WORLD CRUDE-OIL PRICING 

HEARING 

BEFORE THE 

COMMITTEE ON ENERGY AND 

COMMERCE 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED NINTH CONGRESS 

SECOND SESSION 

MAY 4, 2006 

Serial No. 109-96 

Printed for the use of the Committee on Energy and Commerce 

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29-386PDF 
COMMITTEE ON ENERGY AND COMMERCE 

JOE BARTON, Texas, Chairman 

RALPH M. HALL, Texas 

MICHAEL BILIRAKIS, Florida 

 Vice Chairman 

FRED UPTON, Michigan 

CLIFF STEARNS, Florida 

PAUL E. GILLMOR, Ohio 

NATHAN DEAL, Georgia 

ED WHITFIELD, Kentucky 

CHARLIE NORWOOD, Georgia 

BARBARA CUBIN, Wyoming 

JOHN SHIMKUS, Illinois 

HEATHER WILSON, New Mexico 

JOHN B. SHADEGG, Arizona 

CHARLES W. “CHIP” PICKERING, Mississippi 

 Vice Chairman

VITO FOSSELLA, New York 

ROY BLUNT, Missouri

STEVE BUYER, Indiana 

GEORGE RADANOVICH, California 

CHARLES F. BASS, New Hampshire 

JOSEPH R. PITTS, Pennsylvania 

MARY BONO, California 

GREG WALDEN, Oregon 

LEE TERRY, Nebraska 

MIKE FERGUSON, New Jersey 

MIKE ROGERS, Michigan 

C.L. “BUTCH” OTTER, Idaho 

SUE MYRICK, North Carolina 

JOHN SULLIVAN, Oklahoma 

TIM MURPHY, Pennsylvania 

MICHAEL C. BURGESS, Texas 

MARSHA BLACKBURN, Tennessee 

JOHN D. DINGELL, Michigan 

 Ranking Member 

HENRY A. WAXMAN, California 

EDWARD J. MARKEY, Massachusetts 

RICK BOUCHER, Virginia 

EDOLPHUS TOWNS, New York 

FRANK PALLONE, JR., New Jersey 

SHERROD BROWN, Ohio 

BART GORDON, Tennessee 

BOBBY L. RUSH, Illinois 

ANNA G. ESHOO, California 

BART STUPAK, Michigan 

ELIOT L. ENGEL, New York 

ALBERT R. WYNN, Maryland 

GENE GREEN, Texas 

TED STRICKLAND, Ohio 

DIANA DEGETTE, Colorado 

LOIS CAPPS, California 

MIKE DOYLE, Pennsylvania 

TOM ALLEN, Maine 

JIM DAVIS, Florida 

JAN SCHAKOWSKY, Illinois 

HILDA L. SOLIS, California 

CHARLES A. GONZALEZ, Texas 

JAY INSLEE, Washington 

TAMMY BALDWIN, Wisconsin 

MIKE ROSS, Arkansas 

BUD ALBRIGHT, Staff Director 

DAVID CAVICKE, General Counsel

REID P. F. STUNTZ, Minority Staff Director and Chief Counsel

(II)
CONTENTS 

Page 

Testimony of: 

Curaso, Hon. Guy F., Administrator, Energy Information Administration, U.S. 

Department of Energy ................................................................................................... 32 

Yergin, Daniel, Chairman, Cambridge Energy Research Associates ................................ 42 

Levin, Robert, Senior Vice President for Research, New York Mercantile Exchange...... 78 

Williams, Orice, Director, Financial Markets and Community Investment Team, 

Government Accountability Office................................................................................ 88 

Additional material submitted for the record: 

Yergin, Daniel, Chairman, Cambridge Energy Research Associates, response for the 

record.............................................................................................................................. 110 

(III) 

(1) 

WORLD CRUDE-OIL PRICING 

THURSDAY, MAY 4, 2006 

HOUSE OF REPRESENTATIVES, 

COMMITTEE ON ENERGY AND COMMERCE, 

Washington, DC. 

The committee met, pursuant to notice, at 10:11 a.m., in Room 2123 

of the Rayburn House Office Building, Hon. Joe Barton (chairman) 

presiding. 

 Members present: Representatives Hall, Stearns, Gillmor, Deal, 

Whitfield, Norwood, Shimkus, Wilson, Buyer, Radanovich, Bass, Bono, 

Terry, Otter, Myrick, Sullivan, Murphy, Burgess, Blackburn, Markey, 

Pallone, Stupak, Engel, Wynn, Green, Strickland, Allen, Schakowsky, 

Solis, Gonzalez, Inslee, Ross, and Barton. 

 Staff present: Dave McCarthy, Chief Counsel for Energy and 

Environment; Maryam Sabbaghian, Counsel; Peter Kielty, Legislative 

Clerk, Sue Sheridan, Minority Senior Counsel; and Bruce Harris, 

Minority Professional Staff Member. 

CHAIRMAN BARTON. The committee will come to order. 

 Today, we are going to have our hearing on world crude oil pricing. 

I want to thank our witnesses for testifying today. 

 We have Mr. Caruso, who is the Administrator of the Energy 

Information Administration. He has been guiding and advising the 

Energy and Commerce Committee for over 4 years now, and we are 

always appreciative to have him before us. 

 Dr. Daniel Yergin is recognized as one of the most highly respected 

authorities on international politics and economics in the energy field. 

We welcome you back to the committee again, Dr. Yergin. 

 The U.S. Government does not control crude oil prices, and the U.S. 

economy can’t either. We are major players in the global market as 

consumers and as producers, but we don’t control the price of crude oil 

in this country. Major developments in other parts of the world have 

brought the price to as high as $76 a barrel, and I think yesterday it 

closed at about $74 a barrel. 

 Let us take a look at some of the facts that we know. 

 As many months as it has been since the Katrina and Rita hurricanes, 

we still have 300,000 barrels a day in oil production in the Gulf of 

Mexico that is off line. 
2

 Iraqi production is increasing from where it was right after the war of 

liberation, but it is still below its pre-war peak and it is well below its 

potential. 

 There are many people that think Nigeria is becoming even more 

unstable, and its production is horrible, and many traders are taking 

account of that. 

 I am not even going to begin to talk about the President of 

Venezuela, Mr. Chavez, but there are many of us, including myself, who 

consider him to be quite a wild card. 

 And then we talk about Iran and their ability, or at least expressed 

intention, to make nuclear weapons. The response by the West to this 

troublesome mission raises more questions about stability of oil 

production in that nation. 

 Then we have OPEC. OPEC is the cartel that tries to set the price 

for oil in the world market, but I think our two experts before us today 

are going to indicate that, at least for the short term, they have lost that 

ability. Half of our imports come from nations that are members of 

OPEC. 

 Now let us look at the demand side. 

 This is where it gets even more amazing. In spite of the surge in 

gasoline prices in the United States in the last year and a half, demand 

for crude products or refined products made from crude oil is going up in 

the United States, including gasoline, although there have been some 

months recently that the demand for gasoline has gone down. 

 If we will look at China, their demand increase is incredible: up to 

half-a-million or more barrels per day in that one nation alone. Keep in 

mind that in a State like Texas where I come from, you have got more 

cars and trucks than people, but in China, there is only one car for every 

200 people. Just think how their demand is going to grow as more and 

more Chinese demand that they have the same mobility that we have 

here in the United States. China’s industrial sector is growing, literally, 

on a daily basis, and their demand for energy is increasing as their 

industrial sector grows. 

 We could say the same things about India, just at a slightly lesser 

degree than is going on in China. 

 I expect to hear today more on these geopolitical issues affecting 

crude oil prices and how much price they add to the barrel of oil. These 

oil prices and the geopolitical risks surrounding these oil prices concern 

me, as they concern all Americans. 

 Crude oil accounts for more than half of the price of a gallon of 

gasoline. And I think everybody on this committee and everybody in our 

country, including the suppliers of gasoline and crude oil, want gasoline 
3

prices to go down. In the United States, whatever we can do, it is time 

for us to begin to do it. 

 At over $70 a barrel, the price of crude oil is four times the spot price 

on the day back in 1995, 11 years ago, when then-President Clinton 

vetoed drilling in ANWR. They say there are no short-term fixes, and I 

would agree with that, but if we had authorized drilling in ANWR 10 

years ago, crude oil prices would not be, in my opinion, over $70 a barrel 

today. 

 Let me take a point of personal privilege aside from my written 

statement and just point out an amazing fact. Texas began to drill and 

produce oil on a large-scale basis in 1894 in Corsicana, Texas, which 

happens to be in my Congressional district. Since that day in 1894, when 

what we would now call the Chamber of Commerce of Corsicana 

decided to drill some water wells and instead found this stuff called oil, 

the great State of Texas has produced over 60 billion barrels of oil. It is 

currently producing a million barrels a day from over 200,000 wells. It 

is estimated that in ANWR the reserve for that one field is 10 billion 

barrels. The one oil field in Alaska is expected to have at least 10 billion 

barrels in the one discovery well. And in Texas, in 112 years, we have 

drilled over two million wells. We have produced over 60 billion barrels 

of oil. It defies rational explanation to me: drill what would probably be 

the largest oil field on the North American continent when we prove that 

we can do it in a safe environmental way. 

 The Energy Policy Act, which passed last year with bipartisan 

support, the majority of the Members on both sides of the aisle in this 

committee voted for it, included some provisions increasing supply, 

promoting conservation, and pursuing research into the next generation 

of alternative energy sources. But it didn’t do as much as could be done 

because we didn’t have the political consensus on issues like ANWR and 

drilling in the OCS. 

 I think that Congress can and should do more. I think we should do 

things like we did yesterday, once again passing refinery reform 

legislation on the floor of the House. I understand that some people feel 

like that particular bill was made without the proper vetting at the 

committee level, and I respect that, but sometimes you have got to do 

things in a quicker way than a normal legislative process. 

 A Saudi energy official not too long ago told me, “It doesn’t matter 

how much oil we send you, you can’t refine it, because you haven’t built 

a refinery in this country in a generation.” That is, unfortunately, sad but 

true. 

 Yesterday, we also had a hearing in this committee on reforming the 

fuel efficiency standards for automobiles. And maybe that effort will 

have to proceed without a consensus, too, although I hope not. 
4

 America seems to keep praying that we can just buy a ticket in the 

energy lottery and get the winning ticket without having to do anything 

other than that. Some people do win the lottery, about one out of a 

million, but most people don’t. I don’t think that we should put our 

prayers on winning an energy lottery. I think we need to do responsible 

things that make sense, like drilling in ANWR, like looking to the OCS 

and the moratorium areas, like trying to do what we can to get the oil 

shale that we have in the lower 48 into production. In the last 30 years in 

this country, because we have been unwilling, in my opinion, to do some 

things domestically, we have almost intentionally made ourselves 

dependent on the outcomes of what’s going on in places like Nigeria, 

Iran, Venezuela, and various OPEC nations as we refuse to use our own 

resources. 

 North America has tremendous natural resources of all kind. If you 

equate our coal resources and our hard-to-get oil resources, we have 

more energy resources by a factor of three than Saudi Arabia does. It is 

time that we, in my opinion, use the political process to try to at least 

begin to rationalize and maximize the use of such resources before we 

become even more dependent on foreign sources. 

 America just is not likely to win the energy lottery by praying for 

deliverance from other people outside of our borders. 

 [The prepared statement of Hon. Joe Barton follows:] 

PREPARED STATEMENT OF THE HON. JOE BARTON, CHAIRMAN, COMMITTEE ON ENERGY 

AND COMMITTEE

Good morning. I want to begin by thanking all of our witnesses for their time today. 

In particular, I want to recognize the witnesses on our first panel. 

Mr. Guy Caruso, Administrator of the Energy Information Administration, has been 

guiding and advising the Energy and Commerce Committee since his appointment in 

2002 and we are always very appreciative and grateful for his analysis and views. 

Dr. Daniel Yergin is one of the most highly respected authorities on international 

politics and economics in the energy field. Dr. Yergin, we welcome you back to the 

Committee and look forward to your testimony. 

The U.S. government cannot control crude oil prices, and the U.S. economy can’t 

either. We are major players in a global market, but major developments in other parts of 

the world have brought us to $72 dollar crude. Let’s take a quick look at some of the 

factors: 

• 300,000 barrels a day in oil production are still off-line today because of 

Hurricanes Katrina and Rita. 

• Iraqi production is increasing but has not reached its potential yet. 

• Nigeria is increasingly unstable, and so is it’s production, and traders don’t 

know what to make of it. 

• We all know how unpredictable President Chavez is in Venezuela. He’s 

running for re-election there, but his interest in politics extends far beyond the 

borders of his country. 

• And the great question about Iran’s ability to make a nuclear weapon, and the 

response by the West, raises even greater questions about global energy supply. 
5

• And there’s always OPEC. While Canada is our top international supplier, half 

our imports are from the OPEC nations. 

Now let’s turn to demand. Sure, demand in the U.S. keeps increasing. But the 

grown in China’s demand is incredible. China has one car for every 200 people. Just 

think about how their demand will grow when more Chinese get cars. And China’s 

industrial sector is much more energy intensive, and less efficient, than ours. 

India’s growth adds another huge pull on crude oil markets. 

I expect to hear more today on these geopolitical issues affecting crude oil prices 

and how much price they add to the barrel. These oil prices and the geopolitical risks 

surrounding these oil prices concern me as they concern all Americans. Crude oil 

accounts for more than half of the price of a gallon of gasoline, and we want gasoline 

prices to go down. 

Here in the United States, we need to do what we can. 

The price of crude at $72 is nearly four times the spot price on the day in 1995 when 

President Clinton vetoed ANWR. . They say there are no short-term fixes, and that’s 

true, but authorizing ANWR 10 years ago would have dropped world crude oil prices 

today. 

The Energy Policy Act passed last year, with bipartisan support, includes some 

noteworthy provisions increasing supply, promoting conservation, and pursuing research 

into next-generation alternative energy sources. 

Congress can and should do more – like passing legislation on refinery permitting 

that was on the floor yesterday. I leave it to those who voted against more gasoline at 

lower prices to explain themselves, but I think that’s going to be a tough vote to explain 

to America’s drivers. People can’t fill their tanks with excuses or run their cars on 

politics. 

A Saudi energy official once told me “It doesn’t matter how much oil we send you – 

you can’t refine it because you haven’t built refineries in a generation!” Yesterday we 

could not find consensus on putting teamwork and focus into the multi-agency process of 

permitting refineries, whether for gasoline, coal to liquid, or biofuels. 

 We also had an historic hearing yesterday or reforming the fuel efficiency 

standard for automobiles. Maybe that effort will have to proceed without a consensus, 

too, if a bloc of Members has resolved to block all progress everywhere. 

America keeps praying to win the energy lottery. But, we pray to win the energy 

lottery when night after night we rest on approximately 10 billion barrels of oil resources 

in ANWR, at least 90 billion barrels of crude oil resources in the OCS and 2 trillion 

barrels of shale oil resource in our Western States. We have made ourselves dependent on 

the outcomes of situations in Nigeria, Iran, Venezuela and Chad and on OPEC disputes 

because we refuse to use our own resources. North America has tremendous natural 

resources of all kinds, but the government policies restricting access to these supplies 

means we’re more dependent on foreign sources. America won the energy lottery, the 

government just has to buy the ticket and open up the resources for domestic production. 

Many of us in the Republican party have pursued policies to expand our energy 

capacity. These efforts have been blocked by politicians for whom America’s energy 

security is not a priority. It is time for our energy policy to increase America’s energy 

supply through both traditional and alternative sources. Let us act now to ensure that we 

have a plan for today and tomorrow. 

We invited today’s witnesses to help us understand world oil prices. With that 

understanding, consensus on action might materialize. Again, I would like to thank the 

witnesses for coming. 

 CHAIRMAN BARTON. With that, I want to recognize one of my 

senior Democrats for an opening statement. Mr. Dingell is not here. Mr. 
6

Pallone seems to be the only man on the upper table, so we will go to Mr. 

Pallone for a statement. 

 MR. PALLONE. Thank you, Mr. Chairman, and thank you for 

holding this hearing. 

 In the 6 years since the Bush Administration has been in office, gas 

prices have gone from $1.65 per gallon to $3.03 per gallon, and 

obviously, I would like to know why this happened. And I hope this 

hearing will go a long way towards furthering our understanding of how 

crude oil moves around the world and how that relates to gas prices. 

 I am also interested to know what factors we might need to pay 

closer attention to, including speculative and unregulated oil trading that 

might be keeping the price of a barrel of oil artificially high. 

 But my chief concern here is the effect of demand on the world price 

of crude oil. Has that continued excessive demand for oil kept prices 

high and led to price volatility? In other words, if we were to curtail our 

demand through efficiency, would the market be less susceptible to price 

shocks due to temporary supply disruptions? Would this help cure the 

situation in which prices would be more reliable, allowing American 

consumers to better plan their household budgets? 

 Mr. Chairman, I am also concerned about the impact of growing 

demand from China and India, which you, in fact, have mentioned in 

your opening statement. While the rapid industrialization of these 

countries does raise serious questions about world energy supply, this 

sort of discussion often neglects to mention that their combined demand 

pales in comparison with America’s insatiable thirst for oil. 

 And this, then, leads us into discussions like the one we had 

yesterday in this committee when we considered CAFE standards, how 

to curtail our demand to keep prices steady and reduce our dependence 

on foreign oil. 

 Of course no discussion of crude oil would be complete without 

mentioning the fact that the global economy’s current reliance on fossil 

fuels is causing another very serious problem that we need to confront 

now, and that is global warming. 

 Mr. Chairman, I look forward to hearing from our witnesses today. I 

want to sound a note of caution, however. The American people are not 

going to be impressed simply because the Majority can cite however 

many hearings they have had on gas prices or however many of the same 

tired ideas they have passed on the House floor. If we needed this many 

hearings to understand oil and gas markets better, why didn’t we have 

them before we passed last year’s energy bill? 

 The truth of the matter is that years of inaction from this 

Administration and this Congress have contributed to our present crisis. 

Rather than increasing fuel economy standards, this Congress gave out 
7

SUV tax breaks for the biggest cars on the road. And instead of passing 

comprehensive energy policy legislation focused on efficiency and 

conservation, the Republican majority passed, and President Bush 

signed, a bill chocked full of giveaways to the oil and gas companies. 

And I think it is time to get serious about putting off our addiction to oil. 

 Thank you, Mr. Chairman. 

 CHAIRMAN BARTON. Thank you, Congressman. 

 Does Mr. Hall, the Subcommittee Chairman, wish to make an 

opening statement? 

 MR. HALL. I do, Mr. Chairman. Thank you. And thank you for 

holding this hearing. It is very, of course, important in our current 

situation with gas prices where as high as they are, that we understand 

exactly why that is. 

 We know that crude oil makes up about 59 percent of the price of a 

gallon of gasoline, and therefore, the price of crude oil significantly 

affects how much we pay for gas at the pump, so I really look forward to 

hearing from our witnesses today as they help us understand world oil 

prices, how they are established, and why they are currently so high. 

 I would especially like to welcome Dr. Daniel Yergin, Chairman of 

the Cambridge Energy Research Associates, a Pulitzer Prize winner, 

probably the most knowledgeable guy in the world about what we are 

talking about today, and a highly respected authority on energy policy 

and international politics and economics. He invited me to Houston one 

day to speak to a group of about 300 people, and there wasn’t a person in 

the audience that didn’t know ten times as much about what I was talking 

about as I did. So I felt pretty intimidated down there, but I was honored 

to be in your company. I have the honor of working with you before, 

with both of you, and I would just like to extend a warm welcome to you 

and to our witnesses. 

 Thank you for what you have done, what you are doing, and giving 

us your time today. We appreciate it. 

 Thank you, Mr. Chairman. 

 CHAIRMAN BARTON. Thank you. 

 Did Mr. Stupak wish to make an opening statement? 

 MR. STUPAK. Yes, Mr. Chairman. 

 CHAIRMAN BARTON. The gentleman is recognized. 

 MR. STUPAK. Mr. Chairman, thank you for holding this hearing. 

 I would like to welcome our witnesses. I look forward to hearing 

their views on crude oil markets and the effect on gas prices. 

 Gas prices are causing consumers significant financial hardship. 

Many Americans are now paying over $3 a gallon for gasoline. This 

summer, Americans are expected to pay significantly more at the pumps 
8

than last summer. And crude oil prices have exceeded the previous 

record, reaching over $75 a barrel. 

 As Ranking Member of the Energy and Commerce Subcommittee on 

Oversight and Investigations, I have asked for the last eight months for 

hearings on the cause of high gas prices. I am pleased that the Chairman 

has finally realized that these hearings are needed. They are long 

overdue, and I wish we wouldn’t hold them all in one week. 

 Many of my colleagues look at high gas prices and claim that gas 

prices are dependent on world crude oil markets that are out of control. 

They say, “There is nothing we can do.” While some just chock up high 

gas prices to supply and demand, the American people want their elected 

officials to act. 

 Congress has a responsibility to make every possible effort to ensure 

that the markets and pricing practices are fair. Yesterday, the House 

approved legislation to give the Federal Trade Commission the tools to 

prosecute price gouging. I am pleased that the Republicans finally 

realized this legislation is necessary, and I look forward to working with 

them to improve the bill. 

 Just as we continue to work to protect consumers from gouging and 

predatory pricing at the pump, we must also investigate the effect that 

energy futures trading can have on gas prices. Currently, energy 

commodities traded on NYMEX, the New York Mercantile Exchange, 

receive significant oversight from the Commodity Futures Trading 

Commission, CFTC. However, energy futures trading that occurs off the 

market, commonly referred to as over-the-counter, OTC trading, does not 

enjoy the same oversight and transparency. Without effective oversight 

from the CFTC, there is no way to know whether energy speculators are 

basing their trades on market realities or are instead taking advantage of 

the system to make money at the expense of hardworking Americans. 

 Last week, as Americans were hit the hardest by record crude oil 

prices, the LA Times reported, in a piece entitled “Supply Fears, Fuel 

Speculators Pumping up Oil Prices.” It goes on in the article. It says, 

“In an energy futures market wracked with concern that oil demand 

might outstrip supplies, traders call it petronoia, threats alone were 

enough to ignite prices.” 

 A vast majority of the energy derivatives trading that takes place 

does not violate any laws and is actually helpful in allowing energy 

companies to keep their costs down by providing them with a reliable 

and consistent basis for doing business. However, when oil trader 

speculators, motivated by greed, take advantage of these market fears to 

drive up prices, the Federal government must intervene to prevent this 

manipulation from being passed on to the American consumer. 
9

 Due to these concerns, I have introduced the Prevent Unfair 

Manipulation of Prices Act, H.R. 5248, to bring over-the-counter trading 

under the oversight of the CFTC. As I am sure Mr. Levin, our witness 

from NYMEX, will tell us, the oversight provided by the CFTC to 

market trades on NYMEX has helped provide transparency, stability, and 

confidence in these markets. My legislation would provide the same 

oversight and transparency to over-the-counter trading. 

 As Americans continue to face sky-rocketing prices at the pump, our 

constituents are looking to their representatives to enact policies that 

protect them from manipulation and other unfair market prices. 

Hopefully, today is the beginning of many serious discussions about 

what Congress can do to ease prices at the pump. 

 I look forward to hearing from our witnesses. 

 Thank you, Mr. Chairman. 

 CHAIRMAN BARTON. Thank you, Mr. Stupak. 

 Does Mr. Whitfield wish to make an opening statement? 

 MR. WHITFIELD. Yes. 

 Thank you, Mr. Chairman. And thank you so much for holding this 

hearing to look more closely at one of the most pressing issues facing the 

country today, and that is gas prices, and specifically how the supply and 

demand of crude oil factors into the price paid at the pump. 

