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33–736 PDF 2007

S. HRG. 109–950

OIL DEPENDENCE AND ECONOMIC RISK

HEARING

BEFORE THE

COMMITTEE ON FOREIGN RELATIONS

UNITED STATES SENATE

ONE HUNDRED NINTH CONGRESS

SECOND SESSION

JUNE 7, 2006

Printed for the use of the Committee on Foreign Relations

(

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

COMMITTEE ON FOREIGN RELATIONS

RICHARD G. LUGAR, Indiana, Chairman

CHUCK HAGEL, Nebraska

LINCOLN CHAFEE, Rhode Island

GEORGE ALLEN, Virginia

NORM COLEMAN, Minnesota

GEORGE V. VOINOVICH, Ohio

LAMAR ALEXANDER, Tennessee

JOHN E. SUNUNU, New Hampshire

LISA MURKOWSKI, Alaska

MEL MARTINEZ, Florida

JOSEPH R. BIDEN, JR., Delaware

PAUL S. SARBANES, Maryland

CHRISTOPHER J. DODD, Connecticut

JOHN F. KERRY, Massachusetts

RUSSELL D. FEINGOLD, Wisconsin

BARBARA BOXER, California

BILL NELSON, Florida

BARACK OBAMA, Illinois

KENNETH A. MYERS, Jr., Staff Director

ANTONY J. BLINKEN, Democratic Staff Director

(II)

CONTENTS

Page

Biden, Hon. Joseph R., Jr., U.S. Senator from Delaware, opening statement ... 9

Greenspan, Hon. Alan C., President, Greenspan Associates LLC, Washington,

DC .......................................................................................................................... 3

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

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

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Podesta, John, president of the Center for American Progress, prepared statement ...................................................................................................................... 39

(III)

(1)

OIL DEPENDENCE AND ECONOMIC RISK

WEDNESDAY, JUNE 7, 2006

U.S. SENATE, COMMITTEE ON FOREIGN RELATIONS, Washington, DC.

The committee met, pursuant to notice, at 9:00 a.m., in room

SH–216, Hart Senate Office Building, Hon. Richard G. Lugar

(chairman of the committee) presiding.

Present: Senators Lugar, Chafee, Coleman, Voinovich, Alexander,

Sununu, Murkowski, Martinez, Biden, Nelson.

OPENING STATEMENT OF HON. RICHARD G. LUGAR, U.S.

SENATOR FROM INDIANA

The CHAIRMAN. This hearing of the Senate Foreign Relations

Committee is called to order. Let me mention at the outset that the

Chair is aware of the vigorous schedules that Senators have, and

I want to simply indicate that, for the record, we are likely to have

a rollcall vote at about 10 a.m., and at that point the Chair will

declare a recess of about 10 minutes in which the Senators may

vote, so we’ll have that interruption.

Likewise, there will be a joint session of the Congress to hear the

distinguished President of Latvia, and some Members may be joining that situation. The hearing, however, will continue here

throughout that period of time because this is a serious endeavor

and we are very grateful to have our distinguished witness with us

this morning. So I, as the Chair, will try to accommodate the Members, but at the outset we know that we have these scheduling situations.

Today the committee meets to continue our examination of the

geopolitical consequences of energy imbalances and United States

dependence on energy imports. In previous hearings, we have focused on quantifying the costs of U.S. energy dependence and examining options for improving our energy security. We also have

explored in detail how energy is shaping our relationships with

other nations, including India, China, and the Persian Gulf states.

Later this month, we will have hearings that look at energy in the

context of our relationships with Latin America and with Russia.

Today, with the help of our esteemed witness, former Federal Reserve Chairman Alan Greenspan, we will have a unique opportunity to examine economic effects of United States energy dependence. We are delighted that Chairman Greenspan has joined us

today. He has given extraordinary service to our country over many

years, and no one speaks with greater authority on the United

States economy. His presence here, for his first Congressional testiVerDate 11-MAY-2000 14:39 Aug 03, 2007 Jkt 000000 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 H:\DOCS\OIL.TXT mich PsN: mich
2

mony since leaving the Federal Reserve, is a testament to the economic importance he ascribes to solving our energy dilemma.

The Foreign Relations Committee has devoted intense scrutiny to

energy issues because we believe that America’s national security

and our economic well-being depend on reducing our dependence on

foreign oil and establishing more predictable, transparent, and cooperative relationships with both producer and consumer nations.

To this end, I have introduced the Energy Diplomacy and Security

Act which would strengthen United States diplomatic capabilities

related to energy and encourage greater international cooperation

on energy security.

As Secretary Rice stated before this committee, our diplomatic

activities around the world are being—and she used the term—

‘‘warped’’ by petro-politics. Important foreign policy goals—from accelerating progress in the developing world and expanding trade, to

preventing weapons proliferation and promoting democratic reform—are being undermined by international energy imbalances

that have weakened our foreign policy leverage, while strengthening the hand of oil-rich authoritarian governments. In a speech

in March at the Brookings Institution, I attempted to outline these

dynamics in greater detail, and I ask those remarks be entered in

the record.

[EDITOR’S NOTE.—The aforementinoed speech appears at the end

of this hearing in the Additional Material Submitted for the Record

section.]

As recently as 4 years ago, spare production capacity exceeded

world oil consumption by about 10 percent. As world demand for

oil has rapidly increased in the last few years, spare capacity has

declined to less than 2 percent. Any major disruption of oil creates

scarcity that will drive prices up. Our vulnerability was made clear

to Americans after the devastation of Hurricanes Katrina and Rita.

But even as supplies rebounded from those disasters, we experienced a continued upward trend in oil prices. Events such as the

civil unrest in Nigeria, uncertainty over Iran’s nuclear program,

and worries over Venezuelan supply have kept the price of oil

above $70 a barrel.

Our capacity to deal with these energy vulnerabilities in a foreign policy context is shaped in part by the ability of our own economy to adjust to changing energy markets. Eventually, because of

scarcity, terrorist threats, market shocks, and foreign manipulation, the high price of oil will lead to enormous investment in, and

political support for, alternatives. The problem is that by the time

sufficient motivation comes to the markets, it may be too late to

prevent the severe economic and security consequences of our oil

dependence.

Today, we will have the benefit of Chairman Greenspan’s insights into the risks of oil dependency to our economic prosperity.

We are all interested in a clearer picture of how current energy

prices are affecting our economy, how our economy may react to

certain types of supply disruptions, and what steps we should take

as a Nation to reduce the economic risks of our energy vulnerability.

We welcome again Chairman Greenspan to the Foreign Relations

Committee, and thank him for lending his expertise to our ongoing

3

inquiry. At the time that the distinguished ranking member comes

I’ll recognize him, of course, for his opening comment and statements, but for the moment we want to make the best use of our

time and we’d like to proceed directly to our distinguished witness.

We’re delighted to have you and we would ask you to proceed.

STATEMENT OF HON. ALAN C. GREENSPAN, PRESIDENT,

GREENSPAN ASSOCIATES LLC, WASHINGTON, DC

Dr. GREENSPAN. Well, thank you very much Mr. Chairman, Senators. This morning I shall try to detail how the balance of world

oil supply and demand has become so precarious that even small

acts of sabotage or local insurrection have a significant impact on

prices. American business, to date, has largely succeeded in finding

productivity improvements that have contained energy costs. American households, however, are struggling with rising gasoline

prices.

Even before the devastating hurricanes of last summer, world oil

markets had been subject to a degree of strain not experienced for

a generation. Oil prices had been persistently edging higher since

2002 as increases in global oil consumption progressively absorbed

the buffer of several million barrels a day in excess capacity that

stood between production and demand. Today, world oil production

stands at about 85 million barrels a day, and little excess capacity

remains. Just how much excess capacity and of what quality oil, is

a matter of debate. But no matter what the precise answer, the

buffer between supply and demand is much too small to absorb

shutdowns of even a small part of the world’s production. Moreover, growing threats of violence to oilfields, pipelines, storage facilities, and refineries, especially in the Middle East, have increased the private demand to hold oil inventories worldwide. Oil

users judge they need to be prepared for the possibility that at

some point a raid will succeed, with a devastating impact on supply.

For most of the history of oil, its producers and consumers determined its price. Only those who could physically store large quantities of oil had the ability to trade. But important advances in

finance have opened the market to a much larger number of participants. There has been a major upsurge in over-the-counter trading of oil futures and other commodity derivatives. Thus, when in

the last couple of years it became apparent that the world’s oil industry was not investing enough to expand crude-oil production capacity quickly enough to meet the rising demand, increasing numbers of hedge funds and other institutional investors began bidding

for oil. They accumulated it in substantial net long positions in

crude oil futures, largely in the over-the-counter market. These net

long futures contracts, in effect, constituted a bet that oil prices

would rise. The sellers of those contracts to investors, when all of

the offsetting claims are considered, are of necessity, the present

owners of the billions of barrels of private inventories of oil held

throughout the world—namely, the producers and consumers.

Even though inventories of oil have risen significantly in recent

years, persistent upward price movements have made it apparent

that the rise in investors’ ownership claims to the world’s oil inventories has likely exceeded the inventory increase. This implies a reVerDate 11-MAY-2000 14:39 Aug 03, 2007 Jkt 000000 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 H:\DOCS\OIL.TXT mich PsN: mich
4

duction in the unencumbered inventory holdings of producers and

consumers. In other words, some part of the oil in the world’s storage tanks and pipelines is spoken for by investors. The extent of

the surge in participation by financial institutions in claims on real

barrels of oil is reflected in the near tripling of the notional value

of commodity derivatives (excluding precious metals) during the

four quarters of 2005 reported by U.S. commercial banks. Most of

those contracts are for oil. The accumulation of net long positions

in oil on the New York Mercantile Exchange by noncommercial

traders, which is to say by investors, has exhibited a similar pattern.

The new participants, investors, and speculators in the world’s 2

trillion-a-year oil market are hastening the adjustment process

that has become so urgent with the virtual elimination of the world

supply buffer. With the demand from the investment community,

oil prices have moved up sooner than they would have otherwise.

In addition, there has been a large increase in oil inventories. In

response to higher prices, producers have increased production dramatically and some consumption has been scaled back. Even

though crude oil productive capacity is still inadequate, it too has

risen significantly over the past 2 years in response to price.

Hypothetically, if we still had the 10 million barrels a day of

spare capacity that existed two decades ago, neither surges in demand nor temporary shutdowns of output from violence, hurricanes, or unscheduled maintenance would be having much, if any,

impact on price. Returning to such a level of spare capacity appears

wholly out of reach for the foreseeable future, however. This is not

because there is any shortage of oil in the ground. The problem is

that aside from Saudi-Aramco, few, if any, national oil companies

which own most of the world’s proved oil reserves are investing

enough of their surging cash flow to convert the reserves into crude

oil productive capacity. Only Saudi-Aramco appears sufficiently

concerned, at least publicly, that high oil prices will reduce the

long-term demand for oil, which could significantly diminish the

value of Saudi Arabia’s—or indeed, any country’s—oil reserves.

Although outlays on productive capacity are rising, the significant proportion of oil revenues held as financial assets suggests

that many governments perceive that the benefits of investing in

additional capacity to meet rising world oil demand are limited.

Moreover, much oil revenue has been diverted to meet the perceived high-priority needs of rapidly growing populations. Unless

those policies, political institutions, and attitudes change, it is difficult to envision a rate of reinvestment by these economies adequate to meet rising world oil demand. Some members of the Organization of Petroleum Exporting Countries (OPEC) have recently

announced expansion plans. But how firm such plans are, is difficult to judge. They and other nations have rebuffed offers by

international oil companies to help tap their reserves. Opportunities to expand oil production elsewhere are limited to a few regions,

notably the former Soviet Union.

Besides feared shortfalls in crude oil capacity, the adequacy of

world refining capacity has become worrisome as well. Over the

past decade, crude oil production has risen faster than refining capacity. A continuation of this trend would soon make lack of refinVerDate 11-MAY-2000 14:39 Aug 03, 2007 Jkt 000000 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 H:\DOCS\OIL.TXT mich PsN: mich
5

ing capacity the binding constraint on growth in oil use. This may

already be happening in certain grades of oil, given the growing

mismatch between the heavier and more sour content of world

crude oil production and the rising world demand for lighter,

sweeter petroleum products.

There is thus a special need to add adequate coking and

desulphurization capacity to convert the average gravity and sulphur content of much of the world’s crude oil to the lighter and

sweeter needs of product markets, which are increasingly dominated by transportation fuels that must meet ever more stringent

environmental requirements. Yet, the expansion and modernization

of world refineries are lagging. For example, no new refinery has

been built in the United States since 1976. The consequence of lagging modernization is reflected in a significant widening of the

price spread between the higher-priced light sweet crudes such as

Brent, which are easier to refine, and the heavier crudes such as

Maya, which are not.

To be sure, refining capacity does continue to expand, albeit too

gradually, and oil exploration and development is continuing, even

in industrial countries. Conversion of the vast Athabasca oil sands

reserves in Alberta to productive capacity, while slow, has made

this unconventional source of oil highly competitive at current market prices. However, despite improved technology and high prices,

additions to proved reserves in the developed world have not kept

pace with production; so those reserves are being depleted.

The history of world petroleum is one of a rapidly growing industry in which producers have sought to provide consumers with stable prices to foster the growth of demand. In the first decade of the

20th century, pricing power was firmly in the hands of Americans.

Even after the breakup of the Standard Oil monopoly in 1911, pricing power remained with the United States—first with the U.S. oil

companies and later with the Texas Railroad Commission, which

would raise limits on output to suppress price spikes and cut output to prevent sharp price declines.

Indeed, as late as the 1950s, crude oil production in the United

States (more than 40 percent of which was in Texas) still accounted

for more than half of the world total. In 1951, excess Texas crude

was poured into the market to contain the impact on oil prices of

the nationalization of Iranian oil. Excess American oil was again

released to the market to counter the price pressures induced by

the Suez crisis of 1956 and the Arab-Israeli War of 1967.

American oil’s historical role ended in 1971, when rising world

demand finally exceeded the excess crude oil capacity of the United

States. At that point, the marginal pricing of oil abruptly shifted—

at first to a few large Middle East producers and later to market

forces broader than they, or anyone, can contain.

To capitalize on their newly acquired pricing power in the early

1970s, many producing nations, especially in the Middle East, nationalized their oil companies. The full magnitude of the pricing

power of the nationalized companies became evident in the aftermath of the oil embargo of 1973. During that period, posted crude

oil prices at Ras Tanura, Saudi Arabia, rose to more than $11 per

barrel, far above the $1.80 per barrel that had been unchanged

from 1961 to 1970. The further surge in oil prices that accompanied

6

the Iranian Revolution in 1979 eventually drove up prices to $39

per barrel by February 1981. That translates to $76 per barrel in

today’s prices.

The higher prices of the 1970s abruptly ended the extraordinary

growth of U.S. and world consumption of oil and the increased intensity of its use which were hallmarks of the decades following

World War II. Since the more than tenfold increase in crude oil

prices between 1972 and 1981, world oil consumption per dollar of

real GDP equivalent of global gross domestic product (GDP) has declined by approximately one-third.

In the United States, between 1945 and 1973, consumption of petroleum products rose at a startling average annual rate of 4.5 percent, well in excess of growth of our real GDP. However, between

1973 and 2006, U.S. oil consumption grew, on average, at only a

half a percent per year, far short of the rise in real GDP. In consequence, the ratio of U.S. oil consumption to GDP fell by half.

Much of the decline in the ratio of oil use to real GDP in the

United States has resulted from growth in the proportion of GDP

composed of services, high-tech goods, and other less oil-intensive

industries. The remainder of the decline is due to improved energy

conservation: greater home insulation, better gasoline mileage,

more efficient machinery, and streamlined production processes.

