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[Senate Hearing 106-506]
[From the U.S. Government Publishing Office]

                                                        S. Hrg. 106-506

     RISING OIL PRICES, EXECUTIVE BRANCH POLICY, AND U.S. SECURITY 
                              IMPLICATIONS

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

                                HEARING

                               BEFORE THE

                              COMMITTEE ON
                          GOVERNMENTAL AFFAIRS
                          UNITED STATES SENATE

                       ONE HUNDRED SIXTH CONGRESS

                             SECOND SESSION

                               __________

                             MARCH 24, 2000

                               __________

      Printed for the use of the Committee on Governmental Affairs

                     U.S. GOVERNMENT PRINTING OFFICE
64-134 cc                    WASHINGTON : 2000
_______________________________________________________________________
For sale by the Superintendent of Documents, Congressional Sales Office
         U.S. Government Printing Office, Washington, DC 20402

                   COMMITTEE ON GOVERNMENTAL AFFAIRS

                   FRED THOMPSON, Tennessee, Chairman
WILLIAM V. ROTH, Jr., Delaware       JOSEPH I. LIEBERMAN, Connecticut
TED STEVENS, Alaska                  CARL LEVIN, Michigan
SUSAN M. COLLINS, Maine              DANIEL K. AKAKA, Hawaii
GEORGE V. VOINOVICH, Ohio            RICHARD J. DURBIN, Illinois
PETE V. DOMENICI, New Mexico         ROBERT G. TORRICELLI, New Jersey
THAD COCHRAN, Mississippi            MAX CLELAND, Georgia
ARLEN SPECTER, Pennsylvania          JOHN EDWARDS, North Carolina
JUDD GREGG, New Hampshire
             Hannah S. Sistare, Staff Director and Counsel
                      Paul R. Noe, Senior Counsel
      Joyce A. Rechtschaffen, Minority Staff Director and Counsel
                Jonathan M. Gill, Minority GAO Detailee
                 Darla D. Cassell, Administrative Clerk
                            C O N T E N T S

                                 ------                                
Opening statements:
                                                                   Page
    Senator Thompson.............................................     1
    Senator Lieberman............................................     2
    Senator Voinovich............................................     4
    Senator Akaka................................................     6
    Senator Cleland..............................................     7
    Senator Domenici.............................................     9

                               Witnesses
                         Friday, March 24, 2000

David L. Goldwyn, Assistant Secretary for International Affairs, 
  U.S. Department of Energy......................................    11
Jay E. Hakes, Ph.D., Administrator, Energy Information 
  Administration.................................................    14
Red Cavaney, President and Chief Executive Officer, American 
  Petroleum Institute............................................    30
Richard N. Haass, Vice President and Director of Foreign Policy 
  Studies, The Brookings Institution.............................    32
Robert E. Ebel, Director, Energy and National Security, Center 
  for Strategic and International Studies........................    34
William M. Flynn, Vice President, New York State Energy Research 
  and Development Authority......................................    36
John P. Holdren, Ph.D., President's Committee of Advisors on 
  Science and Technology, Belfer Center for Science and 
  International Affairs, Kennedy School of Government............    38
Adam E. Sieminski, Director, Deutsche Banc Alex. Brown...........    41

                     Alphabetical List of Witnesses

Cavaney, Red:
    Testimony....................................................    30
    Prepared statement...........................................    75
Ebel, Robert E.:
    Testimony....................................................    34
    Prepared statement...........................................    90
Flynn, William M.:
    Testimony....................................................    36
    Prepared statement...........................................    97
Goldwyn, David L.:
    Testimony....................................................    11
    Prepared statement...........................................    59
Haass, Richard N.:
    Testimony....................................................    32
    Prepared statement...........................................    87
Hakes, Jay E.:
    Testimony....................................................    14
    Prepared statement with attachments..........................    66
Holdren, John P.:
    Testimony....................................................    38
    Prepared statement with attachments..........................   112
Sieminski, Adam E.:
    Testimony....................................................    41
    Prepared statement...........................................   130

                                Appendix

Additional material submitted for the Record:
    Six-page synthesis of PCAST Report...........................   124
    Independent Petroleum Association of America (IPPA), prepared 
      statement..................................................   152
    Nuclear Energy Institute, prepared statement.................   162

 
     RISING OIL PRICES, EXECUTIVE BRANCH POLICY, AND U.S. SECURITY 
                              IMPLICATIONS

                              ----------                              

                         FRIDAY, MARCH 24, 2000

                                       U.S. Senate,
                         Committee on Governmental Affairs,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 10:00 a.m., in 
room SD-342, Dirksen Senate Office Building, Hon. Fred 
Thompson, Chairman of the Committee, presiding.
    Present: Senators Thompson, Voinovich, Domenici, Lieberman, 
Akaka, and Cleland.

             OPENING STATEMENT OF CHAIRMAN THOMPSON

    Chairman Thompson. Let's come to order, please. Thank you 
all for being with us here this morning. Today the Committee is 
holding an oversight hearing on rising oil prices, Executive 
Branch policy and U.S. security implications. As we all know, 
oil is an essential component of our economic vitality and 
lifestyle. Petroleum products fuel 97 percent of our 
transportation needs, for example.
    Oil is the primary energy source for many industries and a 
key feed stock for others. High oil prices affect everything 
from travel, shipping, autos, chemicals, consumer products, 
technology, and home heating. It wasn't long ago that we 
enjoyed historically low oil prices. A little more than a year 
ago, oil was about $10 per barrel. Gasoline was less than $1 
per gallon.
    In March 1999, OPEC decided to decrease oil production and 
drive up oil prices, even as world oil consumption was rising. 
Since then, oil prices have tripled to about $30 per barrel. 
During this winter, home heating oil prices doubled in the 
Northeast. As Secretary Richardson put it, the administration 
was caught napping at that price jump.
    Economists are predicting gasoline prices will continue to 
rise in the near term and some think that gasoline could cost 
about $2 per gallon this summer. Oil also has important 
application for our national security. Because oil is the life 
blood of our economy, it must be reliable, affordable, and 
predictable. Relying completely on others to supply it can 
present dangerous consequences to our prosperity and way of 
life, both vital interests that the country must be prepared to 
defend.
    The United States is becoming increasingly reliant on 
foreign oil. This is cause for alarm, given that some of the 
world's leading oil producers are politically unstable, face 
difficult internal issues, or live in tough neighborhoods. We 
now depend on foreign sources for over half of our oil needs 
and we are heading to 60 percent within 5 years. It seems that 
few people view our reliance on foreign oil as a problem until 
prices are raised.
    Here in Washington, it is tempting to enjoy the political 
windfall of low oil prices; so long as prices are low, 
policymakers are prone to ignore the link between oil imports 
and national security. But it seems to me that there is a 
danger not having a proactive energy policy. The recent oil 
price shocks may be a sign that these chickens will come home 
to roost and perhaps might be a blessing in disguise if it gets 
our attention.
    It seems to me that after a decade, when we were using more 
oil, consumption was increasing and production was declining, 
during which we enjoyed historic low prices because of a given 
set of circumstances that was prevalent at the time--the Asian 
economic crisis, weather, various other things, miscalculations 
by OPEC, oversupply from their standpoint--those forces are 
simply reversing themselves now, as could be expected. But 
after all of this happening, we find ourselves now that OPEC 
has changed its mind about its policies.
    We are all in a state of shock that such a thing could 
happen. It does not seem to me like we really ought to be, and 
so now we are looking at some short-term solutions that I hope 
will not present more problems than they cure, and also, 
hopefully again, some long-term solutions that we usually seem 
to want to take a look at only when prices go up. But I think 
the issues of supply and stability, frankly, are much more 
important than temporary price increases, considering the 
historical price of oil anyway. But anyway, with that, I will 
turn it over to Senator Lieberman.

             OPENING STATEMENT OF SENATOR LIEBERMAN

    Senator Lieberman. Thank you, Mr. Chairman. Thank you 
particularly for moving quickly to convene this timely hearing 
on this problem that has been of great concern and frustration 
to the Northeast this winter and now is to consumers of 
gasoline throughout the country. The worst of the home heating 
oil panic that hit the Northeast this winter has now subsided, 
mostly because temperatures have warmed, although the supply 
eventually came up to begin to meet the demand. But consumers 
are still bearing a very heavy financial burden with oil prices 
at the $27 to $28 per barrel range, and gasoline prices, as 
everyone knows, are still rising unabated.
    Because our gasoline stocks are now at about the level they 
usually are on Labor Day, reputable analysts are predicting 
drivers could be paying between $2 and $2.50 per gallon at the 
pump as the spring and summer vacation season approaches. 
Incidentally, one of the questions that I will want to ask the 
witnesses today is about the inventories. There was a recent 
article in Business Week that indicated that normally the oil 
industry builds its stocks of oil, to a peak around April 1 and 
then runs them down through the summer driving season.
    This year, however, gas stocks are at the ultra-low levels 
now, usually seen around Labor Day. I want to ask questions 
about that. More generally, Mr. Chairman, I know Secretary 
Richardson has had some success in pressuring OPEC to step up 
its oil production, and, of course, I am grateful that he has 
taken an aggressive role in trying to ease the current squeeze, 
but still we will not know by how much or how soon output will 
be raised until the OPEC conference in Vienna on Monday.
    That reminds us of what Senator Thompson has said, which is 
that we have put ourselves in a position where we are dependent 
on foreign sources of oil and therefore vulnerable. I was also 
encouraged that the President, in his radio address last 
Saturday, called for the creation of a regional home heating 
oil reserve for the Northeast, with an appropriate trigger that 
would supply additional heating oil to the market during a 
future shortage.
    Senator Dodd and I introduced a proposal along these lines 
last month, so I look forward to working with the 
administration on a bill that we can hopefully pass this year 
so that we can give some sense of security to businesses and 
family consumers in the Northeast, before next winter's home 
heating oil season begins.
    But I must say none of this eases the frustration of being 
caught in an all too familiar and aggravating OPEC oil vise yet 
again. So I hope we can discuss today how this great country of 
ours got to this point of economic vulnerability to a cartel 
whose supply-controlling, price-fixing practices would be 
illegal in this country. I hope that we will, if you will allow 
me to put it this way, not just get mad at OPEC today, but 
figure out how to get even, and in that sense, I mean by 
beginning to take the steps that are necessary for our country 
to be more energy independent.
    In the meantime, a lot of us have talked about the 
desirability of responding to the oil crunch by drawing down 
from the enormous crude oil inventory we have in the Strategic 
Petroleum Reserve to add to supply that will reduce prices.
    I do not view this as a panacea, but it certainly could and 
probably would have a short to mid-term effect on gasoline 
prices, and it gives some strength to our position and makes 
us, I think, more than simply a supplicant without resources, 
begging and pleading at the OPEC's table. I remain concerned 
that we have not gone into the Strategic Petroleum Reserve, but 
I'm encouraged that some of our witnesses advocate the 
approach, particularly and preferably the so-called swap 
approach that would involve the release of oil now to refiners 
in exchange for a promise to return additional amounts of oil 
to the reserve in the future.
    But let's step back and look at the big picture, and it 
looks a lot like the Chairman indicated. It is clear that the 
price volatility and the threat that it presents are symptoms 
of the more fundamental long-term problem, which is our 
dependence on foreign oil. By failing to provide our own 
citizens with energy alternatives that are within our control, 
we limit our options in times of national emergencies and 
entrust our economic and therefore, our strategic security too 
much to the whims of others. I think it is imperative that we 
take some steps now to wean ourselves from foreign oil and to 
develop a domestic infrastructure to deliver reliable 
alternatives.
    First, we have to invest the time, money, and energy, to 
wisely increase our domestic gas and oil production, diversify 
our energy mix to include more solar energy, fuel cells, wind 
and even nuclear power, and develop long-range strategies for 
harnessing these additional energy resources. I know in this 
regard that there are different and difficult balances to be 
made, particularly about the drilling of oil domestically. 
Again, some have suggested that we target, for instance, the 
Arctic National Wildlife Refuge.
    The U.S. Geological Survey estimated that there is less 
than a 6-month supply of commercially recoverable oil in ANWR, 
which is not inconsequential, but nonetheless convinces me as I 
make my personal comments, that it is not worth it to destroy 
this refuge for that amount of oil, which some have estimated 
would never meet more than two percent of our Nation's need at 
a given time. But those are the balances that we are going to 
have to make, each of us and the Nation as a whole, as we try 
to become less dependent on foreign sources of oil.
    Second, in the context of the utility deregulation debate, 
Senator Jefferson and I are cosponsoring legislation that would 
require utilities to use renewables for ultimately 20 percent 
of their power projection by the year 2020.
    Third, we have got to take stock of the domestic energy 
market and evaluate national and individual consumer decisions 
affecting our energy supply and efficiency. In some areas here, 
the results are actually encouraging. Conservation and 
efficiency measures that have been taken by American businesses 
have significantly improved the energy efficiency of the 
overall economy. During the crisis of the 1970's, nearly nine 
percent of our GDP was spent on oil. That is down to three 
percent today and I think we can build on that progress.
    But the record is not so bright across other sectors of the 
economy, particularly when it comes to our driving habits where 
vehicle miles have increased by 130 percent over the last 30 
years and, despite early improvements in fuel efficiency, 
current standards have stagnated and Congress has imposed a 
freeze on raising or even studying the benefits of raising the 
corporate average fuel efficiency. I think we have got to do 
much better at that.
    So, bottom line, Mr. Chairman, I hope that we will use this 
moment of dwindling oil supply and rising prices to heed the 
warning signs, to think about our future health and security as 
a Nation, and to act together to adopt a new progressive energy 
policy for this new century. I thank you. We have an excellent 
group of witnesses and I look forward to hearing from them this 
morning.
    Chairman Thompson. Thank you very much.
    Senator Voinovich, do you have any questions.

             OPENING STATEMENT OF SENATOR VOINOVICH

    Senator Voinovich. Mr. Chairman, first of all, I want to 
thank you and Senator Lieberman for holding this hearing today. 
I have been concerned about this Nation's lack of an oil policy 
or energy policy back from the 1970's, when we had that 
terrible situation where our gas prices went through the roof. 
In spite of the fact that we have been through these peaks, 
this Nation has not taken the time to sit down and develop an 
energy policy and to get all of the competing interests 
together in a room and figure out where we are going.
    Yesterday, Senator Warner, Senator Baucus, and I held a 
news conference in opposition to reducing the tax on gasoline 
by 4.3 percent, which people are suggesting is going to solve 
the problem that we have, on the grounds that about all that 
would do is save the average driver a year about 43 bucks and 
break the covenant that was made by this Congress to the 
governors of this country that we would have reliable and 
stable source of revenue so that we could deal with the highway 
and transportation problems that we have in this country. I 
also mentioned the fact that the proposal was just another 
thing to take our eye off the real issue, and the real issue is 
that we do not have an energy policy.
    Senator Lieberman, I think you eloquently spoke to some of 
the various options that are available to us. But we have not 
been willing to do that, to bring them to the table. And the 
environmental interest--we cannot do this and we cannot do 
that. The fact is, we have to get our national security 
interest on the table. We have got to get our economic interest 
on the table. We have to get our environmental interest on the 
table and reconcile them. But one thing I think most people 
would conclude after we do that is that we are too dependent on 
oil from around the world, from a lot of places that are very 
unstable. We have to do, as a Nation, a better job of providing 
our own source of oil.
    The issue is how do you go about doing that and at the same 
time, give consideration to the environmental concerns and 
other concerns that people have? This is an ideal time to do it 
because of the fact that we are seeing just what impact this 
has had on our economy in the short run and God knows how long 
it will be, but I suspect Secretary Richardson and the 
President--we have got a November election coming up, some 
miracle is going to happen before November that gas prices are 
going to go down. I am confident of that, folks. It will 
happen.
    But then the issue is, after the dog has stopped barking, 
are we just going to go back to the way we did things before 
and not really confront this issue? So it is time to get 
together on a bipartisan basis and try and face this thing 
forthright and stop dealing with it by putting it in a drawer, 
and of course, to try to explain to the American public, that 
there are a lot of things that we could be doing. But, it has 
got to be a multifaceted program that we have, and not just one 
silver bullet that we are going to say is going to solve this 
problem.
    I am anxious to hear what you have to say about this issue 
from a national defense point of view. We do not think about 
that, do we? We have our Strategic Petroleum Reserve, but what 
if we do really get into a jam? How vulnerable are we from a 
national security point of view as a result of the policies 
that this Nation has been following?
    So, again, I want to congratulate the two of you for 
holding this hearing and let's hope that after this crisis is 
over, that everybody just does not go back to where they were 
before. We ought to take this thing on and make a covenant 
among ourselves that we are going to stay on this 
administration and the next administration to make sure that 
this Nation has an overall energy policy, and one that will 
protect our security interest and also deal with our own 
economy. Thank you.
    Chairman Thompson. Thank you.
    Senator Akaka, did you have any opening comments.

               OPENING STATEMENT OF SENATOR AKAKA

    Senator Akaka. Thank you very much, Mr. Chairman. I want to 
thank the Chairman and the Ranking Member for having this very 
important hearing this morning. America has energy problems and 
we all understand that there is no overnight solution, but we 
have got to work on it.
    More than 55 percent of the oil we consume is imported. And 
in places like Hawaii and New England, import dependence is 75 
percent or greater. Our import dependence has been rising for 
the past two decades and we cannot turn this trend around 
overnight, and this is our problem. As I see it, two things 
will reverse our energy problem: A multifaceted energy strategy 
and the commitment to sustain that strategy.
    In my judgment, we need both of these in equal proportions. 
If we want to improve our energy outlook, we should adopt 
energy conservation and demand reduction measures. We should 
develop energy resources that diversify our energy mix and 
strengthen our energy security. We should adjust tax policies 
to assist marginal oil producers, encourage energy efficiency, 
and promote renewable energy.
    We should build more efficient buildings and weatherize 
existing structures, so that they waste less energy. We should 
give up our gas guzzling SUVs and drive a new generation of 
cars that consume one-third as much energy. These are long-term 
measures to improve energy security, but I want to point out an 
immediate, short-term energy security initiative, championed by 
the Clinton administration, that has not been given the praise 
it deserves, and I am referring to the Clinton initiative to 
fill the Strategic Petroleum Reserve.
    For the first time in many years, the Clinton 
administration has added significant volumes of oil to the 
Strategic Petroleum Reserve. This achievement was possible 
thanks to a collaboration between the Department of Energy and 
the Department of Interior. This creative arrangement, known as 
the Outer Continental Shelf Royalty In-kind Program, will add 
28 million barrels of oil to the Strategic Petroleum Reserve 
this year.
    Instead of receiving lease payments for oil produced on 
Federal lands, the government receives crude oil that we 
deposit in the Strategic Petroleum Reserve. Filling this 
reserve means greater energy security in times of crisis.
    For too many years, we treated our Strategic Petroleum 
Reserve as a petty cash account. In 1996 and 1997, we sold $450 
million of Strategic Petroleum Reserve oil for deficit 
reduction. Whenever we needed a quick budget fix, Congress and 
the administration agreed to dip into the Strategic Petroleum 
Reserve and sell the emergency reserves.
    Through the royalty in-kind program, we reversed many years 
of bad energy policy. Unfortunately, this is a temporary 
program that expires later this year. But if we extend the 
royalty in-kind program, we could fill the Strategic Petroleum 
Reserve to capacity by the year 2007. That would be a great 
accomplishment, if we could do it, but it will not happen 
without an extension of the royalty in-kind program.
    Six members of this Committee come from New England and 
Mid-Atlantic States that are suffering high energy prices. I'm 
sure that all of you support the Clinton administration 
proposal to establish a regional home heating oil reserve. If 
you support the regional home heating oil reserve, you should 
also support an extension of the royalty in-kind program.
    The royalty in-kind oil has been the only source of new oil 
for the Strategic Petroleum Reserve in the past decade and it 
is likely to be the only source of petroleum product to fill 
New England's regional reserve. Thank you very much, Mr. 
Chairman.
    Chairman Thompson. Thank you.
    Senator Cleland, did you have any comment.