 As you know, Mr. Chairman, you and I have sent letters to the heads 

of five major oil companies in the last day or so, ExxonMobil, Chevron, 

ConocoPhillips, Shell Oil, and BP America, asking for detailed 

information about how those companies are allocating their profits to 

improve domestic and international oil refining efforts. You know, the 

easiest thing for us to do is to blame the oil companies for these price 

increases, and I know that many States are looking at price gouging and 

doing investigations right now. The Federal Trade Commission has been 

doing the same. But I think we all recognize that it is a lot more 

complicated than simply the oil price being manipulated by the oil 

companies. 

 We are consuming 85 million barrels of oil a day worldwide. In the 

United States, we are consuming between 21 and 22 million barrels of oil 

a day. We are the largest consuming nation in the world. 

 I would also point out that in the year 2000, ExxonMobil, as an 

example, was producing 733,000 barrels of oil a day. And in 2004, that 

was down to 557,000 in the United States. 

 I would also point out that during the years from 2000 to 2005, 

actual production declined in Saudi Arabia, Iran, Iraq, Nigeria, 

Venezuela, and Indonesia. And all of those countries face potential 

political problems that could end their production at any time. So there 

are a lot of factors out there that we cannot control. 
10

 I am particularly pleased to hear today that we are going to have 

testimony from the New York Mercantile Exchange, because all of us 

here are about part of the speculators, part of the marketplace, and I 

know their testimony will give the committee a better understanding of 

how their marketplace functions on a daily basis and what their platform 

means for energy prices. 

 I am also specifically interested in hearing about other energy 

markets and other trading platforms, which could have an impact on 

energy prices. More importantly, I think all of us are concerned based on 

our understanding of these other platforms, that the regulatory attention 

paid to them may be somewhat less than that received by NYMEX. If 

this is in fact the case, I know we will all be interested in hearing 

testimony explaining why that is the case. And if the additional 

regulatory oversight is necessary, especially given the importance of 

these markets in establishing prices for commodities used by all 

Americans and is impacting the price, then maybe we need to take 

additional steps. 

 Certainly, we look forward to hearing from the Energy Information 

Administration and the Government Accountability Office, and I yield 

back the balance of my time. 

 CHAIRMAN BARTON. We thank the Chairman of the Oversight 

Subcommittee. 

 Mr. Engel. 

 MR. ENGEL. Thank you very much, Mr. Chairman, for holding this 

important hearing today on world crude oil pricing. 

 As Americans continue to grapple with $75 barrels of oils and $3-

plus gallons of gas, it is obviously helpful for us to hear from the experts 

on the current market forces that are contributing to these escalating 

prices. I share the frustration of the American people with oil and 

gasoline reaching $3-plus a gallon. I think the President of the United 

States, frankly, should call the oil executives into the White House and 

bang their heads together. The oil companies, frankly, are making record 

profits with very little extra work, doing nothing extra, but they are 

reaping these windfall profits. It angers me greatly when the CEO of 

ExxonMobil gets a $400 million golden parachute to leave and the 

average American can barely fill up his or her tank and has lots and lots 

of hardships. This is not something that should continue. Oil companies 

are making record profits, obscene profits, and frankly, as far as I am 

concerned, laughing all the way to the bank. And I am not against 

people making profits, but what is going on with oil and gasoline in 

terms of the cost to fill up your car going up and up is absolutely wrong. 

 Our Chairman, my good friend, made a point to mention that oil 

refineries have not been built in the country, and I think his point is well 
11

taken. I think everything ought to be on the table. However, I am 

angered by the fact that when the price of a gallon of gasoline went up 

after Hurricane Katrina, we were told that because of the hurricane, the 

oil refining facilities in Louisiana were interrupted, and therefore, it sent 

the price of a gallon of gasoline up, but once those oil refinery 

capabilities were back in action, the price of gasoline would go down. 

And indeed, it went down for a few weeks, and now it’s back up again to 

Katrina prices and even more. 

 So I don’t really believe that the lack of building oil refineries is a 

major reason why gasoline is going up. I think it is manipulation, and I 

think, frankly, greediness on the part of the big oil companies. Now we 

consume nearly 21 million barrels of oil per day every day, and our 

appetite is increasing. We cannot be so completely dependent on a 

single, finite, and pollution-causing fuel. We need to change our habits. 

The President is right when he said we need to wean ourselves off of our 

addiction to oil, but it has got to be more than rhetoric. He has got to 

really put his money where his mouth is. 

 Now Congressman Kingston and I have teamed together to introduce 

the bipartisan Fuel Choices for American Security Act, H.R. 4409, which 

enjoys wide bipartisan support in the House and Senate. And very 

briefly, let me say, it encourages production and consumer purchase of 

oil-saving technologies and fuels nationwide without adversely 

impacting air quality. And the way we can do this is by providing 

incentives to encourage manufacturers, distributors, and consumers to 

utilize domestic resources to bring to the market a full range of 21st

Century vehicles and fuels. We can go to biofuels, and we can get off 

our addiction of oil. And we really need to continue to do that. 

 So I thank you, Mr. Chairman. I look forward to the witnesses 

today. 

 CHAIRMAN BARTON. Thank you, Congressman Engel. 

 Mr. Norwood. 

 MR. NORWOOD. Thank you very much, Mr. Chairman, for holding 

the hearing. I will put my statement in the record so we can get to the 

witnesses and have a little longer for questioning. 

 Thank you. 

 CHAIRMAN BARTON. Thank you. 

 Mr. Shimkus. 

 MR. SHIMKUS. I will waive, Mr. Chairman, for more time. 

 CHAIRMAN BARTON. Mr. Buyer. 

 MR. BUYER. I will waive. 

 CHAIRMAN BARTON. Mr. Bass. 

 MR. BASS. I will waive. 

 CHAIRMAN BARTON. Mr. Murphy. 
12

 MR. MURPHY. Thank you, Mr. Chairman. 

 I am reminded of a story of a man who had a few too many drinks, 

and he was on his hands and knees on a street at the curb, at a streetlight. 

And a policeman came by and said, “What are you doing?” The man 

said, “I am looking for my car keys.” And the policeman said, “Where 

did you lose them?” And he said, “Down the end of that dark alley.” 

And the policeman said, “Why aren’t you looking down there?” And he 

says, “Well, there is more light over here.” And the situation here, with 

these oil issues, that I think is not much beyond what this man was doing 

looking for his car keys. We all know, we learned this years ago, the 

issues of supply and demand. In the summer driving season, more 

drivers, with MTBEs and other fuel additives, that adds to costs as well. 

The many fuels. That adds to the cost. 

 But we refuse to take care of the supply issues. We sit here, and we 

hear people blame the President for not doing anything, but quite frankly, 

it is Congress that, for 30 years, hasn’t done the things that we need to 

do. For 30 years, we haven’t built nuclear power plants. For 30 years, 

we haven’t used clean coal technology to take care of some of the energy 

demands. For 30 years, we haven’t built oil refineries. And for some 

reason, we don’t want to drill. We don’t want to explore. We don’t want 

to survey. We don’t even want to look at maps of where the oil is on the 

Atlantic Coast, the Gulf Coast, the Pacific Coast, and Alaska. 

 People claim that they are upset that foreign nations have so much 

money they are making on oil. They get upset because so much the 

executives are making on oil. But still, the issue is we have to find oil 

sources here or we are going to continue to pay through the nose. People 

don’t want to act. We are willing to have oil shipped overseas to be 

refined rather than coming back here. That makes about as much sense 

as saying, “I am going to go drive from Washington, DC to New York 

City to pick up a pack of gum.” It is a waste of energy, it is a waste of 

money, and those are some big reasons why we continue to have huge oil 

prices. 

 I applaud the Chairman for having these hearings on oil, and I am 

hoping that as we look at this, not only will we shed more light on the 

issues that we need to have more capacity in this country to produce oil, 

to drill it, to explore it, to survey it, to refine, but also work on some of 

the issues that deal with conservation. If every American who has a car 

saved one gallon of gas per week, we wouldn’t have a shortage. So it is 

not just a matter of making sure that we reduce demand. It is not just 

about fuel-efficient cars but fuel-efficient drivers as well. 

 There are a number of things this committee has addressed. There 

are a number of bills that have come before the House. But we have to 

stop trying to deal with this with politics and start rolling up our sleeves 
13

and getting to policy. I hope, Mr. Chairman, that these hearings will 

continue to shed light on the issue that we have oil in this country and we 

have citizens who can come up with the ideas to reduce some of our 

demand for oil, but by golly, we have got to start getting it out of the 

ground and stop keeping it in there so we can use it to push polling 

numbers in the next election cycle. 

 Thank you, Mr. Chairman. 

 CHAIRMAN BARTON. I thank the gentleman. 

 Since I pointed it out, production started in Texas in Corsicana. 

Production in the United States started in Pennsylvania. Is it in your 

district? 

 MR. MURPHY. The Oil City is north of me, but it is a fine State, 

nonetheless. 

 CHAIRMAN BARTON. Okay. 

 Mr. Green of Texas. 

 MR. GREEN. Thank you, Mr. Chairman. 

 I want to thank you for calling this. I think it is a very important 

hearing. 

 In the Houston Chronicle, on the front page, it talks about “Chavez 

Leads Energy Sector’s Paradigm Shift,” and the first line says, “With 

Bolivian troops marching into gas fields, Venezuela seizing oil 

concessions, and Ecuador hiking energy royalties, so-called resource 

nationalism is on the rise in South America.” That is on the headline of 

the Houston Chronicle, and I am sure it could be anywhere, but I don’t 

know if it is on New York Times or the Washington Post, because I 

come from an area where we produce, we pipeline, and we refine crude 

oil. We are producing less, as the Chairman talked about, so we import it 

to our refineries, whether it be from Venezuela or anywhere else in the 

world, primarily from Mexico and Venezuela. I have a blue-collar 

district, and our blue-collar workers and retired folks are hit also by the 

high cost of gas prices at the pump, because they are on fixed incomes, 

and of course, we in Texas like to drive trucks and SUVs, so we are 

feeling the pain even more. 

 So many of my colleagues are getting letters and e-mails from voters 

who are angry about high gas prices. As elected officials, we want to 

offer a solution. In our responses to constituents, we try to explain that 

the price of oil is dictated by combined supply and demand of the 

world’s nations. I don’t really know if Exxon can decide the world price 

of oil any more than they walked out of Venezuela because of the price 

increases from President Chavez. Not many oil companies can afford to 

do that. So it is a real price. Unfortunately, the price of oil is at the most 

very unstable regions in the world. And we are not really talking about 

Venezuela or Ecuador or Bolivia, we are talking about Nigeria, you 
14

know, the war in Iraq. They actually are producing less than Iraq did 

before the invasion. The instability is rather incredible, and what we are 

seeing is that the traders in these oil futures respond to every problem 

that you hear in these countries. In fact, I have been told that maybe 20 

percent of the price of crude is based on the speculation that we are going 

to have less crude next week or next year than we do today, so the price 

is going to go up. 

 Most of U.S. oil is off limits by Congressionally mandated 

moratorium. However, still buying back productive leases in California, 

which I know last year, in the energy bill, when we passed it, that was 

one of the concerns. Obviously, that oil may not bring down the 

Government price, but when Iran decides to shut off exports, we are 

going to wish we had ANWR, and we are going to be glad the President 

actually reduced filling just last week simply because it was time for the 

United States to get our market to quit buying $70-a-barrel oil and let it 

go into the market to help lower the price. 

 The price of oil is largely the component of gasoline. We have 

talked about that. And it is great to point fingers at refineries, but in all 

honesty, we haven’t built more refineries. Again, I had a district that 

refined lots of product. We have 12 refining companies in our country 

that make over 500,000 barrels a day. That is more competitive than the 

software-operating industry, the airline industry, the semiconductor 

industry, and many others. So we do have a competitive refining market. 

The point that members on both sides might keep about no new refineries 

in the last 25 years is almost irrelevant. Since 1994, existing refineries 

added 2.1 million barrels to capacity, the equivalent of adding a larger 

than average refinery each year. Over the next several years, capacity 

will increase another 1.2 million barrels per day, according to announced 

expansions. 

 And the most popular blame everybody, even the environmentalists, 

or whoever is your political opponent for the high gas prices, but in 

reality, these prices are beyond any one group’s control. The only way 

we can improve the situation is by bringing more supply on the market as 

soon as possible. And of course, our Congress didn’t help last year with 

the energy bill. We removed MTBE for reformulated gas, and so that 

cost 3 percent of our gasoline capacity. We are replacing with ethanol, 

but you do not have the availability for ethanol. And just yesterday, I 

heard the President talk about removing the import controls on ethanol so 

we can have it. We don’t produce much ethanol in the Houston ship 

channel, Mr. Chairman, but we do refine a lot of gasoline, so I hope there 

are some new methods of ethanol refineries next to all of these refineries 

that I represent. 
15

 And I would like the rest of my statement to be placed in the record, 

Mr. Chairman. 

 CHAIRMAN BARTON. Without objection. 

 MR. GREEN. Thank you. 

 CHAIRMAN BARTON. We will note the clock says that the gentleman 

from Texas took almost 5 minutes, but in Texas, minutes are a little bit 

longer. 

 Mrs. Blackburn. 

 MRS. BLACKBURN. Thank you, Mr. Chairman. 

 I do want to thank you for the hearing today, and I want to thank our 

witnesses for taking the time to come be with us and to work with us 

through this situation. I think it is important that we put some focus on 

crude oil pricing, and it is essential to understanding why gas prices are 

what they are today. 

 And I hope this hearing does help everyone, my colleagues, the 

American public, understand that ending supply with environmental 

regulations during the period of the increasing demand causes gas prices 

to rise. 

 I also hope that this hearing helps my colleagues and the public to 

understand that taxes do not grow oil. Investments in drilling and less 

regulation will increase the supply of oil. We all know that. Higher 

taxes are not going to give you one more drop of oil. 

 President Clinton vetoed drilling in ANWR in 1995, and the 

environmentalists have continued the blockade ever since. China and 

Venezuela are drilling in the outer continental shelf and we are restricted. 

Just yesterday, many of my friends from across the aisle voted against 

and defeated the refinery permit process schedule on the floor of the 

House. The bill would have left the environment regulations alone, but it 

would have streamlined the permitting process of building a new 

refinery, something that we really need. A vote against that bill was a 

vote in favor of bureaucracy and a vote against the supply of gas at the 

pump. 

 I look forward to hearing the testimony that you have for us today. I 

look forward to continuing to work with the committee. 

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

 CHAIRMAN BARTON. I thank the gentlelady. 

 Mr. Strickland. 

 MR. STRICKLAND. I will pass. 

 CHAIRMAN BARTON. I think Ms. Schakowsky was here before Mr. 

Allen. 

 MS. SCHAKOWSKY. Thank you, Mr. Chairman. 

 Gasoline prices have sent this committee scurrying to analyze every 

aspect of the domestic and world energy markets. 
16

 With no disrespect at all to our witnesses, I think this is a poor 

substitute for action on sensible, ready-to-go proposals, many of which 

have long been languishing for lack of interest by the Republican 

leadership, proposals that would address price increases, spur alternatives 

to oil, and increase conservation. For the commuter who must drive 90 

minutes to work, a senior living on a fixed income, or those who depend 

on their cars to make deliveries, hearings are not sufficient. 

 CHAIRMAN BARTON. Would Ms. Schakowsky yield just for a 

minute? 

 MS. SCHAKOWSKY. I would. 

 CHAIRMAN BARTON. We have been graced by the presence of one 

of our former Full Committee Chairmen, Mr. Tauzin of Louisiana, 

whose portrait hangs so proudly above my right shoulder. We welcome 

you back and are hoping you are here to say you are going to announce 

to run for reelection to Congress for Louisiana. 

 CHAIRMAN BARTON. I am going to restart your clock so you can 

start over because that did interrupt your train of thought. 

 MS. SCHAKOWSKY. Okay. Thank you. 

 CHAIRMAN BARTON. I thank the gentlelady for yielding. 

 MS. SCHAKOWSKY. The average household with children will spend 

about $3,343 on transportation fuel costs this year, a 75-percent increase 

over 2001 costs. Memorial Day and the summer driving season are only 

days away. 

 Let us be clear, this energy crisis was foreseeable. This committee 

passed an energy bill last year, which the Energy Information 

Administration predicts they would raise prices, and it has. Republicans 

voted three times against giving the Federal Trade Commission the 

authority to regulate and prosecute our oil and gas companies that price 

gouge, once on this committee and twice on the floor. I and other 

Democrats have written to President Bush and Vice President Cheney, 

both oil men, many times and asked them to bring in the energy 

executives to develop a plan to immediately bring prices down. But not 

once have they stood up to their big oil comrades. Not once have they 

asked them for anything at all, instead lavishing them with tax breaks 

and other favors. 

 Gasoline prices have doubled under their watch, as the oil companies 

reported their highest profits ever. In fact, after covering all of their 

costs last year, oil companies took profits from consumers amounting to 

$1,000 from every household in America. And the golden parachute 

retirement package for Exxon’s CEO cost every household in America 

the average of $3. 

 The Bush Administration and Congress had the power. 

 Well, let me back up. 
17

 Prices at the pump in the United States have risen in part because the 

United States has become more dependent on foreign oil at an 

exponentially increasing rate. Since the Bush Administration took 

office, oil imports have increased over 14 percent, and now we import 

about 20 percent of our oil from the Middle East. 

 The President has again missed the urgency of this crisis. His budget 

only increases funding for renewable energy sources by 0.2 percent this 

year and cuts funding for critical efficiency programs, like 

weatherization assistance, EnergyStar, and the Clean Cities Program. 

Democrats have a plan to make the United States independent of Middle 

Eastern oil within the next 10 years. 

 The Bush Administration and Congress have the power, but are not 

demonstrating the will to limit escalating fuel prices. We should take 

action today to prevent energy companies from making windfall profits 

off the backs of consumers, to provide Detroit with the help it needs to 

make fuel-flexible cars, and to increase the production of renewable fuels 

and use energy-efficient technology that will wean the United States off 

foreign oil. 

 Congressman Stupak has a bill that would regulate off-market 

trading and increase penalties for market manipulation, which we should 

quickly pass. Consumer confidence in Congress and the President is 

tanking. Showing concern about the energy crisis is simply not enough. 

Consumers want action and relief at the pump. 

 And I would like to deal with the refinery issue for just my 

remaining moment. 

 We have to acknowledge that oil companies have closed 178 

refineries since 1980. Only one new refinery permit has been filed since 

that time. The refinery bill rejected yesterday would have given the 

Administration the authority to site refineries and close military bases 

bating local control and community right to know. An ExxonMobil 

official told Congress in January that flat North America demand for 

gasoline through 2030 means there is no need to build new U.S. 

refineries. In 2005 testimony, the CEOs of Shell and ConocoPhillips 

said they did not believe any Federal or State regulation had prevented 

them from siting new refineries. A 1995 American Petroleum Institute 

letter told energy companies to limit refinery capacity in order to boost 

their profits. 

 There are many things that we could do right now. We know about 

them. They have been proposed. We have devoted time to them in this 

committee. Democrats have asked for hearings for a long time, have 

asked to move these pieces of legislation, and while I appreciate the 

expertise of the witnesses, I look forward to their testimony, we need to 
18

move beyond these hearings to real solutions that our constituents, the 

Americans, are demanding. 

 Thank you, Mr. Chairman. I yield back. 

 MR. DEAL. [Presiding.] Mr. Buyer is recognized for an opening 

statement. Mr. Burgess. 

 MR. BURGESS. Thank you, Mr. Chairman. 

 I have a statement that I will submit for the record, but I feel 

obligated to bring up a couple of points, because I have been raised on 

the other side, talking about oil company profits. Shad Roe, Chairman of 

the Texas Pension Review Board, stated that when you look at who 

really owns the big oil, it is teachers, firefighters, police officers, and 

ordinary people who hope to retire someday. Their retirement plans have 

been generally disappointing. The only bright spot has been the 

performance of energy stocks. 

 The other issue before us, and we talked about it some yesterday in 

talking about the demand side, and I do believe we need to concentrate 

on the demand side as much as the supply side. James Smith from 

Southern Methodist University said that cutting consumption may not be 

as painful as we believe. If every American motorist reduced 

consumption by one gallon a week, the price of gasoline could fall by 60 

cents a gallon. And I will be interested to hear our panel’s take on that 

observation. But the problems are complex. It is important work that 

needs to be done for the country. 

 And Mr. Chairman, I am grateful we are having these hearings this 

week. I don’t think we can do enough of them. 

 With that, I will yield back. 

 [The prepared statement of Hon. Michael Burgess follows:] 

PREPARED STATEMENT OF THE HON. MICHAEL BURGESS, A REPRESENTATIVE IN CONGRESS 

FROM THE STATE OF TEXAS

Mr. Chairman, thank you for convening this hearing this morning. 

As we are hearing from our constituents on this topic, I think the information 

provided by the panelists today will help this committee get beyond the rhetoric to the 

facts. 

The geography of oil and gas has led our country to place our energy assurance in 

the hands of leaders such as Venezuelan President Hugo Chavez and inflexible or 

unstable dictators of the Middle East. 

There are ongoing concerns about the stability of supply from Russia and the 

Nigeria Delta Region. 

As we'll hear from our panelists today, these uncertainties, along with fears about 

Iran's nuclear program and the ongoing war on terror, increase the price of oil around the 

world.

All of these geopolitical uncertainties make foreign oil unpredictable and 

unaffordable. As we heard from the panelists yesterday, the best way to bring down 

prices is to increase production in the United States. Today, we import nearly 60% of our 

oil, but we've prohibited exploration in the OCS, in ANWR, and on other federal land. 
19

I believe we should allow, and in fact encourage, exploration and production here at 

home. A barrel of oil coming from the oil shale in Utah is significantly safer than a 

barrel of oil coming from Iran. 

I'd like to thank our panelists who are here this morning. According to the most 

recent figures from EIA the price of crude accounts for between 55 and 60 percent of the 

price of gasoline, so I look forward to learning from our panelists about the market forces 

that influence the price of crude oil. 

Thank you, Mr. Chairman, I yield back. 

 MR. DEAL. I thank the gentleman. 

 Mr. Gonzalez is recognized for an opening statement. 

 MR. GONZALEZ. Thank you very much, Mr. Chairman. 

 I want to welcome this opportunity to have the witnesses that we 

have today. I do want to start with an observation and that is that ANWR 

has been brought up, and I have been voting against ANWR for some 

time. Even though I am from the State of Texas, I believe in exploration 

and production, but the reason is I believe ANWR may be a prime 

example of what is wrong with our energy policy. There is no 

counterbalance to it. There is no balance. And that is, yes, exploration, 

quota, production, and such, but there has to be something out there 

when it comes to efficiencies, conservation, and alternative fuels. It is 

very hard to entertain the ANWR position. I am willing to bet that there 

are many Members that have been voting against ANWR if we had a 

balanced energy policy, their no vote would be translated into a yes vote. 

And that is what negotiation is all about, which there is very little of that 

here in Congress in today’s environment. 

 Yesterday, we had a hearing regarding one part of the equation when 

it comes to oil and our need for it, and that was demand. We can do 

much about demand. We have greater control over demand, yet if you 

listened to the testimony yesterday, we are probably in some sort of a 

gridlock. Today, we are talking about supply, that which we have less 

control over. But yet we can still be masters of our own destinies. 

 And what I am hoping is that the witnesses, and especially one of the 

witnesses, I think, will be able to point out how certain policies, foreign 

energy considerations, are inexplicably intertwined, as we used to say in 

the practice of law, and that is foreign policy and such, which definitely 

impacts different conditions and dynamics out there that have a direct 

correlation to the price and supply of oil in this Nation and the 

consequences to our consumers and our constituents. 

 And with that, again, I just want to say thank you to the witnesses for 

their patience, and I yield back the balance of my time. 

 CHAIRMAN BARTON. We thank the gentleman. 

 Has Dr. Burgess been given a chance? Has Mr. Terry? 

 MR. TERRY. Waive. 

 CHAIRMAN BARTON. Mr. Terry waives. Mr. Otter? 
20

 MR. OTTER. Waive. 