These ongoing trends seem to have intensified of late with the

sharp, recent increases in oil prices.

To date, it is difficult to find serious erosion in world economic

activity as a consequence of sharply higher oil prices. Indeed, we

have just experienced one of the strongest global economic expansions since the end of World War II. The United States, especially,

has been able to absorb the huge implicit tax of rising oil prices so

far. However, recent data indicate we may finally be experiencing

some impact.

Clearly, if the current almost nonexistent supply buffer were significantly increased through a step-up in supply or a stepdown in

consumption, oil prices would fall, perhaps sharply. This would

likely occur even if there were no decrease in the threat to oil facilities from attacks or hurricanes. A large enough buffer could absorb

such contingencies with modest impact on price.

But for good reason, holders of claims to the existing private inventories of oil apparently do not foresee a likelihood of change sufficient to alter the current outlook. This does not mean that oil

prices will necessarily move higher, however. All of the concerns

about future contingencies are already discounted in today’s spot

price. It will require a change in the outlook one way or the other

to move crude oil prices. History tells us that will happen—often.

The U.S. economy has been able to absorb the huge impact of rising oil prices with little consequence to date because it has become

far more flexible over the past three decades owing to deregulation

and globalization. Growing protectionism would undermine that

flexibility and make our Nation increasingly vulnerable to the vagaries of the oil market.

Current oil prices over time should lower to some extent our worrisome dependence on petroleum. Still higher oil prices will inevitably lead to more vehicle transportation to hybrids, and despite

the inconvenience, plug-in hybrids. Corn ethanol, though valuable,

7

can play only a limited role, because its ability to displace gasoline

is modest at best. But cellulosic ethanol, should it fulfill its promise, would help to wean us of our petroleum dependence, as could

clean coal and nuclear power. With those developments, oil in the

years ahead will remain an important element of our energy future, but it need no longer be the dominant player.

Thank you very much, Mr. Chairman, I look forward to your

questions.

[The prepared statement of Dr. Greenspan follows:]

PREPARED STATEMENT OF HON. ALAN C. GREENSPAN, PRESIDENT, GREENSPAN

ASSOCIATES LLC, WASHINGTON, DC

Mr. Chairman, Senator Biden, and members of the committee. This morning I

shall try to detail how the balance of world oil supply and demand has become so

precarious that even small acts of sabotage or local insurrection have a significant

impact on oil prices. American business, to date, has largely succeeded in finding

productivity improvements that have contained energy costs. American households,

however, are struggling with rising gasoline prices.

Even before the devastating hurricanes of last summer, world oil markets had

been subject to a degree of strain not experienced for a generation. Oil prices had

been persistently edging higher since 2002 as increases in global oil consumption

progressively absorbed the buffer of several million barrels a day in excess capacity

that stood between production and demand. Today world oil production stands at

about 85 million barrels a day, and little excess capacity remains. Just how much

excess capacity, and of what quality oil, is a matter of debate. But no matter what

the precise answer, the buffer between supply and demand is much too small to absorb shutdowns of even a small part of the world’s production. Moreover, growing

threats of violence to oilfields, pipelines, storage facilities, and refineries, especially

in the Middle East, have increased the private demand to hold oil inventories worldwide. Oil users judge they need to be prepared for the possibility that at some point

a raid will succeed with a devastating impact on supply.

For most of the history of oil, its producers and consumers determined its price.

Only those who could physically store large quantities of oil had the ability to trade.

But important advances in finance have opened the market to a much larger number of participants. There has been a major upsurge in over-the-counter trading of

oil futures and other commodity derivatives. Thus, when in the last couple of years

it became apparent that the world’s oil industry was not investing enough to expand

crude oil production capacity quickly enough to meet rising demand, increasing

numbers of hedge funds and other institutional investors began bidding for oil. They

accumulated it in substantial net long positions in crude oil futures, largely in the

over-the-counter market. These net long futures contracts, in effect, constituted a

bet that oil prices would rise. The sellers of those contracts to investors, when all

of the offsetting claims are considered, are of necessity the present owners of the

billions of barrels of private inventories of oil held throughout the world—namely,

the producers and consumers.

Even though inventories of oil have risen significantly in recent years, persistent

upward price movements have made it apparent that the rise in investors’ ownership claims to the world’s oil inventories has likely exceeded the inventory increase.

This implies a reduction in the unencumbered inventory holdings of producers and

consumers. In other words, some part of the oil in the world’s storage tanks and

pipelines is spoken for by investors. The extent of the surge in participation by financial institutions in claims on real barrels of oil is reflected in the near tripling

of the notional value of commodity derivatives (excluding precious metals) during

the four quarters of 2005 reported by U.S. commercial banks. Most of those contracts are for oil. The accumulation of net long positions in oil on the New York

Mercantile Exchange by noncommercial traders, which is to say by investors, has

exhibited a similar pattern.

The new participants, investors and speculators, to the world’s $2 trillion-a-year

oil market are hastening the adjustment process that has become so urgent with

the virtual elimination of the world supply buffer. With the demand from the investment community, oil prices have moved up sooner than they would have otherwise.

In addition, there has been a large increase in oil inventories. In response to higher

prices, producers have increased production dramatically and some consumption has

been scaled back. Even though crude oil productive capacity is still inadequate, it

too has risen significantly over the past 2 years in response to price.

8

Hypothetically, if we still had the 10 million barrels a day of spare capacity that

existed two decades ago, neither surges in demand nor temporary shutdowns of output from violence, hurricanes, or unscheduled maintenance would be having much,

if any, impact on price. Returning to such a level of spare capacity appears wholly

out of reach for the foreseeable future, however. This is not because there is any

shortage of oil in the ground. The problem is that aside from Saudi-Aramco, few,

if any, national oil companies which own most of the world’s proved oil reserves are

investing enough of their surging cash flow to convert the reserves into crude oil

productive capacity. Only Saudi-Aramco appears sufficiently concerned, at least publicly, that high oil prices will reduce the long-term demand for oil, which could significantly diminish the value of Saudi Arabia’s—or indeed, any country’s—oil reserves. Although outlays on productive capacity are rising, the significant proportion of

oil revenues held as financial assets suggests that many governments perceive that

the benefits of investing in additional capacity to meet rising world oil demand are

limited. Moreover, much oil revenue has been diverted to meet the perceived highpriority needs of rapidly growing populations. Unless those policies, political institutions, and attitudes change, it is difficult to envision a rate of reinvestment by these

economies adequate to meet rising world oil demand. Some members of the Organization of Petroleum Exporting Countries (OPEC) have recently announced expansion plans. But how firm such plans are is difficult to judge. They and other nations

have rebuffed offers by international oil companies to help tap their reserves. Opportunities to expand oil production elsewhere are limited to a few regions, notably

the former Soviet Union.

Besides feared shortfalls in crude oil capacity, the adequacy of world refining capacity has become worrisome as well. Over the past decade, crude oil production has

risen faster than refining capacity. A continuation of this trend would soon make

lack of refining capacity the binding constraint on growth in oil use. This may already be happening in certain grades of oil, given the growing mismatch between

the heavier and more sour content of world crude oil production and the rising

world demand for lighter, sweeter petroleum products.

There is thus a special need to add adequate coking and desulphurization capacity

to convert the average gravity and sulphur content of much of the world’s crude oil

to the lighter and sweeter needs of product markets, which are increasingly dominated by transportation fuels that must meet ever more stringent environmental requirements. Yet the expansion and modernization of world refineries are lagging.

For example, no new refinery has been built in the United States since 1976. The

consequence of lagging modernization is reflected in a significant widening of the

price spread between the higher-priced light sweet crudes such as Brent, which are

easier to refine, and the heavier crudes such as Maya, which are not.

To be sure, refining capacity does continue to expand, albeit too gradually, and

oil exploration and development is continuing, even in industrial countries. Conversion of the vast Athabasca oil sands reserves in Alberta to productive capacity, while

slow, has made this unconventional source of oil highly competitive at current market prices. However, despite improved technology and high prices, additions to

proved reserves in the developed world have not kept pace with production; so those

reserves are being depleted.

The history of world petroleum is one of a rapidly growing industry in which producers have sought to provide consumers with stable prices to foster the growth of

demand. In the first decade of the 20th century, pricing power was firmly in the

hands of Americans. Even after the breakup of the Standard Oil monopoly in 1911,

pricing power remained with the United States—first with the U.S. oil companies

and later with the Texas Railroad Commission, which would raise limits on output

to suppress price spikes and cut output to prevent sharp price declines.

Indeed, as late as the 1950s, crude oil production in the United States (more than

40 percent of which was in Texas) still accounted for more than half of the world

total. In 1951, excess Texas crude was poured into the market to contain the impact

on oil prices of the nationalization of Iranian oil. Excess American oil was again released to the market to counter the price pressures induced by the Suez crisis of

1956 and the Arab-Israeli War of 1967.

American oil’s historical role ended in 1971, when rising world demand finally exceeded the excess crude oil capacity of the United States. At that point, the marginal pricing of oil abruptly shifted—at first to a few large Middle East producers

and later to market forces broader than they, or anyone, can contain.

To capitalize on their newly acquired pricing power in the early 1970s, many producing nations, especially in the Middle East, nationalized their oil companies. The

full magnitude of the pricing power of the nationalized companies became evident

in the aftermath of the oil embargo of 1973. During that period, posted crude oil

9

prices at Ras Tanura, Saudi Arabia, rose to more than $11 per barrel, far above the

$1.80 per barrel that had been unchanged from 1961 to 1970. The further surge in

oil prices that accompanied the Iranian Revolution in 1979 eventually drove up

prices to $39 per barrel by February 1981. That translates to $76 per barrel in today’s prices.

The higher prices of the 1970s abruptly ended the extraordinary growth of U.S.

and world consumption of oil and the increased intensity of its use which were hallmarks of the decades following World War II. Since the more than tenfold increase

in crude oil prices between 1972 and 1981, world oil consumption per real dollar

equivalent of global gross domestic product (GDP) has declined by approximately

one-third.

In the United States, between 1945 and 1973, consumption of petroleum products

rose at a startling average annual rate of 41⁄2 percent, well in excess of growth of

our real GDP.

However, between 1973 and 2006, U.S. oil consumption grew, on average, at only 1⁄2 percent per year, far short of the rise in real GDP. In consequence, the ratio of

U.S. oil consumption to GDP fell by half.

Much of the decline in the ratio of oil use to real GDP in the United States has

resulted from growth in the proportion of GDP composed of services, high-tech

goods, and other less oil-intensive industries. The remainder of the decline is due

to improved energy conservation: greater home insulation, better gasoline mileage,

more efficient machinery, and streamlined production processes. These ongoing

trends seem to have intensified of late with the sharp, recent increases in oil prices.

To date, it is difficult to find serious erosion in world economic activity as a consequence of sharply higher oil prices. Indeed, we have just experienced one of the

strongest global economic expansions since the end of World War II. The United

States, especially, has been able to absorb the huge implicit tax of rising oil prices

so far. However, recent data indicate we may finally be experiencing some impact.

Clearly, if the current almost nonexistent supply buffer were significantly increased through a step-up in supply or a stepdown in consumption, oil prices would

fall, perhaps sharply. This would likely occur even if there were no decrease in the

threat to oil facilities from attacks or hurricanes. A large enough buffer could absorb

such contingencies with modest impact on price.

But for good reason, holders of claims to the existing private inventories of oil apparently do not foresee a likelihood of change sufficient to alter the current outlook.

This does not mean that oil prices will necessarily move higher, however. All of the

concerns about future contingencies are already discounted in today’s spot price. It

will require a change in the outlook one way or the other to move crude oil prices.

History tells us that will happen—often.

The U.S. economy has been able to absorb the huge impact of rising oil prices

with little consequence to date because it has become far more flexible over the past

three decades owing to deregulation and globalization. Growing protectionism would

undermine that flexibility and make our Nation increasingly vulnerable to the vagaries of the oil market.

Current oil prices over time should lower to some extent our worrisome dependence on petroleum. Still higher oil prices will inevitably move vehicle transportation

to hybrids, and despite the inconvenience, plug-in hybrids. Corn ethanol, though valuable, can play only a limited role, because its ability to displace gasoline is modest

at best. But cellulosic ethanol, should it fulfill its promise, would help to wean us

of our petroleum dependence, as could clean coal and nuclear power. With those developments, oil in the years ahead will remain an important element of our energy

future, but it need no longer be the dominant player.

The CHAIRMAN. Thank you very much, Chairman. I’d like to recognize now the distinguished ranking member of our committee,

Senator Biden, for his opening statement.

OPENING STATEMENT OF HON. JOSEPH R. BIDEN, JR., U.S.

SENATOR FROM DELAWARE

Senator BIDEN. Dr. Greenspan, thank you very much for being

here. Today’s headlines obviously make it clear just how important

this hearing is. On the one hand, we have concern about inflation,

led by the petroleum-based energy costs that has increased 61 percent at an annual rate in the first quarter of this year. And on the

other hand, we have our financial markets roiled by the worry that

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the Federal Reserve’s prescription—continuing a course of 15

straight rate increases—could put the brakes on an economy that

is already slowing down some.

We could not have clearer evidence, in my view, of our country’s

vulnerability to oil prices. I am pleased to be working with my colleague, the chairman of the committee, on a series of hearings relating to the cost of our dependence on imported oil, and joining

with him and others in a search for alternatives.

But today, it’s a privilege to hear you. You’ve guided this Nation’s monetary policy for almost two decades, and through a wide

variety of domestic and international challenges, and through profound changes in our economy. In my view, no one in the world

who spoke on economic affairs was more listened to than you were,

Mr. Chairman. Not always understood, but listened to. It’s a little

daunting to have you before this committee, someone of your stature. You yourself once said, ‘‘If I turn out to be particularly clear,

you probably misunderstood what I said.’’ So your pronouncements,

although they seem clear to me today, then as the Chairman has

said, they can still move markets. And we appreciate your candor

and your clarity and some guidance for us in the challenges we

face.

The last time you appeared before this committee, Mr. Chairman, you were facing—we were facing—the Pesos crisis, the first

wave of international financial crises in the late 1990s. The topic

of today’s hearing presents threats of a similar magnitude to our

economy, in our view, and to our security. Today we’re concerned

about fundamentals, about the fuels that make our economy run,

about the threats to our economic security, because we do not control—as you’ve pointed out very starkly, by going through the historical analysis—we do not control access to those fuels like we did

in the 1950s and 1960s. And we’re looking for ways that we can

move to a more secure source in the near future.

And it seems to me our failure to set a national energy policy

and reduce our consumption of oil has handcuffed our foreign policy

and weakened us economically. Global oil consumption—especially

with the extremely rapid modernization of countries like China and

India—is growing faster than the discovery and development of

new supplies. And supply has never been so tight, as you point out,

relative to demand. We now live in a world that consumes 85 million barrels every day. That’s an enormous amount, and meanwhile

the world’s spare production capacity has shrunk to 2 percent of

demand. And that means the slightest thing—a terrorist attack in

Saudi Arabia, talk tough on Iran, violence in Nicaragua, even a bad

storm in the Gulf—can cause oil markets to panic, for reasons

you’ve stated in terms of it being controlled by private investors as

well.

Here in the Foreign Relations Committee, we deal every day in

foreign policy implications of our dependence on imported fossil

fuels. Most obviously, there are complex relationships with what

Michael Mandelbaum calls, and others have called, the ‘‘Axis of

Oil’’—the oil-rich regimes around the world.

This dependence has a pernicious effect, in my view, on our foreign policy. It literally helps us fuel terrorism—the very terrorism

we’re fighting—because some of the dollars we spend on crude

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wind up in the pockets of the radicals that we are worried about.

