. Major oilfield 

announcements tend to affect the share price or valuation of individual companies 

concerned, rather than commodity prices per se. Brazil faces challenges in constructing infrastructure according to the ambitious schedule it has set itself, and in 

managing windfall oil revenues once production starts in a major way. 

CRISIS-DRIVEN ENERGY POLICY

Question 6. The Outer Continental Shelf Lands Act was implemented after the 

Arab oil embargo and subsequent price controls and economic shocks of the 1970’s, 

as was the authorization of the Trans-Alaska Pipeline System. Are these patterns 

of crisis and response as an unavoidable trend in U.S. energy policy? 

a. Is the U.S., in your group’s view, more proactive or reactive in its energy 

policy? 

Answer. After the Arab oil embargo and the creation of the International Energy 

Agency (IEA), all Member countries of the IEA committed themselves to a number 

of actions to reduce their oil (import) dependency. The actions taken differed, according to the circumstances of the country. Those countries that could increase domestic production did so, like the US, but notably also countries in Western Europe, 

who started successfully exploring the North Sea. 

Also all IEA countries implemented energy savings and energy efficiency programs. 

The efforts of the Member countries have been reviewed over the last 35 years 

during a series of Energy Reviews and Emergency Response Reviews (each con-
85 

ducted in a 5 year cycle). Generally speaking, the crisis response measures of the 

United States are well developed and the Strategic Petroleum Reserve of the United 

States is a valuable asset for the country and for the group of IEA Member countries as a whole. 

CLEAN ENERGY STANDARD

Question 7. Should we learn a lesson from the Renewable Fuel Standard, which 

has fallen short of expectations, when considering an aggressive electricity mandate 

like the one the President is calling for? How likely is it that we will create unforeseen problems if we put a CES in place? To name just one example, will transmission problems—and our inability to add significant amounts of renewable energy 

to the grid—become the new ‘‘blend wall’’? 

Answer. Ambitious targets for low-carbon electricity, especially at the federal 

level, as announced by President Obama , are important signals of the USA’s willingness and determination to move the country onto a sustainable energy trajectory. 

The 450 Scenario of the IEA’s World Energy Outlook 2010 details a medium-term 

carbon-constrained energy pathway, which projects that 89% of the United States’ 

power output could be zero or low-carbon by 2035 given concerted policy support. 

[NB: the WEO’s definition of ‘‘zero or low’’ carbon energy is much stricter than the 

definition given by President Obama: the WEO only includes fossil fuel generation 

with CCS, while President Obama’s CES proposal includes ‘clean coal’ in general 

and ‘efficient natural gas’.] 

Carefully defining the Clean Energy Standard (CES) and its eligible technologies, 

possible technology set-asides and interim targets are crucial first steps to boosting 

investor confidence. Given that a majority of US states already have renewable portfolio standards in place, the effective implementation of a federal clean energy 

standard will require careful coordination and a predictable and transparent transition that avoids disadvantaging existing clean energy investments. 

Targets must be supported by an effective system of financial and non-financial 

incentives to ensure appropriate conditions for exploiting the large potential for 

clean energy technologies. These clean energy technologies, including renewables, 

such as wind and solar, are generally not yet as mature and cost-competitive as conventional carbon-intensive generating technologies, but their costs are declining rapidly thanks to increasing economies of scale and technology learning gained through 

significant market deployments with targeted policy support. 

Doubling the contribution of clean energy technologies to the USA’s generation 

mix by 2035 is evidently a tremendous challenge requiring a systems approach to 

ensure sustainable market growth while controlling overall cost, both in terms of 

policy support and technical infrastructure. Upgrading and expanding existing grids 

to keep pace with capital stock turnover in the power sector is a fundamental challenge regardless of the specific type of generation technologies entering the mix. As 

part of this challenge, in parallel to the introduction of a Clean Energy Standard, 

the system integration of variable renewable energy technologies, such as wind and 

solar PV, needs to be assessed carefully. However, the IEA’s research suggests that 

the capacities of grids, based only on current resources and improving operational 

measures, are usually broad enough in most cases, e.g. in the Western US grid, 

which we have analysed in detail. 

ALTERNATIVES TO OIL

Question 8. How substantial of an impact do you believe advanced biofuels, electric vehicles, and other technologies will have on petroleum consumption by 2020? 

By 2030? 

Answer. IEA analysis shows that there is tremendous potential to cut transport 

oil demand in the 2030 time frame. However, this will depend heavily on the policies deployed over this period, as well as on the success of improving and lowering 

the costs of key technologies that are still in the development phase, such as for 

advanced biofuels and batteries. In our baseline projections (which assume that no 

new policies are introduced by governments), biofuels and EVs do not take sufficient 

market share to save very much oil by 2030. 

However, in a world committed to low-carbon and lower-oil dependence futures, 

we believe there could be a substantial shift away from oil by 2030, with some of 

this shift in evidence by 2020. For example, in our WEO 2010 and ETP 2010 reports 

(which are consistent), our low CO2 scenarios show a reduction in global transport 

oil use, compared to our baseline projection, of 150 million tonnes (about 7%) in 

2020 and 600 million tonnes (about 30%) in 2030. Through 2030, substantially more 

than half of these reductions are attributable to improved energy efficiency across 

a range of vehicles and modes (cars, trucks, aircraft etc), including strong improve-
86 

ments to internal combustion engines (such as hybridization). About 10% of the oil 

savings in 2030 are attributable to biofuels, and another 10% from electric vehicles. 

Other alternative fuels, such as natural gas, also play a role. However after 2030 

the contributions from EVs and biofuels rise rapidly. With the right policy framework we believe that these technologies can become fully competitive, and in fact 

dominant, by 2050. 

Realising a 30% cut in transport oil use relative to the baseline projection by 2030 

would have enormous benefits for energy security, less air pollution in cities and 

the climate. It could also help restrain oil prices. For these reasons, the IEA is committed to helping countries move onto such a pathway. 

FOREIGN OIL DEPENDENCE

Question 9. If Congress had allowed the Coastal Plain of ANWR and other parts 

of Alaska to be opened to production, in 1995 for example, we would be producing 

domestic oil at a considerably higher rate. What would that mean for our nation’s 

energy security? Would we be more protected, or less protected, from civil unrest 

in Egypt, Jordan, and other parts of the Middle East? In the event of a supply disruption abroad, would we be better equipped, or less prepared, to deal with import 

shortages? 

Answer. Generally speaking, if a country has more domestic oil production, it is 

less exposed to physical disruptions from abroad. At the same time, oil is traded on 

global markets, so a severe disruption can cause prices to rise in all countries, because the oil will flow to the highest bidder. So a country with more domestic production has less to fear that its oil supply will be disrupted when a major incident 

happens abroad, but prices may still rise, even in those countries that do not need 

to import any oil. 

PROJECTED OIL PRICES

Question 10. In a hypothetical scenario of September 2012, with unemployment 

is down to 8.0%, the economy growing at greater than 3.0% each quarter, and world 

markets on the upswing, where would you forecast the price of oil? 

Answer. The IEA does not forecast the price of oil. See below. 

OFFSHORE MORATORIUM

Question 11. How does the amount of oil that could be taken offline by unrest in 

the Middle East compare to the amount of production that will be lost because of 

the absence of new exploratory permits in the Gulf of Mexico, and the absence of 

resumed exploratory operations? 

Answer. In our short and medium term market analysis, we do not forecast oil 

prices. Rather our models are driven by the shape of the oil futures curve at the 

time that projections are made. However, the scenario you paint of strong global 

economic growth would likely be accompanied by strong oil demand growth and, because of the lead times necessary to develop new oil production capacity, by a narrowing margin of OPEC spare capacity. Our own medium term market outlook 

under a high economic growth scenario envisages OPEC spare capacity shrinking 

from around 6% of global demand in 2010 to less than 5% of global demand on average in 2012. Spare capacity would still be higher than the very low levels evident 

during 2004-2008, but nonetheless the very fact of a shrinking level of market flexibility suggests more volatile markets. 

Our latest view is that 2015 US GoM oil production could turn out around 300 

kb/d lower than we previously forecast because of delays in new field developments 

and to drilling required to sustain production at older fields. Those volumes could 

be higher if drilling remains at markedly lower levels for longer or new drilling is 

banned altogether in prospective resource-bearing areas. However, they would still 

probably pale in comparison to the amount of production that could be taken off line 

if political unrest were to disrupt production for a significant period in even one 

Middle Eastern exporting country. 