 CHAIRMAN BARTON. He waives. Okay. It looks like Mr. Allen. 

 MR. ALLEN. All right. Thank you, Mr. Chairman, for holding this 

hearing, and I thank the witnesses for being here today. 

 Really, crude oil prices today are high for several reasons. Global 

demand is rising faster than global supply. Instability in oil-producing 

nations is a significant factor as well, and there are certainly others. But 

it is not enough for us to say, “Crude oil prices are high due to factors 

beyond our control. Sorry.” Maybe we need to look in the mirror. 

Much of the instability that we find today in the world market is due to 

our inept foreign policy. It wasn’t global oil markets that suggested that 

the Venezuelan government should be destabilized and overthrown. It 

wasn’t global oil markets that have neglected West Africa, especially 

Nigeria, when it needed help. And it wasn’t global markets that 

launched an ill-advised invasion of Iraq, fumbled the reconstruction, and 

failed to protect the oil-producing infrastructure. 

 Last week, Iraqi oil exports slipped to their lowest level since the 

invasion, and they still haven’t recovered to the sanctioned levels of the 

1990s. American taxpayers are paying billions of dollars for 

reconstruction of Iraq and also paying swelling energy prices here at 

home. We cannot know, and maybe you will enlighten us, how much of 

the spike in global oil markets is due to our inept foreign policy, how 

much to greed and speculation, and how much to rising global demand 

with uncertain supplies. I do believe that is why we need to pass Mr. 

Stupak’s PUMP Act, which would shine some light into the off-market 

trading of energy commodities and allow the CFTC to monitor the 

activities of traders in the NYMEX and other commodity exchanges. 

This bill should attract bipartisan support, because it can have a 

significant impact on the market and on the price of oil. 

 I know this is a complex issue, and I very much look forward to the 

testimony of the witnesses. Thank you for being here. 

 CHAIRMAN BARTON. Thank you, Mr. Allen. 

 Mr. Wynn. Oh, no. I am sorry. Mr. Inslee was here before Mr. 

Wynn. I apologize. 

 MR. INSLEE. Thank you. 

 I just want to followup Mr. Allen’s comment about the fact the 

Federal government’s actions had compounded the misery that 

Americans are having right now. I recall, a few years back, I was in a 

meeting just a couple doors down from the room we are in now, and Paul 

Wolfowitz was telling us about how this invasion of Iraq was going to be 

totally financed by the oil exports. The American taxpayer would not 

have to pay a dime for the war in Iraq. Well, now, we are how many 

hundreds of billions of dollars in it? And, as a bonus, this was not in that 
21

particular meeting, but in other meetings, Iraq would increase 

dramatically its exports and help lessen the cost of oil. That was a heck 

of a job done by our Administration on energy policy in Iraq, a brilliant 

move. 

 And our $3-plus a gallon is tied in part because of the incompetence, 

the ineffectual, and I have other adjectives I won’t use, outright mistakes 

made by this Administration in Iraq. And now to further that failure of 

acts of commission, we now have acts of omission. And I appreciate the 

Chairman having this hearing, but we need a lot more hearings, and we 

need some action. We need Mr. Stupak’s bill to bring the trading system 

under the Commodity Futures Trading Commission. 

 Literally, before I came to this meeting, I had a group of oil 

marketers. These are businessmen who sell oil and gas mostly to farmers 

in the State of Washington. And normally, the business community 

doesn’t rush to endorse new regulatory schemes proposed by Congress, 

but these gentlemen said, “Look, you have got to have some 

transparency in the trading system of oil and gas because there has been 

such huge volatility in these areas in part because of the unregulated 

nature and non-transparent nature of these trades.” And we have 

enormous capital rushing into these trading systems, increasing 

speculation, and increase in volatility in these markets. So this is 

something that if you do it for soybeans, you certainly ought to be doing 

it for oil and gas. And we hope that we can have some action from this 

Committee on that bill, as we will, I hope, on some of the bipartisan 

efforts. Mr. Kingston and Mr. Engel have a bill to inspire flex-fuel 

vehicles so we can get biofuels to be a competitor to oil and gas. We 

need some action in addition to these hearings. 

 Thank you. 

 CHAIRMAN BARTON. Thank you, Mr. Inslee. 

 Mrs. Wilson. 

 MRS. WILSON. Thank you, Mr. Chairman. 

 I apologize for getting here a little bit late, and I appreciate your 

holding this hearing. 

 I understand that there appears from the materials that you have 

given us anyway to be some disagreement as to the multiple causes of 

high prices for a barrel of oil. But one of the things that surprises me is 

that for the last four weeks, the average daily gasoline demand in the 

United States was a little over nine million barrels per day, which was 

barely higher than it was a year ago, and yet oil prices remain 36 percent 

higher than they were a year ago. 

 I recognize that oil is a worldwide commodity and there are a lot of 

things that affect this market, but I would like a little further explanation 

here of why there is this great disparity. And I have read some of the 
22

material you had given us, but there is some of it that, for people who are 

just trying to fill up their cars, really doesn’t make a lot of sense. 

 CHAIRMAN BARTON. Is that the end of your statement? 

 MRS. WILSON. It is a question. I would like to hear why-- 

 CHAIRMAN BARTON. We are still on the opening statements. 

 MRS. WILSON. Oh, I am sorry, Mr. Chairman. I apologize. I look 

forward to the hearing. 

 CHAIRMAN BARTON. I thought that was a very dramatic way to end 

your opening statement. 

 MRS. WILSON. I look forward to hearing why this is dramatic, and it 

just doesn’t make sense to people. 

 Thank you, Mr. Chairman. 

 CHAIRMAN BARTON. Thank you. 

 You are still on after that after your victory on the price gouging bill 

on the floor yesterday, so there you go. 

 Let us see. Now it is Mr. Wynn’s turn. 

 MR. WYNN. Thank you, Mr. Chairman. I certainly appreciate you 

calling this very important hearing to get a better understanding of the 

global energy picture. 

 Let me begin by actually complimenting my colleague, Mr. Allen, 

because I think he very astutely and effectively outlined the phase and 

foreign policy of this Administration with respect to energy in 

Venezuela, Nigeria, and Iraq, and I certainly agree with his sentiments in 

that regard. 

 Presumably, I am hopeful that in this hearing that we will hear 

somewhat extended discussion about the impact of energy policies in 

China and India and the largely state-controlled, state-influenced systems 

that seem to be contributing significantly to the shortage by virtue of 

their expanding demand. The information that I have received would 

indicate that they have a policy, certainly China, of purchasing long-term 

contracts, significantly reducing the long-term availability of oil on the 

world market. If, in fact, that is the case, and I certainly could stand to 

be corrected, then I would be very anxious to hear what the United 

States’ response to this is, because we may have very effective 

conservation policy in this country, but the demand in China continues to 

consume at the rate it is consuming and if that expands and if, in fact, 

they are using this strategy of long-term contracts and, in my opinion, 

questionable foreign policy in places, such as Sudan, in order to obtain 

oil, we will need to have an adequate response, because our conservation 

will not impact the world oil market, and thus we will continue to 

experience significantly high prices at the pump. So I am hopeful the 

witnesses can comment on these, among other, issues. 
23

 But again, Mr. Chairman, thank you for calling the hearing. I look 

forward to hearing from the witnesses. 

 [The prepared statement of Hon. Albert R. Wynn follows:] 

PREPARED STATEMENT OF THE HON. ALBERT R. WYNN, A REPRESENTATIVE IN CONGRESS 

FROM THE STATE OF MARYLAND

Chairman Barton and Ranking Member Dingell, most of us understand that today’s 

excessively high crude oil prices reflect the global market for oil. For instance, Iran 

continues to defy world pressure to halt its nuclear program. Recently, Iran threatened to 

cut off oil production in response to possible U.N. sanctions - illustrating the devastating 

impact oil producing regimes exert on world markets. The mere threat of disruption has 

contributed to the volatility of world oil prices, thus locally impacting national gas prices. 

In Africa, 25% of Nigeria’s oil output has been stalled due to rebel attacks, leaving about 

530,000 barrels per day are offline. 

Contrary to the Administration’s pre-war claims, ongoing security concerns in Iraq 

have suppressed pre-war output by about 900,000 barrels per day. In our own 

hemisphere, partially in response to our own ham-fisted foreign policy, Venezuela has 

reasserted its intention to exert greater control over foreign-owned oil companies, 

reducing production by 400,000 barrels below its 2002 pre-strike levels. Additionally, 

China's demand for oil is expected to continue to increase by five to seven per cent per 

year, and over the last two years, Asia has consumed more oil than North America. This 

trend is expected to continue. 

These are all factors that contribute to the world price of oil on the New York 

Mercantile Exchange (NYMX), which recently hit a record high of $75 per barrel. 

Speculative buying and selling also impact the price of oil as traders update their 

portfolios to reflect anticipated market conditions. According to a recent New York 

Times Article, until more investments are completed in oil production and refining, 

markets will remain on edge and the slightest bit of bad news will likely increase prices. 

Because the U.S. is reliant on 60% of imported oil from foreign sources, we will be 

forever tied to the world oil market and be vulnerable to that market --- unless we can 

become self-sustaining and self-sufficient. 

Today’s global conditions lead us towards two ultimate conclusions. First, we must 

wean ourselves off of foreign sources of oil from politically unstable nations and fast 

track alternative forms of energy. For instance, hydrogen is the energy of the future - 

anything from nuclear to solar has the potential to produce hydrogen, and since its only 

byproduct is water, the energy source is emissions free. Second, in the interim, we must 

evaluate the nature of US foreign relations with oil seeking countries. In today’s resource 

competitive environment, it may be extremely difficult to change the face of US foreign 

policy to promote better relations with oil producing and consuming nations alike, but we 

must act quickly. 

Presumably, I am hopeful that this hearing will address the impact of energy policies 

in China and India, which are significantly contributing to the shortage of oil by virtue of 

their expanding demand. Data indicate that China, in particular, purchases long-term 

contracts, that will significantly reduce the availability of oil on the world market over 

the long haul. I would be interested in learning how the US intends to address this 

concern. 

Mr. Chairman, hopefully, the testimony delivered today will do more than serve as a 

primer in energy prices, but as a wake up call to the American people about the severity 

of today’s energy crisis - which goes beyond $3 gasoline. Thank you, and I look 

forward to today’s testimony. 
24

CHAIRMAN BARTON. I thank the gentleman. 

 Mr. Stearns from Florida. 

 MR. STEARNS. Thank you, Mr. Chairman. 

 And I submit that we hear from different Members talking about 

criticizing the Administration or criticizing Congress. You know, there 

are just supply and demand fundamentals involved, and they play a 

critical role in world oil prices. Obviously, there are geopolitical 

concerns, too. 

 With respect to the supply estimate, there are two million-plus 

barrels per day, BPD, of aggregate disruption in the world supply. We 

know that China, in 2004, increased demand 16 percent. India almost 

the same thing. That sent shockwaves through the market. On May 2, 

2006, the spot price for crude oil closed at $74.78 per barrel, 

approximately a $25-increase over the spot price just a year ago, and 

nearly four times the spot price of crude oil a decade ago. You don’t 

have to go far. You can even look in Nigeria to see there are 530,000 

BPD shut off by the insurgents. Venezuela has a large amount. Even in 

Iraq, the pre-war levels were low. The U.S. Gulf of Mexico, obviously, 

with Katrina. So disruptions in these countries has created this increase 

in oil prices. And so really that is beyond the Administration, and 

beyond the Congress at this point, so a lot of us should realize that a lot 

of this is geopolitical and there is nothing you can do unless you are 

going to approach it from a political standpoint. So this hearing, I think, 

should bring out some of the things I mentioned, these countries and all 

of these supply disruptions and the global crude oil inventories, the 

different size of these and how they have affected the supply and 

demand. 

 So Mr. Chairman, I think in a larger sense, many members should 

realize it is supply and demand, and that is what we are facing. 

 Thank you. 

 [The prepared statement of Hon. Cliff Stearns follows:] 

PREPARED STATEMENT OF THE HON. CLIFF STEARNS, A REPRESENTATIVE IN CONGRESS 

FROM THE STATE OF FLORIDA

Mr. Chairman, thank you for convening today’s hearing on global oil markets. This 

Committee, through the Energy Policy Act and the GAS Act, has dedicated a lot of time 

and energy to removing the regulatory barriers to increased oil supply and to encouraging 

greater efficiencies in the use of energy and limiting its consumption. While we have 

worked diligently on domestic problems within the realm of our jurisdiction, I hope that 

today’s witnesses will enlighten us as to the impact of international events on the supply 

of and demand for oil as a commodity. With skyrocketing demand in China and India, a 

bubbling insurgency in Nigeria, continuing instability in Iraq, potential war with Iran, and 

a growing trend of nationalization and seizure of private companies’ operations in South 

America, it is no wonder that the price of a barrel of oil is nearly $75 -- a nearly 25% 

increase from a year ago. 
25

Disruptions in South America have received the least amount of attention in the 

popular press. Just last month, Venezuelan strongman Hugo Chavez cancelled contracts 

with foreign oil companies, demanding that the government oil company be given 

majority ownership and operational charge of oil fields. Potential new contracts are 

offering little to no profit. Companies that refused to bolt the country outright have found 

their operations seized. Mr. Chavez has a copycat in Bolivia’s new President, Evo 

Morales, who nationalized his energy sector this past Monday. 

These moves will prove detrimental to both the Bolivian and Venezuelan 

economies, and to the world economy. Venezuela is already suffering from insufficient 

investment in energy production. Rampant corruption, and the use of energy profits to 

prop up socialist rule at home and insurgency abroad, have left Venezuela’s oil fields 

depleting at a rate of 25% a year. 

However, in the end, none of these global disruptions perfectly explain the price of a 

barrel of oil. Only the market concepts of insufficient supply and growing demand can do 

that. The low cost of oil in the nineties discouraged exploration for new sources while 

encouraging greater consumption. That is why incidents in oil-producing countries, as 

well as freakish weather like Hurricane Katrina, can drive up prices so sharply. 

 CHAIRMAN BARTON. Let us see. Ms. Solis. 

 MS. SOLIS. Thank you, Mr. Chairman. 

 Mr. Chairman, thank you for having this hearing today, and I am 

glad that we are discussing the global price of oil, and I am pleased that 

our witnesses today will help us better understand how oil is priced. 

 And oil, as I know it, is a global commodity in the global 

marketplace. Its price is seemingly driven only by the premise that there 

is never enough being produced. This is true in the United States, which 

has one of the largest demands for oil. We import nearly 60 percent of 

our oil, more than the total oil consumption of any other country in the 

world and have less than 3 percent of reserves. Because of our 

dependency on oil and the lack of reserves, we are extremely vulnerable 

to variations in international pricing. 

 And also complicating the factor is that the U.S. dollar is weak. The 

United States is borrowing from foreign countries to pay for its war in 

Iraq, imports of raw and manufactured materials. Our current account 

deficit is 7 percent of the economic production and is not decreasing. 

And our largest trade deficit is with China, which is increasingly 

competing for supplies of oil. 

 What this means is that we are highly integrating the global 

marketplace and are affected by what happens in the international 

market. Some would argue that the solution is to dig and drill here in the 

United States. Some would argue that the solution also is that we open 

up ANWR. However, the United States has less than 3 percent of proven 

reserves. This does not begin to touch the growing demand of U.S. 

consumers. No matter how much we dig and drill at home, we will 

always be vulnerable to changes in the world market. That is, unless we 
26

take steps to become more independent of oil, not just foreign oil but all 

oil. 

 And I strongly support diversifying our energy supply, funding 

alternative supplies and conservation. Unfortunately, renewable energy 

programs are being funded at less than 20 percent of what was 

authorized, and funding for clean energy research is less than 7 percent 

of the profits made by ExxonMobil in the last quarter of 2005 and less 

than that amount included in the President’s budget energy bill for fossil 

fuels. 

 Our Nation’s budget, in my opinion, must reflect the urgency of 

reducing our dependency on all oil, not just foreign. Perhaps, we will 

finally learn from our discussions today where we need to go, and I hope 

that we can ascertain some of these answers. 

 I yield back the balance of my time. 

 CHAIRMAN BARTON. I thank the gentlelady. 

 Mr. Ross. 

 MR. ROSS. Thank you, Mr. Chairman. 

 I would like to thank you for holding this important hearing 

regarding record crude oil prices and the adverse impact they are having 

on Americans. Americans are being forced to change their way of life, 

being forced to choose between paying bills, buying prescription drugs, 

or putting gasoline in their vehicles. 

 Mr. Chairman, I represent a large and rural district in the State of 

Arkansas, about half the State. My district includes 21,000 square miles 

and 150 towns and 29 counties. About half of the folks don’t even live 

in those 150 towns. They live in what we call the country. It is not 

uncommon for my constituents to drive 50 or 75 miles each way to and 

from work. And in most cases, they commute these distances for a job 

that pays well below the national average. Mass transit is not an option 

for them. Hardworking Americans who are trying to do the right thing 

by working to put food on the table, to keep the lights on, and to provide 

for their families are being devastated by these record gas prices. 

 In order to see true reductions in prices, we would have to either 

increase supply or decrease demand or, ideally, both. I strongly support 

the continued development and use of ethanol and biodiesel as a way to 

reduce the demand on costly fossil fuels. And as we continue working to 

increase the use of biofuels, we must make the necessary investments to 

develop our Nation’s infrastructure to support increased use of ethanol 

and biodiesel. 

 Mr. Chairman, I am committed to working with my colleagues on 

both sides of the aisle to make these investments to advance alternative 

fuels, which will provide Americans with a choice when they go to the 

pump. 
27

 Now Mr. Chairman, the reality is this. In the energy bill that I voted 

for and we passed earlier this year, there is about $150 million in that bill 

for grants for alternative renewable fuels. That is authorized, but not yet 

appropriated. And yet we send some $279 million every day to Iraq. So 

I want to make sure the American people understand that while there is a 

lot of talk these days about alternative renewable fuels, we are going to 

invest about half as much money in grants for alternative renewable fuels 

in these United States of America as what we will spend in Iraq in the 

next 24 hours. 

 And I say these things because I recognize that as we develop 

alternative fuels and flex-fuel vehicles, our Nation will continue to rely 

on fossil fuels as our primary source of energy. Therefore, I believe we 

must promote further exploration and development of domestic oil and 

gas production. I submit that addressing our Nation’s energy crisis will 

take a multi-faceted approach consisting of increased domestic 

production, conservation, the use of alternative and renewable energy 

sources, utilizing energy-efficient technologies, and end-user 

participation. 

 And with that, Mr. Chairman, I yield back the balance of my time. 

 CHAIRMAN BARTON. I thank the gentleman. 

 I would like to add my support for what he said in his statement. I 

am working with Mr. Dingell right now on a bipartisan letter to send to 

the appropriators, outlining my concerns about some of the programs that 

we have authorized that haven’t been funded and also some of the 

programs that have not been authorized that are being funded. Those 

discussions are ongoing with myself and Mr. Dingell. So we are trying 

to track some of the things that you have said in your statement. 

 The Chairman of the Veterans’ Committee is with us. Does Mr. 

Buyer wish to make an opening statement? 

 Okay. Seeing no other Members present who have not yet had a 

chance to make an opening statement, the Chair would ask unanimous 

consent that all Members not present have the requisite number of days 

to put their statement in the record at the appropriate time. Without 

objection, so ordered. 

 [Additional statements submitted for the record follows:] 

PREPARED STATEMENT OF THE HON. MARY BONO, A REPRESENTATIVE IN CONGRESS FROM 

THE STATE OF CALIFORNIA

 Mr. Chairman, thank you for holding this hearing today. 

 I believe that almost everyone here realizes that we are far too dependent on foreign 

oil. So price fluctuations abroad have a great impact at home. 

 I also realize that countries like China increase the overall worldwide demand on 

this resource. China is a country hungry for oil and natural gas and it now has the 

resources to bid in this marketplace. 
28

 But if our witnesses do not comment on this, I would like to ask them how Russia 

will impact the future price of world oil. Mr. Frederick Kempe in a May 2, 2006 Wall 

Street Journal piece discusses how Russia has “reinvented itself as an ‘energy 

superpower’” and “is moving quickly to consolidate and expand its virtual gas monopoly 

in many parts of Europe....” 

 While our European allies are more directly impacted by this, the fact that our world 

economy is so tied together and also the fact that Europe could also be shopping 

elsewhere is certainly a concern, never mind the geopolitical implications of Russia’s rise 

to power in this field. 

 Of course, I also realize the impact Iran has on the price of world oil. The instability 

within the region itself is a huge concern of ours not just because its impact on energy but 

because the shadow of Iran’s threat is cast beyond the sole concerns of our access to oil. 

 Finally, I wanted to take a moment to discuss another potential impact on the price 

of foreign crude. If you talk to many domestic producers, they might comment on how 

the prices they are getting for their oil is too low and how that threatens to put them out 

of business. We are not talking about $70 a barrel but rather, $22 to $35 dollars a barrel 

for domestic oil. Imagine the impact of losing our domestic producers and how that 

would impact the price we pay at the pump. 

 Again, Mr. Chairman, thank you for holding this hearing today. I look forward to 

hearing from the witnesses. 

PREPARED STATEMENT OF THE HON. CHARLES W. “CHIP” PICKERING, A REPRESENTATIVE 

IN CONGRESS FROM THE STATE OF MISSISSIPPI

Energy prices are on the minds of all Americans these days, given high gas prices. 

As Members of Congress, we are charged with taking the necessary steps to ensure that 

appropriate safeguards exist that will protect against unfair pricing of energy 

commodities, including crude oil. Therefore, our series of hearing on these issues is 

extremely important and timely. If we find evidence of lapses in oversight of our energy 

markets, we will take necessary actions to correct the problems. I understand that the 

New York Mercantile Exchange provides an important platform for the trading of these 

energy commodities and I look forward to hearing testimony today from NYMEX which 

will give the committee a better understanding of how their marketplace functions on a 

daily basis and what their platform means for energy prices. I understand that NYMEX 

is regulated by the U.S. Commodity Futures Trading Commission and look forward to 

hearing more about how the oversight regime works. 

 I am also interested in hearing about other energy markets and other platforms 

which could have an impact on energy prices. More importantly, I am concerned based 

on my understanding of these other platforms, that the regulatory attention paid to them 

may be somewhat less than that received by NYMEX. If this is in fact the case, I will be 

interested in hearing testimony explaining why this is the case and if the additional 

regulatory oversight is necessary, especially given the important of these markets in 

establishing prices for commodities used by all Americans. If the evidence suggests 

insufficient oversight, which could be contributing to higher prices or even market 

manipulation, it is my hope that our committee will move to fix the problem 

 CHAIRMAN BARTON. We now welcome our first two witnesses. We 

are going to start with you, Mr. Caruso, and then we will let Dr. Yergin 

be the clean-up. 

 Normally we do 5 minute summaries, but because of the importance 

of this issue, we will recognize you for 10 minutes each, and if you need 

a little bit more time, we are not going to be too picky about that. 
29

 So welcome to the committee, and we would like to hear your 

statement. 

STATEMENTS OF GUY CARUSO, ADMINISTRATOR, ENERGY 

INFORMATION ADMINISTRATION, U.S. DEPARTMENT 

OF ENERGY; AND DANIEL YERGIN, CHAIRMAN, 

CAMBRIDGE ENERGY RESEARCH ASSOCIATES 

MR. CARUSO. Thank you very much, Mr. Chairman, members of the 

committee. I appreciate this opportunity to present the Energy 

Information Administration’s views and analysis on the world oil market 

situation. 

 As we often hear in the real estate market, the three key factors are 

location, location, and location. In the global oil market, the three key 

factors are capacity, capacity, and capacity. And that is capacity from 

the upstream sector of the industry to explore, develop, and produce 

through the midstream transporting that crude oil to the downstream of 

refining, distribution, and marketing. And as we sit here today, in an 85-

million-barrel-a-day world oil industry, all of those capacities, from the 

upstream through the downstream, are stretched very thin. 