It limits our options and limits our leverage in dealing with national security threats, because oil-rich countries can stand up to

us and oil-dependent countries are afraid to stand with us.

And it undercuts our hopes, in my view, of advancing democracy

and freedom because repressive regimes, swimming in a sea of

high-priced oil, can resist pressures to reform as we see right now

in Iran.

To cite just one example, Iran’s most recent threats to disrupt oil

exports—as a direct response to our attempts to deal with their nuclear ambitions—was immediately translated into an increase in oil

prices, a jump to $73 a barrel. Not just economic forces, but political conflicts, drive the markets.

I will not repeat what the Chairman has often mentioned about

the ability of nation’s to essentially indicate, or impact the security

of other countries by threatening to and/or curtailing access to oil.

It has a powerful, powerful impact.

So we’re here today to get a chance to talk to you about the economic impact of oil and gas prices. And during your long tenure,

Mr. Chairman, oil and gas prices spiked dangerously several times.

So you’ve repeatedly warned us about the potential impact of

those fundamental energy prices on inflation as they worked their

way through the economy, as well as the potential to slow economic

activity as consumers and producers move limited dollars from

other sectors to cover energy costs.

In your last Monetary Report to Congress last year, Dr. Greenspan, you placed significant stress on the potential problems that

could arise from a jump in energy prices.

You reported then that the impact that could have on consumer

spending—the hit to the average American pocketbook—would depend on how much incomes were growing. On that front, the news

is not encouraging. Yesterday’s, I guess it was yesterday’s, June

2nd Wall Street Journal piece on data suggests a rise in energy

prices are hurting low income shoppers.

On that front, as I said, it depends on how incomes are growing.

The last reports from the job market show yet another disappointingly small increase in the number of Americans finding work. And

the persistence of a very troubling notion of stagnation in wages.

Something, it seems to me, is not going right. Thus far, in the economic recovery when the job picture is as weak at it appears to be,

I wish you—I’m going to ask you to speak to that, if you will.

Wages are still flat, up just a penny an hour. That’s 40 cents for

a 40-hour work week. And the cost of living, including the cost of

gasoline, and everything made and transported with petroleum

continues to grow faster than incomes.

The cost of gasoline went up 2 cents a gallon last week. That’s

over 40 cents more for every 20 gallons of gas pumped. That means

that the higher price of gasoline really hurt low-income and middle-income families. Gas is pretty much a fixed cost for the average

American family who can’t switch cars or move closer to work. For

them, it’s is not an abstract discussion.

As I said, I referenced the Wall Street Journal article saying

‘‘Rising Energy Prices Pinch Low-Income Shoppers.’’ Slow growth,

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flat wages—American households are part of the context we need

to understand when we talk about the impact of oil prices.

In the bigger picture, our dependence on foreign oil feeds a cycle

of dependence on foreign lenders to finance our dependence on foreign oil. Our trade deficit, which you’ve often spoke to, through

March of this year, is $192 billion—that’s 6 percent of our economy.

Thirty percent of that deficit—$65 billion—was the cost of our petroleum imports. That number could grow, I’m told, to as high as

$100 billion this year.

To finance that trade deficit, we are borrowing from other countries, and supply of our debt will eventually outrun our demand,

the way things are going. As we are already seeing, that means a

weaker dollar, making imported oil—and the thousands of consumer goods from cars to computers—even more expensive.

Until we do something about our dependence on imported oil, we

will not be in control, in our view, of our economic security. Will

we, are we going to be able to restore our energy security by reducing our consumption of oil? Will we, can we, how do we make the

most progress in the shortest amount of time? If we focus on fuels

that we put in our cars and trucks, 70 percent of the oil we consume is used in transportation. Can we immediately begin to reduce oil consumption by switching to fuels that we can grow at

home and making better, and more efficient use of our energy that

we consume?

You pointed out that ethanol is not the answer, but it seems to

me ethanol may be a way to begin to jump-start this process, as

a logical element of the process of moving to cellulosic fuels and

other fuels. I agree with you that we have to move faster in clean

coal technology and nuclear energy.

But it seems to me we have to make sure, first of all, that we’re

driving good cars by increasing fuel efficiency. By requiring that

every car sold in the United States is a flex-fuel vehicle that can

run on alternative fuels like E85—85 percent ethanol.

Second, it seems to me, we need to make sure that we’re using

good fuels by requiring all major oil companies to add alternative

fuel pumps to at least half of the gas stations they own.

And finally, it seems to me, we need to put in place the market

and the infrastructure for alternative fuels so that as new, more

advanced fuel technologies like cellulosic and ethanol become more

widely available, with the available cars and the pumps that we,

hopefully, have already begun to have put in place.

So, we’ve asked you here today to help us understand better the

shape we’re in today, and to draw on your experience, which is extensive, to understand how we manage this move into the future.

So Doctor, your statement was enlightening. I’m looking forward to

being able to ask you questions, and Mr. Chairman, I thank you

for the courtesy of allowing me to make my statement at this point.

Thank you again, Mr. Chairman.

The CHAIRMAN. Thank you very much, Senator Biden. Let me

just say that the Chair will try to make a pragmatic choice. We

have a number of members here, and as I indicated earlier on we’ll

have a rollcall vote at 10:00, and of course, some members will be

attending the joint session, which all members have been asked to

attend.

13

So with the concurrence of the ranking member, I’m going to suggest we have, perhaps, besides the two of us at the moment, maybe

a 5 minute round so as many Senators can be heard during that

period, and I plan to return after the vote and continue on, and the

ranking member will too, so we can ask our questions more extensively then.

So, we’ll try a 5-minute round and begin with Senator Chafee.

Senator CHAFEE. Thank you, Mr. Chairman, very much. And I’ve

got my question here. In your prepared statement you said that

much oil revenues have been diverted to meet the perceived high

priority needs of rapidly growing populations, and maybe you could

talk about what’s happening in China and India. Those of us that

have been to China see all the bicyclists, and I’m sure the Chinese

are going to gradually change from bicycles to petroleum-based vehicles. One point three billion people, in India also, a billion people.

How’s that, what effect is that going to have on this issue?

Dr. GREENSPAN. Well, Senator, as you’re aware, the motor vehicle culture in China is gaining very rapidly. All you have to do is

remember that it wasn’t that long ago when there were traffic jams

in Beijing with bicycles. And now it’s just car to car, bumper to

bumper, and they’re producing cars at a very rapid pace and indeed

coupled with their imports they’re adding—the actual sales level is

quite high.

The problem in China is, even before this surge, is that their oil

efficiency is half ours. Namely, the ratio of oil consumption to GDP

is twice that of the United States, and there’s a great deal of inefficiency, and obviously since their basic desire is essentially to move

as fast as they can in the manufacturing area, the issue of fuel efficiency is not their highest priority even though they are aware of

it, and obviously increasingly are aware of environmental problems

that affect them.

There’s no question that fuel efficiency will increase in China as

the economy gets more sophisticated. But because it starts at such

a highly inefficient level, and because its growth rate is far faster

than the world average, it’s a major demander of oil and indeed it’s

the second largest consumer in the world and probably—talking

about the contribution to the increase in the demand—it is by far

the dominant force, and is very likely to be until they run into really serious congestion with respect to car saturation. But at the moment, the demand for gasoline is going up quite significantly.

Senator CHAFEE. And India is similar? China and India have

their own reserves, so as they come onto the market, transportation is 65 percent of our consumption—as these two colossus

come onto the market, supply and demand has to be a factor.

Dr. GREENSPAN. India has got, of course, a good deal less in the

way of consumption levels than China. And although it’s growing,

it’s not growing as fast as China, and the level of economic activity

there is much less than in China. So, I would say India is possibly

a concern, but China is by far the most important issue. The great

irony, however, is that the two most rapidly growing consumers in

crude oil in absolute terms recently is China and the United

States, not India.

Senator CHAFEE. Thank you, Mr. Chairman. I’d just note that I

think in the grand scheme of things, as these two countries dip

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their straw into the world’s reserves, their appetite is going to be

enormous and that’s just going to be a factor on the price.

Dr. GREENSPAN. I think you’re addressing a very important aspect of our future.

The CHAIRMAN. Thank you, Senator Chafee, Senator Coleman.

Senator COLEMAN. Thank you, Mr. Chairman, it’s a great pleasure to have you here today, Chairman Greenspan.

I had a chance about a week or so ago to review a presentation

by the CEO of Alliance Bernstein, talking about the possibilities of

lessening dependency, things like hybrids, in a couple of years Toyota may be out with a lithium battery that could sustain and have

a tremendous impact on reducing the need for fuel for transportation, and then as you note—not just corn ethanol, but cellulosic

ethanol—and the possibility of even going to 60 billion barrels of

ethanol in some time in the not-too-distant future.

And you end your presentation here, with those developments, oil

in the years ahead will remain an important element of our energy

future, but it would no longer be the dominant player. With the

possibility of cellulosic out there, with the possibility, very shortterm of hybrids—does that mean that we should be engaging on

some kind of Manhattan Project to accelerate, quickly, the opportunity of cellulosic—it’s kind of at our fingertips but we’re not there

yet? And what would that mean, and how do we accelerate getting

there?

Dr. GREENSPAN. Well, the reason I raise the issue that corn ethanol is limited is merely the fact that you get 2.7 gallons of ethanol

out of a bushel of corn. If you just do the arithmetic we produce

11 billion bushels of corn a year. If you convert that into actual

gasoline equivalent, considering the fact that the BTU per gallon

of corn ethanol is about two-thirds that of gasoline, it’s an important addition, and indeed it’s of very significant importance, especially today.

But over the longer run, it’s going to have to be cellulosic where

the real ethanol imprints are going to come from, because there

you don’t have the types of restraints—the more corn we put into

ethanol the less we feed to hogs and that’s a very important tradeoff. It’s not the case with cellulosic ethanol and the advantage is

there, if we can essentially start to make that productive and get

anywhere near the increases in yields of acreage of switchgrass.

For example, we’ve gotten in the grains over the last 15, 20, 30

years. The growth in agricultural productivity has been awesome—

if we could associate that with switchgrass, we’re going to have an

awful lot of gallons of cellulosic ethanol, and I think that’s important as where the edge is.

Senator, the major problem that I think we have is that, as I

pointed out in my prepared remarks, the United States controlled

the world oil industry until, for the first 100 years of the industry.

We set the price, we decided, essentially, when there was a surplus

or a deficit and corrected it, and the growth in the oil markets

moved very significantly in pace.

Starting in the 1970s, as I pointed out, we lost price control. We

will never get it back unless we can find a way to refill the vacant

reservoirs of east Texas which were filled with crude oil—we’ve

used it all. In other words, our power over oil was the reserves we

15

had in the ground in the United States. Despite Alaska, despite

California, despite the Gulf of Mexico which has been a very major

addition, we’re out of it. We’re out of the market, essentially, as a

very critical player with respect to price.

That means that if we are very significantly tied to petroleum for

our way of life, which indeed we are—in other words, Senator

Biden points out that people drive cars in a way which represents

what they think of themselves as people—what their lifestyle is.

It’s hard to imagine disengaging an American from his car. We all

squawk when the gasoline price goes up but there is no evidence

that we reduce the mileages we drive. We eventually will buy cars

which are more fuel efficient, use less gasoline, but it’s not because

we drive less. And therefore, I think the basic focus is to find ways

to recognize that we are not going to be a world power in oil ever

again. And the dramatic and very facile reduction in our oil use,

I should say that the rising prices have been a very effective tool

in compressing demand. Our demand has very much flattened out

and we are gradually disengaging ourselves from petroleum. If it

happens sufficiently, smoothly, then that’s the best of all possible

contingencies. What we have to make a judgment on is what happens if it doesn’t go smoothly and what types of policies that we

can address, and I think you point out the critical ones—how do

we get consumption down basically on our highways—which incidentally use one out of every seven barrels consumed in the world

every day.

Senator COLEMAN. Thanks, Chairman.

The CHAIRMAN. Thank you very much. Senator Voinovich.

Senator VOINOVICH. Thank you, Mr. Chairman. It’s nice to see

you again, Chairman Greenspan.

The last couple of years I’ve been very concerned about our dependence on foreign sources of energy. In fact I’ve called for a second Declaration of Independence, that is, to become less reliant on

foreign energy sources because of our national security interests,

and also our economic concerns. Several weeks ago I was in Brussels at a Thurman Marshall Fund meeting and I was quite taken

back with the concern the Europeans have in terms of their energy

vulnerability—Iran and also the practices and policies of the Russian Federation. They’re very worried about how that’s all going to

work out.

Your testimony this morning seems to give the impression that

maybe things aren’t as bad as some of us think they are. I really

feel that this country needs to have a reaction like we had to Sputnik going up, in terms of becoming more energy independent.

We had testimony here several months ago from a Dr. Luft and

he said, ‘‘Oil prices are not going down at any time, the rise in oil

prices will yield large financial surpluses to the Middle Eastern oil

producers. This petro-dollar windfall will strengthen the Jihadists

while undermining the strategic relationship the region’s oil producers have with the United States. Real concern about impact on

security.’’ We had other testimony, I’ll quote from Hillard Harrington who heads the Energy Modeling Forum at Stanford, he

said ‘‘Many large scale models of the U.S. economy estimate that

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

oil prices.’’ Since the economy is growing more rapidly than 2 perVerDate 11-MAY-2000 14:39 Aug 03, 2007 Jkt 000000 PO 00000 Frm 00019 Fmt 6633 Sfmt 6602 H:\DOCS\OIL.TXT mich PsN: mich
16

cent per year, that impact would not mean recession, basically

going along with what you’ve said.

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

our historical experience suggests that the level of real GDP would

decline more than 5 percent for doubling of the oil price, and he

goes on to say, ‘‘My personal view is that the higher estimate may

be closer to what actually would happen if we had a major disruption, and that would mean a recession.’’

So I’d be really interested in terms of our vulnerability, in terms

of our security, and also the issue of what impact an interruption

would have on our GDP and our economy.

Dr. GREENSPAN. Well, Senator, I think those same models will

indicate that the impact on the GDP is a function of how rapidly

the prices change. In other words, at this moment, we are observing a fairly significant increase in oil prices, in fact energy prices

generally. And until very recently, it is very difficult to find any serious impact on actual levels of real activity. There’s been no significant cutback in consumption. In fact, seasonally adjusted, our

weekly 20 million barrels a day consumption in recent weeks has

actually been edging up, not down. It’s certainly the case throughout this year. We’re a little bit slow and it’s a small aberration, but

there is no sharp correction and the reason is basically that we

have developed a degree of flexibility in this economy which starts

off in the 1970s with the bipartisan deregulation that we were all

involved with, and which has carried forward to this day, especially

in the financial area, and in the transportation areas, which has

given us an ability to absorb shocks, of which energy is one, and

come back readily.

American corporations have been hit by a very large increase in

energy costs. Yet, profit margins of nonfinancial, nonenergy corporations continue to grow. The reason in part is that there has

been a large increase in cost, but the productivity that has been

put in place in the last several years with respect to energy-saving

equipment has apparently been enough to keep the actual unit cost

of energy moving at a relatively modest rate. In other words, a

goodly part of the price increase has been offset by improved productivity and coupled with other productivity gains, profit margins

continue to grow, which means that we have not had the real serious impact.

If you look at motor gasoline consumption—seasonally adjusted—

gasoline which essentially is used in passenger cars and light

trucks—it has not gone down. In fact, if anything it’s tilted up

slightly. The only serious area of reduction in energy use is apparently in diesel, where those big Class VII, Class VIII tractor trailers consume huge amounts—in fact, 20 percent of total motor fuel

on highways is consumed by heavy trucks. Those have cut back significantly. And for a number of reasons. Obviously, there has been

efficiently in the way that goods are carried because of that.