ECONOMIC RECOVERY

Question 12. Adam Sieminski, the Chief Energy Economist for Deutsche Bank, recently wrote that ‘‘We estimate that a [10 dollar] rise in the oil price subtracts approximately 0.5 percentage points off U.S. growth.’’ Do any of you agree with Mr. 

Sieminski’s assessment? 

a. Would this calculation change if the US supplied 60% of its own oil as opposed to importing 60% of its oil? 
87 

Answer. Our static analysis of oil price impacts on the US economy indicates that $100 per barrel oil (on average) in 2011 translates to an import bill of $385 billion 

at expected import levels (10.5 million barrels per day in our projections). This 

would be equivalent to roughly 2.6% of US GDP, approaching similar levels to those 

experienced in 2008, and risk undermining economic recovery. At $110 per barrel 

in 2011, our estimate for the yearly US import bill would rise to $425 billion (simplified using the same import and GDP levels in the calculation), or 2.8% of US 

GDP. The calculation provides only a rough estimate, but supports the notion that 

a $10 swing in oil prices can have a major effect on the economy. The import bill 

we calculate, and thus its relation to GDP, depends on volume of net imports rather 

than the percentage of imports or domestic production. Assuming that domestic production accounted for 60% of US oil consumption at levels we project for 2011, US 

net imports would amount to about 7.1 mb/d. With $100 per barrel of oil, the import 

bill would then total $260 billion for the year, or 1.7% of US GDP. 

IMPACT OF FEDERAL POLICIES

Question 13. What role does the federal government’s stimulus policies, and the 

Federal Reserve’s second round of quantitative easing, have played in boosting commodity prices? Have these policies boosted the price of oil, and, if so, by how much? 

Answer. Federal stimulus and QE2 could theoretically boost commodity prices 

through physical or financial transmission mechanisms (note, these are two very different policies; the former is fiscal while the latter is monetary). Both may have demand side impact on commodities, but it is simply not possible to attribute specific 

price effects. 

Insofar as stimulus and QE have buoyed economic activity in the US and abroad, 

physical demand for commodities would tend to rise and prices would increase, all 

other factors being equal. Both US economic growth and oil demand came in higher 

than expected in 2H10, one factor behind tightening global fundamentals and rising 

oil prices. However, it is difficult to isolate the effect of these policies on the economic rebound and on oil prices, particularly given the cyclical recovery in US oil 

demand that had already been underway since early-2010 and overarching role of 

global supply/demand fundamentals in tightening the physical market. 

On the financial side, QE2 could potentially boost commodity prices through the 

exportation of currency inflation to dollar-pegged economies or through increased financial flows into commodities and emerging markets. Price pass-through resulting 

from the former mechanism could ultimately manifest itself through physical fundamentals, with currency inflation in emerging markets acting to stimulate oil demand. Increased capital flows into emerging markets could also stimulate higher 

levels of economic activity, thus raising oil demand and prices. However, it is unclear the degree to which QE2 itself has inflated developing economies. The domestic monetary policy of such countries probably plays a larger role and, indeed, several large economies (e.g. China and Brazil) have already begun tightening interest 

rates in order to cool economic expansion. Finally, while increased financial flows 

into commodities may amplify oil price movements in the short-term, there is little 

empirical evidence quantifying the effect of such flows. The linkage of oil futures 

markets to underlying physical markets also suggests that any such price dislocation brought about through purely financial reasons may be short-lived in any case. 

OIL SPILL REPORT

Question 14. Have you reviewed the recommendations made by the President’s Oil 

Spill Commission? Have you conducted any analysis on the impact those recommendations, if fully implemented, would have on domestic oil production, our import levels, and the global price of oil? 

Answer. No, we have not connected an analysis of the possible impact of these 

recommendations, beyond that mentioned above (see question on Offshore Moratorium). 

MODULAR NUCLEAR REACTORS

Question 15. What role do you believe small modular nuclear reactors will have 

in meeting the global demand for electricity? What countries are moving forward 

with this technology and what countries are interesting in acquiring these reactors? 

Answer. Small modular reactors are discussed in the joint IEA/NEA (Nuclear Energy Agency) 2010 publication Technology Roadmap/Nuclear Energy. Countries involved in developing the technology include: Argentina, China, Japan, Korea, Russia, South Africa and the United States. Companies involved include: Areva, Babcock & Wilcox, General Atomics, NuScale and Westinghouse. Two small units are 

known to be under construction in Russia, reportedly for deployment via barge to 
88 

a remote coastal settlement on the Kamchatka peninsula. Elsewhere, some other designs are well advanced, with initial licensing activities underway. Demonstration 

plants could potentially be in operation before 2020, if funding becomes available. 

However, no firm commitments have been made to date. 

CHINA

Question 16. Can you shed light on what China’s energy picture really looks like, 

not just for renewable energy, but also its future demand for oil, natural gas, and 

coal? 

Answer. Over the past year or so we have just seen an historic re-ordering of energy heavyweights, with China surpassing the United States to become the world’s 

top energy consumer. Already a major actor in global energy markets, it has become 

abundantly clear that the developments in China will be key to shaping the world’s 

energy future. Chinese energy use was only half that of the United States in 2000. 

The increase in China’s energy consumption between 2000 and 2008 was more than 

four times greater than in the previous decade. Prospects for further growth remain 

strong, given that China’s per-capita consumption level remains low, at only onethird of the OECD average, and that it is the most populous nation on the planet, 

with more than 1.3 billion people. Consequently, developments on the global energy 

landscape remain highly sensitive to the various factors that drive energy demand 

in China, including prospects for economic growth, changes in economic structure, 

developments in energy and environmental policies, and the rate of urbanisation. 

The momentum of economic development looks set to generate strong growth in 

energy demand in China throughout the Outlook period. In the New Policies Scenario, China’s primary energy demand reaches two-thirds of the level of consumption of the entire OECD. In absolute terms, industry accounts for the single biggest 

element in the growth in final energy demand. China’s electricity demand is projected to almost triple in 2008-2035, requiring capacity additions equivalent to 1.5 

times the current installed capacity of the United States. During much of the period 

of its economic expansion, China was able to meet all of its energy needs from domestic production, but now a growing share is being met by imports. China has extensive coal resources, but in recent years has become a net importer. It has struggled to expand its mining and rail-transport infrastructure quickly enough to move 

coal from its vast inland reserves to the prosperous coastal areas where demand has 

been growing most rapidly. In the New Policies Scenario, China’s net imports of coal 

increase to 2015, but the country once again becomes a net exporter towards the 

end of the Outlook period. Its oil imports jump from 4.3 mb/d in 2009 to 12.8 mb/ 

d in 2035, the share of imports in demand rising from 53% to 84%. Natural gas imports also increase substantially to reach a share of 53% of demand in 2035, requiring a major expansion of pipeline and liquefied natural gas (LNG) regasification infrastructure. 

China’s growing need to import fossil fuels to meet its rising domestic demand 

will have an increasingly large impact on international markets. Similarly, if pursued vigorously, China’s efforts to expand the use of clean energy could have farreaching implications throughout the rest of the world. First, its drive to deploy 

clean energy will lower the cost of those technologies everywhere, made possible by 

the economies of scale achievable in such a vast market and the acceleration of 

learning rates bound to occur. Second, there will be strong effects on global trade. 

China will most certainly attain status as the leading exporter of clean energy technologies and we may see, like Japan’s auto manufacturers have done, an 

internationalisation of Chinese clean energy firms and manufacturing of clean energy equipment in destination markets. Third, China will gain a firmer economic 

stake in global action to reduce greenhouse-gas emissions. 

Note: The graph ‘‘China’s share of the projected net global increase for selected indicators’’ has been retained in committee files. 

RESPONSES OF RICHARD H. JONES TO QUESTIONS FROM SENATOR CANTWELL

EFFECT OF DOMESTIC DRILLING ON GAS PRICES AND FOREIGN OIL DEPENDENCE

Question 1. In response to the recent political unrest in the Middle East, and rising oil prices, we have heard familiar calls to expand domestic drilling in the United 

States—including offshore and in the pristine Arctic National Wildlife Refuge 

(ANWR)—typically with the claim that such actions will lower gasoline prices or reduce our dangerous over-reliance on foreign oil. 
89 

1http://www.eia.doe.gov/oiaf/servicerpt/anwr/results.html 

An Energy Information Administration (EIA) study from May 20081 projected the 

effects on oil prices of drilling in the Arctic National Wildlife Refuge. According to 

EIA’s projections, in the most optimistic case, drilling in ANWR would reduce crude 

oil prices by approximately $1.44 per barrel. I understand this would translate to 

approximately 3 to 4 cents per gallon of gasoline at the pump about 20 years from 

now. 