 During the 1990s, these capacities were looser and the price, for 

example, of West Texas Intermediate crude averaged about $20 a barrel. 

It even fell to $10 a barrel in 1998. OPEC managed the market. After 

that price collapse, prices were coming back and value increased to about 

$30 in 2003. The main reason was world demand was growing, and 

prices doubled to an average of almost $60 in 2005, and, as we know, 

today, they are above $70 a barrel. 

 Crude oil prices are set in international markets based on world 

supply and demand. These higher prices should reduce demand and 

increase supply, however, we must recognize that there are considerable 

time lags in responses to the higher prices on both the demand and the 

supply side. Changing consumer behavior, investment responses all take 

time, and investment in new oil production and refining projects take 

time for a variety of reasons. 

 In the short term, crude oil end-product inventories, surplus 

production capacity, and international trade all serve as cushions for 

unexpected shifts in demand or supply of petroleum products. Today, 

the cushions just aren’t available to make an effect on this market. As a 

result of that, the only pressure relief valve is price, and that is what we 

have been witnessing really beginning in 2004, and it continues as we 

speak. 

 The robust global economic growth has been a key factor, and it has 

pushed the demand for crude oil up significantly in recent years. After 
30

slow growth in the 1990s, oil demand grew significantly beginning in 

2003 and, in 2004, it grew by 2.5 million barrels a day, the largest rate of 

growth in 30 years, and this was particularly stimulated by very robust 

growth in China, other emerging Asian economies, in the Middle East 

itself, and in the United States. Now we are seeing a little bit of an effect 

of the higher oil prices as U.S. demand was relatively flat last year, and 

thus, by this year, is only up slightly. 

 Turning to supply, non-OPEC producers, who tend to further utilize 

their available crude production capacity for economic reasons, produce 

about 60 percent of the world’s oil supply. In 2005, there was essentially 

no growth in non-OPEC supply due to natural declines in the mature 

fields, project delays, and most importantly, the U.S. hurricanes, which 

continue to affect the U.S. production today. 

 The nations in OPEC produce about 40 percent of the world’s oil, 

and its members in the Middle East hold the bulk of the world’s oil 

reserves. For most of the time since the early 1980s, OPEC members 

held sizable surplus production capacity. However, that margin has 

sharply narrowed as world demand has grown. World surplus productive 

capacity now totals only about one to, at most, 1.5 million barrels a day 

out of an 85-million-barrel-a-day world, about 98 percent of capacity. 

 The uncertainties that we have heard a number of committee 

members mention this morning about supply in Iraq, in Nigeria, in 

Venezuela, and in Russia, all are certainly adding to the psychological 

pressures in this marketplace and to concerns that future supply 

disruptions may occur. 

 Oil markets, of course, are not just about crude oil supply but also 

refining. Excess refining capacity has also been shrinking, not only in 

the United States but globally, in the primary distillation facilities and, 

most importantly, in conversion capacity to turn sulfurous crude into 

gasoline, diesel fuel, and jet fuel, which account for about 70 percent of 

our oil demand in this country. 

 We estimate that refinery utilization worldwide is at about 90 percent 

in 2006, up from 85 percent as recently as 2002. Although refining 

margins have increased with these higher product prices, there also has 

been considerable volatility, which tends to effect companies’ 

willingness to invest in what oftentimes is a multi-year development 

project which must pay off over decades. 

 With this virtual disappearance of U.S. excess refining capacity, we 

are now seeing a number of firms, as has been mentioned by Mr. Green, 

that have announced expansion plans at existing facilities. New 

grassroots refineries are under construction at this time. 

 Another factor affecting refineries is crude oil quality. The limited 

amount of surplus capacity that exists today is in Saudi Arabia, and it is 
31

relatively high sulfur, or sour crude. This puts a strain on refineries 

around the world to process the lower-quality oil. The trends in crude 

and product slates plus frightening product specifications have increased 

the need for refineries to invest in upgrades to their existing equipment. 

 In tight markets without surplus capacity, inventories also play an 

important role as a buffer against supply problems. We currently are 

witnessing a futures market, which is in contango, meaning that the 

future prices are actually higher than the current price in the physical 

market. This puts another incentive for companies to add to inventories, 

and the desire to increase inventories adds to current demand, putting 

additional pressure on prices. 

 Some analysts, as has been mentioned this morning, suggest that the 

current prices reflect a “fear” premium, a “risk” premium. In our view, 

supply and demand factors can explain most of the price increases seen 

over the last few years, particularly when it is recognized that demand 

for high inventories is rational under conditions of tight surplus capacity 

and particularly supply uncertainty. Unless surplus capacity increases 

significantly, or many of the supply uncertainties are resolved, we could 

see high inventories and high prices, reflecting a shift from the traditional 

paradigm that associates high inventories with low prices. 

 Now let me briefly turn to the current EIA short-term outlook. 

 We have been saying for some months that the world oil market is 

tight and that prices are likely to remain high over the next two years. 

Our most recent short-term energy outlook released April 11 projected 

crude oil prices averaging $65 for WTI in 2006 and $61 in 2007. Based 

on developments just in the last several weeks, there is likely to be some 

upward adjustment in these projections when our May outlook is issued 

next week. We project continued growth in world oil demand of about 

1.5 million barrels per day in 2006 and a similar increase in 2007. NonOPEC production growth is expected to run behind global demand 

growth in 2006, increasing the call on OPEC’s oil, but still allowing for a 

small increase in OPEC’s surplus production capacity. 

 Based on projects already in the pipeline, it is likely that growth in 

OPEC and non-OPEC capacity will exceed demand growth between 

2007 and 2010, possibly pushing surplus production capacity to three to 

five million barrels per day by 2010. 

 High crude oil prices, growing demand, and changing fuel 

specifications are expected to keep U.S. product prices high in 2006. 

High gasoline margins are expected due to demand increases, sulfur 

reductions, the phase-out of MTBE, and the unusually high level of 

refinery outages recently, partly due to deferred maintenance from the 

Katrina and Rita aftermaths, and to some capacity actually still off-line 

due to those hurricanes. 
32

 So in summary, Mr. Chairman and members of the committee, we 

see oil markets over the next two years characterized by strong demand 

growth, tight global capacity for both crude production and refining, and 

continued supply uncertainty in a number of key producing countries. 

 And with that, Mr. Chairman, I would be pleased to answer 

questions at the appropriate time. 

 [The prepared statement of Hon. Guy F. Caruso follows:] 

PREPARED STATEMENT OF THE HON. GUY F. CARUSO, ADMINISTRATOR, ENERGY 

INFORMATION ADMINISTRATION, U.S. DEPARTMENT OF ENERGY

Mr. Chairman and Members of the Committee: 

I appreciate the opportunity to appear before you today to discuss the world oil 

market situation. 

The Energy Information Administration (EIA) is the independent statistical and 

analytical agency within the Department of Energy. We are charged with providing 

objective, timely, and relevant data, analysis, and projections for the use of the Congress, 

the Administration, and the public. We do not take positions on policy issues. We do 

produce data, analysis, and forecasts that are meant to assist policymakers in their energy 

policy deliberations. Because we have an element of statutory independence with respect 

to this work, our views are strictly those of EIA and should not be construed as 

representing those of the Department of Energy or the Administration. 

Oil market developments are a matter of vital interest to all Americans. During most 

of the 1990s, the West Texas Intermediate (WTI) crude oil price averaged close to $20 

per barrel, but plunged to almost $10 per barrel in late 1998 as a result of the Asian 

financial crisis slowing demand growth while extra supply from Iraq was entering the 

market for the first time since the Gulf War. During that time, the Organization of 

Petroleum Exporting Countries (OPEC) producers adhered to a coordinated production 

quota and reduced output. Crude oil prices not only recovered, but increased to about $30 

per barrel as demand grew. The recent increase in crude oil prices began in 2004, when 

crude oil prices almost doubled from 2003 levels, rising from about $30 per barrel at the 

end of 2003 to peak at $56.37 on October 26, 2004. After falling back briefly, prices then 

continued to rise in 2005 and in the early months of 2006. Just recently, we have seen 

WTI prices rise above $70 per barrel. This is a significant change from what we 

experienced during the latter half of the 1980s and the 1990s. As requested in your 

invitation, my testimony focuses on the major forces at work in today’s oil market and 

then briefly reviews EIA’s current assessment. 

Major Forces Affecting World Oil Markets 

Crude oil prices are determined in international markets. All else being equal, higher 

prices should tend to reduce oil demand and increase supply. However, oil demand is also 

strongly influenced by economic growth, weather patterns, and the availability and price 

of other fuels. Moreover, oil supply can be significantly affected by weather-related 

disruptions, instability, impediments to investment in key oil producing areas, and, under 

certain market conditions, decisions by producers to withhold supplies. Because there are 

considerable lags in the investment and behavioral responses to changing oil prices, 

recent price increases have had only a very small immediate impact on the amount of oil 

consumed or produced. For this reason, changes in the key non-price factors that can shift 

demand and supply at any point in time can result in significant price swings, particularly 

when oil markets are tight. Given the inherent uncertainty in oil markets, commercial 

inventories of crude oil and products and surplus oil production and refining capacity 
33

serve as cushions to absorb the impacts of unexpected shifts in oil supply or demand. 

International arbitrage in products, such as the movement of gasoline from Europe to the 

United States, is yet another form of cushioning. All of these factors are interrelated, as 

will be discussed in more detail below. 

Demand. Recent years have seen a significant acceleration in oil consumption 

growth, largely driven by strong global economic growth. As illustrated in Figure 1, oil 

consumption, which grew at a rate, on average, of roughly 1 million barrels per day 

throughout the 1990s, accelerated sharply in 2003 and especially in 2004, when global oil 

demand grew by 2.5 million barrels per day. Demand growth has been particularly strong 

in China, other emerging economies in Asia, and the United States. In 2005, although 

available data to date indicate that U.S. oil consumption was essentially flat at the 2004 

level, world consumption grew by well over 1 million barrels per day despite rising 

prices. In addition to demand for consumption, there is also a demand for commercial 

(non-strategic) stocks of crude oil and products. Commercial oil stocks have recently 

been growing, as discussed below. 

Supply. Growth in production and productive capacity is shaped by geological, 

economic, and political factors. Production in countries that are not members of OPEC 

accounts for about 60 percent of total crude oil supply. Crude oil suppliers outside of 

OPEC generally produce at maximum rates (i.e., no surplus production capacity) for 

economic reasons. 

Although they provide only about 40 percent of the world’s oil supply, capacity, and 

production, statements by the member countries of OPEC are closely watched. Unlike 

other producers, OPEC and its members explicitly seek to influence world prices by 

varying production levels relative to available capacity. Middle East countries that are 

members of OPEC also hold the bulk of the world’s proved reserves of oil. 

For most of the time since the early 1980s, OPEC members, primarily Saudi Arabia, 

have maintained a considerable margin of surplus crude oil production capacity. The 

large growth in non-OPEC capacity and production in areas like the North Sea, Russia, 
34

and Alaskan North Slope, along with softening demand in response to the substantial 

increase in oil prices following the two oil price shocks of the 1970s, led to major cuts in 

OPEC production in the 1980s, creating large capacity surpluses. As oil demand grew 

through the 1990s, OPEC production increased without a corresponding increase in 

capacity, and the margin of surplus capacity generally narrowed. However, while shortterm imbalances between supply and demand resulted in some price swings during the 

1990s, those imbalances did not last long, as capacity generally existed to remedy the 

situation within a year. 

Even as demand growth slowed somewhat in 2005 compared to 2004, 2005 

witnessed no real growth in non-OPEC supply, in part because of the U.S. hurricanes, but 

also because of other factors such as project delays and significant natural decline in 

mature producing areas. Hence, instead of 2005 giving the market time to breathe after 

the rapid demand growth in 2004, market conditions in 2005 only grew tighter. 

Ongoing supply uncertainties associated with Iraq and Nigeria and investment 

uncertainties in Russia and Venezuela have added to market concerns over the 

availability of crude oil, and prices have continued to rise. In 2005, Iran and Ecuador 

added new uncertainties. So far in 2006, we have seen continued, if not growing, 

geopolitical risks, with Chad most recently added to the list of potential concerns. 

Refining (Downstream) Capacity Constraints. In the past few years, even as 

crude oil prices rose sharply, a great deal of attention has been turned toward the 

importance of the refining sector, especially following the hurricanes last fall. The stormrelated shutdown of many Gulf Coast refineries highlighted a situation that had been 

developing for some time. Excess capacity in the refining industry, like that for crude oil 

production, has been shrinking as demand has grown, leaving less of a buffer for 

emergencies or any periods when the balance between supply and demand becomes 

unusually tight. The reduction in excess refining capacity is a global phenomenon. EIA 

estimates that global refinery utilization has grown to about 90 percent of capacity, up 

from 85 percent as recently as 2002, as the overall growth in demand for petroleum 

products has outpaced refinery additions. 

Historically, price differentials between crude oil and petroleum products have 

varied significantly over time due to a number of influences, the greatest of which is 

seasonality. Even in the absence of changes in the underlying cost of the crude oil from 

which they are refined, gasoline and distillates (including heating oil, diesel fuel, and jet 

fuel) exhibit seasonal pricing cycles over the course of the year. Gasoline prices (and 

differentials from crude oil) tend to rise before and during the summer, when demand for 

it is greater, and decline in the winter. Distillate prices and differentials, on the other 

hand, tend to increase over the fall and early winter, as space-heating demand increases, 

then to drop in the spring. 

This underlying seasonal pattern has always been subject to distortion under unusual 

situations, such as supply interruptions or severe weather, which can affect both supply 

and demand. But by and large, the seasonal shifts in differentials between crude oil and 

petroleum product prices were relatively consistent, and thus predictable. In recent years, 

however, as excess refinery capacity has dwindled, these price spreads have become 

subject to much wider swings, both seasonally and under unusual supply or demand 

conditions. For example, through the 1990s, the average spread between U.S. spot 

gasoline and WTI crude oil prices generally swung from a low of less than 10 cents per 

gallon during the winter months to a high of around 20 cents in the summer. Since 2000, 

the corresponding range has been from a winter low of about 10 cents to a summer high 

of 30 to 40 cents, with last year featuring an all-time monthly average high of 67 cents in 

September, following Hurricane Katrina. 

Much has been made of these higher differentials and the accompanying higher 

profits to refiners. Clearly, when refinery utilization rates were below today’s high level, 

margins were generally lower but so was refining profitability, providing little incentive 
35

for the building of new refining capacity. As a result, as product demand caught up to 

existing refinery capacity, capacity that was not fully utilized has effectively disappeared 

in the United States, and consequently refining margins have grown. A number of U.S. 

refiners have announced major refinery expansion projects to be completed in the next 

few years. 

Commercial Inventories of Crude Oil and Products. When the lack of surplus 

capacity along the entire supply chain is put in context of an oil market where 

uncertainties about future supply abound (e.g., Iran, Nigeria, Iraq, and Venezuela), 

market participants are concerned about being able to get needed supplies should 

something cause a drop in supply. 

As a result, many of them have stored additional inventories as a buffer should there 

be a supply problem at some point in the future. In other words, whereas markets have 

traditionally relied on available surplus capacity to provide a part of the response to any 

unexpected supply problems, under current tight capacity conditions, inventories must 

play a relatively larger role in buffering the market, and the demand for inventories has 

increased, putting upward pressure on prices. 

Additionally, until the most recent surge in crude oil prices, oil market futures prices 

were in contango, i.e., a market in which prices for commodities delivered in future 

months are higher than for those delivered in months closer to the present. This provides 

economic incentive for suppliers to build inventories as they can buy physical barrels at 

current prices, but hedge against any drop in prices by selling contracts at higher prices 

on the futures market. Of course, one of the reasons oil markets were in contango is 

concern about the potential of a disruption in supplies in the future, either from events 

overseas or from hurricanes, for example. 

Thus, until either surplus capacity increases significantly or many of the perceived 

uncertainties in the market are removed, oil markets could see high inventories coexist 

with high prices for the foreseeable future. Oil market analysts used to the old, inverse 

relationship between inventories and prices need to understand that new market dynamics 

(lack of surplus capacity and contango) have significantly altered this linkage. This 

perception that high oil prices may continue for some time encourages non-physical 

traders to buy up contracts, adding further support to high prices on commodity markets. 

In addition, the volume of non-physical traders has increased in recent years, meaning 

that speculative investors have a somewhat greater effect on price than in the past. 

Nevertheless, such speculation is more an effect of real market conditions than a cause, in 

and of itself, of high prices. 

Crude Oil Price Differentials. As global oil demand growth has outpaced supply, 

shrinking available surplus crude oil production and refining capacity, another factor has 

become increasingly important – the quality of the crude oil streams available. The very 

limited amount of surplus oil production capacity is increasingly concentrated in heavy, 

sour (high-sulfur) crude, at a time when demand growth for “light” products such as 

gasoline, diesel fuel, and jet fuel has been particularly strong. The decline in average 

crude quality has put even more strain on a global refining system that is already running 

at unprecedented utilization rates to turn available feedstocks into the desired product 

slate. 

The combination of higher demand for “clean” and “light” products and tighter 

supply of light, sweet crude oils has resulted in wider price differentials between crude 

types. Thus, in addition to higher average world crude oil prices, the prices of highquality crude oils, which can yield the highest percentages of gasoline and other light 

products, have grown even faster than the average, placing an even greater price premium 

on “clean” products such as reformulated gasoline and low-sulfur diesel fuel. The price 

differential between crude oil types also places a greater premium on high-upgrading 

refinery capacity, including facilities able to remove more sulfur and produce higher 

yields of light products from heavier crude streams. Along with tightening product 
36

specifications and other environmental constraints, these trends have forced refiners to 

spend more capital on upgrading existing refinery equipment, at the expense of greater 

capacity growth. 

Is There an Additional “Fear” Premium? Some analysts, noting that oil markets 

have recently shown price changes that they deem to be “unwarranted” in response to 

seemingly innocuous news, have argued that prices are high due to speculation or a 

“fear” or “risk” premium. What is missing from this argument is recognition that under 

the current tight oil market conditions described above, there is very little flexibility in 

the global production or refining system to react to potential supply shortfalls or demand 

surges. EIA currently estimates that global surplus crude oil production capacity is only 

about 1.0-1.5 million barrels per day. The relationship between surplus OPEC capacity 

and prices is depicted in Figure 2. As many as 20 different countries currently produce at 

least 1 million barrels per day. 

Flexibility in oil markets is currently very limited in the capacity to produce 

significant incremental volumes of crude oil or light products. Under these conditions, it 

is not too surprising that traders would bid prices up and down substantially on what may, 

on the surface, appear to be insignificant news, but what can, nevertheless, change 

expectations about what the future may hold. This is why oil prices can increase as fears 

about the damage a hurricane might inflict arise as the hurricane approaches, only to see 

them fall as the hurricane turns away from the oil facilities in the Gulf of Mexico region, 

or as concerns about having enough oil on hand when world total product demand peaks 

in the winter cause prices to go up in the summer. When oil markets are as tight as they 

are, relatively small changes in the actual or perceived supply and demand picture, which 

may result from seemingly innocuous news items, can have a magnified impact on oil 

prices. Simply put, any “fear” or “risk” premium would be hard to sustain without the 

fundamentals of supply and demand already being tight. EIA believes that supply and 

demand factors can explain almost all of the price increases seen over the last few years, 

particularly when it is recognized that demand for high inventories is rational under 

conditions of tight surplus capacity and supply uncertainty. 

0

10

20

30

40

50

60

70

012345678

Surplus OPEC Capacity (million barrels/day)

WTI Price (dollars per barrel)

Sources: WTI - Reuters; Surplus Capacity - EIA calculations

Figure 2. WTI Crude Oil Price vs. OPEC Surplus Crude Oil Production Capacity, 

April 1999 - March 2006 
37

The Outlook for Oil Markets 

EIA’s monthly Short-Term Energy Outlook is fairly representative with regards to 

projections of world oil prices and world oil market trends. However, for the reasons 

discussed above, it should be noted that energy price projections are particularly 

uncertain, because small shifts in either supply or demand can necessitate large shortterm price movements to restore balance under current tight oil market conditions. 

EIA has been saying for many months that the world oil market is tight, and that world 

oil prices are likely to remain high over the next 2 years. Most analysts now agree with 

this assessment, and last week the International Energy Agency (which does not make 

short-term price projections) went on record with this viewpoint as well. This is in 

contrast to the diversity of views expressed just last year, when many other analysts 

believed that prices were out of line with market fundamentals and would not remain 

high for an extended time. 

In addition, EIA’s assessment of world oil demand growth is similar to those of 

other analysts. EIA currently projects demand growth of 1.5 million barrels per day in 

2006, within the 1.2 to 1.7 million barrels-per-day range of other forecasters. Analysts are 

more divided over the prospects for growth in non-OPEC total liquids production, with 

EIA’s projections of 0.8 million barrels per day growth in 2006 on the low end. Most 

projections range between 0.9 and 1.4 million barrels per day, although several other 

forecasters have an even lower estimate of 0.5 million barrels per day. 

According to EIA’s most recent Short-Term Energy Outlook, released April 11, 

2006, continued steady world oil demand growth, only modest increases in world surplus 

oil production capacity, and the continuing risks of geopolitical instability and weather 

are expected to keep crude oil prices high through 2006. The price of WTI crude oil is 

projected to average $65 per barrel in 2006 and $61 in 2007. We are currently in the 

process of compiling our May Outlook for release on May 9, which will likely 

incorporate some upward adjustment to projected prices in light of recent market 

developments. 

World oil market conditions, growth in U.S. demand, and ongoing implementation 

of domestic fuel quality requirements are all expected to keep consumer prices for motor 

fuels and other petroleum products high in 2006. Higher crude oil costs together with 

higher margins (retail price minus crude oil cost and taxes, per gallon) are also expected 

to contribute to increases at the pump. Higher gasoline margins are likely because: 1) 

gasoline consumption is expected to grow solidly following weak growth in 2005; 2) Tier 

2 gasoline requirements mandate further reduction in sulfur content this year; 3) phaseout of methyl tertiary butyl ether (MTBE) from the gasoline pool is likely to put 

significant pressure on ethanol and gasoline prices; and 4) there has been an unusual level 

of refinery outages due in part to hurricane-related deferred maintenance. Higher diesel 

fuel margins are expected because of the additional cost of producing ultra-low-sulfur 

diesel fuel later this year. 

EIA View of Capacity Additions. In OPEC, surplus production capacity will 

remain tight in 2006, but EIA expects around 600 thousand barrels per day of surplus 

crude oil production capacity growth and 600 thousand barrels per day of non-crude 

production growth. Specifically, the UAE could add 200 thousand barrels per day from 

de-bottlenecking the Zakum and Umm Shaif fields. New crude oil production capacity at 

the Bonga and Erha fields in Nigeria has been offset by disruptions to Shell-owned, 

offshore oil production, and these recent disruptions could have longer-term implications 

for net supply growth from Nigeria. Algeria’s production is expected to increase by 100 

thousand barrels per day from increased oil and condensate production. Libya could also 

add 100 thousand barrels per day, primarily from enhanced recovery from existing fields. 

Iran and Indonesia are projected to lose capacity by 2007. This year, EIA expects nonOPEC total liquids supply growth of up to 800 thousand barrels per day, and we expect 

an additional 1.5 million barrels per day in 2007. One major portion of the increases in 
38

non-OPEC supply in 2006 is simply recovery from the Gulf of Mexico hurricanes. 

Improvements to oil supply recovery technology in the Gulf of Mexico, recovery of the 

Mars production platform, and the beginning of production from the Thunderhorse and 

Atlantis fields account for a large portion of growth from the United States. By the fourth 

quarter of 2007, oil production from these fields is expected to account for about 10 

percent of the lower-48 oil production. Outside of the United States, major supply 

additions in the Caspian, Brazil, and West Africa stem the decline in mature field 

production in the North Sea, Russia, the Middle East, and Mexico. 