But there is, as yet, no really serious issue here with respect to

the impact on the United States. If, however, we get a sharp increase in prices very quickly, because our capital stock, our facilities, still really are built, and were originally constructed with $20

17

oil in mind, and therefore there’s not a great deal of efficiency built

into our capital stock, so if we get a big shock it can create a significant contraction in our economy. It’s very difficult to tell how

much, because an awful large part of it is psychological. But if the

flexibility is there, the flexibility that enabled us to get hit by 9/

11, declined very sharply but for a very short period of time, and

because of the flexibility of the system that we have built, we were

able to absorb it. I’m not terribly concerned about that problem.

So, as far as national security policies are concerned, I think it’s

important to one, make certain that we maintain a flexible economy and two, to find ways to one, recognize that we’re not going

to be a price setter in oil in any conceivable future—to find ways

to wean ourselves off gasoline is a critical issue of energy. That applies very importantly on highway fuel, cellulosic, and ultimately

applies gas-to-oil technologies, which if we ever get to natural gas

hydrates which is a huge potential long-term source of methane—

we can find ways to get ourselves away from the actual petroleum

industry, but it will essentially require very considerable effort,

and I think the most practical places are in cellulosic ethanol, and

in hybrids. Because right now you get a hybrid car—you plug it in

overnight, eight or nine hours—and you can get 100 miles a gallon

on it. The technology is going to improve, but that is a very major

saver of gasoline. And if you combine the new ethanols with that,

it’s a decline in convenience of the motor vehicle to drive it, but it

is not as though we have a choice of good and bad. We’ve got a

choice of not-so-good, and worse. We have to make a choice of one

or the other.

The CHAIRMAN. Thank you very much, Mr. Voinovich. Senator

Alexander.

Senator ALEXANDER. Thank you, Mr. Chairman. Dr. Greenspan,

thank you for being here. Thank you for your analysis and as I

hear you, you’re saying we were oil independent until the early

1970s. The United States—quite a bit we make speeches about this

goal—oil independence from foreign oil and we had it until the

early 1970s. You’re telling us we’re not ever going to have it again,

if I hear you right.

Dr. GREENSPAN. I wish I could find the means to think my way

through to such an eventuality. I’ve tried. I failed.

Senator ALEXANDER. But it helps that—so I assume by implication you’re suggesting that our best government policy is probably

not to join China in chasing around the world, tying up every oil

reserve that we can. That is a long-term solution. That’s probably

not our most promising course. I think I also hear you saying that

because of this enormous flexibility of our economy, and I heard

you say it about 9/11, which was a revelation to me, that despite

the dislocations of 9/11, the economy absorbed those. And I think

you’re also saying to us that even with these relatively high prices

for gasoline, our flexible economy is so strong that it seems to absorb those.

The question I’m getting to is, what in the market is going to

drive this transformation that logic would impel us toward? Based

on your analysis, we should be finding something else to put in our

cars and trucks other than petroleum-based fuel. And it’s almost

that simple, because you say we’re not going to stop driving, and

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so we’re going to continue to drive more, we’re not going to compete

with China for oil, so I guess my question is—if you’re in our shoes,

and we’re looking for government policies, it seems to me our economy is so strong and flexible that there may be nothing in the market that will force us to make the changes that we need to make

to find the alternate fuel.

For example, you mentioned hybrids. Well, Mr. Goan, the President of Nissan, is renting Toyota’s technology and not building

many hybrids because he says when you build something that costs

you $6,000 to put in the car, and customers are only willing to pay

$2,000, you’ve got a problem. So what in the marketplace is going

to drive this transformation for alternate fuel?

Dr. GREENSPAN. I would think, Senator, that you have to start

with the presumption that if you do nothing, what is likely to happen. And then ask yourself, would that outcome be acceptable, and

how would you alter it? And I would put forth the projection of

what would happen if you do nothing. If you do nothing, what we

will find is that the pressures on price are very likely to continue.

I don’t necessarily think they need to go much higher, because

we’ve already had—as I pointed out in my prepared remarks—the

whole financial industry moving in advance of events, and they

may have already created a price which already projects a goodly

part of this future.

But let’s just say the prices are where they are—what is going

to happen is that we’re going to start to get major changes in fuel

efficiency cars purchased by American consumers. Especially hybrids, and if the price goes higher which it very well may be, despite the fact that Americans say they do not like plugged-in hybrids—that’s not what happens when the choices ultimately are

there—people accept what is made available. We don’t have the capability of, when I was a kid, 19 cents a gallon gasoline, huge gas

guzzlers, vast sources of oil, never worry about energy—we don’t

have those choices, we have to make a judgment. As it stands now,

it makes no sense to go out and basically try to find oil. The oil

that really is available that is sufficiently cheap to essentially exploit is held by the nationalized oil companies.

My judgment is that if you look at the trends that have developed since the early 1970s, we have been weaning ourselves off oil

very considerably. We are now half as intensive as we were, and

we will continue to be considerably less intensive.

The critical area is clearly on highways, and there is where we

have to figure one, how do you drive certain numbers of miles

which American consumers want. And you can do that either by

getting substitutes for motor fuels other than petroleum. It looks

to me now like cellulosic ethanol is the largest potential—there is

coal-diesel and a variety of others, other forms of bio-diesel which

you can get—but it’s either that or you change the nature of the

motor. And here I think it’s going to be both.

If that is indeed the case, and we get, as Senator Chafee pointed

out, continued increases in Chinese demand, in world demand, likely prices may very well move higher, and what will happen is that

we will—the markets will force us, or more exactly, prices of gasoline will rise to a level where everyone will be very unhappy—they

19

will not stop driving. They will pay the price, but they will buy

much fewer gasoline-consuming vehicles in one form or another.

That’s where the future is, and indeed you can make the case

that obviously petroleum will continue to be available in some significant quantities. And if there is a very substantial decline in

consumption of oil in the United States, the price will come down

worldwide. That will create a significant gap, because remember,

we consume a quarter of the world’s oil right now.

If we are able to bring down our consumption by a number of

means, that’s where the world is likely to end up and I’m not sure

that is all that bad, and from a national security point of view, we

won’t be literally disassociated from petroleum, but the problems

that it’s easy to be concerned about, namely all this huge amount

of cash going to countries who are not friends of ours, it’s a very

serious issue. And the quickest way that you can shut that off is

to open up a gap in spare capacity, and you can do that by increasing capacity which is very difficult, or lower consumption. That will

lower the price significantly and if we’re asking for a national security implication, because such a significant part of the price is probably the result of this new surge in demand for oil by the financial

system, the financial system will turn around and prices will come

down quite considerably, and that more than anything else I know,

will shut off a goodly part of the very large cash flow which is going

to those who do not have our best interests at heart.

The CHAIRMAN. Thank you very much, Senator Alexander. Now,

let me mention that Senator Biden and I will go to the floor temporarily. I will pass the Chairmanship over to Senator Sununu for his

questions and he will exhaust that time on Senator Murkowski or

Senator Martinez, then hopefully we’ll be back so we will not

lose——

Senator Sununu [presiding]. Hopefully you’ll be back so I don’t

have to serve as Chairman for too long. I think all of my colleagues

will appreciate that.

Dr. Greenspan, I served on the Budget Committee in the House.

I’m on the Foreign Relations Committee here, and the Banking

Committee, so I’ve seen you testify a fair number of times, and I

want you to know I appreciate the novelty of your two word declarative ‘‘I failed.’’ It’s not something that we’ve heard very often, and

for good reason, but it’s refreshing. It’s always refreshing to hear

someone be clear about what they know and what they don’t know,

what they can envision and what they have a hard time foreseeing.

I want to begin by checking your math. You made a point about

the fact that corn-based ethanol is almost certainly unable to have

any significant role in supplanting petroleum. You mentioned 11

billion bushels, 2.7 gallons a bushel, roughly a two-thirds conversion factor, that translates in 18 billion gallons which sounds like

a lot if we use every bushel of corn in America to produce a petroleum substitute. That’s gallons, yes. Compared to national consumption—I did the quick math—on the order of 180 or 200 billion

gallons, so we’re talking about 10 percent of the total petroleum

usage in the country if we starved every hog in the country.

I think that’s important to emphasize here, while I understand

the value of the ethanol program to farmers and to those that parVerDate 11-MAY-2000 14:39 Aug 03, 2007 Jkt 000000 PO 00000 Frm 00023 Fmt 6633 Sfmt 6602 H:\DOCS\OIL.TXT mich PsN: mich
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ticipate in it. But if we use every bushel of corn, we’re still only

talking about 10 percent of what we consume in petroleum.

It seems to me that to the extent that we’re concerned about this

problem, I don’t see a great national security threat by a family of

four deciding to buy a mini-van that gets 22 miles to the gallon instead of 28 miles to the gallon. I think as you point out, it’s the

choice they make and Americans enjoy driving cars—most of the

oil, the vast majority, is used for transportation, and most of that

is a consumer decision, a lifestyle decision.

But what is important to avoid economic dislocations is the maintenance of the flexibility you talked about—the resilience in the

economy. So, I think that the important question from my perspective is how do we maintain that flexibility, and are there things

that we could do or might do that would hurt that flexibility. I am

always worried about the unintended consequence. I would like you

to comment on things that you believe might undermine that flexibility in general, and specifically about policies such as production

tax credits, government R&D subsidies on fossil fuel technology,

CAFE standards. Are those things that should be pursued, or

should we have concerns about how they would affect this underlying resilience?

Dr. GREENSPAN. Senator, the major threat to flexibility that we

now perceive is twofold. The one that concerns me most is the very

modest yet not large move toward protectionism in this country.

Protectionism, to the extent that you block the free flow of goods,

services, and finance—almost by definition undermines flexibility

and the adjustment process. And to the extent that we engage in

that, that we prevent the ability of everything to move when something else moves, which is what flexibility does, and what creates

the type of resilience we saw in 9/11, and indeed in the stock market crash of 1987 and the crash of 2000—the economy barely went

down in those particular areas, largely because of the considerable

flexibility in the international area, but also in the financial area.

The one great change that has occurred in the United States,

and indeed the rest of the world, is the dramatic increase in international technology—which coupled with an extraordinary expansion in new types of financial products which laid off credit risk

from highly vulnerable, highly leveraged financial institutions

which made loans to those who were far more capable of absorbing

risks. I’m speaking mainly of credit derivatives, but there are a

whole series of other financial instruments that are relevant. That

has given us a flexibility that if we try to overregulate that particular area it will reduce the flexibility, reduce our ability to make

the types of adjustments that we’ve been able to make, and will

create a problem that in the event of an oil shock or crisis, our ability to absorb it and reduce the impact on employment and output

would be limited.

Senator SUNUNU. I think that the impact of protectionism on our

economy’s flexibility is something that most Members of Congress

can internalize pretty well. We understand the impact of setting up

those kinds of tariffs and borders. But this is one that I’d like you

to elaborate on a little bit. You’re saying that the existence of a

credit derivatives market contributes to that economic flexibility.

You also mention in your testimony, though, the participation of

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the financial markets in the energy futures markets and commodities markets and is that also something that you see as increasing

our—the resiliency and the flexibility of our economy? Has that

been a positive step? Some people would view that as speculation,

and speculation is always bad, but you view it as a positive step?

Dr. GREENSPAN. I do indeed, Senator. And the reason I do, as I

point out in my prepared remarks is the great advantage of speculation in the sense that it was originally supposed to be understood, is that when there are perceived imbalances in the future,

speculation or investing or endeavoring to look for abnormal rates

of return in the financial field tends to advance the adjustment

process so that when the corrections actually occur, they are far

less abrupt.

And what we are seeing today because of the existence of hedge

funds and others taking on fairly large positions in the oil-derivatives markets, and then effectively increasing the demand for real

barrels of oil, is to move the price up and therefore to hasten the

adjustment process which indeed is occurring—that is, we are literally seeing significant acceleration in energy productivity within

the corporate sector. We are seeing a flattening out, not a decline,

but a flattening out of gasoline demand, and indeed a decline in

overall motor fuel consumption on highways because of price. And

that would not have happened were it not for the financial system

being involved, because prices would have been lower through a

considerable amount—part of 2004 through most of 2005, and if

that were the case, the levels of demand would be higher, the pressures on the economy far greater, and we would have increased the

risk of a shock.

So, what the financial system has done is preventive medicine if

I may put it that way.

Senator SUNUNU. Thank you. Senator Murkowski.

Senator MURKOWSKI. Thank you, Chairman Greenspan. It’s a

pleasure to have you here this morning and to hear your testimony.

I want to go back to a statement you had made to Senator Coleman. You indicated that the power over oil that we once had was

what we had here in the ground in the United States and that gave

us that ability to be somewhat energy independent, or oil independent—if you will—and we lost that after the early 1970s.

I want to hear a few comments from you this morning about the

direction of natural gas, an area where I think we look to in this

country as that next great area of possible dependence. Right now

we’re in a situation where our imports of LNG are at a pretty minimal level. I understand it’s about 3 percent right now, but the increase—LNG imports have increased by 180 percent in the past

several years, still accounting for only about 3 percent of our U.S.

imports.

The concern that I have had is that we go in the same direction

with natural gas as we are with oil—being dependent on foreign

sources for an extremely important resource for us here in this

country—and a recognition that we can do something about it, because we have that ability to grow that resource here.

You’ve mentioned that, and this was in a hearing that we had

before the Energy Committee a couple of years ago—that in order

for us to meet our demand here in this country, we must rely on

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imported LNG. We’re trying to move a project down from Alaska

to get Alaska’s natural gas to the rest of the United States. That

project is not moving as quickly as we would like. We recognize

that the country is counting on Alaska’s gas to come down. We’re

trying to make sure that, in fact, that happens.

I am very concerned that we take the approach with a resource

like natural gas and say, ‘‘Well, we simply can’t produce enough of

it here in this country. We must look to foreign nations for that resource,’’ and we must put ourselves again in that position of being

vulnerable, of providing cash to those countries—that as you point

out—might be our friend today, but who knows where they’re going

to be next year.

My question to you is where are we with the demand/supply picture with natural gas—how do we keep ourselves from getting in

the same position with natural gas as we are with oil in terms of

our reliance?

Dr. GREENSPAN. Senator, you raise a very important question

and indeed with the loss of production in the Gulf of Mexico as a

result of Katrina and Rita last summer, we’re not back to productive capability domestically that we had been.

For a generation, we had looked to Canada for piped gas for

about a sixth of our needs, and we were growing reasonably well

and price was low—I remember when it was $2 per MBTUs. The

problem is that the only outlook we really have got is liquefied natural gas. And there are several problems as to why we have not

picked up as quickly as I think we need to in that particular area.

First, of course, is that a goodly part of the liquefied natural gas

market is on long-term contract around the world. And, for example, there’s a very big contract, the biggest probably that I ever remember from the operations in Indonesia to Japan, which was a

major source of their liquefied natural gas in the long-term contracts, and it worked exceptionally well.

We have not been able to do that—we get a lot of our LNG from

Trinidad and the Caribbean, but the size of what we are going to

need and can very readily use right now has got to come from

Qatar or from the Middle East or from other sources—there’s a big

dispute as I’m sure you’re aware now with respect to Russian gas

going LNG to the United States. But our problem is that we’ve got

to one, hopefully get longer-term contracts with the actual producers of the gas which will then ship it to us, and then we’ve got

to be certain that we’ve got the terminals. Until fairly recently, the

‘‘not in my back yard’’ notion made it very difficult to bring LNG

terminals into the United States for fear that there would be these

tankers that would explode and a variety of other problems.