It seems that EIA has found that drilling offshore would have a similarly negligible effect on prices. EIA issued an analysis in 2009 that examined the impact 

of maintaining the historical moratorium on drilling off the Atlantic, Pacific, and 

Eastern Gulf of Mexico. According to that analysis: ‘‘With limited access to the lower 

48 OCS. . .there [would be] a small increase in world oil prices.The average price 

of imported low-sulfur crude. . .is $1.34 per barrel higher, and the average U.S. 

price of gasoline is 3 cents per gallon higher.’’ 

Would you please comment on your views on the ability of expanded domestic 

drilling to affect world oil prices? 

Answer. As noted already, crude oil prices are influenced by today’s market conditions, but also by perceptions of how easy it will be to meet expected demand growth 

in the future. A widespread perception among industry players today is that it is 

difficult to expand the supply base rapidly, largely because of barriers to investment. For the most part, these concerns centre on key areas of low-cost resources 

being completely off limits to international investment (such as Russia and the Middle East). But improved access to known hydrocarbon resources within major consuming countries could also go some way to easing concerns about future supplies, 

thus potentially acting as a restraining factor on future oil price rises. 

IS OPEC ABLE TO OFFSET ANY INCREASED DOMESTIC DRILLING?

Question 2a. IEA forecasts that most the growth in oil production will occur in 

OPEC Countries like Saudi Arabia, Iraq, Venezuela, UAE, Kuwait, Iran, Qatar, Nigeria, Libya, and Algeria—not exactly America’s best friends or even regimes that 

support the basic rights of their citizens. I understand that IEA projects that by 

2035, world dependence on OPEC oil will rise from 41 percent to 52 percent. That’s 

a level not seen since the oil shocks of the early 1970s. 

What can oil importing nations do to mitigate the national and economic security 

threat posed by such a high degree of dependence on OPEC? 

Answer. To enhance their energy security, countries need to take near-term actions in five key areas: (i) promote energy efficiency; (ii) ensure adequate energy diversity by minimising dependency on any single fuel, single supplier or single transportation route/mechanism; (iii) improve oil market data transparency; (iv) maintain 

an adequate safety net for use in the case of a supply shortage; and (v) participate 

in global cooperation on emergency preparedness as an oil supply disruption anywhere in the world would result in severe knock-on effects throughout the entire 

market. In the longer term, the progressive decarbonisation of electricity generation 

and the introduction of alternative transportation technologies would also help by 

reducing the growth in demand for fossil fuels. 

Question 2b. It seems that the policies in the bipartisan 2007 Energy Bill that 

have increased vehicle fuel economy and the use of biofuels are the only things that 

have helped reduce the forecast for U.S. oil imports in decades. What lessons can 

be learned from that? 

Answer. Both fuel economy and the use of biofuels have the potential to significantly lower oil use in the US and elsewhere. Strong provisions in the 2007 Energy 

Bill have helped to leverage this potential. There are still other areas of strong potential to cut oil use, such as promoting electric and plug-in hybrid vehicles. The 

recent Obama administration initiatives appear to put the US on a strong course 

in this regard as well, with a target of 1 million plug-in vehicles on the road by 

2015. 

EFFECT OF SPECULATION ON OIL PRICES

Question 3a. Several of the testified that oil price movements can be explained 

by supply and demand fundamentals, and these explain the upward pressure we’ve 

seen in recent months. We often hear about the lack of a ‘‘conclusive’’ smoking gun 

that links oil price spikes to speculation in the derivatives markets. 

However, as you may know, the recently-passed Dodd-Frank Act requires the 

Commodities Future Trading Commission (CFTC) to establish rules to eliminate excessive position limits. Unfortunately, the 180-day deadline for those rules has 
90 

passed and the regulatory process of establishing position limits is still in the early 

stages, and the limits are planned to be phased in over time. 

Can the witnesses please comment on the likelihood of seeing a huge oil price 

spike this summer of the magnitude that we saw in the summer of 2008? 

Do any of the witnesses believe that putting some limits on excessive speculation 

reduces the chances of rapid rise in oil prices similar to the summer of 2008? 

Question 3b. Recent years have provided us with plenty of fresh evidence that 

markets are susceptible to irrational behavior, both exuberance and fear. We have 

seen this not only in energy markets, but in financial markets in general, whether 

for securities, home mortgages, or other commodities. 

Can you please comment on how, and whether, your organizations attempt to incorporate market forces into your energy pricing models? 

Answer. We think that the rise in prices seen since September 2010 has in large 

part been rooted in a tightening of global market fundamentals, with oil demand 

having run ahead of supply to the tune of over 1 mb/d in 2Q and 3Q 2010. But a 

tightening market is not the same as a tight market. The first half of 2011 sees 

a market that still looks well supplied, with a cushion of flexibility provided by 

spare OPEC crude capacity and OECD refining capacity, plus levels of OECD oil 

inventories that still look comfortable. So the period through summer 2011 does not 

have the same precursors of surging prices that were evident in early 2008. Of 

course, in recent weeks uncertainties regarding future supply due to the ongoing 

turmoil in the region have also had a major impact on prices. How long this might 

persist depends on the course of political events which are impossible to forecast. 

We are generally in favour of greater regulatory oversight of commodity futures 

and derivatives markets and of moves to enhance the visibility of trades both on 

and off exchanges. Measures aimed at reducing systemic risks are to be supported. 

But at the same time, regulators are aware that well functioning markets need liquidity, ease of price discovery and ample opportunities for physical market players 

to hedge price risks for the future. The concept of ‘excessive’ speculation is difficult 

to define, and we would argue in favour of caution as regards position limits, so as 

to avoid sharply curbing market liquidity. Arguably, the sharpest spell of short term 

commodity price volatility occurred in autumn 2008 when liquidity flooded out of 

the market. So there is a risk of unintended consequences from over-zealous regulation, although many regulators seem well aware of this issue. 

EFFECT OF NEW PRODUCTION TECHNOLOGIES ON PRICES

Question 4. There seems to be some disagreement on whether investment in developing new production technologies ends up reducing the price of fossil fuels. We 

have heard a great deal about how oil and gas production is a capital intensive business that requires significant investment in new technologies to access new resources, whether those are unconventional resources, such as oil sands or shale, or 

hard to access resources, such as ultra-deepwater drilling. 

Does investment in developing such hard-to-access resources result in lower fossil 

fuel prices? Or does it simply enable the production of harder to access and more 

expensive resources, thereby ensuring that oil and natural gas will only continue 

to flow as long as global prices remain high? Are you concerned that the U.S. is 

locking itself into dependence on a resource that is destined to get more and more 

expensive over time? 

Do you believe there is now a new normal for fossil fuel prices? Just a decade 

ago OPEC had a $22 to $28 a barrel target range. In 2004, Ali Naimi, the Saudi 

oil minister called $30 to $34 a barrel a ‘‘fair and reasonable price’’ for oil. Why is 

the world now so willing to accept considerable higher level of fossil fuel prices? 

Answer. It is less a case that investment in these new resources might perpetuate 

higher prices, more a case that failing to invest in new sources of supply would likely lead to still higher prices. International oil companies face barriers to investment. 

Much of the world’s low cost oil is situated in countries which deliberately restrict 

access or limit extraction rates. So international companies have had to ‘move up 

the cost curve’. Structurally, and in the long term, the marginal barrel of non-OPEC 

supply is likely to become higher cost. This will ultimately lead to policies which 

lessen dependence on oil in the longer term. But we cannot wean our economies off 

oil and other hydrocarbons overnight. So investment in new sources of oil and gas, 

even if they are higher cost, needs to be encouraged. 