              OPENING STATEMENT OF SENATOR CLELAND

    Senator Cleland. Yes, sir, Mr. Chairman. Thank you for 
having this hearing. It is very timely and I want to thank you 
and Senator Lieberman for bringing us together. Mr. Chairman, I 
might say that the question of high gas prices, to me, is deja 
vu all over again. I was head of the Veterans Administration in 
this town in the late 1970's, and the devastating thing that I 
remember about those years are rising gas prices, which 
basically, on their own, programmed in about three percent of 
the terrible record inflation that we had in those days.
    So I think that rising oil and gas prices are a tremendous 
threat to the economic growth that we have sustained over the 
last 7 or 8 years. I think we have to act on this threat to our 
economic well-being and we have to act quickly. I think we need 
to go back and turn the pages of history back about 20 years, 
to what President Carter was thinking about in those days. That 
was synthetic fuels and more research in that regard, ethanol, 
and using some of our technology to devise means where we could 
become more energy self-sufficient.
    How did we get to where we are? Well, the 1997 Asian 
economic recession, among other factors, led to a decrease in 
global demand for oil. As the market became saturated, the 
price per barrel of crude oil plummeted. At the beginning of 
1999, consumers enjoyed the lowest real dollar price for 
gasoline in history. Mr. Chairman, actually, in my State, the 
average price last year in Georgia for gasoline was 89 cents 
per gallon. I cannot even hardly run my wheelchair that 
economically efficient.
    That is pretty cheap. Now, Senator Lieberman tells us that 
gas prices, by Labor Day, may go to $2 per gallon or $2.50 per 
gallon. This is of great concern to us and great concern to 
citizens in this country and people in my State. Well, the 1999 
gas prices did not stick. The events caused domestic oil 
production to be curtailed to extremely low levels. In fact, by 
July, 1999, domestic oil output had fallen to levels last seen 
in 1946, right after World War II. Think of that.
    By July, 1999, domestic oil output had fallen to levels 
last seen in 1946. All of these events compounded to amplify 
the devastating effect when, in March 1999, OPEC adopted 
production quotas to reduce the global supply of petroleum. By 
cutting output as much as 4 million barrels per day, OPEC was 
successful in driving the cost of gasoline up as much as 33 
cents per gallon in just a single year.
    This sharp increase in oil prices has caused tremendous 
hardship for many of our industries in this country and 
certainly in Georgia and elsewhere, not to mention those 
individuals who must rely on home heating oil for warmth in the 
winter months. Over the last several weeks, I have been 
contacted by many of my constituents who expressed their 
serious concerns about the impact of the recent dramatic 
increase in petroleum prices.
    Among other concerns, propane dealers are facing difficulty 
in trying to purchase and market their product. In several 
areas of my State, propane provides vital fuel for home 
heating. Also, propane is heavily integrated into the 
management of George's poultry operations. We are the leading 
poultry processor in the country and poultry operations 
processors are a leading industry in the State. The high cost 
and lack of product have caused economic hardships to these 
industries, which rely on propane for daily operations.
    Because of my concern about the continued rise in oil 
prices, I've contacted President Clinton to request the 
administration's assistance in addressing the problem. I also 
called on the President to examine the release of petroleum 
from the Strategic Petroleum Reserve. While a release of 
petroleum from the Strategic Petroleum Reserve is one 
possibility, I believe we actually have got to consider any and 
all policy options which may serve to alleviate the increasing 
cost of oil, including strong diplomatic pressure on those oil 
producing nations which actually rely on the United States for 
two things, one, a market for their products, and, two, the 
guarantor of their security.
    We should also take a close look at several legislative 
proposals to reduce or temporarily suspend the tax on gasoline 
and diesel fuel. Senator Campbell has introduced S. 2090, 
America's Transportation Recovery Act, to place a 1-year 
moratorium on the 24.3 cent per gallon tax on diesel fuel, 
effective only if the price per barrel remains above the 
December 31, 1999 market value, followed by a permanent 
reduction in the tax to 4.3 cents, to begin on October 1, 2005.
    Well, I want us to do what is right, prudent, and wise, but 
there is a very palpable air of near-crisis when I go home to 
my State and see the very real effects the rising oil prices 
are having on average working Americans when they have to fill 
up the gas tank to drive or to car pool or when they buy 
airline tickets to visit friends or family or when they are 
paying their monthly utility bills. My constituents are getting 
socked where it hurts, in their wallet, every single day.
    When I go home to Georgia each weekend, people want to know 
what we are doing in Washington to address incredibly high 
gasoline prices. Mr. Chairman, I am grateful for this hearing 
today so we can review what is actually being done and possibly 
come to a consensus on what else is appropriate. I know this is 
a very delicate situation, and it is having very painful 
consequences on Georgians and on all Americans.
    We must all recognize the severity of the situation and the 
need to act, and act swiftly. The American public is looking to 
us to produce an effective and bipartisan response to this 
challenge. Thank you very much, Mr. Chairman.
    Chairman Thompson. Thank you very much. Senator Domenici, I 
think, suggested we go directly to the witnesses. Senator, do 
you have any----
    Senator Domenici. I have been stimulated.
    Chairman Thompson. Senator Domenici.

             OPENING STATEMENT OF SENATOR DOMENICI

    Senator Domenici. And I finally woke up. Is that all right 
with you, Mr. Chairman? Thank you very much for having this 
hearing, and thanks to our witnesses. Actually, what caused me 
to say a few words is that my friend, Senator Lieberman, met me 
back behind the Chairman's desk, and told me that today, he did 
not leave out nuclear energy.
    Senator Lieberman. We have a running dialogue on that.
    Senator Domenici. Heretofore, he has spoken about America's 
energy mix, and I have not heard him say that we need to look 
at nuclear power. But he has told me privately, that it is 
absolutely urgent, and so I wanted to thank him for being all-
inclusive this morning.
    Senator Lieberman. Thanks for making that public again, 
Senator. [Laughter.]
    Senator Domenici. Essentially, I have a lot of questions. I 
would suggest, however, right up front that the response of the 
administration compared to the size and the dimension of this 
crisis, and its potential harm to Americans, is totally 
inadequate. This is a big-time American problem. We can keep 
putting it off, and we might have a new President who will do 
little or nothing, but the truth of the matter is that this 
problem will not go away, because we are at the mercy of a 
number of countries who have their interests at stake, not 
ours.
    As a matter-of-fact, when we talk about OPEC, we have got 
to remember that we did not say anything when oil was selling 
at $10 per barrel, and Mexico could not make it economically at 
$10 per barrel, but we were thriving on cheap oil like kids 
with a new toy. The same thing happened for month after month 
during this recovery period. Venezuela, the same way. They are 
totally an oil dependent economy. When it was $9.50, $10, or 
$11, we didn't say, ``Wait. Wait. Maybe we ought to figure out 
some way so they can have a reasonable economy.''
    So now, when the price goes back up, we think we can 
negotiate our way out of this. I want to tell you another 
thing. There is this notion that we can send our ambassador, as 
good as he is, Secretary Richardson, around the world to 
negotiate. Negotiation with the cartel is no substitute for an 
energy policy. It is not an energy policy. It is, in fact, the 
opposite of an energy policy. Since we do not have an energy 
policy it means we have to go try to convince countries one at 
a time to change their policies to help the United States.
    Now, my suggestion is that if the administration does not 
want to adopt an energy policy, then somebody in Congress that 
has jurisdiction ought to look at every single aspect of energy 
supply for the United States and then proceed to maximize the 
use of the variety of energy sources. Now, obviously, 
environmental concerns will be raised, but the production of 
energy should not be a necessary evil, as I have heard some in 
this administration say as it relates to public domain and the 
use of public domain for oil and gas drilling. Not so. It is an 
absolutely necessity, not evil, and we should open all our 
lands that we possibly can to oil and gas exploration.
    During this administration, we have minimized our options. 
How in the world do we send any signal that we are serious when 
we minimize exploration on public lands? We talk about natural 
gas as being the great solution to all of our problems. Yet, we 
lock up huge supplies of natural gas in the offshore fields 
that are loaded with natural gas, all in the name of the 
environment. Then, we turn around and have 1,000 new ships 
loaded with oil coming into our ports because of our growing 
dependence, and where is the discussion of environmental risk 
in that?
    There is a great environmental risk when you add hundreds 
of thousands of ships that have to come into our harbors, 
loaded with oil and other related products. Yet we leave our 
lands and our offshore drilling unexplored because somebody has 
decided that that is a big environmental issue. Let's look at 
it. How big is it versus the crisis? I close by saying we ought 
to look at the reality. Oil Patch suffers from lack of 
reasonably priced capital. There's no doubt about it. The 
administration is right about one thing, this is a stability 
problem. This is a volatility problem. Part of the volatility 
has to be solved by new mechanisms for financing oil field 
operations.
    I am going to introduce a bill to create an entity much 
like Fannie Mae and Freddie Mac for Oil Patch. We are going to 
call it Paddie Mac, and it will be introduced pretty soon. It 
will be a very good talking point for us to consider. It will 
not cost anybody any money; you'll use the great skills of 
hedging on the marketplace to assist those who are investing in 
Oil Patch.
    Last, I want to conclude that today, as we sit here, there 
are 103 nuclear power plants roaming the seas and oceans of the 
world, more than America has onshore producing energy. They are 
run by the U.S. Navy and they are on naval ships from 
battleships to submarines--103 is my number, I believe.
    Now, since their inception in 1954, I say to my friend, 
Senator Lieberman, there has not been one accident. There has 
not been one leak. There has been absolutely nothing happening 
except precisely what the Navy has predicted, total safety, and 
only one seaport will not accept them, Senator Lieberman. They 
pilot right into any seaport in the world with the nuclear 
power plants in their hulls operating. New Zealand decided many 
years ago they will not accept them. All the rest of the 
seaports in the world accept them.
    They are not afraid of them. They do not tell them to wait 
200 miles offshore. Here we are, fussing over what we are going 
to do with waste in the United States, to put it in a 
temporary, but disposable, situation so we can move on with a 
second generation and third generation of nuclear power. 
Borderline insanity from the standpoint of an enlightened 
country, what we are doing with nuclear power.
    I was not going to talk, but I did. Thank you.
    Chairman Thompson. Well, as you see, we are desperately 
seeking solutions, since we have no opinions ourselves as to 
what to do about this matter, so we are pleased to have with us 
today David Goldwyn, Assistant Secretary for International 
Affairs at the Department of Energy, and Dr. Jay Hakes, 
Administrator of the Energy Information Administration. Thank 
you both for being with us, and the full text of your remarks 
will be entered into the record. Summarize them for us, if you 
would.
    Mr. Goldwyn, would you like to proceed with your testimony?

   TESTIMONY OF DAVID L. GOLDWYN,\1\ ASSISTANT SECRETARY FOR 
        INTERNATIONAL AFFAIRS, U.S. DEPARTMENT OF ENERGY

    Mr. Goldwyn. Yes. Thank you, Mr. Chairman.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Goldwyn appears in the Appendix 
on page 59.
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    Mr. Chairman and Members of the Committee, I am pleased to 
appear before you today and I appreciate the opportunity to 
address the current situation in the world oil market and the 
short- and long-term solutions that have been advanced by the 
Department of Energy and the administration to respond to the 
situation we now face.
    The measures that we have taken are substantial and they 
seek to protect our economic, security, and national interests. 
The administration is concerned, as all of you are, about oil 
price volatility. Oil inventories have fallen to levels that 
could put global economic growth at risk unless OPEC and non-
OPEC producers increase production soon. OPEC will obviously 
have its chance to act when it next meets on March 27.
    Many of you and your constituents are asking how did this 
happen? Why are prices so high? What is our government doing 
about it? My testimony will seek to respond to each of these 
questions and I hope to reassure you and the American people 
that the Department of Energy, led by Secretary Richardson, is 
concerned, is taking measures to deal with the problem, and 
that we do have an energy policy and an energy strategy in 
place to deal with the situation and to respond to in the 
future.
    While, on the whole, competitive markets have provided 
consumers low average prices, the price volatility that we have 
been seeing in the market, $10 a barrel a little over a year 
ago and $30 a barrel earlier this month, hurts both consuming 
and producing nations. Here at home, as you know, $10 oil led 
to shut-in wells and put many independent producers out of 
business. $30 oil hurts our consumers, especially those on low 
incomes, those who drive long distances, as well as businesses 
and truckers.
    Overseas, it was no different. $10 oil, as Senator Domenici 
pointed out, was harmful to Venezuela, Mexico, and other 
countries, and $30 oil is causing severe damage to oil-
importing nations in the developing world, as well, and 
threatens the economic recovery in Asia. So what we all want, 
producers and consumers, is a more stable market and our energy 
policies are focused on ensuring stability in the long run and 
addressing the recent volatility that we have been seeing.
    My colleague, Dr. Hakes, is going to talk about the market 
conditions that led us to the situation and also the current 
markets, so I am not going to address those points, but let me 
turn to what we have been doing to restore stability, increase 
production, and address our short- and long-term energy 
strategy. Secretary Richardson and the Department were out in 
front in recognizing the problem of low inventories.
    When we received signals from our Energy Information 
Administration last fall, Secretary Richardson began quietly 
starting diplomatic action with the major producers. Because of 
our efforts, we are no longer the lone voice calling for 
action. Major consuming nations, the European Union, the 
International Energy Agency, the OECD countries, have all 
joined our efforts.
    There has also been a shift in the attitude of producers in 
the last month. A month ago, when we started this, they were 
saying they thought there was no problem in the oil markets. 
They thought that prices were all right, that stock levels were 
satisfactory, and there was not any jeopardy to the world's 
economy. After Secretary Richardson went to Mexico, Norway, 
Saudi Arabia, Kuwait, and had meetings and phone calls with 
other ministers, including Venezuela, there is now a consensus 
to increase production.
    There is a consensus that volatility is bad. There is 
agreement they will reevaluate the data, and Dr. Hakes and I 
were both on the trip with Secretary Richardson to give them 
this data, so that they could look at the current oil market 
situation and try to reach a new level of production which 
would do what all of us want, which is to sustain world 
economic growth.
    This week, the Secretary's energy diplomacy is continuing 
in earnest. He has been to Nigeria, Algeria, and Norway, and 
met with the OECD ambassadors in Paris. Our momentum is 
continuing. Kuwait, Venezuela, Saudi Arabia, Algeria, Iran, 
Mexico, and Norway, have all made public statements saying they 
support production increases. So now we are in an environment 
where the question has gone from if or when we are going to 
have an increase in production to how much, and the Secretary 
and others have pushed for an early and substantial increase in 
production.
    But our concerns about long-term energy security did not 
begin with $10 oil or $30 oil. Since Secretary Richardson has 
been at the Department of Energy, we have taken a number of 
measures to increase our Nation's energy security. In February, 
1999, we took steps to strengthen domestic production and 
improve security for the long term.
    Senator Akaka mentioned the program to add 28 million 
barrels of royalty oil to the Strategic Petroleum Reserve from 
royalty on-line oil. To support domestic production, we 
streamlined procedures for producers, provided administrative 
and accounting relief for small producers and invested in 
technology for recovery in endangered or hard to produce oil 
reservoirs, as well as many other steps.
    We've also been working to diversify our sources of supply. 
You know, I can talk later about our work in Africa, Latin 
America, and also the Caspian Sea. There is concrete evidence 
that, in terms of diversity of supply, this approach is 
working. Our top supplier of oil varies from week to week, 
among Canada, Venezuela, Saudi Arabia and Mexico. We are 
actually less dependent on OPEC oil and last year imported 
crude oil from 40 different countries.
    I have talked a lot about what we are doing 
internationally, but there have been a number of domestic 
responses, as well. This past weekend, as you know, the 
President announced a series of steps to address the current 
situation, strengthen our energy security, and reduce our 
reliance on foreign oil. The President's plan includes 
establishing an environmentally sound home heating oil reserve 
in the Northeast, calling for reauthorization of the Strategic 
Petroleum Reserve, which is due to expire next week, through 
extension of the Energy Policy and Conservation Act, and 
enacting a comprehensive package of tax incentives to improve 
our energy efficiency, promote the use of alternative fuels, 
and preserve the productive capacity of the domestic oil 
industry.
    He talked a lot about investing in energy efficiency and 
alternative energy technologies by calling on Congress to fully 
fund the more than one billion dollar request the 
administration has made to accelerate research and development 
of more energy-efficient technologies. And over the past month, 
the administration has also made a number of aggressive short-
term moves to ease the current situation.
    The President released almost $300 million in funds to low-
income individuals to pay their higher heating bills, and 
fortunately, this year that aid reached people in time, rather 
than the slow pace in earlier instances. He has asked for $600 
million more to replenish that fund and is also seeking $19 
million from Congress for low-income home weatherization.
    We have also taken measures to increase oil supply, 
increasing Coast Guard support for tankers, small-business 
loans for heating oil distributors and other small businesses, 
and also encouraging refiners to produce as much heating oil as 
possible. The President has also directed the Department to 
study ways to reduce regional reliance on heating oil, mainly 
through the increased use of natural gas, and to study the 
impacts in interruptible natural gas contracts on heating oil 
supply, and we expect these studies to be completed soon. These 
are all concrete measures whose impact in the future can be 
significant.
    In terms of future responses, we have looked at ways in 
which we can prevent this from happening again and look at how 
the Department can help. One is by reestablishing an energy 
emergency office, another is working with industry to get 
better information on world oil inventories, and a third is the 
possible development of global data regimes to give producing 
and consuming nations an early warning system when supplies and 
production levels get out of balance with demand and 
consumption needs.
    Mr. Chairman, in a few short days, we are going to have 
some important news. OPEC ministers are going to begin their 
meeting on March 27 in Vienna, and we expect that OPEC and its 
allies will agree to increase oil production, effective April 
1. The oil market seems to be sharing this view, as oil prices 
have come down over the past 2 weeks, falling below $30 per 
barrel. But we still do not know what the magnitude of the 
production increase will be and what the timetable will be. 
With enough additional supply, we should expect some further 
easing of crude oil prices in the next few weeks, although it 
does take awhile for those to reach the pump.
    OPEC's decision is not going to be the whole story. We are 
also going to need to look at what non-OPEC producers are doing 
and how the market reacts. Our fundamental policy is not to 
interfere with market forces. But Secretary Richardson and the 
rest of the administration look at these measures next week, 
see what OPEC and non-OPEC producers do, and assess what 
additional steps, if any, need to be taken at that time. I 
heard many other questions, and I think I will leave those for 
the question and answer period. That concludes my prepared 
testimony.
    Chairman Thompson. Thank you very much. Dr. Hakes.