Most importantly, we do not yet have a spot market in liquefied

natural gas, and the reason we don’t is, for example, the trade in

crude oil represents such a—imports of crude oil worldwide represent effectively 60 percent of world consumption. The trade from

one country to another is very large. The figure is only a fourth in

natural gas, and a goodly part of that is piped gas, including the

piped gas from Russia down into Europe. So, we don’t have the degree of sophistication as of yet in international trade in LNG, but

we are going to need to make this a viable source in the United

States, essentially equivalent to how we handle crude oil.

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It’s going to take a while, but if we can do that, we will then

have the capability of converting gas into liquids with the new

technologies that are coming on and this could be another source

of replacement of petroleum, and may, indeed, be an actually significant possibility. So, the LNG issue has got a lot of facets to it,

all of which are very important for the United States, for our national security and for the maintenance of, essentially, a car fleet

on the roads not fueled by natural gas, but eventually fueled by the

liquids we can derive from natural gas, provided we’ve got adequate capabilities to purchase it and import it.

Because we do have the inklings—you remember, energy is not

rising in real terms anywhere near energy consumption in the

United States—anywhere near what our incomes are. So we have

the capability of buying, we have the purchasing power that produces other goods and services which gives us the ability to buy a

great deal of energy of the type that we would need, and that largely—in the natural gas field, is to accelerate the capabilities of getting contracts, long-term contracts, and deliverable supplies of

LNG, and eventually the North Slope gas which would not be a

small addition—as you point out—to the lower 48 States’ consumption.

Senator MURKOWSKI. Mr. Chairman, I have to excuse myself and

go vote. I appreciate you mentioning the North Slope gas, and I absolutely appreciate you mentioning the great potential with natural

gas hydrates. I believe when we look to that as a long-term future,

there’s great potential there. It needs to be nurtured, but I do get

concerned that we focus on imported LNG and we are in a situation with natural gas as we are currently with oil in terms of our

dependency and our energy security and the vulnerability that we

face.

I’m trying to figure out a way to get our stuff down to the lower

48 to help in, I think, a significant way. I appreciate your comments.

Thank you, Mr. Chairman.

The CHAIRMAN. Thank you very much, Senator Murkowski. At

this point we’ll have a second round of questioning and we’ll have

a 10-minute limit on questions in each round.

Chairman Greenspan, in your testimony you mentioned the desirability of price increases in oil being gradual. In fact, you discuss

that it’s remarkable that the impact on the economy, even given

fairly sharp increases, has not been greater. I would just ask—the

reason in this context—one of the real problems of remaining too

calm about all this, is that a great deal on the ground doesn’t happen. We talked a little bit about the problems of corn ethanol and

this is not a solution, and we decided to go on to cellulosic. But

even in this interim period, the corn ethanol situation suffers from

the fact that, despite a lot of plants being started, not much ethanol is being produced. And furthermore, even if it was being produced, the number of outlets in terms of filling stations and gas

stations is de minimus at this point. The number of flex-fuel cars

in the country, likewise, despite promises by automobile companies

to produce half a million more, in the case of both Ford and General Motors this year—so that even that particular solution really

needs urgency, and is clouded by the MTBE factor in which ethanol

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has been diverted off to California and New England, so the price

of ethanol at the pump at one of these M85 stations, using market

economics, is almost identical with the petroleum. Therefore the

Mom and Pop people who have started these places, because the

oil companies have resisted doing so, sometimes don’t sell very

much ethanol. It’s hard to keep them in the game.

On the cellulosic front, there are real problems in the Department of Energy, as I see it, just getting the regulations for the loan

guarantees for our companies such as Iogen who wants to come

into Idaho. I cite them because they are the only large candidate

for production of cellulosic ethanol very soon, and they may not

start until the end of this year or next year.

Now, in the midst of this, what happens if, for example, an incident such as the Russians cutting off natural gas to the Ukraine,

albeit for only 48 hours, but nonetheless, the shock waves through

Europe were substantial from this—or other suggestions by countries. Picking up on that measure that they could simply stop production for a while. That it may be in their strategic interests not

to worry about markets or pricing, but the availability.

Leaving aside, as you point out, their lack of interest in going

into their reserves, exploiting those, or trying to find capital around

the world to do that—what I’m just wanting to examine for a moment is what are the possibilities or even the probabilities of shock

therapy coming from national decisions that change the pricing situation abruptly, but with United States no more prepared, still

fumbling about as we try to get these alternatives under way?

Dr. GREENSPAN. Well, Senator, as you point out, in certain respects, Europe is in far worse shape than we are. Europe’s solution

to the Russian gas problem, in my judgment, is to have very substantial liquefied natural gas terminals on standby. With contracts,

contingent contracts out there to import natural gas liquids. It

won’t pay Europe to do that, but what it will do is put a cap on

the price. In other words, it will significantly restrain the issue of

what is, largely equates to a monopolistic position that Russian has

with respect to European gas. And if that standby facility is there,

it will be costly to maintain. It will be costly to get it contingent

contracts. It will also depend on an issue that I was discussing

with Senator Murkowski, namely the advent and the emergence of

a viable spot market in liquefied natural gas.

But it strikes me that we ought to be in similar—try to create

similar sorts of devices. But having said that, it’s not terribly difficult to imagine—you remember the aborted insurgency raid on

the major Saudi Arabian facility not too far from us, the gas processing facility. Had they succeeded in shutting that down, there

would be an incredible impact on the world. We do have strategic

petroleum reserves both here and in Europe which we would use

and presumably it would obviously be the type of problem which

is exactly what the reserve is for.

The CHAIRMAN. What sort of procedures could we adopt—just to

pick up your point—the Europeans have this rather expensive contingency factor, but take the Saudi example. If they had succeeded,

this is a real problem for the world, quite apart from us, but I’m

not certain, aside from our strategic oil reserves, what we’ve got

that really is a stopper in these cases.

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Dr. GREENSPAN. We don’t have much. If, however, we do not undercut the flexibility of our economy, we will take the shock.

There’s no way of avoiding the shock. Strategic petroleum reserve

of 700 million barrels is not a small amount and when really—it

very much depends on the extent of damage and how fast the systems can come back.

But I can very readily envision a shock in which even if we can

bring in strategic control in reserve, the market price will still go

straight up. And as I pointed out with respect to the discussion

with Senator Alexander on the issue of the impact on the American

economy—rising prices per se need not have an effect on American

economic growth if the rise is gradual and the adjustment process

is able to take place.

But a shock has got to be absorbed in one form or another, and

at this particular stage, we don’t have any backup other than the

strategic petroleum reserve and our flexibility. We’ve got to find

more ways to deal with this problem.

The CHAIRMAN. In going a little further with this—if the shock

occurred in our economy, and on various other days you’ve testified

on these sorts of subject—we have already a fairly large Federal

deficit. We have an even larger deficit in terms of our trade imbalance. We are dependent upon others to loan us money by our bonds

essentially. It’s sort of a grand bargain to keep the world economy

afloat this way, so there is still some purchasing power elsewhere.

But please explain what that kind of shock in our economy might

mean, not only to us and our ability to cope with all of this, but

to the world economy.

Dr. GREENSPAN. Mr. Chairman, it’s difficult to give you a definitive answer because there are lots of different ways in which that

can unfold. We don’t know to what extent the foreigners hold U.S.

dollars, basically because under our constitution we protect foreigners’ property rights as firmly as we protect our own. And if

you’re looking for a safe haven for resources, and you don’t trust

your own currency, your own economy, or any of a number of reasons, you do know that a deposit in the United States is safe. And

a large part of the accumulation of U.S. Treasury securities are

that. I won’t mention who, but I had a very interesting conversation with a monetary authority person abroad who has very large

holdings of U.S. dollars and he asked me at one point when there

was some question about possible problems, whether the United

States securities were safe? And I said, ‘‘Of course they are.’’ And

he said, ‘‘That’s very important to us because that’s the reason we

keep our money with you.’’ Now I don’t know the extent to which—

how much are the aggregate holdings, or the result of that and how

much are just economic investments in real rates of returns and

productivity.

But that is a critical issue. It is basically that we are safe and

I feel fine about that the Constitution is not going to be affected

by a problem in the oil fields of the Middle East, but as an economic issue I would be concerned. I don’t know any way to differentiate those particular issues. But I think you can reasonably well

conclude that whatever the consequences are of a major shutdown

of a Middle East facility, most specifically related to the processing

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26

ture. And the greater our flexibility, the greater our ability to absorb that. But there is no scenario which I am aware in which we

get off scott-free. It’s going to be a real serious problem, and I think

the purpose of your deliberations in this committee is largely to

make judgments as to what can this Government do to—not eliminate a potential shock—there is no way you can do that. But how

do we set in place sets of policies which diminish its impact.

The CHAIRMAN. Well, you’ve accurately stated our quest and

there are obviously foreign policy and security implications in this,

in addition to those issues covered by our Energy Committee or the

Banking Committee or Armed Services Committee—each one of us

has a role but we’ve tried really in these hearings to get a comprehensive view of our national security and the foreign policy aspects, and your testimony is helpful.

Senator Biden.

Senator BIDEN. Mr. Chairman, it’s such a pleasure to have you.

I mean it sincerely. You are so, the breadth of your knowledge is

impressive and very much needed by this committee, and the clarity with which you talk about it, is extremely, extremely helpful.

I’d like to focus on, in the short time we have, two pieces. One,

by the way, not that it matters, but I couldn’t agree with you more

about the question if this is a Constitutional investment or an economic investment, and I have a feeling a significant part of it is—

and I’m praying that this relates to the certainty of the investment

as opposed to the economic return, which is a big, big piece as well.

But as you said, no one’s going to know until it ever gets tested,

and pray God we don’t get it tested that clearly.

And in terms of flexibility—that’s really what we’re about here

in this committee. The Senator and I had opportunities, both during the hearings and working our staffs together and us talking—

we’re really not naive enough to think that we’re going to talk

about and be able to be ‘‘energy independent’’ which is a phrase

which is thrown around, but flexibility matters a great deal. Not

only the broad flexibility of our economy, but flexibility as we build

in flexibility to be able to deal with oil shocks, and it’s a process—

we’re talking about a process to put in training.

And I’d like to get to a point which is when we struggle—not just

the two of us, but others—including my colleague from Florida and

my colleague from Ohio. We’re all basically on the same page here.

As we struggle with the notion of providing flexibility by having alternative fuels—and as you point out, the vast majority, you know,

one in seven barrels of oil in the world is consumed on American

highways—so obviously that’s the biggest, biggest ticket item you

could impact on. And 90-some percent of all of the refined oil is

going into the engine or the tank of an automobile.

Right now there’s the economic incentive for alternative fuels to

have a shelf-life. There’s actually a lot of discussion on the street—

which you’ve forgotten more about than I’m ever going to learn—

about investments in alternative energy sources. There is a burgeoning industry that is—goes well beyond corn ethanol out

there—and one of the worries I have—worries is the wrong

phrase—one of the concerns I have is in the past when we controlled oil, figuratively speaking, in the sense you used it in the

phrase, up until the early 1970s, and now the cartel controls it.

27

There has been this sort of self-interest realization on the part of

oil that, if it gets too expensive, you’re going to find yourself in the

position where it’s not beneficial for the industry in the long-run

and those who hold the reserves—it clearly, notwithstanding the

lip service, I should maybe not say it, clearly notwithstanding discussion on the part of major American oil companies about their interest in finding alternative sources of fuel—it is not really overwhelmingly in their interest that we would, in fact, make a major

shift in consumption of oil.

So here’s my concern, and I’d like you to speak to it two ways.

One, is it legitimate, the concern I’m about to express; and two, if

it is—what do we do about it? I am concerned that as the decision

to get the tens of, the billions of dollars, tens of billions of dollars

over the next decade of investment needed to, in fact, produce or

generate an alternative energy source, the kind of investment needed to make it—to give us the flexibility, where it takes up 20, 25,

30, 40 percent of our consumption, at least in automobiles, over the

next decade or more—that it rests upon the price being competitive

with oil. And I don’t say this as, I’m not making a populist argument here. But it would seem to me to be in the naked self-interest

of the major energy producers—oil fossil fuel producers now—that

if that became a genuinely competitive, alternative source of energy

that allowed us not independence, but genuine flexibility, that it

would be very much in the interest of the industry to drop the

price. It doesn’t take much for them to swallow losses for some

time in order to have the effect of driving out of business what are

essentially, great potential—cellulosic, for example—great potential, but in its infancy. Is that a concern that is not well-placed?

Are the economic incentives for major oil, whether it’s Saudi Arabia

and OPEC, or specific energy companies—is that concern of mine

misplaced? Are we still going to get the kind of investment which—

we’re talking the need of billions of dollars of capital to move into

these alternative sources of energy to make them competitive, so

we’re producing billions of gallons—equivalent gallons of oil by alternative sources.

Is it a misplaced concern?

Dr. GREENSPAN. Your concern that people in the oil industry concerned about competition coming in, would produce cellulosic ethanol at a subsidized price to drive out the competition? Or a——

Senator BIDEN. Just in terms of simple flexibility. We had two

very impressive panels that came before us about 3 or 4 weeks ago.

And they pointed out that in order for us to get to the point where

there is really an alternative to fossil fuel for transportation, that

you really have to acquire a scale sufficiently large in the existing

oil industry now. You have to have, not just the kinds of plants

that are bringing economic growth to Southern Indiana, producing

four million barrels a year, roughly, equivalent—you have to get on

the scale of the major oil refineries, in terms of production. And

that is not necessarily in the immediate self-interest with oil at the

price it is now and likely to remain, of those very companies.

So where do you get the tens of billions of dollars of investment?

And they gave it a—I realize it’s more illustrative than—but they,

one of the very well-respected figures we had before us, speaking

about alternative energy, he gave a chart, it was kind of a wish

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list. He said, look, the projected ‘‘if’’ in switchgrass, we produce, we

have the increased yield per acre, increased productivity we’ve had

in corn just in the last 30 years. That if you devoted the prairies

of—I think he picked South Dakota—to, that exist now to a higher

yield but in an economically competitive switchgrass process by

which you refine the switchgrass for, as you point out, that’s the

better bang for the buck in terms of a percentage of it that is usable and is closer to a BTU equivalent of oil, et cetera. He said, and

he put up a chart, he said ‘‘South Dakota would be the second largest producer of energy.’’ And he was making a point that wasn’t literal, but illustrative of the kind of thing that can happen if we put,

for example, 60 million acres—as opposed to 110 million acres—60

million acres in ethanol-based fuels over the next 15 years.

And he made a statement—he said that as Australia tried to

move to an ethanol-based system—as it began to take root, the

price of oil was dropped significantly, making it uncompetitive

without subsidies, and it really tanked. Whereas in Brazil, they—

for reasons I realize that’s a controlled economy, I’m not suggesting

we emulate it or model it—but the bottom line is, Brazil really is

at a place now where they have a distinct flexibility—an alternative. They do not have to listen to Chavez and his ranting and

ravings about what he’s going to do to them, cutting off access oil.

And so the question is, is there any reasonably historically, or

purely from an economic incentive standpoint, and I’m about to go

over my time. I apologize, Mr. Chairman, but is there any concern

about if we were to mandate in a process, flex-fuel automobiles,

mandate ethanol-ready gas stations and so there’s enough of an infrastructure so that if you build a car there’s a place to fill it up—

if we were to mandate more rational mileage for American automobiles. And we both come from UAW states, it’s not something

we’re looking forward to going on and just looking for fights—but

if we did all of those things, would you have to put, essentially, a

floor on the, you know, of $30 or $35 or the equivalent of a barrel

of oil in order to make sure that you’ve got investors who are willing to invest in the long-run and not worried if all of a sudden, oil

drops to $26 a barrel and their investments tank?