There are great dangers in heralding any concrete new ‘range’ for oil prices. Technology, changing economic circumstances and geopolitics often conspire to alter perceptions of what might constitute any new price ‘norm’. Opportunity constraints, rising costs, stretching project lead times and producer revenue aspirations all pushed 

price perceptions higher in the last decade. And indeed in the longer term, the ex-
91 

ploitation of more costly oil resources, and moves toward an effective price for carbon dioxide emissions could indeed lead to a sustained period of higher prices. But 

as the economic recession of 2008 showed, periods of sharply lower prices are also 

possible. In the short term, the global economic recovery would benefit from prices 

lower than currently, as the global oil burden is approaching levels which in the 

past have acted to curb economic activity. 

ROLE OF ENERGY EFFICIENCY

Question 5. Can you please talk about the role of energy efficiency standards— 

for lighting or vehicles or otherwise—in your reference cases? What assumptions are 

made as to how future efficiency standards enacted via legislation or a rulemaking 

process will impact future fossil fuel consumption levels? 

There have been recent legislative proposals to overturn the U.S. lighting efficiency standard enacted in the Energy Independence and Security Act of 2007. I 

have seen analysis showing that this single policy will result in the United States 

foregoing the need for 30 additional large power plants and consumers will collectively save more than $10 billion on electricity bills each year. Do you agree with 

that analysis and how would repeal of this lighting standard affect your long-term 

modeling results? 

Answer. The IEA models estimate that the EISA regulations will result in a sharp 

rise in demand for CFLi from 2012 to 2015 peaking at just fewer than 900 million 

lamps. This is followed by a sharp down-turn in demand of about 560 million lamps 

in 2018. Thereafter, the second tier regulations take effect but only require a modest 

increase in sales because a large proportion of the screw-base lamp stock is already 

converted to higher efficiency lamps and the intermediate xenon halogen options 

that are now being replaced have a longer lifetime and slower replacement cycle 

than the GLS they replaced. Sales continue to rise more modestly but show ongoing 

fluctuations as the replacement lamp market responds to the 2015 peak and trough. 

In addition solid state lighting begins to make accelerated inroads into the lighting 

market in the 2020 to 2030 timeframe at the expense of CFLi (see: IEA (2010) 

Phaseout of Incandescent Lights, OECD/IEA). 

We have not yet carried out a detailed energy impact analysis on these figures, 

however we assume that the replacement of GLS with CFLi’s on a like-for-like basis 

would result in an electricity savings of 28% on average. 

U.S. OIL DEMAND CURVE

Question 6. I found one of the most interesting trends across your collective forecasts is the flat, or even declining, demand for oil in developed countries, including 

the United States, over the next 25 years. 

Mr. Burkhard’s testimony notes that CERA believes aggregate oil demand in developed markets peaked in 2005 and will not exceed that level again. 

The IEA predicts U.S. oil demand will drop by 10% by 2035. 

The EIA reference case predicts that total liquid fuels consumption in the U.S. 

will increase 17%, to 22.0 million gallons per day, but almost all of that increase 

will come from biofuels. Oil demand appears essentially flat or falling. 

All witnesses, if Congress and the Bush and Obama Administrations had failed 

to enact these policies, how likely is it that forecasted U.S. oil demand would be falling over the next 25 years? 

All witnesses, if Congress and the Administration had failed to enact these policies, what would you anticipate would be the effect on global oil prices in 2035, compared with your reference case? 

Answer. Progressive improvements in vehicle fuel efficiency, spurred by higher 

fuel costs as well as fuel-economy mandates (CAFE ́ standards), and an expansion 

in biofuels production (Renewable Fuels Standard) contribute to the decline in US 

oil demand in the World Energy Outlook projections. In our Current Policies Scenario, US oil demand drops from 17.8 mb/d in 2009 to 16.1 mb/d by 2035. This takes 

account of recent changes to CAFE ́ standards through 2016, in which cars must average fuel economy of 35.5 miles per gallon, and targets for biofuels production (that 

can substitute for use of oil products in transport). By 2035, our business-as-usual 

projections show US biofuels consumption rising to 1.21 mb/d, from 0.5 mb/d in 

2009. The net change (+0.7 mb/d) in US biofuels consumption equates to roughly 

40% of the drop in total oil demand during that time (1.7 mb/d). Without policies 

to promote vehicle efficiency and alternative fuels, the United States would undoubtedly see a higher level of oil demand and therefore some tightening of the global oil market, although our analysis in the World Energy Outlook does not specifically contain projections of such a scenario. 
92 

MEETING RENEWABLE FUELS TARGETS

Question 7. I am discouraged by EIA’s prediction that the market will be unable 

to meet the targets set forth in RFS-2, which is the revised Renewable Fuels Standard that Congress passed in 2007. 

That standard mandates production of thirty-six billion gallons of biofuels a year 

by the year 2022, sixteen billion gallons of which must be of ‘‘cellulosic’’ origin. 

Your agency’s analysis states that: ‘‘EIA’s present view of the projected rates of 

technology development and market penetration of cellulosic biofuel technologies 

suggests that available quantities of cellulosic biofuels will be insufficient to meet 

the renewable fuels standard targets for cellulosic biofuels before 2022.’’ 

All witnesses, do you believe there will be enough flexible fuel vehicles available 

in America in 2022 to be able to consume biofuels production mandates in the RFS2? 

Answer. The IEA has not looked at this specific question in its scenarios. However, the vast majority of vehicles that will be on the road in 2022 are not yet on 

the road today, so can still be strongly influenced by policy. While it may require 

new incentives to reach the number of flex-fuel vehicles needed to match blending 

requirements in RFS-2, the cost of producing such vehicles is relatively low and 

there are no technical barriers to producing these in quite large volumes over the 

next 11 years. 

IMPLICATIONS OF BUSINESS AS USUAL

Question 8. One thing I found lacking from most of the analyses was any kind 

of discussion of their broader implications. For example what kind of world will we 

live in 2035 if the forecasts contained in the reference cases prove accurate, a world 

that consumes 107 million barrels of oil per day. 

Mr. Burkhard, in your testimony you describe a world in which access to energy 

services has allowed an unprecedented number of people to join the ranks of the 

middle class. Further reduction in global poverty is an outcome we can all celebrate. 

But I appreciated Ambassador Jones’ testimony as well, which devoted some attention to the risks of continuing on our present path. These include serious risks 

to national security, economic development, and of course the environment. 

If I may quote from the Ambassador’s written testimony: 

. . . the global energy system, in which all countries are interdependent, 

faces a future that is increasingly untenable. To continue business-as-usual 

risks heightened insecurity, increasing economic volatility, and irreparable 

harm to the environment. We truly need a transformation in the world’s energy system to a more secure, sustainable model. 
93 

I completely agree. Energy policy raises complex questions of equity and justice. 

I believe that too often, people who point to the unsustainable nature of our energy 

system are labeled as ‘‘anti-growth’’. For all our sakes, I hope we can begin to move 

beyond such characterizations, and start talking about policy that can foster both 

growth and sustainability. 

All Witnesses, would you please comment on the implications of continuing on our 

business-as-usual trajectory (i.e. the trajectory outlined in the EIA reference case)? 

Answer. Continuing a business-as-usual trajectory leads to a future fraught with 

risk and unsustainable from an economic, security and environmental perspective. 

In our Current Policies Scenario, in which government policies are unchanged, we 

project world primary energy demand to rise by almost 50% over the next 25 years, 

underpinned by an unmitigated increase in global consumption of fossil-fuels (oil, 

gas and coal) led by emerging economies. The result is an energy mix that still remains heavily slanted toward fossil-fuels in 2035, and tighter energy markets characterized by higher prices and heightened volatility. Furthermore, continued dependence on fossil-fuels at levels in our Current Policies Scenario results in a global 

average temperature increase exceeding six degrees Celsius by 2100. At the same 

time, energy security risks on the supply side also increase. Suppliers of oil and gas 

become more concentrated, with the OPEC share of global oil supply rising toward 

half of the market by 2035. The level of investment to maintain existing supply and 

develop new ones is massive. There is a real risk that this spending will not fully 

come forward. National companies, which often have other demands placed on their 

financial resources and are not always market-oriented, are exercising greater control over development of indigenous supplies. 

INVESTMENT LEVELS NEEDED IN NEXT HALF CENTURY

Question 9. The International Energy Agency has said that investment totaling 

$45 trillion might be needed over the next half-century to prevent energy shortages 

and greenhouse gas emissions from undermining global economic growth. Is this 

analysis still up to date and accurate? 