   TESTIMONY OF JAY E. HAKES,\1\ Ph.D, ADMINISTRATOR, ENERGY 
                   INFORMATION ADMINISTRATION

    Mr. Hakes. I would point out that the Energy Information 
Administration is an analytic arm of the Department of Energy. 
I frequently testified before congressional committees on 
energy issues and I think that members on both sides of the 
aisle will tell you that we try to base this on good analysis 
and let the chips fall where they may. I would also say that we 
are a major provider of data and information on this subject. 
In recent days, we have had as many as 35,000 people come onto 
our Website in 1 day, looking for information on energy, 
particularly oil issues.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Hakes with attachments appears in 
the Appendix on page 66.
---------------------------------------------------------------------------
    I think the history of this is relatively clear. OPEC took 
a third step last March to cut production and, over time, 
because of rising demand in the world, we have got a situation 
where the world was producing less oil than it was consuming. 
World stocks got drawn down creating a sellers market and very 
high prices. I think the data on this is shown pretty well in 
the graph that I brought.\2\ It is actually in the handout, it 
is the third item there, even though it looks like the first 
item. You can see that when the cuts started, the inventories 
in the United States for all petroleum were above normal 
levels. Late last year there was a dramatic drop bringing 
levels to well below the normal range that we would expect and 
creating what my somewhat conservative government agency has 
called ``alarming'' stock levels. One way we started to 
describe this some months ago was that we were skating on thin 
ice. In other words, when stocks are very low, if you get all 
the breaks going your way, you may not get big run-ups in 
prices, but if any little thing goes wrong, like a frozen 
Hudson River or a refinery going down, it gets very magnified 
because of these low stock levels.
    I think if I can show the next graph,\2\ it shows what 
happens when the ice breaks. This is basically the situation in 
the Northeast, where you had a run-up in prices that took place 
in just a very brief period of 2 or 3 weeks. Diesel fuel ran up 
to $2.12. This is one of the most rapid increases in prices in 
American history.
---------------------------------------------------------------------------
    \2\ The graphs referred to appear in the Appendix on page 71.
---------------------------------------------------------------------------
    As you can see, the market did correct this regional 
imbalance, and prices are basically back down to the national 
levels, albeit high levels. We are in a situation now where 
actually gasoline costs more than diesel fuel and prices on the 
West Coast are higher than they are on the East Coast. I think 
that as long as we maintain low stock levels, that the United 
States will be vulnerable to these kinds of price spikes.
    It is particularly true on the coasts. In the middle of the 
Nation, people are more tied into the delivery system and less 
subject to these interruptions, but in California and New 
England, which are sort of at the end of the delivery chain, 
this vulnerability will continue to exist. Of course, we will 
be looking at what happens on Monday to see if production 
levels will be increasing and some steps will be taken to get 
world inventories back into more equilibrium.
    I will cut my comments short because I know all of you will 
have many questions.
    Chairman Thompson. Thank you very much, Dr. Hakes. We all 
know, and I think we're here today, primarily because of oil 
prices. I am hopeful that it will cause us to once again focus, 
as Senator Voinovich has pointed out this morning, on something 
that I consider a much more serious problem, and that is 
supply.
    Nobody holds hearings or gets very excited about the issue 
of supply until we have an issue with regard to prices. And now 
everyone wants to focus on short-term solutions as to what to 
do about it. I guess I approach it, as I have had time to think 
about it and look at some of the writing on the subject, maybe 
from a bit of a contrarian position, maybe as far as most of us 
here behind the table are concerned, and that is it seems to me 
the quicker the so-called solution affects prices, the more 
skeptical we ought to be about the solution, because it 
interferes with market forces, which will invariably reverse 
themselves and moderate out.
    And it allows us to ignore the longer-term problem of 
supply and stability in regions of the world as Senator 
Domenici pointed out.
    There is only one oil market and that is the world market. 
It is important that our supplier friends maintain themselves, 
too. If they--through instability or other reasons--are not 
able to supply not only us, but the world, then we have a world 
problem.
    You state, Mr. Goldwyn, in your testimony, that the 
administration's energy policy is based on market forces and 
not artificial pricing. You note that the oil price controls in 
the 1970's prolonged shortages and high prices, yet the 
administration is still talking about the Strategic Petroleum 
Reserve to address the high oil prices and is proposing a home 
heating oil reserve to address higher heating prices in the 
Northeast.
    Clearly, the Northeast has a special problem and it 
deserves attention, but these are both market interventions. So 
which way is it, an energy policy based on market forces or one 
based on market interventions? I was under the impression that 
the Strategic Petroleum Reserve was there for disruptions in 
supply. It was not set up to have anything to do with prices. 
Perhaps some would like to change that now. I do not think it 
would be a good idea to change that policy.
    And it also seems to me that the swap ideas that we have 
heard discussed, in terms of the Strategic Petroleum Reserve, 
perhaps make sense unless we predict that prices go down and we 
miscalculate and prices actually go up. We will be able to get 
our oil at the lower price, but that would be pulling oil off 
the world market at a time when prices are already going up. I 
would also think that OPEC would be watching to see what we are 
doing with regard to our reserve and would react accordingly.
    On the home heating situation, what do you do? If people 
know that at a target price, the oil is going to be dumped on 
the market and prices are going to go down, how is that going 
to affect them? So, what is the administration's position with 
regard to these two so-called short-term solutions, and if they 
are really viable and on the table, do they not go against a 
policy based on market forces that I think most everybody has 
concluded that, basically, is the way to go?
    Mr. Goldwyn. Mr. Chairman, the administration's policy is 
to respect market forces. I think, in terms of the use of the 
Strategic Petroleum Reserve, that you are absolutely correct 
that the legislation provides that it is for national supply 
emergencies, and the reluctance of the Secretary to recommend 
its use or to recommend a swap so far, and the reluctance of 
the President to use it so far, is because there has been no 
determination that there is a national supply emergency at this 
time. And we have been working to get OPEC and non-OPEC 
producers to do what the market is encouraging them to do, 
which is to allow supply to meet demand. We have got to see how 
that works out, and that is why there has been no actions on 
that so far.
    Now, I guess the reason that the President has said that 
all options remain on the table, including a sale, or a swap, 
or other measures, is that if OPEC refuses to let market forces 
do what they are intended to do, if there is an artificial 
response which causes a supply emergency, then the question is, 
is that an appropriate time to use the Strategic Petroleum 
Reserve for a sale or a swap? Are they creating an emergency 
situation here or not? That is a determination that is going to 
have to be made in the future when we see how the market 
reacts.
    I would distinguish the swap from the sale only in the 
sense that people say government ought to act more like 
business. Businesses are smart in how they manage their 
resources and are able to sell high--buy low and sell high. The 
Federal Government tends to do just the opposite. The idea 
behind a swap is we can grow the size of the reserve by the end 
of the year, increase our security, and try and deal with a 
short-term situation. But it is not a preferred option. I think 
that is why you have not seen it exercised so far.
    With respect to home heating oil and the creation of a 
reserve in the Northeast, the Northeast is a different 
situation, as you pointed out. This winter, a lot of the 
problem was that there were low stocks, so when the prices went 
up and there was not a reserve there and harbors froze over and 
barges could not get through, supply could not get to market. 
It would have been good if there were higher supplies and if 
people had thought ahead, who were responsible for stocking 
home heating oil to do that, but it did not happen.
    So I think the idea of a reserve is meant to address the 
unique situation of the Northeast, but one of the things we 
will have to do in the coming weeks is to figure out, how do 
you create that in a way that does not mess with the market? 
How do you do that in a way that is sort of respectful of the 
businesses that work there, but also protective of the 
interests of consumers? It is not an easy question, but it is 
one that we are going to apply ourselves to in order to 
minimize the interference in the market.
    Chairman Thompson. All right, sir. You talked about 
domestic production and taking steps to assist that. I think we 
all know that solutions to the problem have to do with either 
decreasing consumption or increasing production. And we all 
have ideas about what to do or what not to do on both sides of 
that ledger, but clearly, as has been pointed out, the 
administration must take the lead in coming together with the 
right kind of package here. But, it certainly would seem that 
domestic production--increasing domestic production, new oil 
fields, increasing production from existing fields, is an 
important part of that.
    Domestic production dropped 5.6 percent in 1999, and a 
great many of our small producers went out of business. So the 
proof is in the pudding, isn't it? It does not seem like we are 
doing very much in that regard.
    Mr. Goldwyn. Mr. Chairman, I would say two things. One, is 
that obviously it is best that producers respond to the market, 
and part of the problem, as Senator Domenici pointed out with 
the volatility, is when prices swing up and down, there is less 
incentive when it is down for them to produce. It is hard for 
them to predict what their income is going to be, and so 
producers got hurt badly by that drop in oil. And right now 
what we saw is a slowdown in exploration and production when it 
was not profitable, but now we need that production and it is 
not there. But the administration, in fact, has taken a number 
of measures and I am just going to give the very highlights of 
this, because we have been and are concerned about domestic 
production.
    One of them was lifting the ban on the export of Alaskan 
North Slope oil to extend life of the fields there. Another 
was, in Alaska, also opening the National Petroleum Reserve, 
also on the North Slope; providing heavy oil and stripper-well 
oil relief on Federal lands. The deep water and marginal leases 
royalty relief measures have actually brought deep water gulf 
production to new highs, and alternative minimum tax relief for 
small producers.
    Research and development helps industry a lot, lowering 
refining costs and enabling them to make more money by making 
it cheaper for production in difficult circumstances or 
geologic environments. Funding 32 reservoir class technology 
demonstration program projects has been much appreciated by 
industry--the Royalty Fairness and Simplification Act and also 
revisions we have made in the Energy Policy and Conservation 
Act.
    Last year when prices went so low, there were additional 
measures to deal with--the impacts on small producers, 
particularly suspending production requirements for stripper 
oil on Federal lands and royalty relief on Federal lands, also 
some new technologies for independent producers and trying to 
make more advanced technologies for improved recovery available 
to them. So I think there has been a good deal of concern and a 
good deal of money put into research and development, and 
balancing the environmental concerns to have some deep water 
explorations, but not in other areas where there is more 
sensitive environmental concern.
    Chairman Thompson. I think several of those things were 
begun last year, weren't they?
    Mr. Goldwyn. A number of those were done last year and 
others were done earlier. Yes, sir.
    Chairman Thompson. That is kind of late in the game, isn't 
it?
    Mr. Goldwyn. On the small producer front, I guess when they 
were in deep trouble, we moved to help them, but I think the--
--
    Chairman Thompson. Well, a lot of people think the country 
is in deep trouble with a 55 percent dependency, and we have 
been that way for a long time. As we can get into this a little 
earlier, back as far as at least 1994, the Department of 
Commerce determined that increased oil imports impair our 
national security. This is not new news to us. Senator 
Lieberman.
    Senator Lieberman. Thanks, Mr. Chairman. Dr. Hakes, just by 
way of some factual premises here, how much of our imported 
oil, percentage-wise, comes from the OPEC countries?
    Mr. Hakes. I will try to get you an exact number. I know 
that we actually import less from the OPEC countries than we 
did in the 1970's. The growth of production in places like 
Mexico and Canada has led much of our dependency to be on 
places that are closer to us. OPEC actually has less of the 
share of the world market today than it did in the 1970's and 
much less of our petroleum comes from OPEC. That may not be a 
definitive issue in the sense that it is world oil market.
                         INSERT FOR THE RECORD
          In 1999, total crude oil and product imports averaged 10.6 
        million barrels per day. OPEC accounted for 4.9 million barrels 
        per day or 46 percent of that total. Since the Arab oil embargo 
        in 1973, U.S. imports from OPEC have varied from a high of 6.2 
        million barrels per day in 1977 (70 percent of total imports) 
        to a low of 1.8 million barrels per day (36 percent of total 
        imports) in 1985.