Dr. GREENSPAN. I think that’s quite unlikely, and let me give you

the reasons why I think so. It’s a legitimate question, because I

would say if you had raised that question 20 years ago, it’s a real

question. And the reason it would be a real question is that at that

particular point, it was quite apparent that you could get, let’s say,

a 5- or 6-year lead on significant amounts of crude oil out of potential unexplored reserves other than OPEC. That is no longer available. And, in fact, if you take a look at the far distant futures contracts now, for example, go out to December 2012—crude oil is $66

a barrel. Twenty, no 10 years ago, even 5 years ago, 6 years ago,

that figure was $20 a barrel. The reason that has happened is that

the full structure of the international oil industry is getting tighter

and tighter and tighter. It started off in 1870 and we have consumed an unbelievable amount of oil. And whatever there was,

there is less, and it’s beginning to show up in various different

places. It’s beginning to show up in inability on the part of those

drilling in less hospitable places to get oil, and it’s very costly.

29

So what I think is going to happen here is we are already beginning to see private equity funds beginning to invest in ethanol.

Just as the Chairman mentioned, this particular facility that is

being put up and may be available, he said, by the end of the

year—that will tell you what the potential cost runs are and what

a good deal of the economics are. And if it appears to be credible,

you’ll begin to get an awful lot of financial assets coming in—not

an insignificant part of what the oil industry, the hedge fund industry who are now investing in oil—I think they’d start to go into

those particular types of projects.

Especially if the numbers make sense, which I think they do, for

reasons exactly why you point out. If that is indeed the case, there

will be potential concerns of the type you raise, Senator. I cannot

say with certainty that it will not all of a sudden be some pocket

of weakness in oil prices which brings it all the way down.

The real problem, strangely enough, is what happens to the price

of oil if we succeed? Because, if indeed we get a real major displacement of gasoline use on U.S. highways, the world price will come

down. My guess is, and I must tell you I can’t argue that it’s very

much greater than a guess—it will not drop back to $20 a barrel.

It will drop, but it will drop back to levels which will not undercut

the economic viability of the cellulosic ethanol, and indeed it may

very well be that the marginal cost and rates of return of cellulosic

ethanol may very well be determining the crude oil price.

Senator BIDEN. Well, I pray for that day.

Dr. GREENSPAN. Well, we may inadvertently, all of a sudden,

South Dakota may become the new energy czar.

Senator BIDEN. It seems to me your view is one that’s shared by

most of us up here, that we’re really reaching an oil peak here, and

it seems to me that it’s the end of cheap oil. I would love to envision the world being more secure. Enough that in fact we move

back to that ‘‘Bay of Cheap Oil,’’ but in terms of the reserves available, in terms of what I look at there—and I don’t pretend—I think

I know, I feel I know a lot more about foreign policy than I do

about the oil industry. But the fact is, I don’t see the near term,

no matter how well we succeed, that there’s so much stability in

the oil-producing countries around the world in the next generation

that we aren’t going to find ourselves subject to—in bad need of

flexibility.

My time is up, I can’t tell you how much I appreciate your being

here, Mr. Chairman. Your views are welcome and greatly respected, and I thank you for taking the time.

Dr. GREENSPAN. Thank you very much.

The CHAIRMAN. Thank you, Senator Biden. Senator Voinovich.

Senator VOINOVICH. Thank you, Mr. Chairman. I do share Senator Biden’s appreciation of your being here today.

Recently, I met with, a kind of reception with the chairmen of

the three major U.S. auto companies, and they indicated that they

definitely were going to go forward with more ethanol-fueled vehicles. In fact, one of them said that 25 percent were going to be ethanol, E85. I have met with representatives from the oil industry

and talked to them about the infrastructure needed to make this

available, E85, and their response was that, number one, they

weren’t really interested in putting those pumps in. And the reason

30

for it was that the cost of ethanol was high and that in some instances, higher than gasoline. And last but not least, that when

people find that they’re going to have to tank up more often with

ethanol than with gasoline, they’re going to be less inclined to use

ethanol.

The concern that I have is that there seems to be a collision,

maybe going to occur between the auto makers who, by the way,

get credit for their E85 even though you may not use E85, and the

auto companies saying, you know, we’re not that interested in it.

We are thinking about—building on the last energy bill—of increasing the tax credit for building these pumps from 35 to 50 percent. In other words, we’re going to say, ‘‘We’re going to make it

more worth your while to put these pumps in.’’ And I’d be interested in what you think of that.

Second of all, from your testimony, I got the impression that you

really felt that the future was in cellulosic renewables, and that’s

puzzling to a degree, because if you look out in the marketplace,

we’re seeing tremendous investments in ethanol refineries. In my

State when I was Governor, I tried to get them to build a refinery.

I couldn’t do it to save my soul, and we’ve got three that are underway and looks like we’re going to have more. There’s supposedly 38

of them being built in the country, and the issue is for us, in terms

of investment, should we be putting—or in terms of incentives—be

putting more money into that, or should we spend a lot more of our

dollars in moving in the area of cellulosic which I understand the

technology still isn’t there yet for cellulosic, and by the way, these

ethanol plants aren’t going to be able to handle cellulosics. They

will have to add something or build new ones. And of course the

other one is the hybrid that you made mention of, and that is the

electric battery plus gasoline. I met with somebody recently and

they were talking about diesel-electric for big trucks.

So I’d be interested in your comments about some of these statements I’ve made and where do you think we’re going and if you

were in our shoes, where would you be putting your money?

Dr. GREENSPAN. I think it’s a very tough question and I’ll tell you

why. First of all, it’s ultimately going to be the markets and technology which will determine what is what. The real problems with

ethanol are one, that whenever you’re dealing with a huge, say 9

million barrel a day gasoline market, and the inability to intertwine the two types of oils in the pipelines, because as you know

you cannot put ethanol through oil pipelines because of the

chemical——

Senator VOINOVICH. That’s the other thing they mentioned,

they’ve got to truck it in to do it.

Dr. GREENSPAN. Exactly. It’s got to be. Ethanol has got to be

until we find some solution to that, a generally local issue. In other

words, what you’ve got to do is have your local refinery essentially

working off local crops and delivered by trucks and you can’t get

huge volumes of that very easily right away. And I don’t know

enough about the actual details of what the costs are and the like,

and the ability to shift from corn to cellulosic, but I do know that

because corn is inherently limited in size, it has been a very useful

additive to date, and is clearly that’s all we’ve got. So, cellulosic is

very nice, but it’s hypothetical at this particular point.

31

But, if ethanol is to be a really significant issue here, it’s going

to have to be cellulosic. And so I would think that what we’d want

to do is to get up as quickly as possibly on technologies of cellulosic

and find it——

Senator VOINOVICH. So you would be, if you’re—we’re going to

try to pass another, it’s the second version of an energy bill——

Dr. GREENSPAN. Yeah, I would move as quickly as I could to find

out whether cellulosic is really a practical alternative. Because if

it turns out that the plants actually work, are cost-effective and

have potential, reasonably good capacity, with very few problems

which invariably occur in these sorts of technology which we don’t

anticipate in advance. If you can find out if this stuff works rather

quickly, I would try—because of the inability to add/mix corn and

cellulosic ethanols as far as the production facilities are concerned—to find out whether you’ve got something here. Because if

you do, then I think you move ahead as quickly as you can in developing cellulosic, because that’s the only thing that’s going to create the volumes adequate to really be a major competitive thrust

against gasoline.

Then I’d also be trying to move as quickly as we can on liquefied

natural gas, and the gas to liquids conversion capabilities, which

are also beginning to work here——

Senator VOINOVICH. Can I interrupt you just a minute. That gets

into another issue and I’m sorry I missed the testimony—your response to Lisa Murkowski’s questions. But you know and I know

that the high cost of natural gas has clobbered a part of our economy, the chemical industry, and they haven’t been able to adapt as

some others have.

Dr. GREENSPAN. They’ve moved out of the country.

Senator VOINOVICH. We’re a net, right, we used to be a net exporter, now we’re an importer. I had a company in the other day.

They were in 3 years ago. They had 22,000 people in the United

States, now they’ve got 14,000 and they basically said, ‘‘If you don’t

do something about these natural gas costs, we’re going to lose

more jobs.’’ And in our home heating, I mean, we’ve increased lie

heat dramatically to help people with their heating costs. We got

a break this last winter because it wasn’t as bad as what people

expected, but we’re now seeing the cost of natural gas go down

quite a bit because I guess they’ve got a great deal of supply out

there and——

Dr. GREENSPAN. It’s basically a weather phenomenon.

Senator VOINOVICH. But you think it’s a phenomenon, you think

that the natural gas costs will ratchet up again?

Dr. GREENSPAN. Well, we’re now at about a little over $6 for a

million BTUs. We had been, of course——

Senator VOINOVICH. $16, $14, $15, yeah.

Dr. GREENSPAN. Really sharply, the problem is storage capabilities with gas are not obviously as efficient as with liquids, and

when you have any commodity without inventory, like electric

power or, even to a lesser extent natural gas, demand and supply

variations create huge immediate changes in price, rather than

work their way through the inventory system, which is what happens in oil.

32

And so the gas issue here largely is going to rest—not on the current balances which we now have which is, you know, we import

a large chunk of our gas from Canada. We produce a big chunk of

it in the United States, although the production has come down because of the hurricanes—and it’s liquefied natural gas where the

answer lies.

Senator VOINOVICH. Yeah, but can I ask you something? The

question is, we talk about LGN—what I’ve been getting from talking to people, are they, is the infrastructure being put in the

United States in order to bring in LGNs and I understand that

some of the people overseas that provide LGN are wondering

whether or not we’re going to have the places where it can be

brought in and stored.

Dr. GREENSPAN. Yeah, we—our problem at the moment is actually less the terminals which we have a fairly large number that

are planned, authorized, or under construction. It’s getting the

LNG to begin with. In other words, what we need to do is—because

a lot of this stuff is on long-term contract, we have yet to get very

substantial long-term commitments as the Japanese have with the

Indonesian liquefied natural gas operations. And it’s only when we

start to get those longer-term contracts or the LNG market becomes sufficiently large and sophisticated that there is a spot market, which there isn’t to speak of now, and that’s what our problem

is. We need to get a more sophisticated market. But there is a lot

of stranded gas out in the world which is available and if you can

get a world market in LNG it could be rivaling a good deal of the

oil market in certain respects.

Senator VOINOVICH. I’m out of my time, but the real question is,

is Mr. Jones in Cleveland, Ohio, whose natural gas costs have gone

up astronomically, and he’s saying to me, ‘‘Senator, what are you

doing about bringing down my natural gas costs?’’ and the question

is what are the prospects, you know, in the next year or 2 years

to see a situation where I can say to him, ‘‘You know, I think that

maybe you’re going to see a 25 percent reduction in your natural

gas costs.’’

Dr. GREENSPAN. Well, I think what you can say, Senator, is the

fact that if we get this ‘‘stuttering’’ process of expanding liquefied

natural gas on track, which we should be able to do, I hope, within

a couple of years, then the price begins to reflect the marginal cost

of bringing gas from a lot of different places in the world to the

United States which had been—I don’t know where it is now, but

as of the last time I looked at the cost structure—is down in the

area of $4 per million BTUs. Now, I don’t know whether or not that

automatically is what the price will become, but at some point it’s

going to be LNG imports which is going to set the price for all of

the gas in the United States. It can’t do it yet. It’s only 3 percent

of the total.

The CHAIRMAN. Thank you very much, Senator Voinovich.

Senator Nelson.

Senator NELSON. Thank you, Mr. Chairman. Mr. Chairman, it’s

good to see you.

Dr. GREENSPAN. Good to see you, Senator.

Senator NELSON. Given the fact that we in the United States

have about 3 percent of the world’s oil reserves, yet we consume

33

25 percent of the world’s oil production, certainly your testimony is

well-received, and I think will go a long way in trying to jolt some

people out of this oil dependence.

But I’d like you to comment on an additional fact, just for the

record, that 79 percent of the world’s oil reserves are controlled by

governments, suggesting that substantial amounts of proven global

reserves could be subject to political decisions, not market forces.

Dr. GREENSPAN. Well, I’m fearful that they’re doing it now. And

the real problem that I think we have is that vast amounts of reserves in the ground which could be extracted for just a few dollars

a barrel. It used to be in a sense, it’s gone up a lot, but it’s still

relatively negligible. The problem is that the incentives for the nationalized oil companies to do that are not very great. The sole exception, at least to those whom I’ve spoken with who really are concerned about the high price, are the leaders of Saudi-Aramco, who

recognize that a 250 billion reserve plus situation is very precarious if all of a sudden the United States, the big user, starts to

switch to non-oil, non-petroleum means of energy, because what

that will do in the long-run is lower the market value of their reserves, and they recognize that, and they’re trying, essentially, to

expand capacity to hold the prices down.

But the vast proportion of those national oil companies rebuff the

international oil companies—the ones with the technology and capability of going in—and if a deal could be made, some royalty or

something like that, we could increase the crude oil capacity of the

world very significantly with the effect of bringing prices down

quite markedly. But there is very strong political resistance to do

that, and even outside of OPEC. I mean, Mexico, its constitution

prevents foreigners from having any commitment in the national

patrimony which is their crude oil, despite the fact that PEMEX

executives, Mexican national oil company, are petitioning their government to allow them to ask foreigners to come in so that certain

particular fields deep in the Gulf of Mexico and deep down under

the sands are there, but they don’t have the technology to get

there. And so far, nothing has happened. And that’s true everywhere.

And that’s what our problem largely is. It’s not as though the oil

is not there, it’s just that the capability of converting it into productive capacity to meet the growing demands from China, India,

everywhere else in the world are a very big question, a very big

problem.

Senator NELSON. Well given that, we each year go through a drill

up here where we try to increase CAFE standards, and we always

get beat trying just to increase miles per gallon on SUVs, phased

in over a number of years. Is this not the time, in addition to what

you’ve testified about alternative fuels like ethanol, nuclear and so

forth, is this not also the time for us to have the likes of a Manhattan Project where we go out and develop an engine for the future

that will be totally independent of oil?

Dr. GREENSPAN. I think the example of the Manhattan Project—

that project was far more narrow than people realize. There was

a specific technology that, as you know, there had been an early

discovery that the uranium atom was unstable and that eventually

led to the Chicago operation——

34

Senator NELSON. Then let me substitute for Manhattan, an

‘‘Apollo’’ project.

Dr. GREENSPAN. Okay. That is actually a more relevant thing,

because we’re starting with much less knowledge. I would hope we

don’t have to do that, and the reason is that at the moment, I think

the markets are working in the direction of a solution. If we create

an ‘‘Apollo Project’’ it may fail, it may not fail, but one thing it

surely will do is that it will eliminate all of the market incentives,

because there would be no way for a private equity fund that wanted, for example, to invest in the cellulosic project to compete with

unlimited funds of an Apollo Project.

So, I would hope not, but not because I think it may not succeed.

It might. But I’m almost certain that it would divert what is already working at this stage—to be sure slowly—and it’s very frustrating, but it is working. And I’d like to see the market forces

continue, because they are working. We’ve seen the gradual disengagement of the United States from petroleum—it’s been going

on for 35 years. We’ve now reduced our dependence by half and

we’re still moving it down. And at some point we’re going to get

to a level where it’s not going to be a national security question

any more. And I would hate to divert that process.

Senator NELSON. Reduced our dependence by half, and yet our

consumption of foreign oil goes up as a percentage of our total consumption.