Answer. Analysis performed for the IEA publication Energy Technology Perspectives 2010 (ETP) shows that a transition to a low-carbon energy system would require the investment of USD 46 trillion additional to the investment required in the 

ETP’s Baseline scenario from 2010 to 2050. These additional investments are needed to achieve the global goal of halving energy related CO2 emissions by 2050 compared to 2005 levels. Half of these additional investments are needed in the transport sector for advanced vehicle technologies. However, the transition to a low-carbon economy will result in significant energy security and economic benefits. For example, this additional investment would yield important fuel cost savings, due to 

efficiency improvements and as lower fuel demand drives down prices. Gross fuelcost savings are estimated to be USD 112 trillion over this period. Subtracting these 

fuel savings from the additional investment costs yields net savings of USD 66 trillion. Even if both the investments and fuel savings over the period to 2050 are discounted back to their present values using a 10% discount rate, the net savings 

amount to USD 8 trillion. 

HOW TO INCREASE ENERGY DIVERSITY

Question 10a. A common theme across all the witness testimony is that global energy demand is increasing and fossil fuel prices are likely to continue to increase. 

So it seems like if the U.S. continues to ignore this problem, the economic and security impacts will be significant. The witnesses also all seem to agree that diversifying America’s sources of energy is a key way to mitigate these harmful impacts. 

What are the most economically efficient policies to increase U.S. energy diversity 

without the need for government to pick technology or special interest winners or 

losers? 

Answer. Energy security is enhanced both by measures to diversify the energy 

mix and to reduce the intensity (and overall level) of energy use. Measures to promote energy efficiency represent the most economical opportunities for increasing 

US energy security. Significant opportunities exist in vehicles, buildings, appliances, 

lighting, industrial equipment and power generation technology. 

Diversity, however, is also critical. Unfortunately, the US primary energy mix 

today remains heavily weighted toward fossil-fuels (37% oil, 24% coal, 24% gas). Nuclear accounts for only about 9.5% of primary energy demand. The shares of other 

sources are even less: biomass, under 4%; hydropower, less than 1%; and other renewable energy sources, less than 1%. In the Current Policies Scenario of the World 

Energy Outlook 2010, fossil fuels still dominate the mix in 2035, accounting for 

more than three-quarters of US primary energy demand. IEA recommendations that 
94 

would promote US energy diversity include: i) focus on decreasing fossil fuel dependence by pushing for strong energy efficiency and clean energy supply policies, ii) 

evaluate the costs and benefits of establishing a consistent CO2 price, taking account of international experience in order to support market-pull measures for the 

accelerated introduction of clean energy technologies and iii) reinforce the development of open and competitive energy markets through consistent regulatory frameworks. 

Question 10b. Do you agree with many energy experts who argue that a predictable price on carbon designed in a way that minimizes price volatility is the most 

economically efficiency and technology neutral way to realize greater energy efficiency and diversity? 

Answer. Putting a price on carbon is a cornerstone policy in climate change response. It is inherently economically efficient because it captures a wider range of 

activities across the economy than a policy targeted only on a particular technology 

or narrow sector, and as such a lower-cost mix of measures should come forward 

to meet a given target. Also, It has the benefit of being technology neutral. 

Carbon price volatility can be managed in many ways, which is important for investor confidence. In an emissions trading scheme, banking of allowances between 

years is a critical tool for participants to be able to manage changing conditions, and 

has been very successful in managing price volatility in the US SO2 allowances program and in the European Emissions Trading System. Other proposed trading 

schemes introduce price caps and floors as a safety-valve against price excursions. 

These could be helpful if they are set at high enough levels, and if there is confidence in the market that they will not be altered. Finally a fixed carbon price (carbon tax) provides the most predictable investment climate, as long as there is investor confidence that the price is not subject to change with political cycles. However 

a fixed carbon price has the disadvantages that there is no guarantee on the level 

of emissions reductions that will be delivered, and it relies on the political will to 

set the tax at a high enough level, and willingness to increase it if emissions are 

higher than anticipated. Given the revolution in our energy systems needed to stay 

within the 2 degrees climate target agreed at Cancλn, caps on emissions may be 

preferable to give certainty over delivery of emissions targets, and in this case price 

volatility is manageable with appropriate design choices (such as banking). However 

in the real world there is no one ‘‘right’’ policy mix: the most effective policy is that 

which maximises economic efficiency, within the constraints of political and public 

acceptability. 

Moreover there are market barriers and imperfections that mean that a carbon 

price alone is not sufficient. In particular for energy efficiency, there is a huge reservoir of untapped potential for efficiency improvements that are already cost-effective at today’s energy prices. The key to unlocking this potential is not so much to 

increase prices further, as it is to remove the non-economic barriers to energy efficiency’s exploitation. These barriers include lack of information and split incentives 

(i.e. those manufacturing equipment or constructing buildings are usually not those 

who will use them), and policies need to be designed in light of real-world, rather 

than theoretical, consumer behaviour. Energy efficiency standards, labelling, and incentive schemes are all powerful tools in supplementing a carbon price to unlock 

this energy efficiency potential. 

Question 10c. Are there links between policies to reduce greenhouse gas emissions 

and increasing energy diversity? If such policies are successful in significantly reducing world demand for fossil fuels, what impact on future prices is that likely to 

have? 

Answer. In practice, many policies aimed at reducing GHG emissions from the energy sector will also have the effect of increasing energy diversity. Policies that promote the development and deployment of non-fossil fuel and renewable energy 

sources will lead to diversification away from fossil fuels. These can include renewables standards, feed-in tariffs, direct support to utilities to expand or develop nonfossil fuel energy sources, or the implementation of a carbon price (through a cap 

and trade system or through taxation). Policies designed to increase energy efficiency will not, per se, increase energy diversity, but can contribute to energy security as well as reducing GHG emissions. 

The 450 Scenario of the IEA’s World Energy Outlook 2010 assumes strong global 

action to reduce GHG emissions. In this scenario energy diversity is greatly increased by 2035 compared to 2008. In the US, in 2008, 49% of electricity generation 

came from coal, and 21% from gas, with just under 29% coming from non-fossil fuel 

sources. By contrast, in the 450 Scenario in 2035, these fossil fuels’ combined contribution to electricity generation is projected to fall to just over 37%, with nuclear 

contributing just over one quarter, and various renewable technologies making up 

the remaining 37%, with none of these making up more than 14% of the total en-
95 

ergy mix. The reduced demand for fossil fuels compared to a scenario with no additional policy to reduce GHGs is expected to lead to significantly lower prices. For 

instance, in the 450 Scenario, the oil price is expected to reach $90 per barrel in 

2009 dollars by 2035, as compared to $135 per barrel in 2035 in the Current Policies 

Scenario, which assumes no policy change from mid-2010. 

[Responses to the following questions were not received at the 

time the hearing went to press:] 

QUESTIONS FOR JIM BURKHARD FROM SENATOR MURKOWSKI

Question 1. The need for oil exploration: About two years ago you said that ‘‘If 

oil demand does not begin to recover next year, the oil market could face a large 

surplus of production capacity for the next several years—even if growth in production capacity slows significantly:’’ This of course was when oil was barely above $40 

a barrel, and it’s obvious that demand has picked up enough and that OPEC has 

restricted enough output to more than double that price. My question is on investment in new reserves. Are enough exploratory operations underway to comfortably 

back up production for projected demand growth? 

US ENERGY COMPANIES VERSUS NATIONAL OIL COMPANIES (NOCS)

Question 2. Can you describe how U.S. oil and gas producers operate with any 

disadvantages relative to National Oil Companies such as the OPEC owner companies? 

OIL MARKETS

Question 3. If only about 3 percent of the world’s oil travels through the Suez 

canal and the SUMED pipeline, yet we are seeing some influence on the global commodity price resulting from instability around the Suez, does this indicate that 

seemingly small disruptions, real or potential, can have comparatively large impacts 

on global markets? 

MAJOR OIL DISCOVERIES

Question 4. What was the impact on global investment and markets when the 

Tupi field was discovered off of Brazil in 2006, and how does the addition of a multibillion barrel discovery impact the host nation and the industry? 

CRISIS-DRIVEN ENERGY POLICY

Question 5. The Outer Continental Shelf Lands Act was implemented after the 

Arab oil embargo and subsequent price controls and economic shocks of the 1970’s, 

as was the authorization of the Trans-Alaska Pipeline System. Are these patterns 

of crisis and response as an unavoidable trend in U.S. energy policy? 

a. Is the U.S., in your group’s view, more proactive or reactive in its energy 

policy? 