    Senator Lieberman. Right, and OPEC helps determine, and 
plays a critical role in determining the world market.
    Mr. Hakes. Yes.
    Senator Lieberman. Secretary Goldwyn, what do we need OPEC 
to do on Monday at their meeting in Vienna? In other words, 
what are we looking for to create the kind of supply that will 
meet demand here, and obviously I'm speaking short-term, 
leaving aside everything else we talked about, about longer-
term energy policy changes?
    Mr. Goldwyn. Well, what we want them to do is, and in fact 
what we have been working with them to do, is to understand 
what market demand is, that demand for crude oil is not going 
to go down the second quarter as many of them said, but will go 
up in the United States and it will be level in other places. 
We are asking them to look at the gap.
    Looking in the last quarter, there are 75 million barrels 
being demanded and 73 being produced, so we have said you have 
got to let supply meet demand. But, we also want them to look 
ahead for the second quarter and the third and the fourth 
quarter, for that matter, and plan production increases that 
are going to bring the market back into equilibrium. We do not 
recognize their legitimacy and so we do not tell them to pick a 
price and here is the exact amount that you need, but we 
educated them with help from Dr. Hakes on what our situation 
is, on the need for crude oil to get into the market in April 
and May, so it can be refined for gasoline over the summer, and 
that this is a worldwide situation. So we are looking for a 
significant increase at this meeting.
    Senator Lieberman. So, are we looking for a 2 or 3 million 
barrels a day increase in supply?
    Mr. Goldwyn. I guess we have been reluctant to put a number 
on it, in part because we did not want to get into the business 
that OPEC is, of picking what is the right number of supply. 
What we have given them is really orders of magnitude. So far, 
that has been the size of the gap. But we want to look at the 
third and the fourth quarter also, but I think in terms of 
order of magnitude----
    Senator Lieberman. Will the announcement they make on 
Monday be clear? In other words, do we expect it to have a 
number attached to it or will it be a more fuzzy diplomatic 
language? In other words, will they say, we are going to 
increase production by so many million barrels per day?
    Mr. Goldwyn. It may not be clear and it may not be Monday.
    Senator Lieberman. It may not be Monday?
    Mr. Goldwyn. No, their meetings begin on Monday, but they 
may run for a couple of days. It is hard to predict from their 
past behavior how they are going to act. I think they 
understand, because Secretary Richardson has called every 
minister in OPEC with whom we have diplomatic relations, that 
we need a clear signal for the market. But they have a number 
of choices in how they could characterize their position. It 
could be an increase in production or it could be an increase 
in quota. It will take us some analysis, I think, to look at 
what they say and then what the market effect is going to be.
    The other thing that we are going to look at is, OPEC is 
not the whole story. We are going to look at what non-OPEC 
producers do, as well--Mexico has already indicated it will go 
its own way and it will increase production--what Norway is 
going to do, what other non-OPEC members are going to do. Our 
analysis of OPEC's decision, non-OPEC producers and how the 
market reacts is going to be what is going to tell us what the 
real effect of that decision is. That may take us a little bit 
of examination.
    Senator Lieberman. If, by whatever means, we determine that 
the OPEC decision and the decision of the other non-OPEC oil 
producing nations is inadequate to meet demand, and here again 
I'm thinking short-term, second, third, fourth quarter of this 
year, what alternatives does the administration have to try to 
make the problem less painful for the American consumer and the 
American economy?
    Mr. Goldwyn. Two of them had been talked about this morning 
and the President said that all options remain on the table. 
One of them is the swap of Strategic Petroleum Reserve oil. The 
other is the sale of SPR oil. Another is to try and work with 
refiners to take whatever measures we have now and make better 
use of them. Those are the top of the list. We are already 
taking measures to make sure the Federal Government makes more 
efficient use of the oil that we consume, but a lot of those 
are going to be sorted medium-term rather than short-term.
    Senator Lieberman. Right. I hear you to say that if OPEC 
does not adequately increase supply next week at their 
meetings, and the same is true for the non-OPEC oil producing 
nations, that it is more likely that the administration will 
consider swaps from the Strategic Petroleum Reserve as a way 
for us to increase supply short-term. I guess I would simply 
say I hope so. I hope that is true, if OPEC does not bring 
supply to meet demand, because otherwise we are going to have a 
very difficult driving season, spring and summer, in this 
country. Dr. Hakes, let me ask you to speak, and Secretary 
Goldwyn, if you want to add, a little bit about this question 
of oil inventories in our country. Let me state it with this 
edge to it. Some have suggested to me--not that there is 
anything illegal about it, as far as I can tell, I do not 
believe there is--that the oil industry, our oil industry, 
acted in its economic self-interest as the price of world oil 
went up, which is to say they bought less of it, hoping it 
would go down and they would buy it at more favorable prices.
    The effect of that was to make the problem worse because it 
reduces supply. I wonder if you could describe what happened in 
the last 6 months or so, maybe 1 year, after OPEC spiked up the 
price of world oil, evaluate the behavior of our oil industry 
and the oil inventories, and then suggest if there is anything 
that we could or should be doing about that, which is to say, 
to intervene in the market. I would ask Mr. Goldwyn to answer 
the same.
    Mr. Hakes. Well, I guess I would prefer to deal with this 
year to sort of avoid a long dissertation. If you go a few 
weeks before the real run-up in prices in the Northeast, the 
refineries were running at very low levels, which did lead to 
low product stocks. Now, if you look at the economics of 
refining at that point, they were operating on very thin 
margins; so it would be hard for an outside person to 
understand why they would be running at high levels, because 
there just were not margins available for them to make much 
money.
    Now, once the price ran up, then the margins ran up, and 
this has been an incentive for refining to pick up a bit. It is 
running higher now than it was then. However, refining levels 
are still lower than they were last year at this time and maybe 
a little bit lower than one might expect from the spreads that 
currently exist.
    Last week, refineries ran at about 89 percent of capacity. 
We estimate that, at points this spring, refineries will have 
to run at about 98 percent to provide the necessary supply. I 
do not know what the alternatives are to the market. I mean, 
the market certainly brings about corrections. You can see, 
even in the Northeast, as bad as that problem was, there was 
some market correction to it.
    But I think this is an area that requires continued 
discussion. It is a little more severe in the heating oil 
situation, because you're talking about health and safety 
there. I mean, if a person pays more for gasoline, that is very 
irritating and may be economically damaging, but if you were 
actually to run out of heating oil, that could be a real health 
and safety issue for a lot of people.
    So I think that the inventories question, in particular, 
requires more work, and, of course, we are doing some larger 
studies on these issues so we can answer that question in a 
little more detail.
    Senator Lieberman. I look forward to the results of those. 
Secretary Goldwyn, do you have any thoughts on this, which is 
whether government should be doing anything to either require 
or incentivize, create incentives, for oil inventories to be 
maintained at a more even level, so that we avoid the 
exacerbation of the impact of world price fluctuations?
    Mr. Goldwyn. It is a hard question, Senator Lieberman, 
because past attempts to try and incentivize or try and control 
prices, incentives have often led to worse situations than 
existed before the intervention. I mean, I think it was a hard 
market lesson for all the people who sell home heating oil in 
the Northeast, not to have planned ahead, and that is a lesson 
that they may change, and the fact that the government is 
working to create a reserve is going to have an impact on them.
    You know, we have had a bunch of warm winters, and so I 
think everyone is at a high price, attuned to the fact that we 
have got to plan for the worst and not for the same. In terms 
of other inventories, it is hard to imagine what we could do to 
be helpful, but as Dr. Hakes said, people who are expert in 
this, and we obviously work closely with API and others, will 
look at the question of what we can do to not let this happen 
again.
    Senator Lieberman. Thanks very much. My time is up.
    Chairman Thompson. Thank you. Senator Voinovich.
    Senator Voinovich. I am pleased with the fact that there is 
a lot more diversification in terms of foreign oil supply, so 
we are not as reliant as we have been on some of the nations 
that are a little bit questionable; but the fact of the matter 
is that we have seen an enormous increase in gasoline prices, 
and, with all due respect, I think the Department of Energy 
should have been paying more attention and monitoring the 
situation so that we would not end up where we are today.
    I share Senator Lieberman's interest in what is going to 
happen at that meeting in Vienna, and hopefully we are going to 
get a good result, and with a little cramming, take care of a 
situation that could have been taken care of if we had done our 
homework during the past number of months. That being said, I 
notice that we have seen a greater and greater reliance upon 
foreign oil, and all of the projections that I see indicate 
that we are going to be even more reliant on foreign oil.
    Has anyone ever sat down to figure out what the number 
ought to be? Are we too reliant? Should we be less reliant? If 
we should be less reliant, in terms of our national economic 
and security interests, how do we go about achieving that goal? 
I think of our exploration policies. I think of our tax 
policies. I think of our environmental policies, if the 
Department of Interior, the Department of Energy, and the 
Environmental Protection Agency ever sat down together and 
talked about does the left hand know what the right hand is 
doing?
    We have not built any new refineries in this country. If 
you talk to the refiners, they say our environmental policies 
have had a negative impact on their going forward with 
refineries. We have a new controversy over new source pollution 
permits by the Environmental Protection Agency, where they are 
cracking down, and it is going to make it more difficult. We 
just have ordered the oil companies to change, to reduce 
substantially, the sulfur in the gasoline, which some predict 
will be five or six cents more per gallon.
    It may very well be justified, but there are so many--Yucca 
Mountain. Senator Domenici is not here, but we passed the bill 
about moving forward with that place to store high-level 
radioactive material. The President is threatening to veto it. 
That leaves the whole issue of nuclear power. The biggest power 
problem with nuclear power in this country is what do you do 
with the waste? We have had that around a long time.
    The Europeans have seemed to handle it. We just can't seem 
to get that under control. If you start looking at all of these 
various things that are going on, it does not really seem like 
we have got our act together. I would like to know, from your 
perspective, what is the number, in terms of our reliance on 
foreign oil? Are we too reliant today on foreign oil supply?
    Mr. Goldwyn. Senator, let me try and answer all those 
questions, and first, we are very dependent on foreign oil and 
we should be less dependent on foreign oil, and that is the 
direction we want it to go, and it is going up and not down. 
This has been a problem for a long time for the United States. 
Since the 1970's, we have been looking at measures to try and 
make ourselves more energy secure and reduce our dependence.
    A number of those measures have been successful. And so, I 
think we have not picked a number, but what we have done is 
launched a series of measures to give us choices, to give 
Americans choices and to give us the ability to reduce our 
dependence on foreign oil. Let me just try and deal with them 
in a couple of baskets.
    After the oil shocks of the 1970's, we decided first we 
needed to have some security in case there was an interruption, 
so not only do we have the Strategic Petroleum Reserve, but we 
have got the International Energy Agency, 25 countries in 
there, and they have got reserves. So we have got some 
insurance against a supply interruption.
    We also started a campaign then, which has intensified now, 
to reduce the intensity, basically, increase how efficiently we 
use oil. As a result, the U.S. economy is far less dependent on 
oil and the ability of oil to impact other sectors of the 
economy is far less than it was in the 1970's. That has 
provided us some energy security and some insurance, as well.
    We have had campaigns to try and give Americans choices in 
kinds of supply, as well as diversity of supply. We have also 
worked around the world to make sure there are more suppliers 
that are outside of OPEC, in Africa and Latin America and the 
Caspian Sea, so that no one particular country can have too 
disproportionate an influence on our security or the security 
of our allies.
    The two big baskets are energy efficiency and renewables. 
Energy efficiency is an important thing. I have one statistic 
here on some investments that we're making in energy 
efficiency, which, if things like advanced vehicle technologies 
and alternative fuel research were successful, we could reduce 
our consumption by 700,000 barrels per day by 2010, and 1.5 
million barrels per day by 2020. That is pretty much an order 
of magnitude from where we are right now.
    Senator Voinovich. I have seen some of that information, 
but when you see what the experts are saying, they are saying 
we are going to become more reliant on foreign oil. Now, I 
mean, in spite of all of what you're saying----
    Mr. Goldwyn. But we have choices, Senator, and there are 
choices to make right now, which is either we can continue to 
invest and invest more, as the administration has recommended 
for some time, in alternative fuels, in renewable sources of 
energy, in research and development that will give us more 
choices. If we have those, if we do that research and 
development, if we are able to make that investment, then we 
will have choices other than crude oil and gasoline, things 
like the new generation of vehicles.
    Senator Voinovich. But isn't it a combination of a couple 
of things? Well, we are going to have to become more energy-
efficient and we are going to do this and we are going to do 
that. So you go ahead and do it, and in spite of that, you are 
continuing to be more reliant on foreign oil. I mean, it is not 
one thing or another. Don't we really have to look at opening 
up more opportunities for us to have a domestic supply of oil, 
combined with that?
    In other words, we have this, ``Well, this is the way to 
get the job done.'' We had a hearing in Cleveland with a couple 
of congressmen about bringing nuclear waste through our city 
streets or our highways, and people were very disturbed about 
that. I said do not worry about it, because Yucca Mountain is 
not going to be there. You forget that I will be dead before 
that happens; what you ought to be worrying about is the 
nuclear stuff that is piling up at our two nuclear power plants 
in Ohio, that one of these days, they are going to run out of 
space and what are they going to do at that time?
    But the issue that came up was what is the solution? Where 
are we going to get our supply of energy, if you don't consider 
nuclear and somebody said solar. What I am trying to say is I 
think there is too much of this, this is the silver bullet 
thing. What I am interested in is what are your ideas on how we 
can expand the availability of more oil, domestically produced 
oil? What's your thoughts on that?
    Mr. Goldwyn. Well, we do believe that we need to take 
measures and, in fact, have proposed measures to increase 
domestic oil production, in opening the National Petroleum 
Reserve (NPR), up in Alaska. There is more offshore drilling in 
the Gulf. We are making investments in nuclear energy, too. I 
am sorry Senator Domenici is not here right now, but we have 
asked for a 56 percent increase in the Nuclear Energy Research 
Initiative. We are looking at a fourth generation of nuclear 
reactor technology. So, you are right. We have got to look at 
nuclear. We have got to look at domestic production. We have 
got to find ways to make it economic for domestic producers to 
do this. We are looking at gas-to-liquids technology, to get 
the natural gas from Alaska in a cost-efficient way into the 
U.S. market, so we do not have to buy it from someone else. So 
we have to look at the supply side and we also have to look at 
the demand side. Consumption is increasing.
    So you are right; there is not a silver bullet and we have 
to do all of them. But our ability to make huge gains in 
reducing dependency is probably going to come more from 
providing choices and making more efficient use of the oil that 
we consume, and having more new industries use other kinds of 
fuel than it is from the domestic side. But you are right. We 
have got to do both.
    Senator Voinovich. Usually, when I was governor, I always 
said if you cannot measure it, do not do it. We would say by X 
time, we are going to try and reach a number. Have you sat down 
and said, by X year, we are going to be less reliant on foreign 
oil and we are going to bring it down by 50 percent or 45 
percent, and what is the method that we are going to use in 
order to get to where we want to go? You have got to have some 
goal. Have you done that?
    Mr. Goldwyn. Well, I think we do it--we have done it, but 
not in the sense of picking a number to reduce by, but we have 
done it in saying that we have got to do less importing and we 
have to look at all the measures, domestic production, research 
and development, efficiency, and everything else, to make that 
number go down and not up.
    Senator Voinovich. I would suggest that, as a Nation, we 
ought to figure out what the number is and then figure out how 
we are going to achieve it and hold ourselves responsible; and 
you know something, if we do that, we might just make it.
    Mr. Goldwyn. Thank you, sir.
    Chairman Thompson. Thank you very much. Senator Akaka.
    Senator Akaka. Thank you very much, Mr. Chairman.
    Secretary Goldwyn, 1 week from today, provisions of the 
Energy Policy and Conservation Act, which authorize Strategic 
Petroleum Reserve and DOE's international programs, will 
expire. Because of high oil prices and a desire to change our 
energy policy, we are facing a difficult time passing a 
reauthorization. There will be many amendments related to the 
current energy situation. It is probably unlikely that we can 
resolve them in time to enact a bill before the March 31 
deadline.
    I am sure that the leadership of the Energy Department is 
concerned about what would happen if Congress failed to act and 
we had a gap in Strategic Petroleum Reserve or international 
energy authority at the time when we need it most. In today's 
tight energy market, the last thing we need is more 
uncertainty. My question to you is, will you please tell the 
Committee the consequences of Congress' failure to reauthorize 
the Energy Policy and Conservation Act?
    Mr. Goldwyn. Senator, thank you for raising that. 
Obviously, we are deeply concerned about the extension of the 
act, and all that we are asking for is really a simple 
extension of the existing law, which we hope will make it easy 
for the House to act. I think our lawyers have looked carefully 
at what our ability is to do things like use the Strategic 
Petroleum Reserve in the absence of the act, and we have looked 
at what the authorities are under appropriations law and other 
laws.
    I think the prudent answer is that it is a lot harder and 
this is the worst possible time to let this act expire, and 
that we hope that it will be renewed, just a simple extension, 
before March 31. We are not without options, and I do not want 
to give the legal briefs, since I am a lawyer, but not an 
energy lawyer. But the right answer, as your question implies, 
is to renew that immediately.
    Senator Akaka. I hope there are contingency plans to take 
us on here. Secretary Hakes, you paint a fairly bleak picture 
about gasoline pricing during the summer driving season that is 
coming. You state that with low stocks and a market short on 
crude oil, the situation is ripe for gasoline price volatility. 
What is your prediction concerning supply? Do we expect 
gasoline supply shortages and, if so, do you have any 
expectation as to the location of shortages?
    Mr. Hakes. Well, I think we are back into a situation where 
we are skating on thin ice. Our prediction for the average 
price for regular gasoline is that we think it will peak 
somewhere between $1.57, which is not too much higher than it 
is now. But I think that understates the threat of volatility, 
because I think your State, the West Coast area, and the 
Northeast, tend to be more vulnerable if, say, a single 
refinery goes down for unplanned maintenance.
    So, you could see spikes well above this. We are seeing 
some of this on the West Coast right now. The average price in 
California is more than 20 cents higher than the national 
average, and in northern California, even more than that. Of 
course, this is very contingent on what happens next week, 
whether more supplies are produced, but based on what our 
current expectation is, we think this will be a very tight 
summer.
    Senator Akaka. From what you said, I take it that the 
shortage will not be critical, and probably Hawaii, the West 
Coast, and the Northeast States will probably suffer more than 
the rest of the country.
    Mr. Hakes. I think because of the transportation delivery 
system and the location of refineries, those areas tend to be 
more vulnerable, yes.
    Senator Akaka. In his testimony on the next panel, John 
Holdren states that it is not certain that any oil will be 
found in the coastal shelf if the Arctic National Wildlife 
Refuge is opened to oil development. My question is what is 
your prediction concerning oil supplies in that region?
    Mr. Hakes. Senator Murkowski has asked EIA to do a study on 
that particular question, on the production capability in ANWR. 
The U.S. Geological Survey, in my understanding, is actually 
coming out with some new information very, very soon, which we 
will use in that study. So I would prefer to delay a detailed 
answer to that question a month or two. I think we will be 
coming out with a specific study on that.
    Senator Akaka. Should our problem increase, do you see 
where we may be needing gasoline rationing?
    Mr. Hakes. No. You know, there are a lot of advantages to 
the market setting the price. If you look back in the last two 
decades, since we moved away from price controls, on average, 
and even including this recent spike price, energy prices in 
this country have risen more slowly than the general rate of 
inflation. I think also because of the market, we do not get in 
quite as tight a box where we would run out of supply.
    So I may be proven wrong by events, but I have said with 
considerable confidence that I think the market--even with the 
shortages--the market will be flexible enough to supply the 
product to people who want to buy it. It may come at a higher 
price, but I do not think we will see a repeat of the gasoline 
lines that we had in the 1970's, for instance.
    Senator Akaka. Thank you very much. Thank you, Mr. 
Chairman.
    Chairman Thompson. Thank you. Senator Domenici.
    Senator Domenici. Thank you, Mr. Chairman. Dr. Hakes, let 
me ask you, who made the miscalculation with reference to 
supply? Did somebody and was it intentional?
    Mr. Hakes. Are you talking about the estimations that were 
made last year of what the supply for the year would be?
    Senator Domenici. I am talking about the fact that there is 
not enough supply and that that is why the prices are going up, 
and that happened because certain countries produced less. I'm 
asking: Why did they do that and where did they get their 
information? I mean, it is not like this just happened 
overnight because--it was done initially by not just OPEC, but 
those who work with OPEC. We talk of OPEC and we do not think 
Mexico is a part, but thus far, they have been running on 
parallel tracks. They're running together; right?
    Mr. Hakes. Well, I think there were several factors. One is 
it was never clear to the producers, and, frankly, not clear to 
us at all points, exactly what the OPEC strategy was going to 
be in two respects. One is OPEC was a little bit more 
successful this time because they have had the best compliance 
record with their quotas that they have ever had. As you know, 
they frequently have had high levels of cheating.
    They did not have that this time. The other thing that was 
unknown to producers and I would say also to us in the 
government, is how long the OPEC quota cuts were going to last. 
Were they going to relax them in December? Were they going to 
relax them in March? Whenever. So, I think the investment 
community in the United States was a little bit hesitant to 
rush back into production because of these uncertainties. As 
you have seen, the production response to higher prices has not 
been there: It has been somewhat muted.
    I would say EIA, which is an independent organization, 
tracks this as well as anybody and I will match our record 
against anybody, but we certainly, if you look back to, say, 
June of last year, thought that OPEC would actually be 
producing more, because we thought that its production would be 
more at the levels of previous cheating and not this time. 
Venezuela, in particular, has really turned around from being 
one that almost ignored the quotas to now almost being the 
strictest follower of the quotas.
    Senator Domenici. So from my understanding of this, OPEC 
was successful in keeping everybody on board and reducing the 
quotas of the members, correct?
    Mr. Hakes. They are more successful than they have ever 
been. The current quota is 23 million barrels a day and they 
are actually producing 24 million barrels a day. So over time 
there has been some erosion in the quota, but if you compare 
this to other actions by them in the past, they have had the 
highest level of compliance they have ever had.
    Senator Domenici. So do you have any idea why they arrived 
at that quota? Where did they get it? Did they think there 
would be a supply shortage in the world? Did they think the 
prices were going to go up dramatically?
    Mr. Hakes. I think originally they were shocked by $10 a 
barrel. They had made an increase in 1997, at the time that 
they thought it would meet rising world demand, and shortly 
after that increase, the world price started to drop 
dramatically. Just as this hurt private producers all around 
the world, the treasuries of these nations were decimated.
    At the time, they said that what they wanted to do was 
bring stocks back into the normal level; but as stocks got back 
into the normal level, the quotas stayed where they were. So 
the delay in raising production has been a serious problem. But 
their initial goal, as they stated it, was to deal with this 
big overhanging in supply, which created a difficult situation.
    I think some consumers at the time were happy with the 89-
cent gasoline, but the fact of the matter was those prices were 
not sustainable, because the world cannot produce oil at those 
prices. And I do not think OPEC is going to maintain the price 
of $25 per barrel because other places in the world can produce 
a lot of oil at $21 per barrel. So any swing in the market, I 
think, over the long-term is unsustainable.
    But I think their initial action was based on a fear of 
that $10 per barrel oil.
    Senator Domenici. So if we thought we were getting a good 
deal at 89 cents per gallon gasoline, clearly that was going to 
be short-lived, and somebody as knowledgeable as you knew that, 
right?
    Mr. Hakes. Yes. We, I think, have pointed out at every 
valley and peak in the market that this was likely to be a 
short-term situation. Now, this situation turned around faster 
than we were saying at the time, because we had no knowledge of 
how OPEC was going to deal with it, and the three OPEC cuts 
combined are almost 4.5 million barrels per day. That is a lot 
of oil.
    We had said this will take awhile to work off these low 
prices. They got worked off a lot quicker because OPEC made a 
decision that they could cut oil production by 4.5 million 
barrels per day.
    Senator Domenici. I would ask Mr. Goldwyn, did I hear you 
correctly that, with reference to incentives to Oil Patch 
America, that you were aware that incentives had to be built-in 
that would be tied to price. So, if the oil came in below a 
certain price, incentives would trigger in, and if they got 
over certain price, they would be triggered out? Did I read 
that or hear you say something like that?
    Mr. Goldwyn. No, sir.
    Senator Domenici. Let me ask you, if we are talking about 
something like stability or consistency, wouldn't it be a good 
idea to take a look at all the tax incentives that go to Oil 
Patch and decide that they ought to be--I will use the word 
countercyclical, but I do not want to stop there, because it is 
hard for people to know what that means. But, essentially that 
the incentives would be triggered on and off, depending upon 
the price, which would keep us from closing down a lot of our 
wells and the like, if the price came tumbling down?
    Mr. Goldwyn. Without being a tax lawyer, we ought to have a 
rational system that does not provide incentives where none are 
needed, and that has them there when they are required.
    Senator Domenici. Let me ask if either of you with the 
Energy Department--has the administration ever asked that there 
be an evaluation of all Federal lands that currently are closed 
to energy production, and for you to estimate what they might 
yield if, in fact, they were developed in an orderly and sound 
manner?
    Mr. Goldwyn. In two ways, I am aware that there are some 
analyses of what the oil productive capability of Federal lands 
is. I do not know whether that is a comprehensive study or not, 
and certainly in the preparation of a comprehensive national 
energy strategy, we looked at all those things, on Federal 
lands and non-Federal lands, and also balancing the 
environmental cost of exploration on Federal lands.
    Senator Domenici. Mr. Chairman, I do not want to ask them 
to do that. I think that would be a major undertaking. But I 
think it is very important that we ultimately know what we are 
talking about. For instance, we know one thing. ANWR is 
American public lands--the ANWR reserves--and we do know there 
is a pitched battle as to whether or not we should make 
available to the American consumer and to our enterprises and 
our workers. Do either of you know what the estimated 
production of American oil would be if we developed the ANWR 
reserve?
    Mr. Hakes. The USGS has published studies on that in the 
past, as I believe the EIA may have, but the Geological Service 
is updating some of its work, and we will be updating our work 
at the request of Senator Murkowski, so I believe we will be 
able to give you our best estimate of that in some detail, 
maybe in another 6 weeks or so.
    Senator Domenici. Well, I want to state my own view for the 
record. It is pretty close to economic arrogance for a country 
like ours to say we are not going to seriously consider 16 
billion barrels of oil that would come from our property, 
drilled for by Americans who would be employing Americans, and 
the cash flow would be to Americans instead of foreign 
countries, and that is my estimate, is 16 billion barrels. That 
is 30 years of Saudi imports to this country, based on today, 
which is not a lot. They do not send us a lot. But that is a 
lot of oil.
    In the scheme of things, it may not be that much oil, but 
it is American oil, and I guess the Department of Energy 
clearly is not yet willing to look at that and other sources of 
our own oil to help show the world we are doing something for 
ourselves. Is that a correct statement, Mr. Goldwyn?
    Mr. Goldwyn. It is a correct statement that the 
administration does not support exploration in ANWR because of 
the environmental sensitivity of that area and the miles and 
miles of roads and pipe that would be required to explore 
there, but the administration does support development on some 
Federal lands, as they have in some places in Alaska; and so I 
think it is a question of balancing those two interests. But 
the administration is not opposed to exploration of oil on 
Federal lands.
    Senator Domenici. Well, Mr. Chairman, the environment is 
not the principal jurisdiction of this Committee, but the 
question really is about weighing risks. There is no question 
you have got to look at what risks are involved in doing this 
versus what risks are involved in not adding to the American 
production of home-grown oil for the next 25 or 30 years. I 
will submit some questions in writing and I thank you, Mr. 
Chairman.
    Chairman Thompson. Thank you very much. I think this points 
out the fact that each one of these options are very 
controversial. You are asked what is the plan? Well, the fact 
of the matter is what we decide the plan is, to a certain 
extent, is the plan--and every one of these things are very 
controversial. I despair over the fact that we are obviously 
not going to come together with some kind of a give-and-take on 
these various options until we absolutely have to.
    It is just like Social Security. We continue with the 
goodies, retirement income and things like that, take the tax 
off it, and we put off reform until we absolutely have to. I 
assume, in our case, the price will have to get even higher for 
a longer period of time in order for us to do some of these 
long-term things, whether they be ANWR or the CAFE standards or 
whatever they might be.
    One final thing. We are talking about everybody being 
asleep at the switch here, but a year ago, a bipartisan request 
was sent to the administration for an expedited review and 
investigation under Section 232 of the Trade Expansion Act, 
into the impact of the increasing foreign oil imports on U.S. 
national security. There had previously been a determination by 
the Department in 1994, I believe, that, in fact, did impact 
national security.
    So a year ago, a bipartisan group of Senators asked that 
the administration take another look at that. My understanding 
is that the Department of Commerce has had a report on the 
President's desk since November. What is your understanding 
about that? Is that true?
    Mr. Goldwyn. We called over to the White House this 
morning, anticipating that, Mr. Chairman, you might ask this 
question, and what we were told is that the findings of that 
study, which has been delivered to the White House, are being 
reviewed, and that we expect a report to be released soon.
    Chairman Thompson. What about a little more than that? 
[Laughter.]
    Mr. Goldwyn. I know we have submitted----
    Chairman Thompson. Don't make me go through the next two or 
three questions.
    When is soon? Give me a range of time possibilities here.
    Mr. Goldwyn. My life expectancy shrinks by the hours while 
I give the White House time to do the report, but the White 
House is keenly aware of the urgency of this report, that it is 
expected here, and that indeed this morning, and even before 
then, that the Senator has asked for this to be delivered 
promptly.
    Chairman Thompson. I am sure they know that the longer we 
wait, the more the presumption is going to be against them, in 
terms of what is in that report. So let's go ahead and get it 
out and factor that in. You have got a distinct advantage as a 
witness. This gentleman, Mr. Goldwyn, was born in Tennessee and 
went to school in Connecticut. So he is practically the perfect 
witness to come up here today.
    Gentlemen, thank you very much. We are going to call the 
second panel. I want to ask our second panel to step forward. 
Our first witness will be Red Cavaney, President and Chief 
Executive Officer of the American Petroleum Institute. He will 
be followed by Dr. Richard N. Haass, Vice President and 
Director of Foreign Policy Studies at the Brookings 
Institution; and Robert E. Ebel, Director of the Energy and 
National Security Program at the Center for Strategic and 
International Studies; William M. Flynn, Vice President, New 
York State Energy Research and Development Authority; Dr. John 
Holdren, President's Committee of Advisers on Science and 
Technology, Belfer Center for Science and International 
Affairs, Kennedy School of Government; and Adam Sieminski, 
Director of Deutsche Banc Alex. Brown.
    Thank you, all of you, for being with us today. Mr. 
Cavaney, would you like to proceed with your testimony?