Dr. GREENSPAN. That is correct, and indeed it will continue to do

so. And this is the reason why if we can get a major shift in how

we drive our motor vehicles—whether or not it’s hybrid or plug-in

hybrids, or whether or not it’s cellulosic-based ethanol—or whether

we find we can work from liquefied natural gas of which there is

a vast amount out there, converting that into liquids. There are an

awful lot of alternate sources, and they’re not mutually exclusive.

So, we’re on our way, gradually, to weaning ourselves off petroleum. It is slow, and I regret to say in many cases, it’s like watching grass grow, but it is working. And I think we have to be careful

to nurture that process.

Senator NELSON. Final question, Mr. Chairman. Is your opinion

the same with regard to the development of an Apollo-type project

for a new engine if you set a date certain in the future so that the

market forces knew that within that 30-year period that you would

not have the competition of this new engine?

Dr. GREENSPAN. Senator, I don’t think that this Congress or the

next one can commit the United States to such a view. The pressures, as you know far better than I, when that particular deadline

begins to grip, it would have very profound implications. A lot of

constituents would become very strained as a consequence. I’m not

sure how successful you would be to put that in place. I would hate

to see it tried, because I don’t think in the past when we’ve tried

such things it ever really worked out very well.

Senator NELSON. Is that to say that you are suggesting to us that

over the course of the next 20 or 30 years that what we should do

is reduce our energy consumption of foreign oil so that we’re completely free of foreign oil over the course of the next two or three

decades?

35

Dr. GREENSPAN. I would say we reduce our consumption of petroleum. Because whether foreign or domestic, it doesn’t affect the

price. But what is necessarily the case, as far as the United States

is concerned, if national security is the issue, is weaning ourselves

off of those very serious sources of supply which create problems

for us. The issue is to get off petroleum, not whether or not it’s imported or not. And I think that where our ethics ought to be are

in those promising areas where large possible changes are conceivable. And that’s the reason why I would like to see us move as

quickly as we could to find out whether the various forms of cellulosic ethanol are in fact feasible. Everyone thinks they are, everyone has figured out the acreages we need of switchgrass and the

extent of types of significant crop yield changes that are required

and the technology of converting these carbohydrates into oil is

well known. Indeed, we used to use ethanol in American motor vehicles before the first World War, so it’s not an unknown technology, but we don’t know if we can make it work at the levels, the

volumes, the huge volumes that are going to be required to make

a very major—very major effect in motor gasoline consumption in

the United States.

Senator NELSON. Well, if it doesn’t work, I’m going to be advocating for an Apollo Project.

Dr. GREENSPAN. I hope it works, sir.

The CHAIRMAN. Thank you very much, Senator Nelson. I have

just one more question and this concerns an area we haven’t

touched upon today. Some in the coal industry believe that there

are possibilities for believing there’s a portion of the petroleum demand in the United States which is the use of coal. This then leads

to other questions—quickly environmental considerations which

many in our country believe that although there are large reserves

of coal available they have environmental problems.

Now this leads to a debate—we’ve been reading in the press—

between various companies in the coal industry. Some are saying

that it may simply be a prudential measure that at some stage the

United States will require carbon sequestration and therefore if

you’re building a new power plant you ought to build one that

takes that into consideration. Whereas others take a more traditional view. That is that all of this carbon sequestration is very expensive. Even the procedures are not altogether well established,

they would claim. And then we have sort of the issue of the scientific evidence for climate change, global warming, which sometimes leaves the science into the almost theological as people dispute this in the country. So it swirls around the coal business in

a big way.

On the other hand, the discussion of coal can’t be omitted from

the conversation because from the United States’ standpoint, we do

have a lot of coal. As locally based in many places in our country

and there are many persons who are prepared to build power

plants under certain circumstances that sequester the carbon and

might serve us for a long time.

Have you given any thought to the place of coal in this? And the

debate that I’ve just described abruptly here?

Dr. GREENSPAN. Well, Mr. Chairman, it’s fairly obvious that if

the worst of all possible circumstances arose, we do have the techVerDate 11-MAY-2000 14:39 Aug 03, 2007 Jkt 000000 PO 00000 Frm 00039 Fmt 6633 Sfmt 6602 H:\DOCS\OIL.TXT mich PsN: mich
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nology to create, to build only plug-in motor vehicles, and to use

only coal, whether it’s cleaned, or otherwise, to generate electric

power. We can keep our vehicle fleet on the road. Now I grant you

that there will be a lot of required, re-plug ins every hundred miles

or thereabouts, but we could do it. That’s the extreme fallback position.

Less than that is obviously we are moving toward the sequestrated carbon and other clean technologies, but I don’t think we’ve

focused enough on nuclear. The technology of nuclear has changed

dramatically since Three Mile Island. The French have been running three-fourths of their electric power system for decades on nuclear and it’s worked quite fine. I think that our knee-jerk reaction

against the issue of nuclear is in the full context of our environmental requirements, and indeed the health requirements involved

in getting a very large coal economy, have got to be matched

against nuclear. Nuclear’s got problems, there are difficulties clearly with waste and a number of other issues, but we are developing

technologies which can address it on an interim basis, meaning 100

years or something like that. Without putting nuclear into the mix

here, I think we’re making a mistake.

But the one thing we can say with a reasonable degree of accuracy is that the energy abundance on which this Nation was built

is over. We no longer have the choice of one abundant energy

source versus another. We’re now having to make choices as I put

in before, between the non-good, and the still less non-good. We

will not have the uninhibited lifestyle available to us that very lowcost and available energy enabled us to live up through the 1950s

and the 1960s and indeed even today. Because what is happening

is year by year we’re getting closer to the point where we’re starting to really run out of oil, even in the national oil companies. And

at some point we’re going to reach a peak of production, and it’s

going to start down. That doesn’t mean that oil is going to go away.

You can have a decline go on for a long period of time and still

produce a good deal of oil, but oil is a finite resource. We have to

remember that we tend to switch to a new major fuel before the

other major fuel is dissipated. We moved to coal before we denuded

the forests of wood, and we moved to petroleum before we ran out

of coal. And I would surely presume we’re going to move to the

next set of energy technologies before we run out of oil.

The CHAIRMAN. Senator Voinovich, do you have additional——

Senator VOINOVICH. I do, Mr. Chairman.

I’d just like to get back to that natural gas question again. From

what I heard you say, it’s probably going to be 3 or 4 years before

Mrs. Jones in Cleveland, Ohio, is going to see her cost of heating

go down?

Dr. GREENSPAN. I don’t know what the time frame is. If you had

asked me 2 years ago, I would have said we probably would be

there by now—we haven’t been. It’s been a much more difficult,

just plain institutional structure—it’s got nothing to do with technology or anything like that. It’s just that we haven’t managed it

in a way to lock in foreign sources of gas, find the appropriate

tanker fleets, get the contracts written so certain numbers of deliveries are made to each LNG terminal per month, and have the gasVerDate 11-MAY-2000 14:39 Aug 03, 2007 Jkt 000000 PO 00000 Frm 00040 Fmt 6633 Sfmt 6602 H:\DOCS\OIL.TXT mich PsN: mich
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ification of the liquids structured in such a manner that it goes into

the pipelines as we need them——

Senator VOINOVICH. So, basically what you’re saying is that the

future in terms of getting our costs down are the liquefied natural

gas, and we’ve got to move on that as quickly as we can.

Dr. GREENSPAN. Yes, I can not envisage any way to get natural

gas prices down in the United States other than through a significant increase in the imports of liquefied natural gas.

Senator VOINOVICH. Well, you might be interested to know that

the last energy bill did provide some significant incentives in clean

coal technology to—we have an abundance of coal, 250 years of coal

in this country to utilize that more than we’re now doing it, and

the other thing—I don’t know whether you’re aware of it, but I

have a Nuclear Regulatory Commission under my subcommittee in

another committee. We have 19 applications. They are coming into

the NRC, and so because of the incentives that we put into the energy bill, they’re moving in that direction. So I think that’s something that we should be——

Dr. GREENSPAN. Are we getting to, yet, a standardized nuclear

plant which everyone can basically deal with without waiting for

the years and years of people fussing over——

Senator VOINOVICH. Well, the technology’s out there, and in addition to that, we’ve made it easier for them. They can now commit

to their application with the technology and siting, and most of

these are going to site them in areas that are already sited, so you

don’t have to deal with the ‘‘not in my back yard’’ syndrome that

they run into, and the technology’s pretty well accepted. A lot of

it is European technology. Some of it has been used in South Africa—so I think that we’re, we’ve got it, and I think the reason why

we’re seeing the applications is because we do have the technology

that we can move forward with.

The other question I have is dealing with—getting back to oil—

after sitting in on hearings I start to sweat bullets about how vulnerable we are to some foreign power deciding to—I mean, I

thought what if Saudi Arabia becomes unstable? Somebody like

Osama bin Laden gets elected and with their mindset, we’re just

going to cut it off and it doesn’t make any difference whether we

get the money or not, we’re going to do what we’re supposed to do.

You have Chavez talking about it down in, you know, let’s get at

the United States—so I think we should be moving away from the

Persian Gulf in terms of that area because it’s not that stable, and

God only knows where this whole terrorism thing’s going to finally

play out. We don’t know. We’re very uncertain about this.

But if you take that into consideration, the next question is, we

spend—according to testimony before this committee—about $50

billion a year to protect our oil in the Persian Gulf. And if we

gradually move away from that source, who’s going to pick up the

costs of protecting it? I mean, I don’t think some of our European

allies get it that we’ve been doing them a big favor for a long time

of protecting that source of oil supply.

So, the question is, if we move away from that—first of all, do

you think that’s a good idea? Second of all, if we do—maybe this

is beyond, you know, it may be a foreign policy question—what imVerDate 11-MAY-2000 14:39 Aug 03, 2007 Jkt 000000 PO 00000 Frm 00041 Fmt 6633 Sfmt 6602 H:\DOCS\OIL.TXT mich PsN: mich
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plication does that have in terms of our relationship with these

countries in the Persian Gulf?

Dr. GREENSPAN. First of all, Senator, I think that the issue is not

from whom we purchase our crude oil. It’s what the price is. Because we have an international market. And merely saying that we

won’t buy from one supplier or the other is really not terribly important, because the trade is so large and the interchange of crudes

is so substantial that there’s one price in the world for each particular grade adjusted for transportation and the like. And so

whether we buy from Saudi Arabia, or from Venezuela, or from

Canada doesn’t matter. The question basically is what is the overall oil infrastructure supply and therefore, given the world demand,

what is its price. And I think our interests and indeed I think I’ve

always envisaged the reason why we have such large investments

in the Middle East to protect oil is essentially that we are the

major user. We consume 25 percent of the world production, but it

doesn’t matter where we get the oil. But what we do know is that

if the Middle East gets shut down or places in the Middle East

from which we get no oil shut down, the cost to us will go up the

same. And so, our interest is in maintaining the supply, and indeed

not only the Middle East, but actually the tanker shipments across

the various oceans.

So our interest has got to be, until we can reduce our consumption, to hope and protect if we can, the existing system until it

eventually begins to peak—and it will go down of its own—I don’t

know whether or not it starts down in the 2040s as I gather the

Energy Information Agency of the Department of Energy has been

projecting, or whether some new technologies come in and reservoirs are capable of getting 80 percent recoveries—well above

what it is now. Obviously, it increases the availability very substantially—it’s hard to know where all of this is coming out, but

what we do know is our interest is, so long as we are very critically

determined on petroleum, to make sure that its aggregate supply

is maintained. Not that it’s maintained in any particular geographic arrangement.

Senator VOINOVICH. Mr. Chairman, can I ask one more question?

It gets back to your legislation. Tom Friedman recently suggested

that we refocus our policy on developing an access of energy to

compete with. He quotes it ‘‘Access of Evil’’ that would mean that

India, China, and the United States get together and start talking

with each other about this whole energy business. To talk about

the supply and how we need the supply and what are some of the

things that maybe we can do respectively to try to reduce the demand.

Dr. GREENSPAN. I’m not sure what it is that that confab will conclude and what we can do to enforce the particular conclusion. If

there is a, for example, a joint discussion to find ways in which we

can all conserve on energy, and interchange ideas and abilities,

there may be something to that. But it’s not clear to me that the

three of us combined somehow can be a cartel which will dictate

to OPEC—doesn’t sound credible to me. Because I don’t think any

of us has the capability of restraining our use of petroleum without

impacting on our economies very significantly and it’s only when

we find alternate means and alternate solutions that we have that

39

capability. So, Tom Friedman has got a lot of good ideas. I’m not

sure this is one of his better ones.

Senator VOINOVICH. Thank you, Mr. Chairman, and thank you,

Mr. Chairman.

The CHAIRMAN. Thank you, Senator Voinovich, and we all thank

you again, Chairman Greenspan for your testimony today. It’s been

comprehensive and very, very helpful.

I want to present for the record—a request by Senator Biden—

the written testimony of John Podesta, President of the Center for

American Progress, to be made a part of the record. Without objection, that insertion will occur.

[EDITOR’S NOTE.—The previously referred to information appears

in the Additional Material Submitted for the Record section at the

end of this hearing.]

Thank you again, we look forward to continuing our visits with

you.

Dr. GREENSPAN. Thank you very much, Mr. Chairman.

The CHAIRMAN. The hearing is adjourned.

[Whereupon, at 11:37 a.m. the hearing was adjourned.]

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

PREPARED STATEMENT OF JOHN PODESTA, PRESIDENT OF THE CENTER FOR AMERICAN

PROGRESS

Chairman Lugar, Senator Biden, and members of the Senate Foreign Relations

Committee, thank you for the invitation to submit testimony today on the critically

important topic of our Nation’s oil dependence and the risk it poses to our economy.

The Center for American Progress has placed a high priority on developing policy

solutions to a variety of energy-related issues, including the pressing challenge of

our Nation’s growing dependence on oil and the closely related threat of global

warming.

The United States is saddled with rising prices for gasoline and crude oil, escalating uncertainty in energy markets, and increasing oil importation stretching into

the foreseeable future. These stubborn facts will not change without an aggressive

policy response that promotes both radically increased energy efficiency in our vehicle fleet and a rapid shift to greater use of alternative renewable fuels. At the Center for American Progress, it is our belief that such a bold program to advance both

new technology for conservation and greater use of biofuels to replace polluting fossil fuel will have a tremendous positive impact on jobs and economic growth, as well

as securing improved national, economic, and environmental security. This moment

holds both great risk and great opportunity.

Let me quickly review the underlying fundamentals.

SUPPLY IS STRUGGLING TO KEEP UP WITH DEMAND

Today the cost of a gallon of gasoline remains well above $3 per gallon in many

parts of the country, and the cost of a barrel of oil continues to hover above $70.

Just a few years ago, these prices would have been unthinkable, and they are having a significant and regressive impact on working families and on our greater economy. The causes of these persistent high prices are clear. Global demand is outpacing supply and refining capacity, creating a tight market that leaves us and our

allies increasingly vulnerable to disruptions in energy supplies from unstable and

sometimes hostile countries (which adds a further premium to prices). Consumers

have insufficient choices in fuel type, fuel efficiency, or even other transportation

options, all adding to the economic strain on families.

The United States is responsible for 25 percent of global oil demand, largely for

our vehicle fleet, yet we possess less than 3 percent of proven oil reserves. Clearly

domestic supplies cannot solve this problem. Oil is a global commodity, and global

demand will define our options as long as we rely on oil as the lifeblood of our economy. These patterns show few signs of declining. Today global oil demand has already surpassed 80 million barrels per day, and the Energy Information Administration (ETA) projects it to reach 103 million barrels per day in 2015 and nearly

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120 million barrels per day in 2025. Projected increases in world oil demand would

require an increase of more than 42 million barrels per day relative to 2002 crude

oil production capacity, the equivalent of four Saudi Arabias, but global oil reserves

are already being depleted three times faster than new reserves are being discovered, according to a 2004 Department of Energy (DOE) analysis.