CLEAN ENERGY STANDARD

Question 6. Should we learn a lesson from the Renewable Fuel Standard, which 

has fallen short of expectations, when considering an aggressive electricity mandate 

like the one the President is calling for? How likely is it that we will create unforeseen problems if we put a CES in place? To name just one example, will transmission problems and our inability to add significant amounts of renewable energy 

to the grid—become the new ‘‘blend wall’’? 

ALTERNATIVES TO OIL

Question 7. How substantial of an impact do you believe advanced biofuels, electric vehicles, and other technologies will have on petroleum consumption by 2020? 

By 2030? 

FOREIGN OIL DEPENDENCE

Question 8. If Congress had allowed the Coastal Plain of ANWR and other parts 

of Alaska to be opened to production, in 1 995 for example, we would be producing 

domestic oil at a considerably higher rate. What would that mean for our nation’s 
96 

energy security? Would we he more protected, or less protected, from civil unrest 

in Egypt, Jordan, and other parts of the Middle East? In the event of a supply disruption abroad, would we be better equipped, or less prepared, to deal with import 

shortages? 

PROJECTED OIL PRICES

Question 9. In a hypothetical scenario of September 2012., with unemployment is 

down to 8.0%, the economy growing at greater than 3.0% each quarter, and world 

markets on the upswing, where would you forecast the price of oil? 

OFFSHORE MORATORIUM

Question 10. How does the amount of oil that could he taken offline by unrest in 

the Middle East compare to the amount of production that will be lost because of 

the absence of new exploratory permits in the Gulf of Mexico, and the absence of 

resumed exploratory operations? 

ECONOMIC RECOVERY

Question 11. Adam Sieminski, the Chief Energy Economist for Deutsche Bank, recently wrote that ‘‘We estimate that a [10 dollar] rise in the oil price subtracts approximately 0.5 percentage points off U.S. growth.’’ Do any of you agree with Mr. 

Sieminski’s assessment? 

a. Would this calculation change if the US supplied 60% of its own oil as opposed to importing 60% of its oil? 

PRICE INCREASES

Question 12. The head of the Bipartisan Policy Center noted earlier this week that 

‘‘A one-dollar, one-day increase in a barrel of oil takes $12 million out of the U.S. 

economy. If tensions in the Mideast cause oil prices to rise by $5 for even just three 

months, over 5 billion dollars will leave the U.S. economy.’’ Do any of you disagree 

with that assessment? 

IMPACT OF FEDERAL POLICIES

Question 13. What role does the federal government’s stimulus policies, and the 

Federal Reserve’s second round of quantitative easing, have played in boosting commodity prices? Have these policies boosted the price of oil, and, if so, by how much? 

MODULAR NUCLEAR REACTORS

Question 14. What role do you believe small modular nuclear reactors will have 

in meeting the global demand for electricity? What countries are moving forward 

with this technology and what countries are interesting in acquiring these reactors? 

OIL SPILL REPORT

Question 15. Have you reviewed the recommendations made by the President’s Oil 

Spill Commission? I lave you conducted any analysis on the impact those recommendations, if fully implemented, would have on domestic oil production, our import levels, and the global price of oil? 

CHINA

Question 16. Can you shed light on what China’s energy picture really looks like, 

not just for renewable energy, but also its future demand for oil, natural gas, and 

coal? 

QUESTIONS FOR JIM BURKHARD FROM SENATOR CANTWELL

EFFECT OF DOMESTIC DRILLING ON GAS PRICES AND FOREIGN OIL DEPENDENCE

Question 1. In response to the recent political unrest in the Middle East, and rising oil prices, we have heard familiar calls to expand domestic drilling in the United 

States—including offshore and in the pristine Arctic National Wildlife Refuge 

(ANWR)——typically with the claim that such actions will lower gasoline prices or 

reduce our dangerous over-reliance on foreign oil. 
97 

1http://www.eia.doe.gov/oiaf/servicerpt/anwr/results.html 

2 EIA Factsheet. ‘‘Gasoline Explained: Factors Affecting Gasoline Prices’’, available at http:// 

tonto.eia.doe.gov/energyexplained/index.cfm?page=gasolinelfactorslaffectinglprices 

An Energy Information Administration (EIA) study from May 20081 projected the 

effects on oil prices of drilling in the Arctic National Wildlife Refuge. According to 

EIA’s projections, in the most optimistic case, drilling in AN WR would reduce crude 

oil prices by approximately $1.44 per barrel. I understand this would translate to 

approximately 3 to 4 cents per gallon of gasoline at the pump about 20 years from 

now. It seems that EIA has found that drilling offshore would have a similarly negligible effect on prices. FIA issued an analysis in 2009 that examined the impact 

of maintaining the historical moratorium on drilling off the Atlantic, Pacific, and 

Eastern Gulf of Mexico. According to that analysis: ‘‘With limited access to the lower 

48 OCS...there [would be] a small increase in world oil prices...The average price 

of imported low-sulfur crude...is $1.34 per barrel higher, and the average U.S. price 

of gasoline is 3 cents per gallon higher.’’ 

Mr. Jones, Diwan, or Burkhard, would you please comment on your views on the 

ability of expanded domestic drilling to affect world oil prices? 

IS OPEC ABLE TO OFFSET ANY INCREASED DOMESTIC DRILLING

Question 2. A number of experts have argued that any price impact of increased 

domestic production can be easily offset by OPEC. According to another EIA factsheet2: 

One of the major factors on the supply side is OPEC, which can sometimes exert significant influence on prices by setting an upper production 

limit on its members, which produce about 40% of the world’s crude oil. 

OPEC countries have essentially all of the world’s spare oil production capacity, and possess about two-thirds of the world’s estimated crude oil reserves. 

Mr. Newell, Diwan, and Burkhard, is it true that OPEC, by modestly curtailing 

its output, has the power to offset any downward pressure that a marginal increase 

in US oil production might otherwise produce? 

EFFECT OF SPECULATION ON OIL PRICES

Question 3. Several of the testified that oil price movements can be explained by 

supply and demand fundamentals, and these explain the upward pressure we’ve 

seen in recent months. We often hear about the lack of a ‘‘conclusive’’ smoking gun 

that links oil price spikes to speculation in the derivatives markets. 

However, as you may know, the recently-passed Dodd-Frank Act requires the 

Commodities Future Trading Commission (CFTC) to establish rules to eliminate excessive position limits. Unfortunately, the 180-day deadline for those rules has 

passed and the regulatory process of establishing position limits is still in the early 

stages, and the limits are planned to be phased in over time. 

Can the witnesses please comment on the likelihood of seeing a huge oil price 

spike this summer of the magnitude that we saw in the summer of 2008? 

Do any of the witnesses believe that putting some limits on excessive speculation 

reduces the chances of rapid rise in oil prices similar to the summer of 2008? 

EFFECT OF NEW PRODUCTION TECHNOLOGIES ON PRICES

Question 4. There seems to he some disagreement on whether investment in developing new production technologies ends up reducing the price of fossil fuels. We 

have heard a great deal about how oil and gas production is a capital intensive business that requires significant investment in new technologies to access new resources, whether those are unconventional resources, such as oil sands or shale, or 

hard to access resources, such as ultra-deepwater drilling. 

Does investment in developing such hard-to-access resources result in lower fossil 

fuel prices? Or does it simply enable the production of harder to access and more 

expensive resources, thereby ensuring that oil and natural gas will only continue 

to flow as long as global prices remain high? Are you concerned that the U.S. is 

locking itself into dependence on a resource that is destined to get more and more 

expensive over time? 

Do you believe there is now a new normal for fossil fuel prices? Just a decade ago OPEC had a $22 to $28 a barrel target range. In 2004, Ali Naimi, the Saudi 

oil minister called $30 to $34 a barrel a ‘‘fair and reasonable price’’ for oil. Why is 

the world now so willing to accept considerable higher level of fossil fuel prices? 
98 

U.S. OIL DEMAND CURVE

Question 6. I found one of the most interesting trends across your collective forecasts is the flat, or even declining, demand for oil in developed countries, including 

the United States, over the next 25 years. 

Mr. Burkhard’s testimony notes that CERA believes aggregate oil demand in developed markets peaked in 2005 and will not exceed that level again. 

The IEA predicts U.S. oil demand will drop by 10% by 2035. 