Major projects in Angola include the Chevron-led Benguela Belize project, of 200 

thousand barrels per day, and the ExxonMobil-led Kizomba B and C projects, of 250 

thousand and 240 thousand barrels per day, respectively. By the time these projects are 

all producing at their maximum rates in 2007 and 2008, they will have added almost 700 

thousand barrels per day to Angola’s existing production. In the Caspian, the BP-led 

consortium that is developing the Azeri-Chirag-Guneshli (ACG) project will increase 

production by around 400 thousand barrels per day between 2005 and 2007. The project 

operators maintain that they will be able to double Azerbaijan’s existing production to 

around 1 million barrels per day by 2010. Finally, in Canada, conventional oil production 

in the Western Canada Sedimentary Basin will continue to decline at around 3 percent 

per year. Taking into account nonconventional growth from oil sands, EIA still expects 

400 thousand barrels per day of net growth from Canada between 2005 and 2007. 

Based on projects that are already in the pipeline, there is a strong likelihood that 

additions in OPEC and non-OPEC capacity will exceed demand growth between 2008 

and 2010. World surplus production capacity could grow to 3 to 5 million barrels per day 

by 2010, substantially thickening the surplus capacity cushion, if demand projections 

prove accurate. A larger surplus capacity cushion would undoubtedly be beneficial. 

Based on recent experience, it is clear that geopolitical developments in oil-producing 

areas will also be important to the future supply situation, but EIA has no basis for 

projecting whether the overall stability of these areas will improve or deteriorate. 

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

be happy to answer any questions you may have. 

 CHAIRMAN BARTON. We thank you, Mr. Administrator. 

 We now want to hear from Dr. Daniel Yergin, who is recognized as 

one of the leading experts and consultants on the energy sector in the 

world today. We appreciate you being here. 

DR. YERGIN. Thank you, Mr. Chairman. 

 And it is really an honor and a privilege to be able to join you, Mr. 

Chairman and members of the committee, as you conduct this timely set 

of hearings on America’s energy situation. 

 As we all know, the deep concerns and the financial pressures that 

the American public are experiencing are what prompted this hearing, 

and I hope in the course of our discussions to be able to contribute a little 

bit to understanding the context. 

 There are many issues here at home to address, but I think if there is 

a single message I can leave you all with today, it is that we cannot begin 

to understand what is happening at the gasoline pump today unless we 

see it in the global context involving both crude supply, refining, and 

indeed foreign policy and geopolitics. So I am pleased to be here, and I 
39

am very happy to be with the Administrator of the EIA, Guy Caruso, for 

whom I have great respect. 

 I want to try and answer four questions and maybe set them out as a 

framework for discussions. 

 First, the question on everybody’s mind, we heard it today, why have 

prices doubled in the last two years. And as I say, you need to see it in a 

global context. There is not, today, a global shortage, but the oil market 

is very tight, pointing to rising demand and now, to what we can see, is 

this kind of slow-motion energy shock. We have developed the concept 

of an aggregate disruption to try and bring it together. We put that 

number at 2.2 million barrels a day, based upon Venezuela, Iraq, the Gulf 

of Mexico, and Nigeria. 

 Guy Caruso spoke about the risk premium, or the “fear” premium, or 

some call it a “security” premium. And we share the view that it really 

does derive from people looking at the fundamentals in the market. And 

at least our estimate right now is that it will be somewhere between $10 

and $15 a barrel. 

 The second question is what are these high prices telling us about the 

futures world oil supply? Are we, indeed, running out, as some say? 

And to that, I answer the question: yes, indeed, we are running out, and 

indeed, this is the fifth time that we have run out of oil. The first time 

was in the 1880s. The last time, before this time, was in the 1970s, and 

since then, world oil production has increased by 60 percent. 

 In other words, what I want to suggest to you all today is that the 

prime risks are not the resources underground, but what is happening 

above ground: politics, geopolitics, policies, and a rebirth in some parts 

of the world of what sure looks like a 1970s-style resource nationalism, 

which is riding on this crest of high energy prices. We saw it unfolding 

there past few days in Bolivia, and it reminds us that, indeed, the broader 

context of geopolitics and foreign policy is very important to the whole 

energy picture. 

 There is, understandably, and we hear it all of the time, much focus 

on energy security. It will be the number one issue on the agenda when 

the G-8 nations meet in St. Petersburg in July. But one of the things that 

strikes me is that everybody is in favor of energy security, but there is 

not a lot of clarity on what do we mean by energy security. 

 So for this hearing, I wanted to offer a set of principles, which I will 

just do in shorthand, and though not offer them as a definitive list, but 

really as a process of dialogue or consideration. And there are ten of 

them. 

 One is diversification of supply. That is the starting point. 
40

 The second is the importance of a resilient security margin. The type 

of issue is capacity that Guy Caruso was talking about that gives us a 

buffer. 

 Three, and this is something that we forget a lot, is really the reality 

of integration. There is, at the end of the day, only one global oil market. 

There are not four or five different ones. 

 Fourth, and we see it whenever emotions get hot, the importance of 

quality information. 

 Fifth, and this is in response to some of the issues that have been 

raised, the need to engage countries, such as China, India, and Brazil, in 

the energy security system and to use the sort of idiomatic parliaments to 

understand where they are coming from on energy issues. 

 Sixth, something that I think is complicated, but very important, is 

extending the energy security concept to include the infrastructure and 

the entire supply chain. The hurricanes emphasized that. 

 Seventh is something that, frankly, I think is probably 

counterintuitive for these circumstances, recognizing that flexible 

markets are actually a source of security rather than insecurity. And I 

think we saw that in the response to the hurricanes last autumn. 

 Certainly, as we have heard, renewing the commitment to energy 

efficiency and conservation, strengthening the investment climate, which 

is an international issue, and the development and deployment of new 

technologies. So I offer those as ten elements about energy security. 

 The final overall point that I develop in my testimony is an urgent 

need to update the SEC-mandated system for defining proved oil 

reserves, because it is still done on the basis of technology from the late 

1970s. It is this 1978 system. It provides a distorted view of our reserve 

base. It is as though saying that when you submit financial information 

to the SEC, you should use only typewriters and carbon paper. That is, 

more or less, what it is like. And this serves neither the interest of 

consumers, nor investors, nor that of energy security. 

 As I think Guy emphasized, we are really at a historic juncture right 

now. After a quarter century, this great cushion of surplus production 

capacity that was created by the energy turbulence of the 1970s and the 

early 1980s has been largely spent. It is gone, at least for the time being. 

And it is on that relatively narrow band of “spare capacity” that so much 

of the drama in the world oil market, and indeed at the gasoline pump, 

now plays out. 

 We all know, and it is a question for this hearing, why people are 

paying $3 a gallon or more today. But as I said, we won’t find the 

answer if we only look inside the United States. Sometimes, as I hear the 

debate about energy, it seems to assume that we are an island; the United 

States is an island, albeit a very large continental island. 
41

 That is not the case, as we have already heard. We imported a third 

of our oil in the 1970s. Today, we import 60 percent. What this means 

is that we are highly integrated into the global marketplace, and we are 

surely affected by what happens in that marketplace. 

 We have to remind ourselves of scale. U.S. oil companies, for 

instance, produce less than 10 percent of the total oil that is produced in 

the world today. Sixty-five percent is produced by State-owned 

companies. They have over 80 percent of the reserves. 

 Today, that balance between supply and demand is very tight. As we 

have heard, part of the reason is the surge in economic growth in 

developing countries. China and India are the most noteworthy 

examples, although China grew by 16 percent in 2004. That caught 

everybody’s attention. In 2005, China’s demand grew by only 2 percent. 

And the data is still preliminary, but we will look to EIA for what is 

happening in data. 

 On refining, and I hear the numbers about all of the refineries that 

have disappeared. I think it is true, but an awful lot of those were the 

“teakettles” that were created in the 1970s to take advantage of what was 

called the “small refiner bias.” These were very inefficient refineries. 

And I think we have to look at the overall aggregate refining capacity. 

That number went down until about 1993 or 1994. It has grown by about 

15 percent since then, which is as though we have built ten new 

refineries in the United States, but we built them by expanding existing 

capacity. And part of the discussion, of course, is what we need to do to 

expand our capacity looking to the future. 

 But there, too, we have to look in a global context, because there is a 

global shortage of what is called “complex refining capacity,” which is 

necessary to reflect the fact that European motorists love diesel cars. 

Over half of them buy diesel cars. Asia depends upon diesel fuel. We 

have complex refining capacity, but Europe and Asia don’t have enough. 

 I think we can say that the focus of the market, which was on 

demand, has really now shifted to supply, and that we are experiencing, 

as I said, that slow motion supply shock. But what explains the rapid rise 

over the last eight weeks? There are three things that really stand out. 

 Number one is Nigeria, and I think there is an underestimation in the 

discussion about the significance of what has happened in Nigeria, the 

loss of that high-quality oil--which is so essential for making gasoline--

and the uncertainty about whether we are going to lose more from 

Nigeria. Five hundred and fifty thousand barrels a day is missing from 

Nigeria. The last time there was a disruption like this a few years ago, it 

was like 800,000 barrels a day. That is one reason the market is nervous. 

 The second is the ratcheting up of tensions over Iran’s nuclear 

program. We all know what has happened over the last month, and the 
42

fear of disruption in one way or another of Iran’s 2.5 million barrels a 

day of exports. Some Iranian spokesmen threatened to unleash an oil 

crisis while others seek to separate oil from atoms. But in this market, 

the threat of risk escalation is enough to send crude oil prices up. And 

sometimes, I think the chief speculator in the oil market today is the 

President of Iran. 

 The third factor that I want to just say, and you all know it very well, 

is clearly this rapid switchover from MTBE to ethanol. It has added to 

the pressures in the market. It comes at a difficult time. The spring is 

really when you see the pressure of the summer driving season, the 

additional pressures of the hurricanes. I think when the energy 

legislation was passed, no one knew that these hurricanes would, of 

course, follow, but it is very well to remember when we have these 

changes, doing it in compressed time is very difficult when we think in 

another few weeks we will be through it, but it is certainly something 

that should work now. So as I said, we think this transition, MTBE to 

ethanol, will be over by the time Americans begin their serious driving 

this summer. But there is little reason to think that the tension over 

Iran’s nuclear program will abate, and much uncertainty about what will 

happen in Nigeria. And as we have heard, in terms of foreign policy, 

elsewhere in the world as well. 

 So, in terms of dealing with the situation that we now see, the $3 at 

the pump, the pain it is causing for American consumers, I think we have 

to look for the impact of fundamentals for price moderation. We need to 

look for the build-up of supplies from elsewhere. We need to look at the 

level of crude oil inventories. And we need to look to the response to 

higher prices on the part of consumers, on the part of investors, and 

indeed on the part of people in the Congress and other parts of the U.S. 

government who are entrusted with making wise decisions about our 

energy future. 

 Thank you. 

 [The prepared statement of Daniel Yergin follows:] 

PREPARED STATEMENT OF DANIEL YERGIN, CHAIRMAN, CAMBRIDGE ENERGY RESEARCH 

ASSOCIATES

It is an honor and privilege to be invited to address this Committee as it begins its 

important and timely set of hearings on America’s energy position. The deep concerns 

among the American public that are prompting this hearing are evident, and I appreciate 

the opportunity to contribute to understanding the context. I hope that I can provide a 

framework for your consideration. If there is a single message, it is that we cannot begin 

to understand what is happening at the gasoline pump unless we see it in the global 

context -- involving both crude supply and refining worldwide. 

I hope in this hearing to answer four questions:
43

1. Why have oil prices nearly doubled during the past two years? What are the 

risks going forward? I would like to present what is happening at the pump in a 

global context. Although there is no actual supply shortage, the world oil 

market is very tight, owing not only to rising demand, but also to a “slow 

motion supply shock” -- what we have called an “aggregate disruption” in 

excess of two million barrels per day. 

2. What are current prices telling us about the world’s future oil supply? Oil is a 

non-renewable resource, but we do not believe the world is imminently facing 

the specter of running out. Or, to put it differently, this current period is the 

fifth time the world has run out of oil. The first time was in the 1880s and the 

last time before this time, in the 1970s – since which world oil production has 

increased 60 percent. The prime risks today are not lack of resources 

underground, but what is happening above ground ... politics, geopolitics, and 

a rebirth in some parts of the world of 1970s style resource nationalism that is 

riding on the crest of high prices. 

3. There is, understandably, much focus on energy security today. But what does 

the concept mean for the 21st century and how does it need to be updated from 

traditional definitions? I would like to offer these principles: 

a) Diversification of supply is the starting point 

b) Resilience, a “security margin” in the energy supply system that provides 

a buffer against shocks and facilitates recovery after disruptions. 

c) Recognizing the reality of integration – there is only one global oil market 

d) The importance of quality information 

e) The need to engage such countries as China, India, and Brazil in the 

energy security system 

f) Expanding energy security to the include the infrastructure and the entire 

energy supply chain 

g) Recognizing flexible markets as a source of security 

h) Renewing the commitment to energy efficiency and conservation 

i) Strengthening the investment climate itself 

j) Development and deployment of new technologies 

4. Finally, I want to comment about the urgent need to update the SEC-mandated 

definition of proved reserves, which are still based on the technology of the late 

1970s and, as a result, provides a distorted view of our reserve base. That 

serves neither the interests of consumers, nor investors, nor that of energy 

security. 

II Prices and the Security Premium 

As the sense of these hearings indicates, we are at a historic juncture. After a 

quarter century, the great cushion of surplus oil production capacity that was created by 

the energy turbulence of the 1970s and early 1980s has been largely spent – at least for 

the time being. It is on that relatively narrow band of “spare capacity” that so much of 

the drama in world oil markets is playing out. 

The American people clearly want to know why they are paying about $3 -- or more 

-- at the pump. But we will not find the answer if we only look inside the United States. 

Sometimes, the debate about energy prices seems to assume that the United States is an 

island – albeit a very large continental island. 

That, of course, is not the case. In the 1970s we imported a third of our oil; today, it 

is on the order of 60 percent. Our oil imports are larger than the total oil consumption of 

any other country in the world. What this means is that we are highly integrated into the 

global marketplace – and are affected by what happens in the market. 

Today, the balance between supply and demand in the world oil market is very tight. 

Part of the reason is the surge in economic growth in both developed and developing 
44

countries – of which the growth of China and, to a lesser regard, India provide the most 

noteworthy examples. But the demand surge turned into slower growth in 2005 and the 

data is still preliminary for 2006. 

Meanwhile, the focus of the market has shifted from demand to supply. We are 

currently experiencing that slow motion supply shock, the aggregate disruption of more 

than two million barrels per day, to which I referred before. 

What explains the sharp rise in oil prices over the past eight weeks? 

1. The first is the real disruption of a significant part of Nigeria’s oil 

production owing to an insurgency in Nigeria’s Delta region. Workers 

have been evacuated, and the local insurgents are threatening further 

attacks. This means the loss of a high quality light sweet oil particularly 

well-suited for making gasoline. 

2. The second is the ratcheting up of tensions over Iran’s nuclear program 

with a fear of a disruption of Iran’s 2.5 mbd of exports. Some Iranian 

spokesmen threaten to unleash an “oil crisis” while others seek to separate 

oil from atoms. But in a market this tight, the risk of escalation is enough 

to send crude oil prices up. 

3. The third factor is at home – the rapid switch over from MTBE to ethanol 

on the East Coast and in Texas has added pressure to what has been for a 

number of years the most difficult period in the gasoline market – the 

spring makeover of gasoline from winter to summer blends. This year’s 

switchover has been made more arduous by the consequences of last 

year’s hurricanes. Refineries need downtime for maintenance and to 

prepare for the switch to ultra-low sulfur diesel in the summer. The 

shifting from MTBE to ethanol has required changes all along the supply 

chain – different suppliers, different transportation (trucks and rail cars 

instead of pipelines) and different locations for blending (terminals 

instead of refineries.) Normally a change over like this would be done in 

a couple of years. As it turned out, 270 days a very compressed time for 

conversion in the face of other challenges, including the unexpected fury 

of the hurricanes that occurred after the passage of the energy bill. 

We would expect that the transition will be complete by the time most Americans 

begin their serious summer driving. But there is little reason to think that the tension 

over Iran’s nuclear program will abate, and much uncertainty remains over what will 

happen in Nigeria. So we must look to the impact of fundamentals for price moderation 

-- in the build-up of supplies from elsewhere, the relatively high level of crude oil 

inventories, and the demand response to higher prices. 

The Demand Surge 

The last decade has witnessed a substantial increase in the world’s demand for oil, 

primarily because of the dramatic economic growth in developing countries, in particular 

China and India. As late as 1993, China was self-sufficient in oil. Since then, its GDP has 

almost tripled and its demand for oil has more than doubled. Today, China imports 3 

million barrels of oil per day, which accounts for almost half of its total consumption. 

China’s share of the world oil market is about 8 percent, but its share of total growth in 

demand since 2000 has been 30 percent. 

The impact of growth in China, India, and elsewhere on the global demand for 

energy has been far-reaching. In the 1970s, North America consumed twice as much oil 

as Asia. In 2004 and 2005, for the first time ever, Asia’s oil consumption exceeded North 

America’s. The trend will continue: half of the total growth in oil consumption in the next 

15 years will come from Asia, according to CERA’s projections. 

However, Asia’s growing impact became widely apparent only in 2004, when the 

best global economic performance in a generation translated into a “demand shock”—
45

that is, unexpected surge in petroleum consumption that was more than double the annual 

average growth rates of the preceding decade. China’s demand in 2004 rose by an 

extraordinary 16 per-cent compared to 2003, driven partly by electricity bottlenecks that 

led to a sharp rise in oil use for improvised electric generation. US consumption also 

grew strongly in 2004, as did that of other countries. The result was the tightest oil 

market in three decades (except for the first couple of months after Saddam’s invasion of 

Kuwait in 1990). 

The torrid pace of demand in 2004 did not continue into 2005. Last year China’s 

demand grew by 1.7 percent – compared to the 16 percent in 2004 – and world demand 

grew just 1 percent. 

Refining Capacity 

Refining capacity is a major constraint on supply, because there is a significant 

mismatch between the refined product requirements of the world’s consumers and 

refineries’ capabilities. Although often presented solely as a US problem, inadequate 

refining capacity is in fact a global phenomenon. The biggest growth in demand 

worldwide has been for what are called “middle distillates”: diesel, jet fuel, and heating 

oil. Diesel is a favorite fuel of European motorists, half of whom now buy diesel cars, 

and it is increasingly used to power economic growth in Asia, where it is utilized not just 

for transportation but also to generate electricity. But the global refining system does not 

have enough so-called deep conversion capacity to turn heavier crudes into middle 

distillates. This shortfall in capacity has created additional demand for the lighter grades 

of crude. 

Nevertheless, refining is a high-focus issue in the United States. The number of 

U.S. refineries has gone down by about half since the 1970s. Many of these were the 

small “tea kettle” refineries that were intended to take advantage of the “small refiner 

bias” under the 1970s control system. 

Yet what truly counts is not the number of refineries but the capacity – the number 

of barrels that can be produced. Here we see a different trend. Overall, capacity went 

down until the early 1990s and then began to increase again with larger, more efficient 

refineries. This does not reflect the building of new refineries, which has been hampered 

by costs, siting, and permitting. Rather it is expansion and upgrading of existing 

refineries and what is called “refinery creep”—which when added up has taken some big 

steps. Capacity is up 15 percent – 2.2 mbd – since then. This 2.2 mbd expansion in 

capacity is the equivalent of adding 10 new good-sized refineries over the last dozen 

years. 

There is unease, of course, about dependence on imported refined products and 

possible threats to the supply chain. At this point, half of total refined products imports 

come from Western Europe, Canada, and the Caribbean (excluding Venezuela). Western 

Europe has been the largest source because it has excess gasoline production. 

Slow Motion Supply Shock: the Aggregate Disruption 

But what has now become clear in 2006 is that we are experiencing a slow motion 

supply shock – an aggregate disruption that, at present, we would put at 2.2 million 

barrels per day. 

Nigeria 550,000 bd 

Venezuela 400,000 bd 

Iraq 900,000 bd 

US Gulf 324,000 bd 
46

A good part of Gulf of Mexico production is slated to soon start up again (as is 

hurricane season.) In the meantime, other transitory interruptions elsewhere in the world 

can, at least for short periods, take additional oil off the market. 

These disruptions have, with the strength of demand, resulted in a very tight oil 

market and one that is more vulnerable to any further problems. Market psychology – 

anticipation of risk – becomes more powerful, translating into a scarcity or risk premium. 

We currently estimate that premium at $10 -15 a barrel. At the present time, the most 

important contributors to the premium are the unrest in Nigeria, and uncertainty about 

what will happen there, and the ratcheting up of tension over Iran’s nuclear progress and 

the fear that in one way or another, Iran’s 2.5 mbd of exports may be disrupted, with 

additional collateral effects. Without these circumstance, we would not be seeing oil 

over $70 per barrel.

IV Growing Resource Base – and the “Undulating Plateau” 

As always happens when prices are high and supplies are uncertain, there is much 

discussion about whether the world is going to run out of oil. In the 1970s, the term was 

“the oil mountain,” as in “the world was about to fall off the oil mountain.” The 

geographic imagery has gotten higher -- today it is “peak.” Our research leads us to 

conclude that “peak” is a misleading image. Based upon our analysis of oil fields and 

investment programs , and drawing on the databases of our parent company IHS, which 

has the largest collection of data on world production, we see a substantial buildup in 

world oil production capacity for a number of years. A more relevant description is 

“plateau” in production capacity that might be reached closer to the middle of the 

century. 

We currently project worldwide liquids production capacity (not actual production) 

to grow from 88.7 mbd in 2006 to 105.3 mbd in 2015. This involves a growing role for 

non-traditional liquids – oil sands, gas-to-liquids, ultra deep water. This represents a 

widening of the definition of oil. Such a development and accords with the history of the 

industry, in which non-conventional technologies are introduced and, over time become 

conventional. 

The risks are not below ground, in terms of shortage of resources, but above ground 

– political decisions by governments, conflict, natural disaster, or price volatility. Rising 

costs and shortage of people are also of concern. Our CERA Capital Costs Index

indicates that offshore costs are up 42 % since 2000 – and 14% just in the last half-year. 

After 2010, growth in capacity will be concentrated in what we call the “0il 15” – 

which will likely cause increased foreign policy concern. 

I want to emphasize that this outlook does not detract, at all, from the need to 

develop new technologies, new energy options, alternatives, and new unconventional 

production. It does argue strongly for a need to integrate energy and foreign policy in a 

considered way – a point I will develop later. 

Modernizing Reserve Disclosure 

I have spoken about the need to understand future resources and to expand our 

concepts of energy security. Let me mention one area in which the US government could 

address both. The system for reserves disclosure mandated by the Securities and 

Exchange Commission was established by the US Congress in the mid-1970s, after the 

first Oil Shock, for reasons of energy security – to answer the questions “how much oil is 

actually there?” 

The “1978 System,” as put in place reflects the best practices of the time. It was 

based upon the 1965 definition of The Society of Petroleum Engineers (SPE) and 

discussions in the 1970s. Since then, the SPE has revised its definition three times and is 

in the process of doing so again. However, the SEC’s system still relies on the definition 
47

of 1965 and the practices of the 1970s. Thus registrants are basically restricted to the 

technology of those years in reporting reserves – which has led to a growing divergence 

between what is reported under the SEC’s 1978 system and how companies, using more 

modern technologies and tools, assess their own reserve position, on which they base 

investments of hundreds of million of dollars – and, now more frequently, several billion 

dollars. 

The changes have been enormous since the 1970s. Back then there was no digital 

revolution, and the frontier for offshore developments was 600 feet of water; today it is 

12,000 feet. The rules do not recognize the vast technical progress over the last 30 years, 

and as a result, standard techniques used today by companies to set multibillion 

investment programs are not approved, or only partly approved, for use in describing 

proved reserves for disclosure purposes to investors. 