  TESTIMONY OF RED CAVANEY,\1\ PRESIDENT AND CHIEF EXECUTIVE 
             OFFICER, AMERICAN PETROLEUM INSTITUTE

    Mr. Cavaney. Thank you, Mr. Chairman. My name is Red 
Cavaney. I am President and CEO of the American Petroleum 
Institute, and I appreciate the opportunity to offer our 
assessment on the recent oil supply situation and on the impact 
of rising petroleum product prices on consumers. I request that 
my written statement be inserted into the hearing record.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Cavaney appears in the Appendix 
on page 75.
---------------------------------------------------------------------------
    Chairman Thompson. All statements will be made a part of 
the record.
    Mr. Cavaney. Thank you. America's oil and natural gas 
industry is committed to supplying our Nation's consumers with 
a reliable and affordable supply of energy for all their needs. 
We also pledge to provide consumers with the information they 
need about the current gasoline price situation, as well. Four 
important points need to be understood.
    First, the cost of crude oil is a key determinant of prices 
at the gasoline pump, and crude oil prices are a function of 
supply and demand in the international marketplace. Second, 
high crude oil prices have resulted from a decrease in foreign 
oil production and greater demand for oil from recovering Asian 
economies and the continued growth of the Western economies.
    Third, although prices have risen rapidly, retail prices, 
after adjusting for inflation, are generally well below 
gasoline prices in the early 1980's. Finally, the U.S. oil and 
natural gas industry is operating its refineries at record 
production levels and will continue to increase production as 
we approach the prime driving season. The price increases we 
were experiencing were brought on by short-term shocks that 
resulted from sudden changes in supply and demand.
    Just as prices are up now, they will turn down when factors 
change, and change they will. We commend the Federal Government 
for taking a balanced approach to the current situation by 
encouraging more crude oil production while refraining from 
interfering in the marketplace, which is still the best way to 
get gasoline to consumers reliably and at the lowest cost. We 
believe the government and industry can work closer together to 
ease some of the hardships and concerns faced by American 
consumers. We are pleased to learn that the Energy Information 
Administration has acted on one of our recommendations and is 
convening a pre-summer transportation fuels outlook conference 
to evaluate the status of gasoline, diesel, and jet fuel 
production and inventories.
    We are also asking EIA to expand the scope of its winter 
fuels conference. API is also eager to provide additional 
information on market conditions. Our industry is committed to 
continue working closely with the Department of Energy, to 
monitor the situation and give Americans the latest and most 
accurate information available. Educated consumers are a vital 
asset.
    In the short-term, the government should also take steps to 
help prevent another recurrence of the home heating oil 
situation. It can increase funding for the low-income home 
energy assistance program and more quickly and equitably 
release funds, as well as consider expanding Small Business 
Administration emergency loans to home heating oil dealers and 
to truckers.
    In the long run, government can reduce our reliance on 
foreign supplies and also exert downward pressure on 
international crude oil prices by opening our most attractive 
oil and natural gas prospects to responsible exploration and 
development. Since 1983, access to available lands in the 
Western United States were nearly 67 percent of our onshore oil 
reserves and 40 percent of our natural gas reserves are 
located; that access has declined by 60 percent.
    Our industry supplies the energy to keep America going 
strong, but to continue to produce domestic oil and natural 
gas, we must have improved access to State and Federal lands.
    Senator Lieberman. Mr. Cavaney, could you just go back--
excuse me for the interruption, because those are interesting 
and important numbers. Where is 67 percent of the domestic 
oil----
    Mr. Cavaney. Of our onshore oil reserves.
    Senator Lieberman. Onshore, and 40 percent of onshore gas.
    Mr. Cavaney. And 40 percent of our natural gas.
    Senator Lieberman. And where is that, generally speaking?
    Mr. Cavaney. The 10 Western States.
    Senator Lieberman. That is what you were talking about. OK.
    Mr. Cavaney. If you look at all that is available to us, 
the statistics are pretty well the same; 61 percent of the 
total reserves, onshore and offshore, are also basically 
restricted access at the present time, and that is according to 
USGS and MMS data.
    Also, the Federal Government has imposed layer upon layer 
of regulations on U.S. refineries without sufficient regard as 
to their collective impact on a refiner's ability to meet the 
full range of American consumer needs. Refineries need 
flexibility to respond to the fast-paced changes in today's 
world. Overregulation reduces that flexibility.
    A soon-to-be-proposed regulation to drastically lower the 
sulfur content of diesel fuel is an example of government 
action that could have significant negative consequences on our 
ability to supply heating oil and diesel fuel in the near 
future. We share the government's interest in further cleaning 
the air. However, reductions beyond the 90 percent we have 
already proposed are likely to drive up fuel manufacturing 
costs unnecessarily, imposing yet additional burdens on our 
Nation's truckers, farmers, and homeowners in the Northeast, in 
particular.
    We have talked directly to EPA Administrator Carol Browner 
about our concerns, and today API and other impacted parties 
are visiting OMB to reiterate our opposition. In closing, we 
share your concern for the help and welfare of your 
constituents. America's oil and natural gas companies have a 
long and proud history of providing this country's consumer 
with a reliable and affordable supply of energy, to make their 
homes comfortable and to take them where they need to go when 
they want to go.
    We recognize you are faced with increasing demands to 
address this situation. To the extent to which we can help in 
your efforts to better understand the possible effects of the 
many proposed actions under consideration, we are here to 
assist you.
    Thank you.
    Chairman Thompson. Thank you very much, and thank you for 
staying close to your time here.
    Dr. Haass.

 TESTIMONY OF RICHARD N. HAASS,\1\ VICE PRESIDENT AND DIRECTOR 
      OF FOREIGN POLICY STUDIES, THE BROOKINGS INSTITUTION

    Mr. Haass. Thank you, Mr. Chairman, and Senator Lieberman. 
I think it is clear why we are here today. It is because of the 
large and relatively sudden surge in oil prices from just over 
$10 a barrel a little more than a year ago to around $30 today. 
This has translated into an equally dramatic increase in retail 
gasoline prices. In many cases, these increases have caused 
real hardships for individuals, families, and businesses.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Haass appears in the Appendix on 
page 87.
---------------------------------------------------------------------------
    I think, though, it is important not to confuse higher oil 
prices with high oil prices. The recent prices, while obviously 
higher, are not particularly high by historical standards, 
especially when adjusted for inflation. Indeed, in real terms 
and despite the recent increases, today's energy prices are no 
higher and, actually compared to some years, say in the early 
1980's, are actually lower, than they were over the past 3 
decades.
    It is important to keep in mind, as well, that one of the 
reasons the prices are so much higher today is because of where 
we were 12 months ago and the fact that oil prices had fallen 
so far. Still, the question arises as to whether higher prices 
constitute a national security problem for the United States.
    Within limits, and I would suggest we are nowhere near such 
limits, the answer is no. It is not because higher oil prices 
are without impact, economically, to businesses to the economy 
as a whole. But in and of themselves, the sorts of prices we 
are experiencing do not threaten either American or global 
prosperity.
    Indeed, what is normally more important than the specific 
price of oil is price stability and predictability. This 
conclusion has several consequences for American policy. First, 
and as has already been discussed, I would suggest use of the 
Strategic Petroleum Reserve, would not be warranted under 
current circumstances. I would reserve, so to speak, the 
Strategic Petroleum Reserve for true crises.
    Second, the United States ought to engage in regular 
consultations dealing with long-term supply and demand 
projections with OPEC producers. Such talks could not change 
market fundamentals; technology will do that, but they can 
prove useful in preventing and smoothing out the sort of price 
fluctuations we have seen.
    Implicit in saying this is the notion, controversial 
perhaps in some places, that low prices, per se, should not be 
a goal of American energy policy. Low prices have an adverse 
impact on American businesses and communities that depend upon 
oil production. They obviously encourage consumption with all 
that that means for the balance of trade and for the 
environment. Low prices discourage exploration and production 
which, over time, exacerbate supply shortages. And low prices 
obviously cause great potential instability in countries that 
are of vital national importance to us, including Mexico and 
Saudi Arabia.
    I, therefore, would hope that the Senate would avoid any 
sort of sanctions along the lines that the House has been 
recently considering against the oil producers, and indeed, in 
general, I would jettison the idea of a confrontational 
relationship with the OPEC producers, in part because I do 
think it is possible to work out a more cooperative approach to 
smooth out oil pricing. Second, we cannot somehow disaggregate 
the oil part of our relationship with these countries from 
everything else. Many of these countries are in a position to 
affect vital national interests of the United States, whether 
in the area of drugs or involving basic questions of foreign 
policy, weapons of mass destruction, and so forth.
    So, what, then, should we do? Let me just suggest here, and 
I want to associate myself with the comments of the Chairman, 
that the real question of the relationship between oil and 
national security deals with supply and not price. There has 
got to be simply enough oil to meet the bulk of the world's 
demands. And it is not enough that the United States, alone, 
can meet its oil imports, because as it has already been 
pointed out, there is really only one global oil market. Even 
if somehow we could manage to meet our needs, if the needs of 
our major trading partners and allies were not met, we would 
then indirectly suffer as a result.
    Senator Lieberman, as you and some of your colleagues have 
suggested, there is no single answer--no simple answer--to 
this. It is the reason that this country has had so much 
difficulty coming up with and implementing what you might call 
a comprehensive energy policy. But it touches on a whole range 
of issues that cuts across foreign policy and defense policy. 
It cuts across economic policy and it cuts across domestic 
policy. Again, there is no one locus of decision-making in this 
area, be it within this body or within the Executive Branch. 
But energy involves a whole range of issues, from questions of 
strategic reserves to conservation, to new energy sources, to 
finding new places to produce oil, to the Arab-Israeli issue, 
to the IEA and other sharing arrangements, to making sure that 
we have an adequate military in case there is another supply 
interruption threatened by Saddam Hussein or anyone else.
    Let me end with two last points, as I see the red light. 
One is to keep an emphasis on the Persian Gulf. It is still 
home to two-thirds of the world's proved oil reserves, and to 
the extent there is a swing region in the world oil market, it 
is the Persian Gulf. To the extent there is a swing producing 
country, it is Saudi Arabia.
    Two other countries have a big potential to affect 
international energy, one more in the negative sense, which is 
Iraq, one more in the positive sense, which is Iran. In the 
case of Iraq, the United States cannot think of having a secure 
energy policy so long as Saddam Hussein is in power. And in the 
long run, not simply containing Iraq, but bringing about a 
different government in that country is very much part of a 
long-term energy policy for this country.
    Second, and here I would welcome some of the comments made 
by the Secretary of State recently, I also think it argues for 
some new thinking about U.S. relations with Iran. Right now, 
U.S. policy towards Iran seems to be penalizing American oil 
producers, in many cases, much more than it seems to be 
penalizing Iran. Again, I think it is impossible to think of 
global energy policy in the absence of steps that would somehow 
get Iranian production on line, in full, with American 
participation. Thank you very much.
    Chairman Thompson. Thank you. Mr. Ebel.

 TESTIMONY OF ROBERT E. EBEL,\1\ DIRECTOR, ENERGY AND NATIONAL 
    SECURITY, CENTER FOR STRATEGIC AND INTERNATIONAL STUDIES

    Mr. Ebel. Thank you, Mr. Chairman. It has been more than 25 
years now, since the Arab oil embargo disrupted oil supplies in 
October 1973. How has the United States fared since that time? 
Not too badly, in fact. Our per capita use of oil has come 
down, but so then has our domestic crude oil production.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Ebel appears in the Appendix on 
page 90.
---------------------------------------------------------------------------
    However, our population growth has more than offset the 
decline in per capita oil use. And that, unfortunately, 
translates into much higher dependence on oil imports, which, 
as noted, now surpasses 50 percent. In the interim, and in 
response to supply and price crises, we have worked our way 
through price controls, through oil import quotas, through a 
synthetic fuels corporation, and through subsidies and tax 
credits for various kinds of alternative forms of energy. But 
then, the market eventually adjusts itself and the remedies of 
the day go back on the shelf.
    Today I know of no reasonable scenario which does not 
foretell an increasing reliance on imported oil. Does that mean 
our national security is more in jeopardy today than in the 
past, simply because of this higher dependence? How do we 
define national security? George Kennan has offered the least 
complicated definition and I quote, ``The continued ability of 
this country to pursue its internal life without serious 
interference.'' If we accept that definition, then oil imports 
do threaten national security. And the greater the dependence, 
the greater the prospect for interference.
    When we consider the world's growing appetite for oil, 
where will that oil come from? It will come from the Middle 
East, because that is where the oil is. Today's rogue states--
Iran, Iraq and Libya--had well better be tomorrow's suppliers 
if supply is to match anticipated demand. That finding comes 
out of our strategic energy initiative project, of which 
Senator Lieberman is a congressional co-chair.
    Let me list several other findings. We found that fossil 
fuels will continue to dominate world energy supply, at least 
to the year 2020. We found that there are two comparatively new 
influences on energy decision-making: The growing role being 
taken on by nongovernmental organizations and the mounting 
concern over global warming. We found that there is an interest 
in renewables, and that matches concerns over global warming, 
but we also found that their relative contribution to world 
energy supply will be mostly unchanged.
    Finally, we found in looking ahead, sporadic price 
volatility--price hikes and price declines with accompanying 
implications for producers and consumers. This is what business 
as usual in the world oil industry is all about. Policymakers 
come under tremendous pressures to do something about high oil 
prices, high heating oil prices, and high gasoline prices. And 
that something is usually in the form of government 
intervention or regulation, which tries to artificially shape 
economic forces. Unfortunately, these actions tend to prolong 
crises rather than relieve them.
    Several are on the table, as mentioned this morning. One is 
the withdrawal from the Strategic Petroleum Reserve. I would 
strongly advise against withdrawals, if only because we would 
send the wrong message to OPEC. Those exporting companies might 
conclude, let the United States add to supply and we will hold 
firm with our cuts.
    It has been suggested that, instead of withdrawals, why not 
a form of swaps, with withdrawals to be replaced at a later 
date? Swaps are difficult, however, because of pricing 
complications.
    Finally, a third option attracting support is the 
establishment of a home heating oil reserve for consumers in 
the northeastern United States. Questions arise--how much to 
hold in that reserve and what triggers the release? Having set 
a precedent, what next? Surely other groups will be impacted by 
higher oil prices and they will seek relief. Farmers in the 
sowing season. Farmers in the harvest season. Where does it all 
end? A much better policy response would be to provide 
financial assistance programs for the low-income home heating 
oil consumers in the Northeast.
    I would conclude with a thought that with only minor 
exception, the oil exporting companies are just as vulnerable 
as the oil importing countries. These countries are exposed to 
the dangers of the so-called Dutch Disease. Dutch Disease 
appears when one sector of an economy, such as oil, flourishes 
at the expense of other sectors, namely agriculture and 
manufacturing. Sizable revenues from exports greatly improve 
local currencies against others, which makes imports 
particularly attractive at the expense of local industries.
    Clearly, unless and until all exporting countries diversify 
away from their inordinate dependence on oil derived income, 
there will always be pressure on their part to maximize 
revenues from the depleting source. That translates into a 
continued price volatility or, as I noted earlier, business as 
usual. Thank you, Mr. Chairman.
    Chairman Thompson. Thank you very much. Mr. Flynn.