The EIA reference case predicts that total liquid fuels consumption in the U.S. 

will increase 17%, to 22.0 million gallons per day, but almost all of that increase 

will come from biofuels. Oil demand appears essentially flat or falling. 

If Congress and the Bush and Obama Administrations had failed to enact these 

policies, how likely is it that forecasted U.S. oil demand would be falling over the 

next 25 years? 

If Congress and the Administration had failed to enact these policies, what would 

you anticipate would be the effect on global oil prices in 2035, compared with your 

reference case? 

MEETING RENEWABLE FUELS TARGETS

Question 7. I am discouraged by EIA’s prediction that the market will be unable 

to meet the targets set forth in RFS2, which is the revised Renewable Fuels Standard that Congress passed in 2007. 

That standard mandates production of thirty-six billion gallons of biofuels a year 

by the year 2022, sixteen billion gallons of which must be of ‘‘cellulosic’’ origin. 

Your agency’s analysis states that: -ETA’s present view of the projected rates of 

technology development and market penetration of cellulosic biofuel technologies 

suggests that available quantities of cellulosic biofuels will be insufficient to meet 

the renewable fuels standard targets for cellulosic biofuels before 2022.’’ 

Do you believe there will be enough flexible fuel vehicles available in America in 

2022 to be able to consume biofuels production mandates in the RFS-2? 

IMPLICATIONS OF BUSINESS AS USUAL

Question 8. One thing I found lacking from most of the analyses was any kind 

of discussion of their broader implications. For example what kind of world will we 

live in 2035 if the forecasts contained in the reference cases prove accurate, a world 

that consumes 107 million barrels of oil per day. 

Mr. Burkhard, in your testimony you describe a world in which access to energy 

services has allowed an unprecedented number of people to join the ranks of the 

middle class. Further reduction in global poverty is an outcome we can all celebrate. 

But I appreciated Ambassador Jones’ testimony as well, which devoted some attention to the risks of continuing on our present path. These include serious risks 

to national security, economic development, and of course the environment. 

If I may quote from the Ambassador’s written testimony: 

...the global energy system, in which all countries are interdependent, 

faces a future that is increasingly untenable. To continue business-as-usual 

risks heightened insecurity, increasing economic volatility, and irreparable 

harm to the environment. We truly need a transformation in the world’s energy system to a more secure, sustainable model...’’ 

I completely agree. Energy policy raises complex questions of equity and justice. 

I believe that too often, people who point to the unsustainable nature of our energy 

system are labeled as ‘‘anti-growth’’. For all our sakes, I hope we can begin to move 

beyond such characterizations, and start talking about policy that can foster both 

growth and sustainability. 

Would you please comment on the implications of continuing on our business-asusual trajectory (i.e. the trajectory outlined in the EIA reference case)? 

HOW TO INCREASE ENERGY DIVERSITY

Question 11. A common theme across all the witness testimony is that global energy demand is increasing and fossil fuel prices are likely to continue to increase. 

So it seems like if the U.S. continues to ignore this problem, the economic and security impacts will be significant. The witnesses also all seem to agree that diversifying America’s sources of energy is a key way to mitigate these harmful impacts. 

What are the most economically efficient policies to increase U.S. energy diversity 

without the need for government to pick technology or special interest winners or 

losers? 
99 

Do you agree with many energy experts who argue that a predictable price on carbon designed in a way that minimizes price volatility is the most economically efficiency and technology neutral way to realize greater energy efficiency and diversity? 

Are there links between policies to reduce greenhouse gas emissions and increasing energy diversity? If such policies are successful in significantly reducing world 

demand for fossil fuels, what impact on future prices is that likely to have? 

QUESTIONS FOR ROGER DIWAN FROM SENATOR MURKOWSKI

US ENERGY COMPANIES VERSUS NATIONAL OIL COMPANIES (NOCS)

Question 1. Can you describe how U.S. oil and gas producers operate with any 

disadvantages relative to National Oil Companies such as the OPEC owner companies? 

OIL MARKETS

Question 2. If only about 3 percent of the world’s oil travels through the Suez 

canal and the SUMED pipeline, yet we are seeing some influence on the global commodity price resulting from instability around the Suez, does this indicate that 

seemingly small disruptions, real or potential, can have comparatively large impacts 

on global markets? 

MAJOR OIL DISCOVERIES

Question 3. What was the impact on global investment and markets when the 

Tupi field was discovered off of Brazil in 2006, and how does the addition of a multibillion barrel discovery impact the host nation and the industry? 

CRISIS-DRIVEN ENERGY POLICY

Question 4. The Outer Continental Shelf Lands Act was implemented after the 

Arab oil embargo and subsequent price controls and economic shocks of the 1970’s, 

as was the authorization of the Trans-Alaska Pipeline System. Are these patterns 

of crisis and response as an unavoidable trend in U.S. energy policy? 

a. Is the U.S., in your group’s view, more proactive or reactive in its energy 

policy? 

CLEAN ENERGY STANDARD

Question 5. Should we learn a lesson from the Renewable Fuel Standard, which 

has fallen short of expectations, when considering an aggressive electricity mandate 

like the one the President is calling for? How likely is it that we will create unforeseen problems if we put a CES in place? To name just one example, will transmission problems and our inability to add significant amounts of renewable energy 

to the grid—become the new ‘‘blend wall’’? 

ALTERNATIVES TO OIL

Question 6. How substantial of an impact do you believe advanced biofuels, electric vehicles, and other technologies will have on petroleum consumption by 2020? 

By 2030? 

FOREIGN OIL DEPENDENCE

Question 7. If Congress had allowed the Coastal Plain of ANWR and other parts 

of Alaska to be opened to production, in 1 995 for example, we would be producing 

domestic oil at a considerably higher rate. What would that mean for our nation’s 

energy security? Would we he more protected, or less protected, from civil unrest 

in Egypt, Jordan, and other parts of the Middle East? In the event of a supply disruption abroad, would we be better equipped, or less prepared, to deal with import 

shortages? 

PROJECTED OIL PRICES

Question 8. In a hypothetical scenario of September 2012., with unemployment is 

down to 8.0%, the economy growing at greater than 3.0% each quarter, and world 

markets on the upswing, where would you forecast the price of oil? 
100 

1http://www.eia.doe.gov/oiaf/servicerpt/anwr/results.html 

OFFSHORE MORATORIUM

Question 9. How does the amount of oil that could he taken offline by unrest in 

the Middle East compare to the amount of production that will be lost because of 

the absence of new exploratory permits in the Gulf of Mexico, and the absence of 

resumed exploratory operations? 

ECONOMIC RECOVERY

Question 10. Adam Sieminski, the Chief Energy Economist for Deutsche Bank, recently wrote that ‘‘We estimate that a [10 dollar] rise in the oil price subtracts approximately 0.5 percentage points off U.S. growth.’’ Do any of you agree with Mr. 

Sieminski’s assessment? 

a. Would this calculation change if the US supplied 60% of its own oil as opposed to importing 60% of its oil? 

PRICE INCREASES

Question 11. The head of the Bipartisan Policy Center noted earlier this week that ‘‘A one-dollar, one-day increase in a barrel of oil takes $12 million out of the U.S. 

economy. If tensions in the Mideast cause oil prices to rise by $5 for even just three 

months, over 5 billion dollars will leave the U.S. economy.’’ Do any of you disagree 

with that assessment? 

IMPACT OF FEDERAL POLICIES

Question 12. What role does the federal government’s stimulus policies, and the 

Federal Reserve’s second round of quantitative easing, have played in boosting commodity prices? Have these policies boosted the price of oil, and, if so, by how much? 

MODULAR NUCLEAR REACTORS

Question 13. What role do you believe small modular nuclear reactors will have 

in meeting the global demand for electricity? What countries are moving forward 

with this technology and what countries are interesting in acquiring these reactors? 

OIL SPILL REPORT

Question 14. Have you reviewed the recommendations made by the President’s Oil 

Spill Commission? I lave you conducted any analysis on the impact those recommendations, if fully implemented, would have on domestic oil production, our import levels, and the global price of oil? 

CHINA

Question 15. Can you shed light on what China’s energy picture really looks like, 

not just for renewable energy, but also its future demand for oil, natural gas, and 

coal? 