In addition, the rules simply have not kept up with the globalization of the industry. 

They were devised for onshore operations in “Texlahoma,” the “oil patch” of Texas, 

Louisiana and Oklahoma that was the center of industry activity in the ‘50s and ‘60s. 

Today more than 80% of the total of companies’ proved reserves are outside the US; and 

the differences among the fiscal regimes in several countries make it harder, not easier, to 

compare domestic and international reserves. As perverse as it may sound, under the 

“production sharing agreements” that are common in many oil-producing countries, when 

the price goes up, the proved reserves go down. 

Major projects today dwarf those in the past, both in size and complexity. “Nontraditional projects: are drawing on increasing share of capital, but they are not 

adequately accommodated under the “1978 system.” This includes a significant part of 

Canadian oil sands, gas-to-liquids and projects in what’s called the “ultra-deep-water.” 

And yet these “non-traditional-liquids will account for as much as 45% of oil production 

capacity in North America by 2010. Nor does the current system fully account for larger, 

commodity-driven liquefied natural gas business that will be critical to the future US 

natural gas supplies. 

But the industry is still required to report using the technology of the 1970s -- when 

no one had a cell phone or a personal computer, let alone access to the Internet. It is as 

though companies preparing financial reports to the SEC in 2006 could do so only use 

typewriters and carbon paper. Modernizing the reserves disclosure would clearly 

improve understanding of the resource base and its potential and provide clarification for 

purposes of energy security. 

Energy Security in the 21st Century 

What has been the paradigm of energy security for the past three decades is too 

limited and must be expanded to include many new factors. Moreover, it must be 

recognized that energy security does not stand by itself but is lodged in the larger 

relations among nations and how they interact with one another. Energy security will be 

the number one topic on the agenda when the group of eight highly industrialized 

countries (G8) meets in St. Petersburg in July. The renewed focus on energy security is 

driven in part by an exceedingly tight oil market and by high oil prices, which have 

doubled over the past three years. But it is also fueled by the threat of terrorism, 

instability in some exporting nations, a nationalist backlash, fears of a scramble for 

supplies, geopolitical rivalries, and countries’ fundamental need for energy to power their 

economic growth. 

Concerns over energy security are not limited to oil. When it comes to natural gas, 

rising demand and constrained supplies mean that North America can no longer be selfreliant, and so the United States is joining the new global market in natural gas that will 

link countries, continents, and prices together in an unprecedented way. 

At the same time, a new range of vulnerabilities has become more evident. Al Qaeda 

has threatened to attack what Osama bin Laden calls the “hinges” of the world’s 
48

economy, that is, its critical infrastructure—of which energy is among the most crucial 

elements. The world will increasingly depend on new sources of supply from places 

where security systems are still being developed. And the vulnerabilities are not limited 

to threats of terrorism, political turmoil, armed conflict, and piracy. In August and 

September 2005, Hurricanes Katrina and Rita delivered the world’s first integrated 

energy shock, simultaneously disrupting flows of oil, natural gas, and electric power. 

The key to energy security has been diversification. This remains true, but a wider 

approach is now required that takes into account the rapid evolution of the global energy 

trade, supply-chain vulnerabilities, terrorism, and the integration of major new economies 

into the world market. 

The current energy security system was created in response to the 1973 Arab oil 

embargo to ensure coordination among the industrialized countries in the event of a 

disruption in supply, encourage collaboration on energy policies, avoid bruising 

scrambles for supplies, and deter any future use of an “oil weapon” by exporters. Its key 

elements are the Paris-based International Energy Agency (IEA), whose members are the 

industrialized countries; strategic stockpiles of oil, including the US Strategic Petroleum 

Reserve; continued monitoring and analysis of energy markets and policies; and energy 

conservation and coordinated emergency sharing of supplies in the event of a disruption. 

Experience has shown that to maintain energy security countries need to recognize 

several key principles. 

1. The first is diversification of supply. Multiplying one’s supply sources reduces 

the impact of a disruption in supply from one source by providing alternatives, 

serving the interests of both consumers and producers, for whom stable markets 

are a prime concern. But diversification is not enough. 

2. A second principle is resilience, a “security margin” in the energy supply 

system that provides a buffer against shocks and facilitates recovery after 

disruptions. Resilience can come from many factors, including sufficient spare 

production capacity, strategic reserves, backup supplies of equipment, adequate 

storage capacity along the supply chain, and the stockpiling of critical parts for 

electric power production and distribution, as well as carefully conceived plans 

for responding to disruptions that may affect large regions. 

3. Hence the third principle: recognizing the reality of integration. There is only 

one oil market, a complex and worldwide system that moves and consumes 

about 86 million barrels of oil every day. For all consumers, security resides in 

the stability of this market. Secession is not an option. 

4. A fourth principle is the importance of information. High-quality information 

underpins well-functioning markets. Information is crucial in a crisis, when 

consumer panics can be instigated by a mixture of actual disruptions, rumors, 

and fear. Reality can be obscured by accusations, acrimony, outrage, 

transforming a difficult situation into something much worse. In such 

situations, governments and the private sector should collaborate to counter 

panics with high-quality, timely information. 

As important as these principles are, the past several years have highlighted the need to 

expand the concept of energy security in two critical dimensions: 

5. the recognition of the globalization of the energy security system, which can be 

achieved especially by engaging China and India, and 

6. the acknowledgment of the fact that the entire energy supply chain needs to be 

protected. 

It is important to get China’s situation into perspective. Despite all the attention 

being paid to China’s efforts to secure international petroleum reserves, for example, the 

entire amount that China currently produces per day outside of its own borders is 

equivalent to just 10 percent of the daily production of one of the supermajor oil 

companies. If there were a serious controversy between the United States and China 
49

involving oil or gas, it would likely arise not because of a competition in a wellfunctioning global market for the resources themselves, but rather because they had 

become enmeshed in larger foreign policy controversies (such as a clash over a specific 

regime or over how to respond to Iran’s nuclear program). Indeed, from the viewpoint of 

consumers in North America, Europe, and Japan, Chinese and Indian investment in the 

development of new energy supplies around the world is not a threat but something to be 

desired, because it means there will be more energy available for everyone in the years 

ahead as India’s and China’s demand grows. 

It would be wiser—and indeed it is urgent—to engage these two giants in the global 

network of trade and investment rather than see them tilt toward a mercantilist, state-tostate approach. Engaging India and China will require understanding what energy 

security means for them. Both countries are rapidly moving from self-sufficiency to 

integration into the world economy, which means they will grow increasingly dependent 

on global markets even as they are under tremendous pressure to deliver economic 

growth for their huge populations, which cope with energy shortages and blackouts on a 

daily basis. Thus, the primary concern for both China and India is to ensure that they 

have sufficient energy to support economic growth and prevent debilitating energy 

shortfalls that could trigger social and political turbulence. 

The concept of energy security needs to be expanded to include the protection of the 

entire energy supply chain and infrastructure. None of the world’s complex, integrated 

supply chains were built with security, defined in this broad way, in mind. Hurricanes 

Katrina and Rita brought a new perspective to the security question by demonstrating 

how fundamental the electric grid is to everything else. 

Energy interdependence and the growing scale of energy trade require continuing 

collaboration among both producers and consumers to ensure the security of the entire 

supply chain. Long-distance, cross-border pipelines are becoming an ever-larger fixture 

in the global energy trade. There are also many chokepoints along the transportation 

routes of seaborne oil and, in many cases, liquefied natural gas (LNG) that create 

particular vulnerabilities. 

The challenge of energy security will grow more urgent in the years ahead, because 

the scale of the global trade in energy will grow substantially as world markets become 

more integrated. Currently, every day some 40 million barrels of oil cross oceans on 

tankers; by 2020, that number could jump to 67 million. By then, without major technical 

changes, the United States could be importing 70 percent of its oil (compared to 58 

percent today and 33 percent in 1973), and so could China. 

 But in the United States, as in other countries, the lines of responsibility—and the 

sources of funding—for protecting critical infrastructures, such as energy, are far from 

clear. The private sector, the federal government, and state and local agencies need to 

take steps to better coordinate their activities. 

7. Markets need to be recognized as a source of security in themselves. The 

energy security system was created when energy prices were regulated in the 

United States, energy trading was only just beginning, and futures markets were 

several years away. 

Today, large, flexible, and well-functioning energy markets provide security by 

absorbing shocks and allowing supply and demand to respond more quickly and with 

greater ingenuity than a controlled system could. Such markets will guarantee security for 

the growing LNG market and thereby boost the confidence of the countries that import it. 

There is much to be said in terms of resisting the temptation to intervene and 

micromanage markets. . Intervention and controls, however well meaning, can backfire, 

slowing and even preventing the movement of supplies to respond to disruptions. At least 

in the United States, any price spike or disruption evokes the memory of the infamous gas 

lines of the 1970s. Yet those lines were to a considerable degree self-inflicted—the 
50

consequence of price controls and a heavy-handed allocation system that sent gasoline 

where it was not needed and denied its being sent where it was. 

Contrast that to what happened immediately after Hurricane Katrina. A major 

disruption to the US oil supply was compounded by reports of price spiking and of 

stations running out of gasoline, which together could have created new gas lines along 

the East Coast. Yet the markets were back in balance sooner and prices came down more 

quickly than almost anyone had expected. Emergency supplies from the US Strategic 

Petroleum Reserve and other IEA reserves were released, sending a “do not panic” 

message to the market. At the same time, two critical regulatory restrictions were eased. 

One was the Jones Act (which bars non-US-flagged ships from carrying cargo between 

US ports), which was waived to allow non-US tankers to ship supplies bottlenecked on 

the Gulf Coast around Florida to the East Coast, where they were needed. The other was 

the set of “boutique gasoline” regulations that require different qualities of gasoline for 

different cities, which were temporarily lifted to permit supplies from other parts of the 

country to move into the Southeast. The experience highlights the need to incorporate 

regulatory and environmental flexibility—and a clear understanding of the impediments 

to adjustment—into the energy security machinery in order to cope as effectively as 

possible with disruptions and emergencies. 

7. The US government and the private sector should also make a renewed 

commitment to energy efficiency and conservation. Although often underrated, 

the impact of conservation on the economy has been enormous over the past 

several decades. Over the past 30 years, US GDP has grown by 150 percent, 

while US energy consumption has grown by only 25 percent. In the 1970s and 

1980s, many considered that kind of decoupling impossible, or at least certain 

to be economically ruinous. Current and future advances in technology could 

permit very large additional gains, which would be highly beneficial not only 

for advanced economies such as that of the United States, but also for the 

economies of countries such as India and China (in fact, China has recently 

made conservation a priority). 

8. The investment climate itself must become a key concern in energy security. 

There needs to be a continual flow of investment and technology in order for 

new resources to be developed. The IEA recently estimated that as much as $16 

trillion will be required for new energy development over the next 25 years. 

These capital flows will not materialize without reasonable and stable 

investment frame-works, timely decision making by governments, and open 

markets. 

New Technologies 

9. Development of new technologies will remain the fundamental starting 

principle of energy security for both oil and gas. This will require new 

generation of nuclear power and “clean coal” technologies and encouraging a 

growing role for a variety of renewable energy sources as they become more 

competitive. It will also require investing in new technologies, ranging from 

near-term ones, such as the conversion of natural gas into a liquid fuel, to ones 

that are still in the lab, such as the biological engineering of energy supplies. 

Investment in technology all along the energy spectrum is surging today, and 

this will have a positive effect not only on the future energy picture but also on 

the environment. 

We talked earlier of the widening definition of oil. We will also see the widening 

definition of gasoline with what has recently become a broad commitment to introducing 

ethanol into the gasoline pool. Undoubtedly we will see a substantial growth of ethanol 

and the infrastructure to support it. But we have to remember the overall scale of the 

target envisioned in the 2005 legislation would be about five percent of total supply. 
51

Given the current incentive to step up in investment, the number could be somewhat 

higher. Achieving much larger objectives depends on substantial advances in the science 

of cellulosic ethanol. Certainly this will be a major focus of effort in the years ahead. 

Finally, we must return to the larger context. Energy security indeed exists in a 

larger context. In a world of increasing interdependence, energy security will depend 

much on how countries manage their relations with one another, whether bilaterally or 

within multilateral frameworks. That is why energy security will be one of the main 

challenges for US foreign policy in the years ahead. Part of that challenge will be 

anticipating and assessing the “what ifs.” And that requires looking not only around the 

corner, but also beyond the ups and downs of cycles to both the reality of an ever more 

complex and integrated global energy system and the relations among the countries that 

participate in it. 

 CHAIRMAN BARTON. Thank you, Dr. Yergin. 

 The Chair is going to recognize himself for the first round of 

questioning. 

 I want to thank each of you for your testimony. It is refreshing to 

have a discussion that it is non-demagogic, about the oil industry. I want 

to start with a general question that each of you may want to address. 

 Each of you has indicated that the cushion between production and 

reserve capacity is almost non-existent, that we produce about 85 million 

barrels of oil worldwide, and we are using about 85 million, maybe 84 

million. What were the events, say, 10 years ago, and what would it be 

helpful if they were today, i.e., if we had a 5 million barrel reserve 

margin or a 10 million barrel reserve margin. What would that do to the 

price structure? 

 MR. CARUSO. About 10 years ago, world surplus capacity was 

between three and four million barrels a day. And in the mid-1980s, 

when prices collapsed, those of you who remember in 1986, world 

excess capacity actually reached 11 million barrels a day. Then prices 

were averaging about $12 a barrel that year. So we are talking about if 

you had to pick one key factor, surplus productive capacity, there is a 

chart in my testimony, shows how critical that is, that as you move 

towards the 5-million-barrel-a-day mark and higher, then you get back to 

what we have observed as a historical average of around $20 a barrel in 

the world oil market. 

 CHAIRMAN BARTON. Is 5 million barrels kind of the minimum? 

 MR. CARUSO. It is very difficult, because it is not only the absolute 

number but, as has been eloquently pointed out, in the context of what 

kind of geopolitical environment are you in. I think we are not only right 

now in the worst of both worlds, we have 1 or 1.5 million barrels a day 

of surplus-- 

 CHAIRMAN BARTON. Well, could you postulate a theory that you 

need enough reserve capacity to take the expected increase this year and 

next year with, then, maybe another million barrels on top or something 

like that? If you had a “world energy czar” and they adopted that as a 
52

strategy, would that alleviate some of the price pressure that we have 

today at retail? 

 MR. CARUSO. In my view, it would. 

 CHAIRMAN BARTON. Because that would take some of the 

speculative pressures off. 

 Well, the question I would ask you, Dr. Yergin, given this tightness 

of the supply reserve margin cushion and these high prices we have had, 

why has there not been more of a response on the production side in 

these countries that have large proven reserves? 

 DR. YERGIN. Right. I think you have to look at each country. 

Venezuela has had a 400,000 barrel-a-day decline in production capacity 

since the turmoil there in 2002 and 2003. I think Russia was on a very 

strong up growth, but changes there and the shift there has meant that 

Russian growth is much lower. I think that when prices are high, 

governments don’t feel the pressure or the need for revenues, and so they 

put a lot less focus on-- 

 CHAIRMAN BARTON. Take a country like Mexico, if there is ever a 

country that has a revenue pressure on it because of its economy and the 

growth of its population, why would they not significantly expand 

production on their proven reserve base, given these prices? 

 DR. YERGIN. Well, I think Mexico is constrained by the nature of its 

political system from responding, and it needs more investments in its 

sector. They don’t have the capital to do it. It needs technology to go 

out into deep waters and so forth, and it is not doing that. And I think if 

you look at the battles over the last 6 years, 5 years, and Mexico’s 

political system, an awful lot of it has been do you open up their sector to 

international investment, which would certainly lead to higher 

production and ultimately would lead to higher government revenues. 

 CHAIRMAN BARTON. Well, is there any evidence, either one of you 

gentlemen, that the current price level is encouraging proven reserves 

coming on line in some of the nations that actually have large reserve 

bases? 

 DR. YERGIN. Well, I think the country where you can see and it is 

pretty clear a substantial increase is coming, of course, is Saudi Arabia, 

which has a $50 billion program to increase capacity. The other thing is 

you can see that the spending, where you can see it by companies around 

the world, is increasing very substantially to invest, but it is also coming 

at a time that costs are going up pretty rapidly in the industry. Our cost 

index shows the costs of developing, let us say, an offshore field in the 

Gulf of Mexico, doing it today would be 42 percent more expensive than 

it would have been 5 years ago. So people are increasing investment, but 

it is also up against an industry that is very short of people. There is 
53

another capacity to add to Guy’s capacity, the shortage of people, 

equipment, and skills. 

 CHAIRMAN BARTON. Okay. My time has expired. I want to ask one 

more question. And I could ask questions for the next hour, but 

obviously, with all of the Members here, that is not fair. 

 I want each of you to speculate a little bit on what is happening in the 

futures market by speculators, and what would the reaction be if we 

raised the margin requirement on the energy futures market from the 

current requirement, 2 or 3 percent, to 35 percent or 50 percent, 

something like it is in the stock market. Dr. Yergin, in your testimony, 

said that the estimates are that speculation adds $10 to $15 a barrel or 

maybe 10 to 15 percent. 

 DR. YERGIN. Ten to 15 dollars a barrel. 

 CHAIRMAN BARTON. So what would happen, because that is 

something this Congress could do. 

 DR. YERGIN. Yes. 

 CHAIRMAN BARTON. We could have a margin requirement increase 

on the floor two weeks from now, maybe even next week. What would 

that do to drive the speculators out of the market and bring the price 

down? And what would that do for the people, the hedgers and the 

traders who actually use the futures market in their daily business 

regime? 

 DR. YERGIN. I think that, obviously, that is really getting to the next 

panel, but I would say that one of the new things in the market is that it is 

not only the traditional traders and hedgers and so forth, but also you 

have an awful lot of pension fund money, endowment money, and so 

forth, that is going into the oil market, seeing oil as a financial 

instrument, and that is long-term passive money. 

 CHAIRMAN BARTON. They are in the futures market? 

 DR. YERGIN. Yes, they are buying the commodity. 

 CHAIRMAN BARTON. A pension fund is buying a futures fund? 

 DR. YERGIN. Yes, pension funds now believe that they need to 

diversify into their asset classes, and one of their asset classes is 

commodities. And what commodity looms larger than oil? None. So 

that is part of their diversification. So that is part of it. As to what the 

right percentage for the margin requirements is, that is not something that 

I have studied so that I could give you an answer for that. 

 CHAIRMAN BARTON. Well, make a guess. 

 DR. YERGIN. Well, I think if you raise the margin requirements, 

would it reduce the volatility? I don’t know. Guy, what do you think? 

 MR. CARUSO. I am not sure, probably a bit less. Our analysis, what 

should I say, we don’t think the speculative part of the price is quite as 

high as $10 to $15, but there is clearly an upside bias to this market. It is 
54

because most people perceive the risk to be on the upside. Now by 

raising the margin requirements, it certainly would make the cost of 

business for legitimate speculators on the market more expensive, but I 

think, my understanding is the CFTC now has very tight regulations on 

NYMEX, for example. So I am not so clear it would really achieve the 

stability that you are looking for. And I think volatility plays a role in 

the marketplace. It reflects the uncertainty that is out there. And 

ultimately, the physical market brings the futures and the paper market 

back down. It can’t get too far out of line because of the arbitrage and 

the normal hedging that takes place. So my own view is it probably 

wouldn’t reduce volatility that much. 

 DR. YERGIN. Mr. Chairman, if I could add one other thing. I think 

when I assumed that $10 to $15, I think we wouldn’t say it is a 

speculative premium so much as a “security” or a “fear” premium, 

because the President of Iran makes a very apocalyptic statement, and I 

think that participants in the market, whether they are traders, whether 

they are people worrying about long-term supplies, what they are looking 

at is it reflects the fear that maybe there will be a disruption, and it may 

be more of a shortage. So I just wanted to separate out the speculative 

from what is really driven by, ultimately, a concern about the 

fundamental. 

 CHAIRMAN BARTON. I understand that, but there is a difference 

when an airline is using the futures market to try to hedge the price of 

fuel or a producer who wants to make sure they lock in a certain price for 

their product than somebody who is just literally, “Well, I think the price 

is going to go up. I think the price is going to go down.” And buying a 

futures contract purely on speculation. They have no intention to use the 

contract for anything other than to make or lose money. There is nothing 

wrong with playing the markets to make or lose money, but this 

particular commodity, at this particular time, if those participants in the 

market are a larger percentage than normal, I think it is a legitimate 

government function to consider raising the margin requirement to make 

it more difficult to just purely be speculative in the market. 

 Let us see. Mr. Gonzalez would be the senior Member here who was 

here at the start of the bell. 

 MR. GONZALEZ. Thank you very much, Mr. Chairman. 

 And I share with you the concerns regarding the investments by 

pension funds and such and highly speculative investments, but I do 

believe, and I will have to look at it, one of my concerns was actually 

included in the Republican Pension Reform Bill out of the House, which 

actually lowered the threshold to allow these pension funds to get into 

the hedge markets and investments. And so maybe we ought to have that 
55

discussion on another day, but it is out there, and it is very real. And I 

share your concerns. 

 My question. Mr. Caruso, when was the last time you testified here? 

It wasn’t that long ago. A few months ago? 

 MR. CARUSO. Well, after the Katrina. 

 MR. GONZALEZ. And at that time, I think, you had some projections 

or predictions on the price of gasoline. And I believe you were right on 

until very recently. Do you remember what your predictions were? I 

don’t have my notes. I just remember you-- 

 MR. CARUSO. I think last fall, we were looking at an average 

gasoline price for the United States this year would be around about 

$2.40. So we were lower than the way they are going right now, largely 

because I think our crude price projection was around $60, and now we 

are probably looking at $66 or $67. 

 MR. GONZALEZ. So a lot of what we do, government agencies, 

departments, Members of Congress, when we look to the future, this is 

something that really is not that predictable depending on all of these 

other conditions? 

 MR. CARUSO. Correct. 

 MR. GONZALEZ. Yes. Because I mean, when we went back to our 

district, we were telling them that basically government officials were 

telling us, and you were actually right. I mean, I was really surprised 

that you were that accurate at that point in time. I hate to say that, you 

know, now your batting average in the past couple of weeks is really bad. 

 Mr. Yergin, this is really amazing. You know, I come from Texas, 

Mexican-American descent and such, and it is a heartbreaker to think 

that PEMEX is not more than it can be. Are there any estimate studies 

out there showing what the potential output would be of Mexico and, of 

course, the Gulf Coast? What would they be adding as far as the output? 

What is the potential out there that is untapped, and for whatever reason, 

may remain untapped? 

 DR. YERGIN. Well, the Mexican Oil Minister came to our 

conference in Houston in February, and he presented this map of the U.S. 

Gulf of Mexico, which showed lots of black points in the U.S. sector of 

the Gulf of Mexico and almost none in the Mexican sector. And yet, you 

can’t really believe that those oil and gas resources just end at the 

boundary line, because they were there a long time before the boundaries 

came in, so I can’t put a number on it, but I think that Mexico could be a 

substantially larger producer, which would be good for Mexico, and it 

would be good for Mexico’s neighbors. 

 MR. GONZALEZ. The other thing is, as I think you pointed out, the 

importance of our international policy and what we do here domestically 

and how it impacts our relationships with these particular oil-producing 
56

countries. We are involved in a highly contentious immigration 

proposed legislation that demonizes, in essence, the undocumented 

worker and the family coming from Mexico and parts of Latin America. 

Do you see a downside? Do you see any implication? Do you see any 

consequences of that policy and its potential impact on our relationship 

with any oil-producing country in that area? 