  TESTIMONY OF WILLIAM M. FLYNN,\1\ VICE PRESIDENT, NEW YORK 
        STATE ENERGY RESEARCH AND DEVELOPMENT AUTHORITY

    Mr. Flynn. Thank you, Chairman Thompson and Senator 
Lieberman. On behalf of Governor George Pataki and the 
residents of New York State I want to thank you for the 
opportunity to testify today concerning the energy supply and 
price problems that New York State and the Northeast region 
have been experiencing since last January.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Flynn appears in the Appendix on 
page 97.
---------------------------------------------------------------------------
    New York State relies on heating oil more than any other 
State in the Nation. We consume 20 percent of the Nation's 
total distillate demand--43 percent of New York's households 
use oil for space-heating--over 2.9 million households. In 
February, retail heating oil prices soared to record levels, 
from $1.24 per gallon on January 17 to a record-breaking $2.02 
per gallon on February 7, with New York City metropolitan area 
customers paying $2.25 per gallon. To put this price in 
perspective, last year, the average price per gallon of heating 
oil was 91 cents.
    States throughout the Northeast experienced similar price 
increases. The economic burden of rising oil prices is not 
confined to heating oil. For example, New York motorists 
annually consume over 5.6 billion gallons of gasoline and 
nearly 1 billion gallons of diesel fuel. Increasing pump prices 
will also significantly increase the cost of transporting 
people and goods in and out of New York.
    What were the reasons for these price increases? There was 
no single definable factor that we can point to as the ultimate 
cause of these price increases. There are, however, a number of 
market factors that contributed which bear mentioning.
    One, economic growth in the United States and the 
strengthening economies of the Pacific Rim contributed to a 
resurgence in the demand for petroleum at the same time OPEC 
and non-OPEC nations reduced production.
    Two, the petroleum industry has adopted just-in-time 
resupply of inventories. Additionally, New York's heating oil 
bulk storage capacity declined by 20 percent over the past 5 
years. As for gasoline over this same period in-state storage 
capacity fell by over 17 percent.
    Three, New York and New England do not have any refineries. 
We rely on refineries in New Jersey, Pennsylvania, the Gulf 
Coast and imports to meet our needs. And, refinery utilization 
rates have dropped.
    Four, weather--we had mild weather in December that 
continued into early January. When the extreme cold weather 
arrived in mid-January, we experienced a sharp increase in 
demand by all sectors, creating greater competition among 
buyers, including interruptible natural gas customers and 
electric generators.
    Five, resupply problems caused by icing on the Hudson River 
and high seas and strong winds on Long Island Sound, delayed 
barge shipments to key coastal and inland oil terminals. This 
exasperated the already tight supply situation.
    Caught up in all these market forces are consumers. While 
we expected prices to rise because of OPEC cutbacks, the sudden 
and dramatic price increases were way above the expected norm, 
particularly because this winter was 9 percent warmer than 
normal and 1 percent warmer than last year. We estimate that 
just the heating oil price increase will cost New York's 
economy about $650 million more than last year, with nearly 
$450 million of this increase felt by residential heating oil 
customers.
    Also, truckers in New York and throughout the Nation are 
feeling the pinch of high diesel prices, although diesel prices 
have dropped from a high $2.70 per gallon in February, the full 
effect of these prices have yet to hit the stores that rely on 
trucking to meet demand for their products.
    As for gasoline, national inventories are 12 percent lower 
than year ago levels, and in the mid-Atlantic States these 
inventories are 20 percent lower than last year. The average 
retail price for a gallon of regular gasoline in New York 
escalated 18 cents per gallon in recent weeks. The current 
statewide gasoline price is 55 cents per gallon higher that 
last year--far exceeding the previous all-time high of $1.51 
per gallon during the Persian Gulf war. Obviously, this 
situation deserves much attention as we come close to the 
summer season.
    Faced with this situation, Governor Pataki directed several 
actions. We established emergency provisions for shelter and 
heating by working with the Red Cross. We were in constant 
contact with county energy emergency coordinators across the 
State, with the U.S. Coast Guard, with oil distributors, and 
terminal operators and oil companies to get the best available 
information about the supply situation. Governor Pataki called 
upon the Public Service Commission to voluntarily keep utility 
customers who could switch to oil or natural gas.
    The New York State Department of Tax and Finance issued 
temporary certificates to heating oil distributors and trucking 
companies. The New York State Department of Environmental 
Conservation granted a 1-week waiver to allow New York City 
municipal facilities to use slightly higher sulfur oil to meet 
their heating needs.
    Governor Pataki also asked the Consumer Protection Board 
and our authority to investigate the causes of the current 
shortage. Therefore, our authority is surveying heating oil 
distributors, terminal operators, refiners, electric 
generators, natural gas utilities, and interruptible customers 
to determine the causes. We expect to issue a report later this 
spring, at which time we will make it available to this 
Committee.
    Besides the actions we took in-state, there were several 
Federal measures we initiated. Governor Pataki called upon the 
administration for an increase in LIHEAP funds. Governor Pataki 
then raised the LIHEAP income limits for eligibility to help 
the elderly and the working poor. Governor Pataki and other 
elected Northeast officials, also asked for the release of oil 
from the Strategic Petroleum Reserve in mid-February. If the 
administration had acted then, we would be seeing greater 
supplies of gas and diesel fuel today.
    I would also add some humble recommendations, some of which 
have already been mentioned today. We need to use the United 
States influence with OPEC and non-OPEC to achieve a more 
competitive oil market. Domestic crude oil production has 
declined. We need to accelerate recovery technologies and 
improve the economics of finding and withdrawing oil from 
domestic reservoirs. An important step in New York and in the 
Northeast is better fuel diversity. We need to study the 
possible expansion of natural gas pipeline capacity and we need 
to look at new technologies such as fuel cells and alternative 
fuel vehicles as a way to provide us with greater energy 
security.
    The Federal Government must do a better job of coordinating 
within the Department of Energy. They must take a more active 
lead role. And the Federal Government should also ensure that 
there is adequate funding in place for Coast Guard ice 
breakers. These ice breakers are essential in keeping the 
Northeast and Midwest waterways open for the movement of 
petroleum.
    At NYSERDA our principle mission is to promote energy 
efficiency and to develop New York's renewable resources. 
NYSERDA has and will continue to support oil heat research. We 
strongly support continued DOE funding for the Brookhaven 
National Lab oil heat research. Again, Mr. Chairman, on behalf 
of Governor Pataki, thank you for inviting me to testify today 
and I would be happy to answer any questions you may have.
    Chairman Thompson. Thank you very much. Mr. Holdren.

 TESTIMONY OF JOHN P. HOLDREN,\1\ PH.D., PRESIDENT'S COMMITTEE 
   OF ADVISORS ON SCIENCE AND TECHNOLOGY, BELFER CENTER FOR 
SCIENCE AND INTERNATIONAL AFFAIRS, KENNEDY SCHOOL OF GOVERNMENT

    Mr. Holdren. Thank you for the opportunity to present my 
views here today. I do want to say that although, as the 
Chairman indicated in his introduction, I am affiliated both 
with Harvard University and with President Clinton's Committee 
of Advisors on Science and Technology, I am speaking here today 
as an individual and not representing any of those other 
organizations.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Holdren with attachments appears 
in the Appendix on page 112.
---------------------------------------------------------------------------
    The burden of my testimony today, and I should say I have 
submitted for the record a much longer statement than I am 
going to make here, can be summarized in four points. The first 
one is that we should be trying both to increase domestic oil 
production above what it would otherwise be and trying to 
reduce U.S. oil consumption below what it would otherwise be.
    Second, we should be trying to do these things both by 
using price and non-price incentives of various kinds to affect 
the choices that are made among the energy alternatives that 
are available out there now, and also by investments and 
incentives and other measures that promote the development of 
improved energy supply and energy end-use options from which we 
will be able to choose in the future.
    My third point is that having said all of that, analysis 
both of recent history and of the technological possibilities 
suggests that there is a much larger potential in increasing 
efficiency of energy use and in deploying substitutes for oil 
than there is potential for increasing the domestic production 
of oil.
    My fourth point is that we are not now doing enough in any 
of these dimensions. We are not doing enough in terms of a 
sensible array of the incentives to promote appropriate choices 
among today's technologies. We are not doing enough in terms of 
investments in research, development, and demonstration of 
advanced technologies for energy end-use and for substitution 
for oil in the U.S. energy mix.
    My own focus in the bulk of my testimony is on the 
technological potential of the various approaches and on the 
measures that we could and should be taking to bring that 
technological potential into being, but I want to urge the 
Committee not to neglect, in its larger deliberations, the 
crucial question of incentives, both in the short-term and the 
long-term, that affect what we deploy from the menu of 
technology options that are available at any given time.
    Turning then to that question of the technical potential of 
different approaches, my written statement contains an analysis 
that suggests that between the time of the first Arab OPEC oil 
price shock in 1973 and 1999, the effect of increasing 
efficiency and substitution for oil in the U.S. economy was at 
least three times as big in terms of effective displacement of 
oil import dependence, as was the effort to enhance domestic 
production.
    My rough estimate is that efficiency and substitution for 
oil was worth over 10 million barrels a day in 1999, in the 
sense that our oil demand was that much lower than it would 
have been had pre-1973 business-as-usual trends persisted over 
that period. It is harder to assess the exact contribution of 
the attempts to increase domestic production in that period, 
for which, of course, there were considerable incentives, 
considerable investments, and considerable technological 
improvements brought to bear. But if one makes a reasonable 
assumption about the size of the impact, it is at least three 
times smaller than the impact on the efficiency and non-oil 
supply side.
    If you turn to the question of the potential for the 
future, as opposed to the historical performance, I think a 
number of useful things can be said. If we were to manage to 
increase the rate of decrease of the energy intensity of the 
U.S. economy, that is, the amount of energy it takes to 
generate a real dollar of gross domestic product, from its 
recent historical trend, which is a 1.2 percent per year 
decline in energy intensity of the economy, to 2.2 percent, 
which is halfway between where we are and where we were at the 
height of energy intensity declines after the second oil price 
shock; if one were to do that and if the U.S. economy were to 
grow at three percent per year real over the next three 
decades, we would save, as a result of that efficiency 
improvement, 5.5 million barrels a day in 2010 and more than 20 
million barrels a day of total energy oil equivalent in 2030.
    In the oil sector alone, the potential is clearly very 
high. If you simply look at the transport sector, which is two-
thirds of U.S. oil use, and look at the prospective impact of 
the program on a new generation of vehicles, the study by the 
President's Committee of Advisers on Science and Technology 
(PCAST) that I led on U.S. energy research and development 
strategy completed in 1997, concluded that the results of PNGV 
could be displacing 4 million barrels a day by 2030, with 
comparable efforts on light trucks and heavy trucks displacing 
another 2 million barrels a day, 6 million barrels a day 
altogether.
    If you look, by comparison, on the supply side and ask what 
the Energy Information Administration's year 2000 energy 
outlook, going out to 2020, says the prospects are for 
enhancing domestic production, the difference between their 
reference case and their high world oil price case, which adds 
to the incentives to improve domestic production, is 800,000 
barrels per day in 2020, between those two cases.
    Expanding non-oil supply is a lot more promising than that. 
If you look at the potential, for example, to expand natural 
gas supply and use natural gas to displace oil in the home 
heating sector, in the industrial sector, and even in the motor 
vehicle sector, where compressed natural gas can substitute for 
gasoline, you find that that potential is in the multiple 
millions of barrels per day by 2020.
    If you look at biofuels, the potential is also multiple 
millions of barrels per day by the period 2020 to 2030. If you 
look at the potential of renewable electricity generating 
technologies to free up more natural gas from the power 
generating sector to use in other sectors to replace oil, that 
is also in the multiple million barrel per day class by 2020 to 
2030.
    So the potential for replacing oil is very large, and the 
potential for saving oil is very large, but those potentials 
are not going to be realized even in the technological sense if 
we do not make the needed investments. When PCAST looked at the 
current picture of U.S. investments in energy research and 
development, we found that in fiscal year 1997, the U.S. energy 
R&D expenditures at the Federal level were at the same real 
level that they had been in 1973, and, of course, half that 
level as a fraction of the GDP.
    We deemed that level of investment in energy research and 
development to be incommensurate with the challenges and 
opportunities that the energy scene is going to present in the 
21st Century, and we recommended that that level of investment 
should roughly be doubled over the ensuing 5-year period, that 
is, starting in fiscal year 1999 and out to fiscal year 2003.
    The Clinton Administration, in its fiscal year 1999 budget 
request, accepted about two-thirds of those recommendations. 
The Congress passed 60 percent of that, and so we ended up with 
40 percent of what PCAST had recommended in enhanced 
investments in alternative technologies in the fiscal year 1999 
budget. There was a further increase in fiscal year 2000, but 
the gap between the PCAST recommendations and what the 
administration has recommended and, in turn, the gap between 
what the administration recommended and the Congress passed is 
getting wider.
    So what we have achieved in turning around the decline in 
U.S. energy R&D is a lot more than nothing, but it is also a 
lot less than, in the view of me and my colleagues, is 
required. We did, just to close very quickly, a follow-on 
report that was released in 1999 on the role of increased 
international cooperation in addressing these problems. The oil 
problem and many other aspects of the global energy predicament 
cannot be successfully addressed by technologies that the 
United States deploys domestically alone. Dr. Haass made the 
same point a few minutes ago.
    It is in our interest to see that advanced technologies 
that reduce the world's dependence on imported oil and that 
reduce emissions of air pollutants and greenhouse gases, as 
well, should be deployed as widely as possible, and it is in 
the United States' interest to cooperate with other countries 
to see that that happens.
    A six-page synthesis of PCAST report \1\ on international 
cooperation has been provided to the staff and to the press and 
I hope that it will also be entered into the record. I will 
close just by saying that it does not seem to me that any of 
these are partisan issues. They are issues in which the 
national interest, as seen by Republicans and Democrats alike, 
is very similar. So I hope that the administration and the 
Congress will find it possible to work more closely together to 
generate the enhanced investments in achieving the potential to 
reduce dependence on imported oil that is out there.
---------------------------------------------------------------------------
    \1\ The report appears in the Appendix on page 124.
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    Thank you very much.
    Chairman Thompson. Thank you very much. Mr. Sieminski.