Domestically, our demand shows even more alarming trends. As the largest consumer of oil on the planet, we are most vulnerable to fluctuations in this market.

Yet America’s dependence on imported oil has grown steadily since 1972, when domestic output reached its peak of 11.6 million barrels per day. Domestic production

is now 9 million barrels per day and declining. Yet total oil consumption is nearly

21 million barrels per day, and, absent change, projected to reach 29 million barrels

per day by 2025. Today, 66 percent of oil consumed in the United States comes from

foreign sources, up from 58 percent in 2000, with about 20 percent of those imports

coming from the volatile Persian Gulf region. In spite of these alarming statistics,

the efficiency of our vehicles is moving in the wrong direction. In 1987, the average

fuel economy of U.S. auto and light truck fleet was 26 mpg; in 2004, that number

had fallen to 25 mpg.

RELIANCE ON OIL HAS REAL COSTS TO THE U.S. ECONOMY

In 2005, the United States spent over $300,000 a minute on foreign oil. Oil is the

largest component of the U.S. trade deficit, which has reached an unprecedented cumulative level of $2.835 trillion during this administration. In 2005, our trade deficit reached $723.6 billion, a 17 percent jump over the previous year and twice the

trade deficit of 2001. Oil imports accounted for nearly 25 percent of the entire deficit, with rising crude oil costs adding an estimated $70 billion to the Nation’s trade

imbalance in 2005 and as much as $100 billion predicted in 2006. Volatility in the

oil market creates further costs, estimated by the DOE at $7 trillion during the past

30 years. Together, these impacts mean that our reliance on oil is a substantial

drain on our overall economy.

Rising energy costs are also highly regressive. Working families—who spend the

largest share of their income on transportation and energy—are hit the hardest. A

recent Center for American Progress analysis found that between March 2001 and

May 2006, rapidly rising gasoline prices and flat minimum wages have resulted in

a nearly 105 percent increase in the cost for minimum wage earners of getting to

work each week. On average, it now takes 11.2 hours of work—until Tuesday morning—for these low wage earners to pay to get to work, up from an average of 5.5

hours in March 2001. Amid these rising gasoline and oil prices, 23.2 million families

with incomes of less than $24,102 paid almost 8 percent of their annual income for

gasoline in 2004, according to the most recent data from the Bureau of Labor Statistics. And that’s before the recent jump in gas prices.

Yet while consumers are taking a hit at the pump, oil companies have made

record profits. In 2005, Exxon earned the highest profit ever recorded by a corporation: $36 billion. Large profits were reaped throughout the industry, with companies

like Valero Energy—the Nation’s largest oil refiner—posting record quarterly earnings of $849 million. In light of the record-breaking profits and substantial social

costs from energy prices, there is a need for increased Federal oversight on issues

of market power and consolidation, market manipulation, and price gouging.

A further cost to America’s businesses and consumers has been the failure to put

the full weight of public policy behind the transition to energy efficient and renewable energy technologies. U.S. auto manufacturers, who are hemorrhaging jobs, are

losing market share to foreign competitors in the race to produce more fuel-efficient

vehicles and could benefit from strong manufacturing conversion incentives to get

more efficient and alternative-fuel cars on the road. The slow progress in bringing

biofuels to scale delays the benefits to U.S. farmers and refinery and construction

workers that will come from an emerging renewable fuels industry and upgraded

infrastructure.

RELIANCE ON OIL POSES SERIOUS NATIONAL SECURITY

AND DIPLOMATIC CHALLENGES AS WELL

Since 2001, America’s dependency on foreign oil has steadily increased, even as

the cost of oil has more than doubled. This dependence compromises our foreign policy objectives by compelling the United States to support or tolerate authoritarian

regimes that pose a threat to its national security. An increasing share of the

world’s oil imports will come from these undemocratic countries, not from friendly,

stable ones like Canada or Norway.

These political risks both threaten our security and impose direct costs by driving

an ever larger risk premium into the price of each barrel of oil. Osama bin Laden

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has identified the global energy infrastructure as an important target for his followers, and in February 2006, suicide bombers attacked a key oil processing facility

in Saudi Arabia. The attackers failed to penetrate the heavily guarded facility’s security perimeter, but nevertheless oil prices jumped 3.4 percent. Likewise, Iran has

to do no more than threaten to cut supply for oil prices around the world to spike,

as it demonstrated once again this week.

The defense of the global oil infrastructure is another cost born in large part by

the United States. Around the world, the U.S. military is charged with protecting

pipelines, refineries, and strategic sea lanes from terrorist or insurgent attack. The

Department of Defense has stepped up its arms deliveries and training to forces in

Angola and Nigeria. As long as American forces remain in Iraq, a significant number of them will spend their time guarding highly vulnerable pipelines, refineries,

loading facilities, trucking routes, and other petroleum installations. The U.S. Navy

is patrolling the vital tanker lanes of the Persian Gulf and the Strait of Hormuz,

the South China Sea, and the Strait of Malacca. While these costs are not solely

born in the defense of oil, our dependence on oil makes them essential.

The Congress may have to vote again before the end of the year to raise the Federal debt limit, this time to $9 trillion. The combination of our unbalanced fiscal policy with a deepening trade deficit, a third of which came from imported petroleum

products in 2005, is untenable. As we finance our deficits in global capital markets,

we reduce our own flexibility in national security matters while increasing the leverage of our competitors. I do not want to overstate the importance of this development, but it is imprudent to think that the increase in our debt attributable to energy costs will not negatively impact our national security.

Climate change—which is caused by excess emissions of heat-trapping gases from

the combustion of fossil fuels as well as other human activities—also poses a growing threat to our national and economic security. Scientists project that the earth’s

average temperature will increase 2 to 10°F (1.4 to 5.8°C) over the next 100 years

if the world fails to curb greenhouse gas emissions (of which the United States currently accounts for 25 percent). The U.S. State Department released a report

predicting that these increases in temperature would cause sea levels to rise (threatening the coastal areas where 53 percent of Americans live), more frequent and severe storms, the widespread destruction of ecosystems, and more frequent heat

waves and droughts. One of the many lessons of Katrina is that the economic and

social impacts of such natural disasters would be enormous.

In much of the developing world, meanwhile, reliance on oil has already been devastating. The International Energy Agency (lEA) estimates that for every $10 hike

in the cost of a barrel of crude, the economy of an oil importing country in sub-Saharan Africa is impacted more than 10 times as much as the United States. As a result, important gains reaped from sensible debt forgiveness initiatives are being

wiped out by rising energy costs (see Annex 1). For example, the increase in the

cost of imported oil from 2002 to the projection for 2006 for Ethiopia is over 10 percent of their total debt service relief granted. This increased cost of oil is equal to

4 percent of their GDP. To put that percentage in context, Ethiopia spends the

equivalent of 2.6 percent of their GDP on health care. The resulting squeeze on

struggling developing world budgets can lead to serious consequences with international repercussions. Decreasing our reliance on oil and helping the developing

world to do the same would reduce greenhouse gas emissions and global inequity,

thereby ultimately increasing domestic economic security in our Nation and the developing world.

LEADERSHIP IN MOVING AWAY FROM OIL DEPENDENCE IS NEEDED

To find a path forward that strengthens our domestic economy and increases our

security, it is essential that the Senate continue to show real leadership in advancing policy solutions that break our dependence on oil in a manner consistent with

the rising threat of climate change. These policies should encourage the domestic

production of more efficient vehicles and the development of a domestic renewable

fuels industry and infrastructure that decreases both oil consumption and greenhouse gas emissions.

The American Fuels Act (S. 2446) written by Chairman Lugar and Senator

Obama, for example, is a bipartisan measure that creates meaningful incentives for

commercializing the next generation of ethanol and investing in new fueling infrastructure. The recently introduced Clean EDGE legislation (S. 2829) contains many

building blocks for a rapid transition to a more secure energy future, including

strong incentives for the rapid deployment of an E85 ethanol infrastructure for distribution and fueling stations, increased investment in commercialization of cellulosic ethanol, strong incentives and mandates for the deployment of flexible fuel

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vehicles and hybrid electric cars within the fleet, as well as manufacturing conversion incentives for domestic production of high performance cars.

In addition, innovative policies that will ensure reductions in oil consumption, like

the binding oil savings targets included in the Vehicle and Fuel Choices for American Security Act (S. 2025), or an increase in fuel economy standards, should be part

of a meaningful policy program to break the grip of imported oil on the domestic

economy. Senator Tom Daschle, a Distinguished Fellow at the Center for American

Progress, and Vinod Khosla, who testified before this committee just last month,

have recently proposed a Carbon Alternative Fuel Equivalent standard that expands

on the traditional CAFE calculations to incorporate both fuel economy and the use

of alternative fuels in a single metric that captures the benefits of reduced carbon

emissions.

Over time, ending our oil dependence will mean a stronger economy, more jobs,

healthier communities, greater innovation, and a more efficient and productive

workforce. These benefits should not be delayed. The economy of Brazil offers a compelling picture of what an alternative fuel future holds for the United States. Since

the mid-1970s, Brazil has saved $100 billion dollars by substituting domestically

produced ethanol for imported oil. Ethanol now accounts for 20 percent of Brazil’s

transportation fuel market, and production of flexible fuel vehicles able to run on

gasoline or ethanol has grown from less than 1 percent of the Brazilian new car

market in 2001 to more than 70 percent today. The country of Sweden has proposed

to do even more, setting a national goal to end their reliance on oil altogether over

15 years by 2020.

The United States has had its own success with the recently enacted Renewable

Fuel Standard (RFS). The RFS mandates that 7.5 billion gallons of ethanol be used

in the U.S. fuel supply by 2012, but a rapidly growing ethanol industry is on track

to meet that requirement well before the deadline. We need to nurture this success

into an even larger market for renewable fuels from sources that minimize environmental impacts and greenhouse gas emissions. All opportunities to expand the market for clean renewable fuels should be pursued. For example, the Environmental

Protection Agency’s rulemaking on mobile source emissions presents a unique one.

By replacing with ethanol the 25 percent of our gasoline supply that is made up

of aromatic compounds, we have the opportunity to improve air quality and protect

public health while increasing our national and economic security.

Clearly, there is much to be done, but as seen in the previous examples, much

is possible. It is time for concerted effort to move rapidly toward increased energy

independence by uniting the country behind a bold national goal as we did with the

Manhattan Project or the Apollo space program. The American people are looking

to you for leadership.

Thank you for the opportunity to submit this testimony.

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ANNEX 1: THE IMPACT OF HIGHER OIL PRICES ON SELECT HIPC COUNTRIES 1

Country GDP (US$ in 2005) Debt service relief granted (US$) Annual oil consump- tion (bbl in 2003) 2 Estimated cost of oil to country in 2002 (US$) 3 Projected cost of oil to country in 2006 (US$) 4 Increase in annual cost to country 2002–2006 5

Cost of

oil in

2006 as

percent

GDP

Increase

in cost as

percent

debt relief

Increase

in cost as

percent

GDP

Public expenditure on

health as percent GDP

(2002)

Total poverty

reduction expenditures as

percent GDP

(est. 2006) 6

Mauritania ........................ 1.4 billion ......... 1.1 billion ........ 9 million ............. 184 million ......... 520 million ......... 336 million ........ 38.3 30.5 24.8 2.9 5.5Sao Tome and Principe .... 69 million ......... 200 million ...... 0.2 million .......... 5 million ............. 14 million ........... 9 million ............ 20.4 4.5 13.2 9.7 31.1Guinea-Bissau .................. 280 million ....... 790 million ...... 0.9 million .......... 19 million ........... 53 million ........... 34 million .......... 18.9 4.3 12.2 3.0 5.3Sierra Leone ..................... 1.1 billion ......... 950 million ...... 2 million ............. 50 million ........... 141 million ......... 91 million .......... 12.5 9.6 8.1 1.7 4.9Gambia ............................. 429 million ....... 90 million ........ 0.7 million .......... 15 million ........... 43 million ........... 28 million .......... 10.1 31.1 6.5 3.3 5.0Burundi ............................. 730 million ....... 1.5 billion ........ 1 million ............. 23 million ........... 65 million ........... 42 million .......... 8.9 2.8 5.7 0.6 2.9Senegal ............................. 8.0 billion ......... 850 million ...... 11 million ........... 238 million ......... 671 million ......... 434 million ........ 8.4 51.0 5.4 2.3 8.6Rwanda ............................ 1.8 billion ......... 1.4 billion ........ 2 million ............. 46 million ........... 130 million ......... 84 million .......... 7.1 6.0 4.6 3.1 10.6Ethiopia ............................ 8.8 billion ......... 3.3 billion ........ 10 million ........... 207 million ......... 585 million ......... 378 million ........ 6.6 11.4 4.3 2.6 17.0Malawi .............................. 2.0 billion ......... 1 billion ........... 2 million ............. 42 million ........... 118 million ......... 76 million .......... 5.9 7.6 3.8 4.0 15.4Guinea .............................. 3.6 billion ......... 800 million ...... 3 million ............. 64 million ........... 182 million ......... 118 million ........ 5.1 14.7 3.3 0.9 3.3Mozambique ..................... 5.7 billion ......... 4.3 billion ........ 4 million ............. 84 million ........... 238 million ......... 154 million ........ 4.2 3.6 2.7 4.1 17.6Tanzania ........................... 12.1 billion ....... 3 billion ........... 8 million ............. 169 million ......... 476 million ......... 308 million ........ 3.9 10.3 2.5 2.7 12.1Niger ................................. 3.4 billion ......... 1.2 billion ........ 2 million ............. 41 million ........... 117 million ......... 76 million .......... 3.4 6.3 2.2 2.0 6.5Burkina Faso .................... 5.4 billion ......... 930 million ...... 3 million ............. 61 million ........... 173 million ......... 112 million ........ 3.2 12.0 2.1 2.0 5.9Uganda ............................. 8.0 billion ......... 2 billion ........... 4 million ............. 77 million ........... 217 million ......... 140 million ........ 2.7 7.0 1.8 2.1 10.7Mali .................................. 5.4 billion ......... 900 million ...... 2 million ............. 33 million ........... 92 million ........... 59 million .......... 1.7 6.6 1.1 2.3 7.7

1 This survey includes only countries in Africa that have reached either their completion or decision points under the Heavily Indebted Poor Country Initiative (HIPC) and are 100 percent reliant on oil imports. These are 17 of the total 29

HIPC countries. 2 Calculations made assume 2003 consumption levels are representative of levels in 2002 and 2006.

3 Cost of oil to country in 2002 is calculated using CIA World Factbook figures for estimated 2003 country consumption levels and an average of 2002 weekly crude oil prices provided by the Energy Information Administration of the Department of Energy, or $20.99/bbl. Inflation since 2002 is assumed to be negligible. 4 The estimated 2006 world oil price, $59.31/bbl is the average of 2006 weekly world prices as of June 1, 2006, as provided by the Energy Information Administration of the Department of Energy. 5 Increase in cost of oil from 2002 to 2006 denotes a 183 percent increase.6What is considered ‘‘Poverty Reduction Expenditure’’ varies according to country, but primarily includes public spending on education and health. It may also include rural infrastructure, water works, roads, HIV, social safety nets, and agricultural research.

Sources: CIA World Factbook; U.S. Department of State, Bureau of African Affairs; The World Bank, Energy Sector Management Assistance Program and International Development Association; International Monetary Fund; Department of Energy, Energy Information Administration; United Nations Development Program.

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