 DR. YERGIN. Well, I don’t know how this whole issue is playing in 

Mexican politics. I think the issues over Mexico’s oil, whether they open 

up their system or not, goes back to the Mexican Revolution and to the 

nationalization of 1938, which is one of the most important political 

events in Mexico’s history. And I think that a lot will depend upon who 

is elected this year in Mexico. As I think several Members have 

remarked, there are a lot of adverse geopolitical trends in the world, and 

certainly we have seen a kind of clash now, or a conflict, in Latin 

America between what you might call the hard left, return to socialism, 

and the sort of center left as to how engaged or not engaged to be with 

the world economy. And I think how that plays out is something we 

haven’t been, as a country, giving that much attention, except 

sporadically. I think that, over the next few years, is something that will 

loom more significantly. 

 MR. GONZALEZ. And one last question. First of all, and of course, 

part of the House bill has a 700 mile-long wall being built along the 

Mexican border. Should we be considering an exception for pipelines 

just in case? 

 DR. YERGIN. That is-- 

 MR. GONZALEZ. I am making jest, but this is-- 

 DR. YERGIN. Mexico actually-- 

 MS. BONO. Would the gentleman yield for one second? 

 MR. GONZALEZ. No, I am actually going to be-- 

 MS. BONO. Oh, excuse me. 

 MR. GONZALEZ. But I do have a question. 

 If we send back $100 to all of the consumers out there, if we have a 

windfall profit tax and we suspend the Federal gasoline tax, and some 

States suspend it, what is the implication? What is the real consequence 

to the consumer out there when they are paying $3 for a gallon of gas? 

How temporary is this fix? Is it really long term? What I want to know 

is, is it practical and of any real significance. 

 DR. YERGIN. I think the number one factor, there are other domestic 

factors we have talked about, how specifications come in, fuel changes, 

and the others like refining capacity. But at the end of the day, it is the 

crude oil and the price of crude oil that is really the largest determinant, 

and that is determined in the world. 
57

 MR. WHITFIELD. [Presiding.] The gentleman’s time has expired. 

Thank you. 

 I will recognize myself now. 

 I was reading an article the other day, and it was talking about that 

over the last year, Saudi Arabia had increased its drilling rig count from 

38 to 42. And it says that all four of these have been contracted for 

offshore work, two for work-overs and two for exploration. And it went 

on to say that Saudi Arabia has been trying to get rigs from all over the 

world and has not been successful, which raises this question. One of 

you mentioned that in the 1980s, with prices going down to $10 a barrel, 

and it is my understanding that in the 1980s, although I was not 

particularly focused on the oil business at that time, that big companies 

went out of business, particularly oil and gas service companies that 

failed to service, and that as a result of that, we lost a lot of technical 

knowledge because a lot of people did not go to engineering school for 

oil exploration and service, and that there is a real lack of supply in that 

whole area right now. And I would ask you all, would you agree with 

that analysis? And if so, what kind of impact does that have on prices? 

 MR. CARUSO. Well, I would absolutely agree with that. We lost 

about two decades of supply of engineers and other petroleum-skilled 

workers. And now, there is a shortage everywhere you go, whether you 

are in Canada, in Saudi Arabia, or in Texas. There is a real lack of 

skilled workers in the petroleum industry, and that is definitely part of 

this story in addition to the infrastructure that you mentioned. The rigs 

availability are very tight. Steel is very tight. Even cement for drilling. 

So the resource, concerns in that story from chief executive officers, 

whether it be a national oil company or an international oil company. So 

it is absolutely a factor. 

 MR. WHITFIELD. It seems like if you had the adequate reserves, it 

would be very difficult, I mean, that the new market is just so tight on 

this supply and the training personnel. It is a significant issue. 

 DR. YERGIN. Yes. And it takes time to gear up. Academic 

programs that crunched in and then collapsed are now expanding again, 

but it takes time to put them back. 

 MR. WHITFIELD. Right. 

 DR. YERGIN. So right now, you see very active hiring campaigns in 

the industry, but it is a lot of hiring from each other as they try and bring 

in more people and more equipment. 

 MR. WHITFIELD. Right. Now my recollection was that during 

Katrina, the United States lost, what, about 15 percent of its refinery 

capacity. Is that the right number? Is it 10 to 15 percent? 

 MR. CARUSO. Yes. At one point, it was even higher than that, but 

the sustained reduction in capacity was about 15 percent. 
58

 MR. WHITFIELD. And on the production side, it was about one 

million barrels a day. Is that corrected? 

 MR. CARUSO. Initially, 1.5 million, and even now, it is still 300,000 

barrels a day. 

 MR. WHITFIELD. Okay. And it is my understanding that also in the 

spring is when refineries normally do their maintenance. Is that correct 

or is that not correct? 

 MR. CARUSO. Well, there are different schedules. Sometimes they 

are done in the fall or in the spring. What happened this last six months 

is that many of the refineries deferred the fall maintenance because of the 

amount of refineries still down. They kept running and oftentimes 

pushing capacity probably very hard, and therefore, there was a large 

amount of deferred maintenance this spring that is contributing to the 

current gasoline situation. 

 MR. WHITFIELD. So that is definitely having an effect because this 

spring, they are having to do more because of the push in the fall? 

 MR. CARUSO. Yes. 

 MR. WHITFIELD. Okay. Now it is my understanding that in order to 

refine heavy, sour crude, it is much more difficult than it is light, sweet 

crude. That is correct, isn’t it? 

 MR. CARUSO. Yes. 

 MR. WHITFIELD. And I have heard that in order to do heavy, sour 

crude, that you have to have retooling of the U.S. refineries. What does 

that refer to? Retooling? What does that mean? 

 MR. CARUSO. Well, the U.S. refineries are among the most 

sophisticated in the world, so we have more ability to convert heavy, 

sour crude into the product slates we need. It is not enough. We need 

more. We are probably importing about 1.5 million barrels a day of 

gasoline this summer. So we need more conversion capacity to deal with 

this heavier, sour crude slate. But it is critically important in places like 

China where they have been relying on their own domestic crudes for so 

many years, and those were lighter and sweeter. Now they are having to 

input heavier, sour crude, and they don’t have the capability to turn it 

into diesel fuel and gasoline, and that is what is putting a lot of pressure 

on light crudes and is why Nigeria is so important. Nigeria produces 

light, sweet crude. A lot of it was going to China. And the diminution of 

Nigerian production is really affecting this factor. 

 MR. WHITFIELD. One last question. 

 Which country is producing the most heavy, sour crude? 

 MR. CARUSO. I would say Saudi Arabia. 

 MR. WHITFIELD. Saudi Arabia? 

 MR. CARUSO. Yes. 
59

 DR. YERGIN. Some of the Mexican grades are also at that quality, 

some of the Venezuelan, then Saudi, and some of the other Middle 

Easterns. So they have a range of grades, but the spare capacity that does 

exist in Saudi Arabia is primarily this heavier, sour crude for which there 

is not the refining capacity around the world, not just in the United 

States, to convert it into gasoline or diesel. 

 MR. WHITFIELD. Yes. Okay. Thank you very much. 

 My time has expired. I will recognize Mr. Green from Texas. 

 MR. GREEN. Thank you, Mr. Chairman, Mr. Caruso, and Mr. 

Yergin. And I apologize for not being here. This is the biggest issue we 

are getting calls on, more than immigration and the other issue. 

 I note in your opening statement you talked about, Mr. Caruso, the 

loss of the gasoline supply and the impact it will have in the ethanol we 

need to replace it, particularly in areas like Houston. It is a nonattainment area, and it has cleaned up our air since 1991 and 1992 when 

we first started using it. And again, I just heard yesterday that the 

President was talking about relieving the imports that our ethanol market 

production can ramp up. My concern is that I want to make sure we 

produce, in our own country, whether it is oil or not. I would love to 

drill for oil and then refine it in our own country instead of again 

depending on other parts of the world where stability is always in 

question. 

 For both of you on the change from MTBE to ethanol, and I know, 

Mr. Yergin, I heard you say something about that you thought that the 

change would not have any impact some time during the summer. That 

may be a bit optimistic, but I would like you to say it again. 

 DR. YERGIN. Right. Well, I think that you did see that the refining 

industry has a lot of resilience, too. It is a tough transition because you 

needed to change the suppliers; you weren’t using chemical companies 

anymore. You were getting ethanol from corn. You couldn’t ship it in 

pipelines, so you had to ship it in trucks and railway cars. And then you 

don’t blend it at the refinery. You blended it at the terminal. So you get 

all of those things. You are basically changing your whole, what they 

call, the supply chain, and you are doing it when you have all of these 

other problems. But it looks like maybe a little optimistic, but I would 

think in 4 or 5 weeks before people really hit the roads, that changeover 

will be complete. 

 MR. GREEN. You do think we need to delay or eliminate the import 

fees for ethanol from other countries? 

 DR. YERGIN. Well, I know the Brazilians feel passionately on that 

subject, since there is a 54 cent-a-gallon import fee on it. And it would 

be interesting to see, as we get up against the limits of domestic with 

conventional ethanol production, whether there will be a drive to allow 
60

some more ethanol into the country, if that is the objective. And, you 

know, we never thought of Brazil before as an energy power, but it is on 

the basis of ethanol. It has the leadership. 

 MR. GREEN. Again, on the import, as long as we need it, until we 

ramp up, because like I said earlier, I would like to have an ethanol 

refinery somewhere, which we don’t have on the Texas Gulf Coast, but 

we do refine a lot of gasoline. But we also need that reformulated gas in 

the Houston market. So we will have to have it somewhere there. And 

of course, we could import it on the short term, but I would much rather 

produce it there, because that is what we do historically is produce 

energy. 

 How does the instability in oil-producing nations today compare with 

some of the worst times in history, such as the Arab oil boycott? And 

what are some of the major international developments that could bring 

down or further increase the price of oil, one way or the other? I mean, 

obvious ones are continued problems in Nigeria and, of course, Iran, 

even though we don’t import it from Iran. It still affects the price. 

 DR. YERGIN. You know, people note that 25 years ago the oil and 

gold prices were both the highest they have been for 25 years, and you 

say, “Oh, what was happening 25 years ago? Oh, it was Iran.” And you 

know, here we are again. So my sense is that how this confrontation 

between Iran and the international community is going to play out, no 

one has a very good handle on it at all, so I think that shadow is going to 

be over the oil market for some time. 

 Nigeria, I think, and this goes back to the question that was asked of 

Guy about his forecast, I don’t think anybody really saw, including the 

Nigerian government, this insurgency in the delta, which had its big 

impact. It sort of just started sporadically in January or February and 

suddenly went up in scale. And after the workers were taken hostage and 

threatened and people killed, people withdrew their workers in that area, 

and we are seeing the impact of that. You look around the world and 

those are two things we are focused on. And looking around the world, 

where else are there issues that maybe won’t have the same scale of 

importance, but could add to the pressure right now? So on the one 

hand, you see maybe we are seeing a demand response, which takes the 

pressure off, but on the other hand, where is the next problem going to 

come from that might take out another couple hundred thousand barrels a 

day. And I think the other thing that, of course, everybody is worried 

about, is hurricane season begins in a month. 

 MR. GREEN. That is right. 

 Thank you, Mr. Chairman. 

 MR. HALL. [Presiding.] Thank you. 
61

 And they tell me I am next for questions. Since I have the gavel, I 

will take their word for it. 

 Mr. Yergin, in your testimony, you discussed the peak oil theory, but 

you didn’t subscribe to that theory. You site unconventional resources as 

part of the reason why. Can you give some examples historically of 

technologies that were considered non-conventional? And the one I am 

really kind of leaning toward is the ultra deep amendment that is in the 

energy bill that this Chairman passed really after 10 years of trial by 

Chairman in this committee to write an energy bill. We finally wrote one 

that is accepted and the President signed. And now, there is some 

movement away from some parts of that, the ultra deep being part of it 

that I think is a major part of that bill and a major answer to some of our 

needs for gas in the future from the depths of the Gulf and shut-in places. 

But your ideas on R&D programs for oil and gas, how shortsighted it 

would be to cut funding to such research, I would just like to hear your 

opinion on that. 

 DR. YERGIN. Sure. Well, I think on resources, as you were asking 

the question, I was thinking about coal bed methane, which about 15 

years ago was considered something really exotic and now, Guy, you 

might know what the percentage is-- 

 MR. CARUSO. Ten percent. 

 DR. YERGIN. It is now 10 percent of our natural gas supply. So that 

is an example of something that has moved into the mainstream. And 

people often forget that the oil industry is really a gas industry, a pretty 

high-tech industry. Actually, a good example, I mentioned the SEC 

reserves disclosures. When those were put into effect at the end of the 

1970s, the deep water frontier was all of 600 feet. Today it is 12,000 

feet. It is remarkable to think of drilling through 12,000 feet of water 

and another 12,000 feet underground. And I think there is now growing 

excitement about exploration going on in the ultra deep water and that it 

might be a very significant contribution, and not just in the United States, 

but around the world. 

 MR. HALL. And the technology is there for the asking, but it is 

expensive and it takes some supporting. And it is doubtful that the big 

oil companies are going to do it. They haven’t. I think in the ultra deep 

amendment, we provided, I think, $100 million a year for 10 years on it, 

and then we got that cut in two, but it was still $50 million. That is not 

anything to turn down, if you don’t say $100 million or not, which they 

probably could get. But that is now being looked at very closely by the 

Secretary as maybe whiting that out from the bill. And although he 

signed the bill less than, I don’t know how long ago, just several months 

ago. So we are talking to him and urging him, friendly persuasion to 

look that over really carefully, because research and development, that is 
62

more an R&D bill, actually, than it is an energy bill, because it allows us 

to go to the depths. As you say, there are depths that we can know, and 

we know it is there. Known reserves are there. We don’t have the 

ability today to get them, but cooperating with universities and others 

who do have that knowledge and input, we can get them and pay for the 

program with what we get, and if we don’t get it, it is going to stay in the 

Gulf, and we are not going to get it. So it doesn’t cost the taxpayers 

anything. And that is the beauty of it. And I have passed that last 4 

years as a Democrat four times and a Republican the last time. And you 

have seen the bill, and I am hoping that will stay in there. But that is part 

of what you alluded to, is it not? 

 DR. YERGIN. Well, I think in general we need a constancy and 

consistency on research and development. And some years ago, I 

chaired a task force for the Energy Department on Energy Research and 

Development, and I came to the obvious conclusion the reason you call it 

research and development is because you don’t know. And if you knew, 

it wouldn’t be R&D. And a large, wide portfolio and constancy is a 

really important part of it. 

 MR. HALL. And your reference to Nigeria is very timely, as a matter 

of fact, though it is not new. The problems in Nigeria that American 

businesses have had with Nigeria in the 1960s. And you know, they had 

a way of raiding. They would give you all of the political help and the 

bank would be guaranteed on a percentage basis. And always Nigeria 

had the worst percent, because you could send the press over there. If 

you sent it FOB, they would learn to unload it. So we got to where we 

had to put it in the channel in Houston to get our money. Nigeria is just 

not a country that you really want to deal with, but they are so rich in so 

many things that we need. And you know of the unrest there and the 

recent militant group that seized hostages and I think you said 550,000 

barrels per day. 

 DR. YERGIN. Yes. 

 MR. HALL. What is the United States to do to relieve the tensions in 

Nigeria? If the instability continues, is it going to lead to further losses? 

I guess that is pretty obvious, but let me hear your thoughts on that. 

 DR. YERGIN. Guy, do you-- 

 MR. HALL. Or Mr. Caruso. When I said you were so intelligent, I 

didn’t mean to exclude Mr. Caruso. I just don’t know him as well as I 

know you. 

 DR. YERGIN. As you say, the problems in Nigeria have been 

endemic in that country: the regional conflict, the poverty, the ethnic 

conflict, and the poverty in the delta region. There has been, in the last 

several years, an effort to really reduce corruption, which was quite 

sensitive, and that has been, I think, part of where this conflict is coming 
63

from. And now, at least part of the conflict seems to be also about 

whether President Obasanjo is going to run for a third term or not. And 

that is something that will ultimately be decided in Nigeria. 

 I think there is a role, as we think about energy security, the supply 

chain, the infrastructure and working with countries as we are with 

countries in the Cascan Sea. We could be working with them in the Gulf 

of Guinea to help with issues of physical security, given the kind of 

volatilities that are so evident. 

 MR. HALL. I think my time has expired, and I thank both of you men 

for your input. 

 Mr. Stupak is next for 5 minutes. 

 MR. STUPAK. Thank you. 

 Dr. Yergin, some of your answers bring up the possibility that 

current price changes can be attributed to speculation on the potential for 

global instability rather than actual supply changes. In his written 

testimony, Mr. Caruso, and we have talked about it before, refers to this 

as the “fear” or “risk” premium. While Mr. Caruso seems to discount 

this argument, I am curious to hear your opinion on this issue. Are 

energy speculators, causing high prices at the pump by taking advantage 

of the fears, as we mentioned Iran, Nigeria, and Bolivia here this 

morning? But how does that affect the future of gas supplies? 

 DR. YERGIN. Well, as I said, I think the leading speculator on oil 

prices today is probably the President of Iran. If you plot the statements 

by the Iranian officials over the last month and the reaction in the oil 

prices, you see that people are worried and they are taking them 

seriously. What I wanted to say, and I think Guy Caruso made the point, 

is that there is an underestimation of the significance of the loss of 

Nigeria and what a big impact that is having at this particular time 

because the market is so tight. And I think that I have trouble 

differentiating between what are called speculators and the kind of 

general pervasive fear and anxiety in the market about whether there is 

going to be more serious disruption. The issue of Iran’s nuclear program 

is, I think, both very serious and very perplexing. 

 MR. STUPAK. So even the real fear that we may have, which is, 

again, speculation, if you will, and Nigeria might be a little bit more of a 

concrete example, but there is a “speculative” or a “fear” premium? 

 DR. YERGIN. I would call it a “fear” or a “risk.” As I think I said in 

my remarks, Nigeria, currently, is down 550,000 barrels a day. 

 MR. STUPAK. Right. 

 DR. YERGIN. In 2003, it was down over 800,000 barrels a day. So 

those who are experienced and knowledgeable are going to say, “Is this 

going to spread the threats to other companies?” Some bombs have been 

set off and so forth. If we were to lose another 300,000 barrels a day 
64

without some corresponding give somewhere else in terms of additional 

supplies or demand response, I think we would see prices higher than 

what they are today. It is a very tricky situation. 

 Going back to spare capacity, we think that the spare capacity 

situation will improve over the next year or two, but right now, we are 

still in a very narrow band. 

 MR. STUPAK. Okay. Mr. Caruso, as I continue to learn more about 

this OTC, over-the-counter trading of energy derivatives, I haven’t been 

able to find anyone who can tell me exactly how much of this trading is 

going on. Does the EIA, or any other Federal agency, have any way of 

knowing how to calculate how big these markets are, the OTC market? 

 MR. CARUSO. If there was, it would probably be the Commodities 

Futures Trading Commission. 

 MR. STUPAK. Okay. And I know they are up next. 

 MR. CARUSO. And I think Mr. Levin may be able to answer that 

question. They certainly track the regulated markets very closely, every 

week, you know, what the long positions are and how much were by 

speculators versus non-speculators. But the OTC, I am not familiar with. 

 MR. STUPAK. Okay. Mr. Yergin, it seems like once a month we get 

some kind of reason for these prices going up. And we made mention 

here this morning, even the hurricane season is going to be starting now, 

so that is another fear factor, which, again, can drive up the price of oil, 

at least a barrel of oil, correct? 

 DR. YERGIN. Yes. I think that what we will probably see is any time 

a hurricane starts building up, and particularly if the weather reports say 

it is going to bypass Florida and hit in this central area of the Gulf, before 

anything happens, you will see people, particularly if it is towards the 

end of the week, putting up the price. And then when we see where it 

goes and what the impact is, the price comes off. But I think it will 

really register in a way that it really hasn’t registered before. 

 MR. STUPAK. Sure. Mr. Caruso. 

 MR. CARUSO. There is a linkage between fear and the physical 

market and that is what we are seeing now--crude oil inventories being 

built up, because companies are worried that if there is a disruption, they 

want to have enough physical supply, so there is a linkage between the 

physical and the futures. 

 MR. STUPAK. We are going to live through a hurricane season every 

year and go through a summer driving season every year. We go through 

Iran’s instability every 10 years. There are all of these others. I would 

think by now the market would figure this out and be a little bit more 

stable when it comes to this, but it is really not in their best interest, in a 

way, as long as you have speculators who will use this risk factor or fear 

factor to drive up the price. 
65

 DR. YERGIN. Well, let me say, I think what has happened the last 2 

years with hurricanes has made a change in psychology that was not 

anticipated. We created, in the 1970s, this energy security machinery to 

deal with a disruption in the Middle East, and we ended up having to 

deal with a disruption in the Gulf of Mexico. And I think that we entered 

a new period with the election of the new Iranian President last June, and 

Iran going from sort of finessing and being ambiguous about what it is 

doing, if anything to being over-explicit and threatening and the type of 

statements that are being made. So I think people have trouble seeing 

how this is actually going to play out. 

 MR. STUPAK. Okay. 

 DR. YERGIN. I mean, what kind of resolution is there going to be? 

 MR. CARUSO. Yes. I think you hit, really, the crux of what is going 

on here and that is why do we really have such volatility. And the reason 

I think you have that volatility is it takes only small changes in either 

supply or demand, regardless of the reason, in a market that is so finely 

balanced to lead to large changes in price. And once, somehow, we 

relieve that tightness, whether it is on the demand side or the supply side, 

and you, certainly have been debating that, that is the only way we are 

going to change this point you just made. 

 MR. STUPAK. Thank you. 

 MR. SHIMKUS. [Presiding.] The gentleman’s time has expired. 

 And I will recognize myself for 8 minutes. 

 And it has really been a great hearing, and I appreciate your time and 

effort on this debate. I have been taking notes and listening, and the 

thing that frustrates me about the energy debate is we departmentalize 

energy. Here is an example. My first trip to Iraq, I visited their power 

plant there in Baghdad. It is called Al Durra, and it burns crude oil. 

High sulfur crude oil is what they used. I am assuming they still do. 

And it is dirty. And it is probably very inefficient. But in the public’s 

debate of energy, we like to compartmentalize it to electricity generation 

or we like to compartmentalize it to fuel. And it is not always the case 

where if they had nuclear power abilities or coal generation or solar 

generation they could decrease that reliance on the crude oil, and maybe 

that could be used in the world market. I was interested in, Mr. Yergin, 

your analysis, and you were very diplomatic. Can it be said that the 

exchanges in these foreign countries and governments, Venezuela, 

Russia, even in Mexico, a movement to the hard left or the populist arena 

already threatens the ability for the world crude oil markets, is that 

correct? 

 DR. YERGIN. Well, it may not threaten to disrupt, but it changes the 

balance in the world crude oil market. It adds to the tension in the 

market. And unbalanced, it constrains supply. 
66

 MR. SHIMKUS. What does it do to the investment and development? 

 DR. YERGIN. Well, I think that the Russian government has $200 

billion in reserves now when it had almost none in 1998. And I think 

they are not feeling the pressure for revenues and are very focused on 

consolidating control of its energy sector. Certainly, what an 

international company is going to go and do investment into-- 

 MR. SHIMKUS. Eight minutes is a lot of time, but it is not going to be 

very long. What do we expect to happen to the Bolivian natural gas 

fields? Do we expect more efficient production or do we expect less 

efficient production and, in essence, no future development? 

 DR. YERGIN. Well, I think the southern part of Latin America is 

suffering from gas shortage. This would aggravate the gas shortage. 

There would be less investment. It will operate less efficiently. The gas, 

which could be monetized and provide revenues for the Bolivian people, 

to help the poorest nation in Latin America be less poor, will not be 

forthcoming to the same degree. And I think Brazil is going to be 

looking for alternatives to Bolivia unless there is some resolution of this. 

 MR. SHIMKUS. And I really appreciate your ten points. And I 

scribbled them down. I said, “Well, I haven’t looked at your statement 

and your testimony.” You are saying those who fail to plan, plan to fail. 