  TESTIMONY OF ADAM E. SIEMINSKI,\2\ DIRECTOR, DEUTSCHE BANC 
                          ALEX. BROWN

    Mr. Sieminski. Mr. Chairman, and Senator Lieberman, thank 
you. Like Dr. Holdren, my bosses at Deutsche Bank assured me 
that I was totally on my own up here, so I was hoping that they 
would not be listening in this morning, since rather than go 
through the 21 pages of testimony that I gave the Committee 
about what I knew, I thought we could spend just a minute or 
two on what I do not know. My dear friend and colleague, Bob 
Ebel, earlier today said, ``Adam, if you tell them what you do 
not know, we are going to be here all day.''
---------------------------------------------------------------------------
    \2\ The prepared statement of Mr. Sieminski appears in the Appendix 
on page 130.
---------------------------------------------------------------------------
    So I thought I would try to limit it to five things that I 
think are important in the crude oil markets today that should 
be of great interest to the Committee. I do not know five 
things that are worth half-a-million barrels a day of oil 
apiece.
    First, is worldwide inventories. Are they falling at the 
normal 1.2 million barrel per day rate right now, or is it less 
than that, because the preliminary data says less? This is very 
important to OPEC.
    The second thing that I do not know is whether Iraq is 
going to be able to quickly raise exports from its recent level 
of only 1.7 million barrels per day to the 2.2 million barrels 
per day rate that I think they are capable of doing and, in 
fact, they achieved in late 1999. Alternatively, we might see a 
cutoff in June of Iraqi exports, as we have seen nearly every 6 
months when the oil-for-food program comes up for 
reauthorization at the United Nations.
    The third thing that I do not know is whether or not higher 
oil prices are going to dampen the world economy and demand for 
oil by 200,000 to 300,000 barrels per day, or maybe have a 
similar but positive impact on world oil supply. On the demand 
side, let me just mention that just this morning, the 
government released the durable goods orders number for 
February, and it fell by 2.3 percent, including an 8.7 percent 
decline on the transportation side of durable goods orders. I 
am beginning to wonder if maybe high prices for gasoline, 
diesel fuel, and jet fuel are already having an impact on the 
view that companies have about the future need for those pieces 
of equipment.
    The fourth thing that I do not know is what the true short-
term excess production capability is within the OPEC cartel. 
There is a pie chart in my testimony that shows a very uneven 
distribution of excess capacity within OPEC, with Saudi Arabia 
having more than half of it, Kuwait, the United Arab Emirates, 
big chunks, but other countries having less. If that is true, 
what that might mean is getting an agreement in OPEC to raise 
production this time, and it gets worse in the next required 
increase, maybe this summer or in the fall, because of the 
inability to evenly spread the increases throughout the cartel.
    The fifth thing that I do not know is what the weather is 
going to be this summer, what it is going to be next winter or, 
interestingly, if the lack of additions to natural gas storage 
which we are seeing occurring now might end up creating a 
natural gas problem in the coming winter that would compound 
the oil problem we are going to have.
    Now, the other thing that I do not want my bosses at 
Deutsche Banc to know is that they pay me pretty good money to 
try to know the answers to these things, and I spend a lot of 
time doing this, and if I do not know the answers, I do not 
think OPEC does, either, so they are in a serious bind.
    Chairman Thompson. Isn't it refreshing, though, to come to 
a place where we know all the answers? [Laughter.]
    Mr. Sieminski. Well, so, Mr. Chairman, Senator, let me try 
to give you five recommendations for what you could do in the 
face of this uncertainty. The first thing that I think you 
should do is to keep funding agencies like the Energy 
Information Administration (Dr. Hakes, who was here this 
morning), and the International Energy Agency in Paris to try 
very hard to improve the data collection and analysis functions 
of those agencies. I think if good oil market information is 
known by everybody, including OPEC, we are all going to be 
better off.
    The second thing I think you have to look at is lowering 
taxes on production-related energy activities. This was a very 
successfully implemented strategy in the North Sea, in the 
early 1990's, and caused North Sea production to rise after a 
lot of analysts said it would fall. You might want to look very 
carefully at the idea of lowering taxes at the consumer end, 
because that actually just goes the reverse of what you are 
trying to accomplish.
    Chairman Thompson. You say look very carefully at it. You 
mean you would recommend against it?
    Mr. Sieminski. Yes. I agree with Senator Domenici, who said 
that the idea of taking money away from the highway program in 
the near term to deal with this situation is really not a 
particularly good idea. Most of the world looks at us and 
thinks we are a little silly over here in the United States 
complaining about gasoline prices, given that we are still 
getting it for $1.50 per gallon and it is $4 or $5 in most of 
the European countries and many countries in Asia.
    The third thing I would say is do not tie up the 
prospective oil producing areas in Alaska, the Outer 
Continental Shelf, and the western lands, because we need it. 
Be careful about environmental rules. Environmental rules make 
sense generally, but I think you can get carried away with that 
and it can get very expensive. I think we should take a more 
accommodating attitude towards mergers, simply because bigger 
companies, I believe, are going to have a better ability to 
deal effectively, not just with OPEC, but with all of the non-
OPEC countries that they are going to have to operate in over 
the coming years.
    Fourth, I think we should encourage the flow of capital 
overseas. I believe we should reverse the trend towards 
imposing unilateral sanctions here in the United States. Over 
the last 5 years, most of the growth in non-OPEC oil came from 
Norway, the United Kingdom, Canada, Brazil, Mexico, and 
Columbia. My projections for the next 5 years say it is going 
to be Angola, Sudan, Russia, Azerbaijan, Kazakhstan, Yemen, 
Chad, and a number of other countries where I think that we 
first want to encourage investments to go in there, and second, 
I think we do not want to impose sanctions on so many of these 
countries that we will not get the oil out.
    Finally, actually, there is another one. I think we ought 
to be prepared (I think as New York State did) to temporarily 
suspend fuel regulations if we have a gasoline problem. You 
could get imports of gasoline feed stocks from Europe and Asia 
to help a crisis if we see one, if the fuel specifications were 
relaxed for a short period of time.
    Finally, the Strategic Petroleum Reserve. Look, I agree 
that the petroleum reserve ought to be reserved for 
emergencies. The problem is, nobody can define what the 
emergency is. If you have a free market, you never have a 
shortage, because prices go up, and that deals with the 
situation. So what I would suggest is that the Department of 
Energy ought to look into the idea of using a more market-
oriented approach to the Strategic Petroleum Reserve. As an 
example, if the trigger mechanism were tied to the difference 
between where prices are now versus where they look like they 
are going to be in the futures market a year or two down the 
road, at any particular time, you could use that difference as 
the trigger mechanism to define the degree of an emergency or a 
shortage.
    If that type of approach had been taken over the course of 
the last 10 years, the Strategic Petroleum Reserve would have 
only been used three times, maybe four. One of those would have 
coincided with the release (sale) that did take place by the 
Department of Energy in 1996. The other two would have been 
purchases or borrowing of oil into the Strategic Petroleum 
Reserve (when prices were low) that would have taken place in 
June 1993 and in late June-December 1998.
    Using the amount of difference between the front end and 
back end of the futures curve as the trigger mechanism, we 
would have been lending oil out into the markets over the 
course of the last month or two under this kind of a plan. I 
agree that it is a good idea to preserve the Strategic 
Petroleum Reserve for a true supply crisis, but I think it is 
almost impossible to define what that is politically, and I 
would rather let the markets define it.
    Note that this does not have anything to do with absolute 
price. Just as an example, if oil was $40 today, but the future 
price a year or two down the line was $50, we would be buying 
oil for the strategic reserve, not selling it.
    Thank you.
    Chairman Thompson. So basically, what you are saying is 
that in a free market, there can never be a shortage, even if 
OPEC totally shut us down and did not give us anything, there 
would be enough in the world market, it would just be at an 
astronomically high price.
    Mr. Sieminski. Right, and I assure you that that would not 
last for a very long time, but this trigger mechanism could 
actually deal with that. The near-term price could go to $100 
per barrel, but probably most companies and analysts would say 
that, well, it is not going to last and certainly within a year 
or two, it is going to be back down to $20 or $25.
    Chairman Thompson. Thank you.
    Senator Lieberman, I know you have to go.
    Senator Lieberman. Thanks very much for your courtesy, Mr. 
Chairman. Very interesting idea. Incidentally, the panel has 
been superb. I think you really each contributed to our 
understanding of the problem and hopefully to the public's 
understanding. We might hope they would read the transcript. It 
is more likely they will see you on C-SPAN, but you have been 
excellent.
    On this last interesting idea about a trigger mechanism for 
the reserve, what is the gap between what oil is costing now 
and what it would cost in the futures market a year from now 
that you would set as a standard?
    Mr. Sieminski. Senator, the gap right now is probably--it 
varies from day to day, but it is up over $6. It is probably $6 
to $8 per barrel, so that current price that is $28 in the 
market, a year from now or 18 months from now is about $20.
    Senator Lieberman. So what is the gap that would trigger 
the reserve?
    Mr. Sieminski. With a 95 percent confidence level, so in 
other words, you are only dealing with that five percent that 
you want to deal with; the trigger would probably come in 
somewhere around $4 per barrel when oil is low and about $5 
dollars or so per barrel when prices are high.
    Senator Lieberman. That is about the standard you used in 
saying that it would only have had been used three times.
    Mr. Sieminski. That is correct.
    Senator Lieberman. Including in December of last year, 
1999.
    Mr. Sieminski. Well, yes. We would have had something 
happen sometime over the course of the last couple of months.
    Senator Lieberman. What I am asking you, Mr. Sieminski, I 
take it from what you said about this question of the 
unevenness of spare production capacity in OPEC, and the 
internal political difficulties that creates in OPEC, that you 
expect they will not make a decision to increase supply next 
week, adequately to meet world demand.
    Mr. Sieminski. I think that OPEC is going to act on the 
side of caution, because they are very afraid of having a 
renewal of what happened in late 1997, when there was too much 
oil on the market, and that uneven capacity issue comes into 
play, as well. I think the market needs a minimum of 1.5 
barrels a day, and I think that we are likely to see something 
a little bit less than that coming from the OPEC countries.
    Senator Lieberman. Thanks. Mr. Cavaney, thanks for your 
testimony. I am correct, I believe, in saying that API has been 
opposed to using the Strategic Petroleum Reserve.
    Mr. Cavaney. We believe it should be reserved for its 
intended purpose and not to intervene in the market.
    Senator Lieberman. Is there a different position or a more 
open position on the question of swaps, because when that has 
been talked about, there is a suggestion, though I have never 
heard it made explicit, that the oil industry is more open to 
swaps than to an actual release of oil from the reserve?
    Mr. Cavaney. Philosophically, that is still a measure of 
market intervention, but we would be prepared to sit down, and 
explore and discuss in further detail how that might work, 
because how the mechanisms kick in and so forth would have an 
impact.
    Senator Lieberman. OK. I appreciate that. Let me ask if you 
can sketch for us, and this is real difficult. We tried to do 
it a little bit earlier. As we talk about trying to have a new 
national energy policy and creating more energy independence, 
American energy independence, through all the means we are 
talking about here, renewables, alternatives, and more 
production of oil and gas within our control, what the 
potential is domestically? You mention the percentages in terms 
of the western States, but in terms of barrels?
    Mr. Cavaney. I can share with you, this data that I am 
about to give you is from 1995 U.S. Geological Survey and 
Minerals Management Service estimate, the U.S. undiscovered 
potential reserves are 78 billion barrels of oil and 885,000 
TCF.
    Senator Lieberman. What is that?
    Mr. Cavaney. TCF, trillion of cubic feet of natural gas. 
So, oil alone, which has what has been principally the 
discussion today, is 78 billion barrels. That, as you noticed 
just recently, the Geological Survey updated the non-U.S. 
supply potential and increased it by about 20 percent. If you 
look historically at their revisions, they have all been 
upward.
    As was mentioned earlier by the EIA, they soon expect to 
come out with another revision. We expect it will be upward, so 
it may well be more than 78 billion barrels in the near future.
    Senator Lieberman. I want to ask you a question next that 
is pretty hard to answer, because it is highly subjective, and 
if I asked it in the crudest fashion, I would say how much of 
that is not environmentally controversial? In other words, how 
much of it is not being developed for economic reasons, and 
then I would ask what economic incentives, apart from market 
price, could we create to encourage the development of those 
resources?
    Mr. Cavaney. It is difficult to answer. To some people, any 
drilling is a concern, and, to others, it can be done in an 
environmentally sensitive way, and we should maximize that. 
What concerns us in the macro sense, by any use of mathematics, 
about 60 to 61 percent of the reserves are basically restricted 
and not available. That reduces, by a very large amount, the 
capacity to basically take market risk.
    As you are aware, people have to invest huge amounts of 
money in order to both first explore and then bring production 
online and then, ultimately, deliver it to a refiner to make it 
into heating oil, diesel fuel, crude oil, whatever the case may 
be. So what you do, since you have opportunities to look 
worldwide, and what has been the trend of late, is increasingly 
U.S. producers, because of the obstacles here in the United 
States, the long-term and costly permitting process and, in 
some cases, the inability to get permits, increasingly U.S. 
producers have gone to foreign countries, and we are not as 
attractive a place as we were 20 years ago.
    There are things that can be done, by easing the regulatory 
burden for permitting, by opening up some of these lands, by 
looking at whether or not the United States provides a level 
playing field in its tax policy with other countries, because 
there are ample reserves there for us to be able to bring on a 
good deal more domestic production and, therefore, ease some of 
the price pressures we have right now with the strong reliance 
on foreign oil production.
    Senator Lieberman. Thanks. Hopefully, we are in a climate 
where we could figure out ways to do some of that. Some of the 
battles we are fighting, I understand there are strong opinions 
on both sides, at least in the foreseeable future, such as 
ANWR, it is hard to see them getting anywhere. But I hope there 
are other areas of potential that we all might work on that are 
less confrontational.
    Mr. Cavaney. These areas that I have mentioned include all 
the Rocky Mountain States, very attractive, particularly for 
gas, the Gulf of Mexico, very attractive there, all of Alaska, 
not just the ANWR part, and offshore, both on the East Coast 
and on the West Coast. So there are ample opportunities there 
to look.
    Senator Lieberman. Dr. Haass, I wanted to ask you, at the 
foreign policy level, you are right, of course, that we have 
ongoing relations with OPEC and other oil-producing nations 
that are important, and they are important to us strategically 
and in other ways. Of course, we are important to them. 
Obviously, we went into Operation Desert Storm to protect a 
group of them. We have been involved in economic assistance, 
disaster assistance, to our Central American, Latin American 
neighbors and allies who produce oil.
    There is a mood here now, and it is somewhat reflected, 
although it has been moderated in the House bill, to strike 
back, and it is an understandable mood. I want to ask you how 
you strike the balance here? And when I say how do you strike 
the balance, I mean, it is certainly, generally speaking, as I 
listen to the experts in this area who pretty much feel that, 
although the market is the market, the world price going up to 
$34 per barrel is excessive; that $10 was too low, and it is 
not just splitting the difference, but most of the people you 
listen to seem to say, ``Well, $18, $20, to $22 a barrel seems 
to be kind of a consensus preferred rate.''
    So in the midst of that kind of excessive pricing, what do 
we do with our allies? There is a tendency, understand, not to 
be vindictive, but to say, ``Hey, you know, we sent half-a-
million of our soldiers over there to protect you 10 years ago. 
We gave you aid when you had a disaster. We helped you out when 
you had an economic crisis. Why are you squeezing us now?''
    Mr. Haass. I understand the sentiment. I think the 
producers understand it, as well, and they are uncomfortable 
with it. It is one of the reasons you will see them responding. 
Indeed, I do not think they ever thought prices would get to 
the point they have gotten. They were extremely unhappy, for 
obvious reasons, with $10 per barrel oil. I have no reason to 
believe that any of them actually thought we were heading north 
of $30 per barrel, in part for the reason you warned. They are 
worried about the political reaction, and they understand their 
own economic future is somewhat intertwined with the world's 
economic future.
    So the idea that they would bring down the temple is not in 
their interest, either. I would just say two things, though, 
Senator. First of all, you might say our moral authority to 
weigh in with them would be somewhat greater if we had shown a 
little bit of concern about low oil prices. It is not enough 
for the Secretary of Energy to get on his bicycle when oil 
prices are at $30 and say bring them down. He has also got to 
get on his bicycle when the prices are $10 and say, ``We 
understand this is causing hardship for you. It actually could 
cause national security problems for us, so let's talk about 
how we avoid that.''
    You heard it from the panel today--greater transparency is 
key here. To the extent producers and consumers can sit down 
and talk about long-term projections of supply and demand, to 
add transparency to calculations, people then can adjust levels 
of output in order to anticipate these changes and, as a 
result, hopefully avoid them. In many ways, it is akin to the 
same logic that you heard with the petroleum reserve.
    To the extent you look at the future, you can anticipate it 
and take steps, in the process helping to prevent undesirable 
futures from coming about. But it means, therefore, to some 
extent eschewing a confrontational relationship with OPEC and 
become somewhat more cooperative.
    Senator Lieberman. That is a helpful thought and it has 
obviously not happened at this point. Maybe that is another 
lesson to be learned from this crisis, to be on a more 
continuing basis of discussion with the oil-producing nations, 
to avoid these extremes, both up-and-down, which are not good 
for either the producers or the consumers. I was going to ask 
you, Dr. Holdren, a lot of questions, but you answered them 
all. I just think your testimony was very interesting in terms 
of the enormous potential for energy savings in the investments 
we are making in the new technology vehicles, for instance, 
next generation, new generation vehicles, and in some of the 
renewables and conservation. So I thank you.
    I just wonder, Mr. Chairman, if I may read into the record. 
Dr. Hakes asked a question earlier about the extent to which we 
depend on OPEC for our daily oil supply, and he did not have 
the number right off the top of his head, but he dropped it off 
at the desk before he left. His figures say that U.S. crude use 
is 14.8 million barrels per day, and that the OPEC-imported 
crude is 4.8 million barrels per day, and the total U.S. crude 
imports are 8.59. So OPEC is about half, 49 percent, of our 
imported crude, and about 28 percent of our total use, so it 
gives us interesting dimensions.
    Mr. Chairman, I apologize for having to go. I was supposed 
to be somewhere 15 minutes ago. I thank you for your courtesy 
in letting me go first and in holding the hearing. I hope and I 
believe that we have contributed to the dialogue in a 
thoughtful way, and most importantly, I think you have each 
given us--and the two witnesses before--some material to work 
with now as we go forward, both in terms of our international 
relations and also in terms of our domestic policy. So I thank 
you very much.
    Chairman Thompson. Thank you very much.
    You pointed out that the United States gets about half of 
its oil from OPEC, and I believe it was Dr. Holdren's written 
statement that said half of that comes from the Persian Gulf; 
is that correct?
    Mr. Holdren. Right
    Chairman Thompson. In listening to the interchange with Dr. 
Haass here, it occurred to me that is why it seems to me that, 
I do not want to say the long run, but generally speaking, that 
market forces will win out in this thing, not because we remind 
our friends in the Gulf area of what we have done for them or 
anything or because we prick their conscience, but because it 
is in their self-interest, not only to maintain the 
relationship with us, and I do not think they kid themselves as 
to why we were down there in Desert Storm, but also in terms of 
the international marketplace.
    So I think, if they are enlightened at all, they take all 
those things into consideration and that works in our favor, 
maybe not as rapidly as we would like and, as Dr. Haass points 
out, that does not keep us from talking and trying to take the 
sharp edges off maybe in the process, but it looks to me like 
it is a very much of a good news situation. That is not the 
bigger long-term problem, if they are going to be so 
unenlightened as to do things that are outrageous.
    I think the bigger problem is, as you point out, potential 
problem, is things that the leadership in some of our friends' 
countries can maybe do very little about, and that is internal 
economic problems. It was pointed out that they are so 
dependent on oil. You think we are dependent on oil. They are 
the ones that are dependent on the oil, in terms of their 
income, so it was very good to be reminded, I think, of that 
interrelationship.
    Would all of you agree that, generally speaking, with Dr. 
Haass' comment that historically, prices are not particularly 
high by historical standards, not higher than in past decades, 
especially in the early 1980's, I believe, was where you put in 
some cases, some years where--compared to some years, it is 
actually lower? Is that a fair assessment?
    Mr. Cavaney. If you look at the gasoline data nationwide 
and adjust it for inflation, it is about 40 percent lower than 
it was at its height, which was in the early 1980's.
    Chairman Thompson. Talking about the Gulf area there, which 
you, Dr. Haass, I think you have broadened the discussion to 
what our real attention ought to be on here. Do you welcome the 
recent overtures that we have made toward Iran, for example? 
Does that contribute toward your view as to what we should be 
doing to maybe open that part of the world up for us? Does it 
make any difference?
    Mr. Haass. In general, I do welcome it, but I say that 
without great confidence one way or the other about what 
dividends it will yield. But I think it's worthy as an 
investment. We are not risking a lot by importing rugs or 
pistachios, and Iran is one of the key countries in one of the 
key regions of the world. It is hard for me to see how, in the 
long run, U.S. national security interests are served by the 
United States and Iran being estranged.
    So, to the extent this may lead to some momentum with what 
is clearly a more reformist government in that country, good. 
But we have also got to recognize that the hold of the 
reformers in Iran on the policy of their own country is clearly 
less than complete.
    There are independent centers of decision making in their 
country which may have, as their principal objective when they 
get up every morning, to frustrate any rapprochement or 
normalization between our two countries. So I predict it is 
going to be one of those ``steps backwards for every step 
forwards'' type of process. But I believe the administration 
was correct in moving away from dual containment and in not 
tarring Iran and Iraq with the same brush. Having a 