QUESTIONS FOR ROGER DIWAN FROM SENATOR CANTWELL

EFFECT OF DOMESTIC DRILLING ON GAS PRICES AND FOREIGN OIL DEPENDENCE

Question 1. In response to the recent political unrest in the Middle East, and rising oil prices, we have heard familiar calls to expand domestic drilling in the United 

States—including offshore and in the pristine Arctic National Wildlife Refuge 

(ANWR)——typically with the claim that such actions will lower gasoline prices or 

reduce our dangerous over-reliance on foreign oil. 

An Energy Information Administration (EIA) study from May 20081 projected the 

effects on oil prices of drilling in the Arctic National Wildlife Refuge. According to 

EIA’s projections, in the most optimistic case, drilling in AN WR would reduce crude 

oil prices by approximately $1.44 per barrel. I understand this would translate to 

approximately 3 to 4 cents per gallon of gasoline at the pump about 20 years from 

now. 

It seems that EIA has found that drilling offshore would have a similarly negligible effect on prices. FIA issued an analysis in 2009 that examined the impact 

of maintaining the historical moratorium on drilling off the Atlantic, Pacific, and 

Eastern Gulf of Mexico. According to that analysis: ‘‘With limited access to the lower 

48 OCS...there [would be] a small increase in world oil prices...The average price 
101 

2 EIA Factsheet. ‘‘Gasoline Explained: Factors Affecting Gasoline Prices’’, available at http:// 

tonto.eia.doe.gov/energyexplained/index.cfm?page=gasolinelfactorslaffectinglprices 

of imported low-sulfur crude...is $1.34 per barrel higher, and the average U.S. price 

of gasoline is 3 cents per gallon higher.’’ 

Mr. Jones, Diwan, or Burkhard, would you please comment on your views on the 

ability of expanded domestic drilling to affect world oil prices? 

IS OPEC ABLE TO OFFSET ANY INCREASED DOMESTIC DRILLING

Question 2. A number of experts have argued that any price impact of increased 

domestic production can be easily offset by OPEC. According to another EIA factsheet2: 

One of the major factors on the supply side is OPEC, which can sometimes exert significant influence on prices by setting an upper production 

limit on its members, which produce about 40% of the world’s crude oil. 

OPEC countries have essentially all of the world’s spare oil production capacity, and possess about two-thirds of the world’s estimated crude oil reserves. 

Mr. Newell, Diwan, and Burkhard, is it true that OPEC, by modestly curtailing 

its output, has the power to offset any downward pressure that a marginal increase 

in US oil production might otherwise produce? 

EFFECT OF SPECULATION ON OIL PRICES

Question 3. Several of the testified that oil price movements can be explained by 

supply and demand fundamentals, and these explain the upward pressure we’ve 

seen in recent months. We often hear about the lack of a ‘‘conclusive’’ smoking gun 

that links oil price spikes to speculation in the derivatives markets. 

However, as you may know, the recently-passed Dodd-Frank Act requires the 

Commodities Future Trading Commission (CFTC) to establish rules to eliminate excessive position limits. Unfortunately, the 180-day deadline for those rules has 

passed and the regulatory process of establishing position limits is still in the early 

stages, and the limits are planned to be phased in over time. 

Can the witnesses please comment on the likelihood of seeing a huge oil price 

spike this summer of the magnitude that we saw in the summer of 2008? 

Do any of the witnesses believe that putting some limits on excessive speculation 

reduces the chances of rapid rise in oil prices similar to the summer of 2008? 

EFFECT OF NEW PRODUCTION TECHNOLOGIES ON PRICES

Question 4. There seems to he some disagreement on whether investment in developing new production technologies ends up reducing the price of fossil fuels. We 

have heard a great deal about how oil and gas production is a capital intensive business that requires significant investment in new technologies to access new resources, whether those are unconventional resources, such as oil sands or shale, or 

hard to access resources, such as ultra-deepwater drilling. 

Does investment in developing such hard-to-access resources result in lower fossil 

fuel prices? Or does it simply enable the production of harder to access and more 

expensive resources, thereby ensuring that oil and natural gas will only continue 

to flow as long as global prices remain high? Are you concerned that the U.S. is 

locking itself into dependence on a resource that is destined to get more and more 

expensive over time? 

Do you believe there is now a new normal for fossil fuel prices? Just a decade 

ago OPEC had a $22 to $28 a barrel target range. In 2004, Ali Naimi, the Saudi 

oil minister called $30 to $34 a barrel a ‘‘fair and reasonable price’’ for oil. Why is 

the world now so willing to accept considerable higher level of fossil fuel prices? 

U.S. OIL DEMAND CURVE

Question 6. I found one of the most interesting trends across your collective forecasts is the flat, or even declining, demand for oil in developed countries, including 

the United States, over the next 25 years. 

Mr. Burkhard’s testimony notes that CERA believes aggregate oil demand in developed markets peaked in 2005 and will not exceed that level again. 

The IEA predicts U.S. oil demand will drop by 10% by 2035. 

The EIA reference case predicts that total liquid fuels consumption in the U.S. 

will increase 17%, to 22.0 million gallons per day, but almost all of that increase 

will come from biofuels. Oil demand appears essentially flat or falling. 
102 

If Congress and the Bush and Obama Administrations had failed to enact these 

policies, how likely is it that forecasted U.S. oil demand would be falling over the 

next 25 years? 

If Congress and the Administration had failed to enact these policies, what would 

you anticipate would be the effect on global oil prices in 2035, compared with your 

reference case? 

MEETING RENEWABLE FUELS TARGETS

Question 7. I am discouraged by EIA’s prediction that the market will be unable 

to meet the targets set forth in RFS2, which is the revised Renewable Fuels Standard that Congress passed in 2007. 

That standard mandates production of thirty-six billion gallons of biofuels a year 

by the year 2022, sixteen billion gallons of which must be of ‘‘cellulosic’’ origin. 

Your agency’s analysis states that: -ETA’s present view of the projected rates of 

technology development and market penetration of cellulosic biofuel technologies 

suggests that available quantities of cellulosic biofuels will be insufficient to meet 

the renewable fuels standard targets for cellulosic biofuels before 2022.’’ 

Do you believe there will be enough flexible fuel vehicles available in America in 

2022 to be able to consume biofuels production mandates in the RFS-2? 

IMPLICATIONS OF BUSINESS AS USUAL

Question 8. One thing I found lacking from most of the analyses was any kind 

of discussion of their broader implications. For example what kind of world will we 

live in 2035 if the forecasts contained in the reference cases prove accurate, a world 

that consumes 107 million barrels of oil per day. 

Mr. Burkhard, in your testimony you describe a world in which access to energy 

services has allowed an unprecedented number of people to join the ranks of the 

middle class. Further reduction in global poverty is an outcome we can all celebrate. 

But I appreciated Ambassador Jones’ testimony as well, which devoted some attention to the risks of continuing on our present path. These include serious risks 

to national security, economic development, and of course the environment. 

If I may quote from the Ambassador’s written testimony: 

...the global energy system, in which all countries are interdependent, 

faces a future that is increasingly untenable. To continue business-as-usual 

risks heightened insecurity, increasing economic volatility, and irreparable 

harm to the environment. We truly need a transformation in the world’s energy system to a more secure, sustainable model...’’ 

I completely agree. Energy policy raises complex questions of equity and justice. 

I believe that too often, people who point to the unsustainable nature of our energy 

system are labeled as ‘‘anti-growth’’. For all our sakes, I hope we can begin to move 

beyond such characterizations, and start talking about policy that can foster both 

growth and sustainability. 

Would you please comment on the implications of continuing on our business-asusual trajectory (i.e. the trajectory outlined in the EIA reference case)? 

HOW TO INCREASE ENERGY DIVERSITY

Question 11. A common theme across all the witness testimony is that global energy demand is increasing and fossil fuel prices are likely to continue to increase. 

So it seems like if the U.S. continues to ignore this problem, the economic and security impacts will be significant. The witnesses also all seem to agree that diversifying America’s sources of energy is a key way to mitigate these harmful impacts. 

What are the most economically efficient policies to increase U.S. energy diversity 

without the need for government to pick technology or special interest winners or 

losers? 

Do you agree with many energy experts who argue that a predictable price on carbon designed in a way that minimizes price volatility is the most economically efficiency and technology neutral way to realize greater energy efficiency and diversity? 

Are there links between policies to reduce greenhouse gas emissions and increasing energy diversity? If such policies are successful in significantly reducing world 

demand for fossil fuels, what impact on future prices is that likely to have? 

Æ