differentiated policy and essentially investing a little bit in 
the Iran relationship to see what might come of it makes sense.
    Chairman Thompson. All right. But, specifically, I take it 
from your statement that our long-range goal there is to free 
up some oil from that area.
    Mr. Haass. Right. Iran is one of the principal producers of 
the world. U.S. companies do not participate in it. Iran is 
producing a significant amount of oil now. I would think they 
could produce perhaps a bit more were the United States to be 
involved. Put it this way: Whatever penalty Iran pays from our 
non-participation is overwhelmed by the increase in the price 
of oil.
    For every dollar that oil goes up per barrel, I estimate 
that Iran's revenues go up by somewhere between $1 billion and 
$1.5 billion. So, oil price fluctuations overwhelm any 
potential impact of American sanctions.
    Chairman Thompson. What do you think is going to happen 
with regard to Iraq, both in the longer term play, influence 
they have down there with regard to our allies, ourselves, but 
also in terms of what they do with their oil production as we 
lift sanctions?
    Mr. Haass. I think Iraqi oil production will, for the most 
part, continue to come up. The regime wants this, particularly 
to the extent it can smuggle oil, because that allows them to 
get the revenues and escape the controls of the international 
community, which is obviously what Saddam Hussein wants to do. 
He wants to avoid as much of his revenues being captured as he 
can, because to the extent we capture the revenues in this 
U.N.-overseen account, we can then have some handle on how that 
money is spent.
    But there is a bigger question about Iraq. It is a bad 
penny about to turn up. We are living on borrowed time. It is 
more a question of when, and not if, Saddam Hussein pops up and 
presents us with a weapons-of-mass-destruction problem.
    Mr. Sieminski. Senator, if I could come back to your 
question about oil prices.
    Chairman Thompson. Yes, sir.
    Mr. Sieminski. On page 21 of my testimony, there is a chart 
that shows oil prices in today's dollars, going back to 1960. 
With oil at $30 or over $30, that is higher than it has been at 
just about any time since 1980, 1981 or 1982, so at that level, 
it is pretty high. Now, if prices come down and average lower 
than that for the year, then I think you could say that prices 
are not that bad compared to where they have been in the past, 
but if prices stay at $30 or go higher, and they could, there 
is an issue.
    The other thing I would like to mention is again back to 
this point of what is called backwardation in the oil markets, 
the gap between where prices are today and where the futures 
market is saying prices will be a year from now is the highest 
that it has ever been. So, what that says, in relative terms, 
is this a big problem, and that is obviously what consumers are 
feeling.
    Chairman Thompson. I see. Well, let me ask you this first, 
on another subject. Dr. Holdren, you state that, in your 
opinion, that we have had better success in decreasing 
consumption than we have in increasing production. Is that 
generally----
    Mr. Holdren. Yes, that is the finding, and that is not to 
say we should not continue to try to strengthen domestic 
production.
    Chairman Thompson. Does anyone take issue with----
    Mr. Holdren Ultimate magnitudes?
    Chairman Thompson. Does anyone take issue with that really? 
My question there is why do you think that is? Is it because of 
the efforts that we have made or not made, or is it because of 
the inherent problems with production, or why do you think that 
has been historically true?
    Mr. Holdren. I think increasing domestic production is a 
very hard problem. A very distinguished geophysicist, M. King 
Hubbert, many years ago did a series of analyses based on 
assessments of discovery rates and the likely amount of oil to 
be found, and so on and so forth, in which he predicted that 
the peak of U.S. domestic oil production would occur around 
1970. He predicted that in the 1950's and became a prophet in 
his own time when it happened.
    M. King Hubbert would have argued that the reason for that, 
again, was not inadequacy of our efforts, but the fact that 
there is a certain amount of high-quality, accessible oil out 
there to be found, and after you spent a lot of effort at it, 
you found a certain fraction of it and your capacity to find 
more is constrained by the fact that you have already found and 
used a lot of it.
    There are differences of opinion about how much more 
remains to be found and how long you can stave off a steeper 
decline. The Energy Information Administration's year 2000 
outlook out to 2020 basically said that with continuing 
technological innovation--and there has been a lot in seismic 
exploration, horizontal drilling, secondary recovery--we could 
expect to hold it flat between 2005 and 2020 at about 7.3 
million barrels per day, and they estimated further that if the 
price of oil were as high as $28 per barrel in 1998 money, that 
you could add about 800,000 barrels to that in 2020.
    Now, if the price of oil were higher still, obviously you 
could do better than that. If the country made the judgement 
that every conceivable place you should look for oil should be 
opened to exploration and production, you could do better 
still. The EIA forecast did not assume that the----
    Chairman Thompson. That is not going to happen, of course, 
but what about a modest opening up of restricted lands?
    Mr. Holdren. Well, if you opened up--I mean, I say in my 
testimony that sort of the middle of the road estimates of what 
you are likely to find in the coastal plain of the Arctic 
National Wildlife Refuge might be comparable to Prudhoe Bay, 
and if you look at the production history of Prudhoe Bay, it 
peaked around 2 million barrels a day, with a long tail at 1 
million barrels a day, so you might suppose if you did that you 
could be getting an extra million barrels a day during the 
decade stretching out from 2010 to 2020 and more.
    That would be worth having. The difficult dilemma that the 
policy makers have to face is whether that addition to domestic 
production is worth the costs and the risks, environmentally, 
against the possibilities of getting considerably larger 
amounts with considerably less effort and less environmental 
risk on some of these high-leverage opportunities for oil 
displacement by alternative technologies.
    Chairman Thompson. Well, that gets to my next question. Mr. 
Cavaney, do you have anything to add to that, thoughts that 
cross your mind?
    Mr. Cavaney. No. I think, in general, what you are going to 
do is you are going to look for the oil that is the most 
inexpensive to lift, because it is a competitive global market. 
New technology, though, has had a dramatic impact in reducing 
those costs and making old fields good.
    So, I think give people the opportunity, and the industry 
has proven it has been very resourceful, and I think you will 
see figures in excess of that.
    Mr. Ebel. Mr. Chairman, could I jump in?
    Chairman Thompson. Yes, sir.
    Mr. Ebel. Two points I'd like to make: One, we have talked 
about the advances of technology and how it has allowed us to 
find oil cheaper and quicker, and that is great. But there is a 
downside to these advances in technology which have not been 
discussed, and that is it also allows us to deplete our fields 
faster, which has a downside impact.
    Second, I think any additional barrel of domestic oil that 
we could add to supply is worthwhile. We just have to be 
careful not to delude ourselves that it is going to reverse our 
increasing dependence on foreign oil. It is not going to 
happen.
    Chairman Thompson. So do you think there is really nothing 
we can do, as a practical matter, to substantially reduce our 
dependence?
    Mr. Ebel. We can slow down our increasing reliance on 
foreign oil. But I do not see a situation arising where this 
new oil coming from ANWR or from some offshore area would allow 
us to reverse our increasing dependence----
    Chairman Thompson. Would you be willing to guess at any 
realistic percentages? If we start doing some things better 
than we have done, and all these things have tradeoffs, you 
talk about ANWR. But you start talking about CAFE standards on 
the other side. Everything has tradeoffs. Can you foresee a 
time, if we started doing some things better, we could get down 
to 40 percent, 30 percent, on any continuing basis?
    Mr. Ebel. I doubt that very much.
    Chairman Thompson. Really?
    Mr. Ebel. I do not think that is a realistic goal at all. 
When we go out to look for oil, it is like throwing a forward 
pass in a football game. Three things can happen, and two of 
them are bad. One is that you can drill a well and you find 
nothing or you drill a well and you find something, but it is 
not producible at today's price and today's technologies. If 
you are lucky, you find something that is.
    So there are more than adequate risks out there in the 
exploration side, and we can talk about the potential of these 
areas which are denied to us now, but there is only one way to 
find out whether that potential is real or not, and that is to 
drill a well. It was not too long ago that the media was hyping 
the potential to be found in the Caspian Sea and central Asia, 
many stories that we have at last found an alternative to the 
Persian Gulf.
    Well, reality has set in and we have not found an 
alternative to the Persian Gulf. We perhaps have found 
something comparable to the North Sea, but, by the year 2010, 
if exploration efforts are successful, if pipelines have been 
built and are operating, we might see a contribution to the 
world oil supply on the order of two to three percent, 
important at the margin, but not----
    Mr. Holdren. Mr. Chairman, could I just augment that for 
one second?
    Chairman Thompson. Yes.
    Mr. Holdren. I think Mr. Ebel is absolutely right in saying 
that there is no prospect that efforts to enhance domestic 
production could reverse our growing dependence on imports, but 
I very strongly believe, and argued in my testimony, that 
efforts to increase the efficiency of oil use and to displace 
it with non-oil alternatives could certainly reduce our 
dependence on foreign imports.
    It is a question of whether we will make the choices to 
move in that direction.
    Chairman Thompson. What do you think about that, Mr. Ebel?
    Mr. Ebel. Well, in my oral remarks, I mentioned about how 
we responded in the past to oil supply crises, to price crises, 
where we trotted out renewed attention to alternatives. We 
tried our hand at a synfuels corporation, but then the market 
adjusted itself, and these new approaches get put back on the 
shelf, to be trotted out at the time of the next crisis.
    Our findings are that alternative fuels, yes, will grow in 
absolute terms, but in relative importance to our total energy 
supply, will be about the same 20 years from now as it is 
today.
    Chairman Thompson. Yes?
    Mr. Holdren. That will depend on choices that we can make. 
If we make different choices, we could have a different 
outcome.
    Chairman Thompson. I will get to you in just a minute, Mr. 
Cavaney. The question always, I guess, is how dramatic would 
the choices have to be and to what extent? We have not made any 
tough choices yet, and according, I believe, to your figures, 
Mr. Holdren, that we are getting 7.5 percent of our energy 
supply from renewables; half of that is hydro, biomass, 
geothermals, solar, wind. You know, everybody wants some cost-
free solution.
    But here we are, after all this time, with these extremely 
low percentages in these areas. Obviously, we can do more. I 
have heard some people say we are spending about as many 
research dollars in these areas as we can effectively utilize. 
Is it really realistic to think that we are going to do that 
much better, as far as renewables are concerned?
    Mr. Holdren. Although some people say this, I do not agree 
at all that we are spending research dollars at the rate we 
could effectively utilize. The PCAST panel that wrote the 1997 
report, which had 21 members, a very large proportion of them 
from the private sector--people experienced in oil, gas, 
nuclear, renewables, efficiency--reached the unanimous 
conclusion that we could be very cost-effectively spending 
twice as much as we are spending today on Federal energy R&D, 
taking into account what the private sector is doing (which is 
very important) and is likely to continue to do.
    We concluded further that, if we did that, the gains would 
be quite substantial in the array of technologies that could be 
brought to the point of commercialization. But there does 
remain the question of incentives. The fact is that for most of 
the period after the early 1980's, the price of oil has been 
low; the price of natural gas has been low.
    It is very hard for renewables or even for coal and nuclear 
power to compete with natural gas when natural gas-fired 
electricity generation can make electricity for three cents a 
kilowatt hour. It is hard to touch it. Natural gas will not 
always be that cheap. We may not always be willing to put the 
amount of carbon dioxide into the atmosphere that that approach 
to electricity generation puts in. But as long as it is that 
cheap, and as long as no policy measures to narrow the gap are 
put in place, based on the public benefits perceived from 
having a wider, more diverse portfolio, you are not going to 
see the penetration of alternatives.
    So I said in my testimony and I will say again, we need the 
R&D to develop a more diverse array of energy technology 
options, both for supply and for increased end-use efficiency. 
We also need incentives that will cause us to deploy them, and 
until we are ready, I believe, to talk about the dreaded T-word 
or its equivalent, that is gasoline taxes, and carbon taxes, we 
won't get the job done. You can reduce income taxes and capital 
gains taxes to compensate for the energy tax revenue, to make 
it revenue-neutral. The economy would probably do better if you 
do that than it would under business as usual, that is, if you 
raise the taxes on bads and decrease them on goods.
    But if we are not willing to talk about measures of that 
sort, we will continue to be vulnerable to an overdependence on 
imported oil and to overreliance on other energy technologies 
that are running big environmental risks.
    Chairman Thompson. Well, listening to you, you could make 
the case that what we really need is much higher prices for a 
long period of time in order for us to do the right thing.
    Mr. Holdren. I would say certainly somewhat higher prices 
for those energy sources that bring big external costs, either 
in terms of the environment or in terms of foreign policy, 
military policy, national security and so on.
    Chairman Thompson. That would certainly include oil; 
wouldn't it?
    Mr. Holdren. I would include oil.
    Chairman Thompson. I mean, does anybody really disagree 
with that, in terms of just objective analysis? I guess you 
would be better at it if you were a political scientist more 
than some of your other specialties, because a lot of it has to 
do with what we do up here, what the next President does and so 
forth.
    But does anybody really think that anything is going to be 
done in terms of renewables or anything else unless we have 
something dramatic happen in the price area?
    Mr. Ebel. Let me respond to that, and I think it goes back 
to the interest that you expressed as the first panel was 
coming to an end. But, as you wanted to know, what happened to 
that Section 232 report? Well, it is sitting in somebody's in-
box in the White House.
    Back in the 1980's, I had the pleasure--well, 
responsibility of preparing a Section 232 petition, which took 
a year for the government to respond to, and the answer was 
yes, our oil imports threaten our national security, but 
present policies suffice. I would not be a bit surprised if 
that is the answer you are going to get when this one comes out 
of the in-box.
    Chairman Thompson. At first blush, that does not look like 
it makes much sense; does it?
    Mr. Ebel. But that is the response, present policies 
suffice.
    Chairman Thompson. Is that the correct response, in your 
opinion?
    Mr. Ebel. Well, it is what we have been talking about. If 
that is not the correct response, what is the correct response? 
If you cannot do anything on the supply side, on the domestic 
supply side, what can you do on the domestic demand side? But 
as long as oil is going to be relatively cheap, it will be hard 
to get the public and the Congress to focus on that issue.
    Chairman Thompson. Mr. Cavaney.
    Mr. Cavaney. Mr. Chairman, as I had mentioned earlier when 
talking about undiscovered reserves and the like, one of the 
things we should not overlook is natural gas. The United States 
has a tremendous abundance, 885 trillion cubic feet.
    Chairman Thompson. What is the problem with that? Why 
aren't we utilizing natural gas more?
    Mr. Cavaney. Several things. Again, a large part of it is 
in areas that are restricted for use; the other is basically 
you need significant investment to go after it, because, as was 
mentioned by Mr. Ebel, is that technology allows you to find 
this and better pinpoint it, but it also allows you to more 
quickly use up those reserves, so you have to keep peddling 
faster and faster.
    So, we need to be able to recognize that the extent to 
which we can integrate natural gas more into the economy, 
particularly in the industrial sector and in the Northeast, in 
areas--in homes or other areas--we will create more demand and 
that will attract more capital, and therefore we will have more 
growth in natural gas.
    Chairman Thompson. Any further observations? Oh, I did have 
one more, Mr. Sieminski--to ask you to elaborate on one more 
point before we quit. You mentioned--I believe--the excess 
capacity that the Saudis had, in comparison with some of the 
other Persian Gulf countries or OPEC countries. I am not sure I 
got the significance of that. Could you go through that again?
    Mr. Sieminski. The estimates of excess capacity, that is, 
the ability of the OPEC countries to raise production 
immediately, range from about 4 million barrels a day up to as 
high as 6 million barrels a day. Most of the forecasters or 
analysts that look at that think that Saudi Arabia alone is 
about half of that capability. So, the Saudis could increase 
production by at least 2 million barrels a day, maybe as much 
as 3 million barrels a day.
    If the world really needs 2 million barrels a day more 
right now, the Saudi share within OPEC is typically about 30 
percent of OPEC's output the Saudies could easily make up their 
portion of a large production increase to meet worldwide demand 
over the next year or two, or whatever.
    The problem for the cartel is going to be that a number of 
countries, Indonesia, Libya, right now Iran, Nigeria, maybe 
even Venezuela, do not have the capability to go up as much as 
Saudi Arabia, Kuwait, and the United Arab Emirates. So, that 
creates a political problem within the cartel in terms of 
getting an agreement to the production increase.
    Chairman Thompson. So the Saudis are going to be more 
likely to want to loosen than some of the other countries?
    Mr. Sieminski. Exactly, and the others are going to hold 
back because----
    Chairman Thompson. Unless the others are persuaded that 
their long-term, overall global interests----
    Mr. Sieminski. Right. Senator, I would like to point out 
one last thing, back to this swap idea and the SPR, so that I 
do not get into trouble with my friends in the producing 
industry here in the United States. Of the four times that the 
SPR could have been used in a situation that was out of the 
normal range over the last 9 years, two of those would have 
been times when oil would have been added to the SPR.
    I would also point out that in a swap, oil in the SPR 
ultimately would be greater; that is, oil would be added to the 
SPR, whether it was being lent out in a time of shortage that 
you have now or borrowed in at a time of excess supply, like we 
had in 1993 and 1998.
    The way the swap agreement would work, taking advantage of 
the futures market, is that Strategic Petroleum Reserve would 
get more oil back in both cases than they had----
    Chairman Thompson. Let me see if I understand----
    Mr. Sieminski. So, actually, the taxpayer could get more 
oil and not have to pay for it.
    Chairman Thompson. Let me see if I understand this. That is 
premised on the notion that we would lock in a price, that we 
would trade expensive oil for cheap oil and we can wind up with 
more oil at the same price.
    Mr. Sieminski. Exactly.
    Chairman Thompson. What if we are wrong and everyone is 
wrong, and prices, instead of dropping, increase? We would get 
ours back at the lower price, but we would be doing it at a 
time that we would be taking that much money out of the market. 
Wouldn't that increase even further to the higher prices that 
would be occurring at that time and exacerbating the problem?
    Mr. Sieminski. If you had a second problem at the time that 
the oil was supposed to be returned a year or two later, if the 
markets were still in serious or significant backwardation, you 
could just simply implement the program again, lend more oil 
out of the SPR at that time, defer the return.
    In fact, Senator Akaka from Hawaii had mentioned the 
royalty on-line program. Right now, we are actually adding oil 
into the Strategic Petroleum Reserve, and frankly, I think that 
that is a good program, but bad timing. I think it ought to be 
continued, but if I were running the SPR, what I would do is 
make a deal with those producers to let them keep that and 
return that oil to me a year from now and I would get more 
barrels and we would have a little bit more supply.
    Chairman Thompson. You would just keep doing it until the 
price dropped?
    Mr. Sieminski. Yes, sir; I would. Now, the risk would 
actually be borne by the futures market. Let the speculators or 
OPEC pay for this. Let's not let the taxpayer pay for it.
    Chairman Thompson. Well, I understand that. I am more 
interested in what it does to the world market, what it would 
do to the world market. I don't know. Maybe it is not enough to 
make that much difference.
    Mr. Sieminski. This trigger mechanism is one of the things 
that the Department of Energy could do in trying to implement 
this. It is a touchy situation. I mean, there are lots of good 
reasons for not using the SPR, saving it for that ``super 
crisis.''
    Chairman Thompson. For what it was intended for.
    Mr. Sieminski. For what it was--yes.
    Chairman Thompson. I think that is a happy note to end on.
    Mr. Sieminski. I was actually thinking about this, Senator, 
the question of what is that huge horrendous problem that we 
are going to have. When the SPR was originally set up, it was 
part of the International Energy Agency agreements to share oil 
around and the idea was that you needed a countervailing force 
to OPEC, and I am not sure that we should not consider at least 
using it from time to time, just to let producers or a cartel 
know that they cannot get away with everything.
    Chairman Thompson. OPEC could also be a countervailing 
force to our decisions to use the----
    Mr. Sieminski. They could. The SPR is capable of doing 4 
million barrels a day for 90 days. Now, I do not think anybody 
would recommend that that is what we should do if there is a 
gasoline price problem in May or June, but you could actually 
publish right now that if the backwardation in the market--and 
the other word that is used in the futures market is contango. 
That is when prices are real low, like $10 in January 1999 and 
but the futures market is rising, maybe up to $15 a couple of 
years out.
    When backwardation or contango is very steep, the SPR would 
just automatically release a couple hundred thousand barrels a 
day or bring in a couple hundred thousand barrels a day if it 
is in contango, and let the market decide. The DOE could 
publish a schedule, that at a low level of backwardation, that 
there would be this much available, if anybody wanted to take 
advantage of it. As backwardation increases; that is, as that 
near-term----
    Chairman Thompson. Everybody would look at that and make 
decisions based on what they knew was going to happen at a 
particular time. I think we need to get a whole lot smarter 
before we start doing that kind of stuff. But you have the last 
word. Mr Flynn does, maybe.
    Mr. Flynn. Thank you, Senator. I thought I would jump in on 
the discussion here. It is a follow-up to what Mr. Ebel was 
saying before. I think what is very important--that what we are 
doing here today is bringing a focus on the other alternative 
uses of energy.
    At our authority in New York State, we have been talking 
about oil heat research, and we believe we are the only State 
in the Nation that does this type of research. As a matter of 
fact, at our authority, we do over $1 million a year in oil 
heat research. But how we do it is we do collaborative efforts, 
not only with the petroleum industry, but with the gas industry 
and the renewables industry.
    We feel that this type of effort, the collaborative effort, 
prepares us for the future. The only way that we are going to 
be taking the emphasis off of the oil industry is leaders such 
as yourself who are going to have to trumpet the cause to the 
American people, so that they stop focusing just on oil and 
that there are other fuel uses that can be used to help us in 
these dire times.
    Chairman Thompson. Well, some of these things that you are 
doing at the State level can be a good example for us.
    Thank you very much, gentlemen. This has been extremely 
helpful to us. Thank you for being here with us. The record 
will remain open for 10 days following the close of the 
hearing. We are adjourned.
    [Whereupon, at 1:25 p.m., the Committee was adjourned.]
                            A P P E N D I X

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