And I think it pretty safe to say that those of us who are market-based 

individuals, the Government does incentivize or not and a lot of us come 

to a lot of reasons. We have, in the energy sector, and I am saying that as 

a broad term, not just to crude oil, but we have not incentivized the 

development of energy opportunities. 

 You know, your first point is diversification of supply. And so I am 

looking at what we have done recently to try to do diversification of 

supplies. And renewables come to mind. I have been talking extensively 

on coal-to-liquid development. I don’t think we mentioned that at all in 

any of the comments I have heard so far. Over to technology, level of 

applications, South Africa doing it, and no looking at locations in the 

United States to provide that, taking conversion. You all know all of this 

debate. But that has an opportunity to positively affect additional supply, 

at the United States’ internal security applications. Also, the President’s 

initiative FutureGen, which is again using coal, near-zero emissions, 

addressing some of the environmental concerns. As you put in other 

points in your testimony, the energy markets are international markets. 

FutureGen realizes this, and that is why FutureGen is not only a U.S. 

Government operation, but it is private sector with our major energy 

companies like Southern Company, Console Energy, Peabody, along 

with companies from the international arena in Australia and China. 

Because as you have stated, they are going to be consumers. They are 

going to be using coal. Now we are united in this search. The 
67

President’s initiative on GNEP is another proposal to start addressing the 

electricity future demands and how we, as an international community, 

can address the nuclear fuel issue, the reprocessing issue, the storage 

issue, and get as an international organization. I mean, I have scribbled 

notes all over this place about coal-to-liquid and how some of the plans 

that we have in place could affect this whole international debate. But 

the difficulty is in politics 101, all politics being local, high gas prices, 

politicians are scared, and because of that, we have to do something and 

hence we have these hearings and we try to find some culprit. Our job is, 

really, to look over the horizon so that we are not identified as folks that 

don’t plan for the future. 

 Having said that, to look over the horizon, you offer a very clear, 10-

point agenda. And I would encourage my colleagues to help look at that 

as a way and slip in some of the proposals that we have right now, like 

GNEP, FutureGen, coal-to-liquid development in that equation and look 

at legislative responses to help bring those to fruition. 

 Dr. Yergin, can you comment on any of that? 

 DR. YERGIN. I realize that you all are engaged in this enormous 

pressure from constituents, very justifiably so. But standing back one 

step from it, I am struck by some larger elements of consensus that I 

think I see, although maybe you all don’t feel it on the floor. One is of 

an embrace of energy efficiency across the spectrum. The second, a 

recognition that we really do need to widen our options and choices. 

And I think, as you say, basically widening the definition of what we 

mean by oil or liquids is really whether it is gas to liquids, whether it is 

oil sand or it is ultra-deep water, whether it is coal to liquids, which we 

note the increased interest. Those are all counterbalances to the 

instability and the pressures in the international market. They are not 

going to provide answers quickly. And of course, with gas prices, the 

pressures are very difficult. And it does require keeping one’s balance. 

Probably half of the people in this room remember the gas lines, and the 

other half think they remember gas lines because they have seen the 

photographs. But in fact, those gas lines in the 1970s were self-inflicted 

because of regulations and controls. And we should keep in mind the 

value of the flexibility of our system and that things will change. I 

would just say the first Congressional hearing I could find for high 

gasoline prices when I was researching “the prize” was in 1923, when it 

was going to go to $1 a gallon and within 4 years, it went from $1 a 

gallon to 10 cents a gallon. So I suspect that in a couple of years, the 

picture, just as it looks very different now than it did 2 years ago, will 

look different again. And I think if we can keep the consistency of the 

view about widening that diversification, that is something that is an 

essential goal work of security for our country. 
68

 MR. SHIMKUS. Thank you. 

 I am going to end, but Mr. Caruso, I am just going to throw this out. 

If you could get back to me, because of time. I don’t really need you to 

answer it now. 

 But can you tell me if you have done analysis of the available coal 

reserves in the United States, and what would that translate into barrels 

of crude oil and the lifetime of that if we really effectively moved to 

coal-to-liquid technologies and helped incentivize that? And having 

those numbers could help me in my crusade here to encourage my 

colleagues to really look at that as an assistance, not total salvation, but 

obviously an assistance in this debate. 

 Now I would like to turn my colleague from Maine, Mr. Allen, for 5 

minutes. 

 MR. ALLEN. We will get it right. Thank you. Thank you, Mr. 

Chairman. 

 Mr. Caruso, you are the Administrator of the world’s most advanced 

energy data system. The EIA sets the standard for global efforts to 

improve the understanding of our complex, evolving global oil market. 

In fact, the International Energy Agency depends on EIA’s data on 

imported oil prices. They have recently been warning of a looming crisis 

in the compilation of energy data, which, they feel, could sway world oil 

and natural gas prices and affect the planning of the bigger energy 

producers. 

 Oil companies have posted record profits. The public is out there 

saying maybe these oil markets aren’t working. And there are concerns 

about the ability of oil-producing nations to respond to the demand that is 

increasing here and in China and India. So the information is very 

important. And that is why I am puzzled by your decision to suspend 

collecting domestic and foreign crude oil price surveys, at least certain of 

those. These surveys collect information used both domestically and 

internationally to track and inform oil markets. The Federal government 

relies on this data for a variety of purposes, including Federal land 

leasing evaluations, tax assessments, and the evaluation of current and 

future policies, such as royalty payments. With crude oil prices reaching 

$75 a barrel and growing public demand for increased transparency in oil 

markets, it seems to me we are in no position to eliminate this vital 

government data collection and market analysis. 

 So I wonder if you could explain to the committee precisely why you 

decided to discontinue the domestic and imported crude oil price 

surveys. And the ones I am talking about, EIA-182, domestic crude oil 

first purchase report, and the EIA-856, the monthly foreign crude oil 

acquisition report. 

 MR. CARUSO. Thank you. 
69

 Yes, those two surveys are among the 30 surveys that we do for oil 

and gas weekly, monthly, and annually. And it was a tough decision, 

largely based on the budgetary resources available, and that was in our 

submission to the Appropriations Committee in February of 2005 that, 

given the budgetary appropriation that was being requested, it would 

mean that we would have to take a hard look at everything we do in 

order to maintain total quality of all of EIA’s data collection. And those 

two surveys were a lesser priority than the other surveys that are being 

done. So we said in our budget submission that if we got a certain 

amount of money, we would have to drop those two surveys. And we 

just felt they were less important than other things we are doing. And we 

are continuing to collect price data. So those aren’t the only surveys for 

collecting that data. 

 Now I realize that some of the users that you mentioned would suffer 

from the lack of that data, and we are certainly willing to look into seeing 

whether there is any way to meet the requirements. 

 MR. ALLEN. You are not saying that those two surveys are 

unimportant, I take it? 

 MR. CARUSO. They are not unimportant, at all. 

 MR. ALLEN. They would be useful in trying to understand the global 

oil markets? 

 MR. CARUSO. That is correct. And it was a reluctant but tough 

budgetary decision. 

 MR. ALLEN. Well, I am not on the Appropriations Committee, Mr. 

Caruso, but to me, I would say that in this kind of climate, when the 

Government stops producing data that would be helpful to people trying 

to understand these markets, it seems to me to be a mistake, and I hope 

you do better this year before the Appropriations Committee. 

 But in the time I have got left, very quickly, I think you said, and 

correct me if I am wrong, Mr. Caruso, between 2007 and 2010, demand 

will exceed the excess production capacity in the world? 

 MR. CARUSO. What I said was that we do see productive capacity 

growing to the point where we might have three to five million barrels a 

day of spare capacity by 2010. 

 MR. ALLEN. Okay. So the productive capacity is growing at a rate 

of-- 

 MR. CARUSO. Yes. 

 MR. ALLEN. And that is the capacity. There are some big questions, 

as I understand, about reserves, global reserves. We also have some 

issues about whether or not the authorities are reporting and giving us 

accurate information. 

 MR. CARUSO. Yes, there are a lot of issues, but the biggest one is 

converting those reserves into productive capacity. 
70

 MR. ALLEN. Right. Thank you. With that, I will yield back. 

 MR. SHIMKUS. I thank my colleague for being very punctual. 

 And I would like to recognize now my friend from Tennessee, Mrs. 

Blackburn, for 5 minutes. 

 MRS. BLACKBURN. Thank you, Mr. Chairman. 

 And thank you all for being so patient with us this morning. 

 I would like to stay on the capacity issue, Mr. Caruso. In your 

testimony and a couple of times in answering questions, you talked about 

world refining capacity and the utilization rate being at 90 percent 

compared to 85 percent in 2002. And you have also touched a little bit 

on the margin of the error and the gas prices can be affected a little bit by 

an outage. And we have had some debates. We had a bill on the floor 

yesterday that would have streamlined some of the issues dealing with 

refineries and getting them on the books and then in the ground and up 

and running. And Mr. Bass has been very involved in this issue, so I am 

asking this question for myself and for Mr. Bass, because he had to go to 

the floor and handle our amendment. 

 Now the U.S. capacity, are we higher or lower than the worldwide 

number? 

 MR. CARUSO. Our utilization rate is higher than the world. We will 

probably average about 95 or maybe 96 percent this summer. 

 MRS. BLACKBURN. Ninety-five to 96? 

 MR. CARUSO. Yes. Compared to a world of about 90. 

 MRS. BLACKBURN. Okay. Then considering that we have that 

higher utilization number, is there not an economic incentive for more 

companies to either build new refineries or expand their current 

capacity? 

 MR. CARUSO. Yes, I think we have now seen 3 years in a row where 

we have had very good margins of profitability, and this is definitely 

having an impact on investment plans. And a number of companies have 

announced plans for expansion of capacity at existing plants. And we 

think that could be as much as 1.5 million barrels a day. 

 MRS. BLACKBURN. One and a half million barrels a day? 

 MR. CARUSO. Yes. 

 MRS. BLACKBURN. Okay. And then specifically to one of Mr. 

Bass’s concerns, if we speed that capacity up, how quickly do you think 

we could fill that? I mean, is it going to be filled as soon as we can get 

something in the ground and operating? Or Dr. Yergin, you may have an 

estimate on that, also. Either of you. 

 MR. CARUSO. Well, I guess it goes back to how long it takes to put a 

project together and get a permit. It depends. We are talking about 

additions to existing capacity, right? 

 MRS. BLACKBURN. That is correct. 
71

 MR. CARUSO. So what is that? A 2 or 3 year process? 

 DR. YERGIN. Minimum. 

 MRS. BLACKBURN. And we are trying to streamline that. Yesterday, 

we had a bill on the floor that did not pass that would have streamlined 

that permitting process, and we are looking at the availability of the 

product at the retail level and having it available to consumers for usage 

and the refinery capacity and the way it plays into that. So any time that 

we are looking at 95 to 96 capacity, I think your points are well taken, 

because as you have previously said, as you take places down for 

maintenance, for routine maintenance, for scheduled maintenance, to go 

in and change the equipment so that it is more environmentally-friendly. 

And as I mentioned in my opening statement, environmental goals were 

set in place in the permitting bill we had on the floor yesterday. It would 

have sped the process. And from what I am hearing you say, speeding 

that process would yield us the results that we need, which is a greater 

supply. 

 MR. CARUSO. I would agree: the speedier the better. 

 MRS. BLACKBURN. Okay. All right. Well, I know we have another 

panel. We want to get to them, and we are going to have votes, so I will 

stop with that one question. I have three others for you, Dr. Yergin, and 

four for you, Mr. Caruso, and I will submit those to you. But thank you 

for your patience today. We appreciate it. 

 MR. CARUSO. Thank you. 

 MR. SHIMKUS. Thank you. 

 And for the record, my colleague is correct. The vote did not pass on 

a super majority basis, but it did receive a vote of 237 to 188, and we 

expect to bring that permitting bill back to the floor under a rule and pass 

it with a simple majority. 

 So with that, I turn to my colleague from the State of Washington, 

Mr. Inslee, for 5 minutes. 

 MR. INSLEE. Thank you. 

 It is my understanding that production of oil in Iraq has been down in 

the magnitude of 900,000 barrels per day. This follows the invasion of 

Iraq decision by the President. The question is, did the President’s 

decision to invade Iraq contribute in some way to the increase in fuel 

prices that Americans are now experiencing by disrupting Iraqi oil 

production and decreasing the supply? 

 MR. CARUSO. The Iraqi production, as we have it right now, is about 

1.9 million barrels a day. 

 MR. INSLEE. I think it was about 2.6 million prior to the invasion. 

So my question is it reduced oil production. It did not achieve the 

foretold result of actually deadening oil production, what we were told 

that is a possibility with Iraq, after the invasion. Did the invasion of Iraq, 
72

at the request of President George Bush, reduce oil supplies, whereby, in 

some fashion, contributing to the increase of oil prices and gas prices that 

Americans are now experiencing? I think a yes or no could work pretty 

well. 

 MR. CARUSO. Well, there are a lot of factors that have contributed to 

the oil price, and that is one of them. 

 MR. INSLEE. Okay. So the answer is yes. And on the supply side, 

one of the President’s big decisions, reduced supply and increased the 

costs that my constituents are now paying. 

 Now I am going to ask you about the demand side. When I got my 

degree in economics, supply and demand was a big deal for 4 years of 

my life. And both are important. 

 So on the demand side, for the 5 years of this President’s presidency, 

there have been efforts in the U.S. Congress to decrease demand by 

increasing the efficiency of the passenger cars that we drive. And in fact, 

the efficiency of the cars we drive have actually reduced since the time 

President Bush took the oath of office. And I will add, that has been the 

case for several situations, several terms. But the President has resisted 

to improving mileage for passenger cars, which he has the statutory 

authority to do to improve the mileage of our cars, something that was 

very successful in the late 1970s and early 1980s where we increased our 

mileage by at least 60 percent, and had we continue increasing our 

mileage, we would actually be free of the Persian Gulf oil today. 

 So the President has not used the authority he has had, and has 

resisted efforts, in this Congress, to improve the mileage of the cars we 

drive. Is it fair to say that the President’s resistance, to date, to 

improving the efficiency of our cars, thereby decreasing demand, has 

also contributed to the increase in costs that Americans are paying today 

for the price of a gallon of gasoline? 

 MR. CARUSO. Well, I think there are a lot of factors in the gasoline 

demand increase. I am not a policymaker, so I wouldn’t want to 

comment. 

 MR. INSLEE. Well, let me stretch your job classification just a little 

bit. And there are a lot of factors in this. I am just asking about a couple 

of them. If you believe, as I do, that auto efficiency will, to some degree, 

reduce demands, driving the same amount of miles for less gasoline, and 

a safe and handy way to do it, and I drive a car that gets 50 miles to the 

gallon. If you make that assumption, how has the President’s decision 

failed to help at all increase the efficiency of our passenger cars, has that 

contributed in some way to the price of gasoline? 

 DR. YERGIN. Did you say you drive a car that gets 50 miles to the 

gallon? 

 MR. INSLEE. Right. 
73

 MR. CARUSO. What are you driving? 

 MR. INSLEE. A Prius. And I am looking forward to some of our 

domestic folks getting involved. And by the way, there is some good 

news on that. I read that GM is now looking at a dual drivetrain for a 

hybrid that could be a great entry in this. 

 So let me still ask this question. Just, you know, simple. Has it 

contributed, the President’s failure to move on efficiency? Has it 

contributed, at least some way, to the increase in the price of gasoline? 

Give it your best shot. 

 MR. CARUSO. Well, I think the President has done a number of other 

things to deal with the efficiency side of things. 

 DR. YERGIN. Let me say that the two most important things we did 

in energy policy in the 1970s that had an immediate effect, one was the 

fuel efficiency standards on the demand side, and the other was the 

building of the Alaska oil pipeline. They each contributed about the 

equivalent of two million barrels a day. And I think I hear when gas was 

cheap, there was not much of a drive to change the fuel efficiency. 

People bought SUVs and didn’t think about it. That is obviously very 

different now. And high prices have sent a very powerful and painful 

message to American automobile makers, among others. And I think, 

one way or the other, we are going to get a more efficient automobile 

fleet. It may not get up to your 50 miles per gallon for everybody, but I 

think we will get to more efficient cars. And when you look not just at 

the United States, but if you look at China and you look at India and 

other countries, you see that a greater efficiency in transportation is 

really a global priority. 

 MR. INSLEE. I have a lot of questions, but thank you. 

 Thank you, Mr. Chairman. 

 MR. SHIMKUS. I thank my colleague. 

 Now I would like to recognize the gentleman from Massachusetts, 

Mr. Markey, for 5 minutes. 

 MR. MARKEY. Thank you, Mr. Chairman. 

 Mr. Yergin, reading through your testimony, I was struck by the fact 

that the United States has actually added 2.2 million barrels a day in 

refinery capacity over the last dozen years, which, as you note, is the 

equivalent of adding ten new good-sized refineries. Now it has been 

suggested by some in the Administration and in the Majority that U.S. 

environmental and permitting laws are somehow an obstacle to refinery 

capacity expansion. But your testimony suggests that the oil companies 

have been able to build the equivalent of ten large refineries over the last 

dozen years without overriding environmental or local zoning permitting 

requirements. 
74

 So would you agree that we don’t need to change our environmental 

laws or override State and local land use rules in order to expand refinery 

capacity? 

 DR. YERGIN. Congressman Markey, I don’t know. I didn’t read the 

legislation that was voted upon yesterday, so I can’t address that 

specifically. The increase in capacity, what I am struck by, is focusing 

on the number of refineries rather than capacity. And in terms of 

capacity, that is a substantial increase. It is, of course, not building new 

refineries, but is the expansion and deep bottlenecking and so forth on 

existing sites. And there are plans to continue to add increasing capacity 

to existing sites. A critical question is, at some point, where will new 

refineries be built? Will they be built here in the United States, or will 

we be importing more product from other countries? 

 MR. MARKEY. I also see that on page nine of your testimony, 

although often presented solely as a U.S. problem, inadequate refining 

capacity is, in fact, a global phenomenon. What are the factors that have 

led to this global refinery capacity problem so that we can get it out of 

the context of just U.S. environmental laws and the committee can 

understand this situation? 

 DR. YERGIN. I think there are two big things. One, the European 

prices for motor fuels have been biased in favor of diesel over gasoline, 

and so there has been this extraordinary explosion in diesel cars. Half of 

the new cars in Europe, 70 percent of the new cars in continental Europe 

are diesel, and the refining system does not support that. The second 

thing is that because of the Asian financial crisis, refinery developments 

in Asia were held up. And so Asia is short of refining capacity. In both 

cases, it is short of the complex refinery, what Mr. Caruso called the 

sophisticated refining capacity to turn out diesel. This is adding to the 

picture on making things like Nigerian oil more valuable in the 

marketplace. And if we look on a global basis, diesel demand is growing 

more rapidly than gasoline. So that is the global context, and the United 

States is part of this global market. 

 MR. MARKEY. Which, of course, has nothing to do with the U.S. 

environmental laws? 

 DR. YERGIN. That is right. It has to do with what is happening 

there. 

 MR. MARKEY. Across the board. Thank you. 

 And, as you know, Newt Gingrich and the Republican Congress, 

beginning in 1995, prohibited the Department of Transportation and their 

part in promulgating new fuel economy standards, and for the last 6 

years, they have sat on their hands and refused to promulgate new fuel 

economy standards that could have dramatically increased the overall 

fleet average, including SUVs and light trucks. What kind of a 
75

difference would it have made if the same kind of progress that we have 

made from 1975 to 1986 had been made over the last 12 years in terms 

of increasing the fuel economy standards? 

 DR. YERGIN. Well, I haven’t calculated that. Certainly, one reason 

we went from a very tight oil market in the early 1970s, which I should 

say that the oil market today is even tighter than it was then, but a very 

tight oil market to that huge surplus that Mr. Caruso described was, 

among other things, not only the switching from oil and electric 

generation, but the fuel efficiency standards. I think fuel efficiency 

standards in the United States and around the world would have a big 

impact. I think it is always a question whether you do it through 

regulation, whether you do it through, I hate to use that word, a gasoline 

tax, or some other way, or some mixture of them, but one way or the 

other, it certainly seems this country is going to move towards greater 

efficiency in our transportation. 

 MR. MARKEY. You said that we saved about two million barrels of 

oil. 

 DR. YERGIN. Yes, in 1973 and sort of the early 1980s. 

 MR. MARKEY. Would that have been possible again if we had made 

the same progress on fuel economy standards in the past 12 years? Or 

would that have been possible? 

 DR. YERGIN. Well, I think I would have to calculate it out. The 

other thing that has happened, of course, particularly when gasoline 

prices were low, and it is quite striking, and I think Mr. Caruso could 

say, the number of miles that Americans drive has increased quite 

substantially over the 5 or 6 years, and so that is a factor there, too. But I 

think that greater efficiency, if you are talking about greater efficiency 

being important, there is no place where it has a bigger immediate impact 

than in transportation. 

 MR. MARKEY. Okay. Thank you. 

 MR. SHIMKUS. I thank my colleague. 

 I want to thank the panel for their long testimony and questions and 

answers. We really do appreciate it. It is a very complicated issue, and 

you have helped, hopefully, enlighten us a little bit to make strong public 

policy decisions. 

 So with that, I would like to excuse you and welcome the second 

panel. 

 The Chairman is on his way back, but because I like to be in the 

chair, the sooner we get started, the better for me. 

 I am going to start with some initial introductions. 

 On the second panel, we have Mr. Robert, is it Levin? 

 MR. LEVIN. Levin, yes. 
76

 MR. SHIMKUS. Senior Vice President for Research at the New York 

Mercantile Exchange. And we appreciate your attendance. 

 We are also being joined by Ms. Orice Williams. 

 MS. WILLIAMS. Orice. 

 MR. SHIMKUS. Orice. Okay. Orice. No one else can make that 

mistake now. Director of Financial Markets and Community Investment 

Team with the Government Accountability Office. 

 And we are glad to have you. Your full statements are submitted for 

the record. If you could summarize that statement in 5 minutes, we will 

be very grateful, because I know there is a lot to talk about. 

 We would like to begin with Mr. Levin. Welcome. 

STATEMENTS OF ROBERT LEVIN, SENIOR VICE PRESIDENT 

FOR RESEARCH, NEW YORK MERCANTILE EXCHANGE; 

AND ORICE WILLIAMS, DIRECTOR, FINANCIAL 

MARKET AND COMMUNITY INVESTMENT TEAM, 

GOVERNMENT ACCOUNTABILITY OFFICE 

MR. LEVIN. Thank you very much, Mr. Chairman. On behalf of 

New York Mercantile Exchange and myself, thank you for the 

opportunity to be here today. I am going to briefly go over my written 

testimony and then just briefly describe the New York Mercantile 

Exchange. 

 To refresh everyone’s memories, we are a regulated public 

marketplace. We offer trading in many different products, a 

concentration in many of the metals and energy. And of course, energy 

futures products is, I think, the reason that I am here today. 

 The trading in our exchange is competitive. We offer what we 

consider a level playing field. We believe trading is fair. We publicly 

disseminate all of our prices. Market prices and the process of price 

determination is transparent. We would refer to that as price discovery. 

We consider most of what goes on at the Exchange to be very 

transparent. NYMEX itself, as an institution, is neutral regarding what 

happens in the market. We don’t have a view on price. The staff, for 

instance, is prohibited from trading. 

 Regarding world energy markets, much has been discussed 

previously, and I think I will just try to touch on some types of that. But 

I want to emphasize that NYMEX, especially as a staff member, we do 

not take views on the price, and regarding specific questions, though, I 

will try to answer any question that comes up as well as I can under that 

circumstance. 

 The many markets in energy are highly regionalized and, to a large 

degree, they are independent. As a matter of fact, natural gas, in some 
77

sense, is on the verge of becoming an international market, but it has not 

quite arrived there yet. Electricity, certainly in North America, is still 

more regionalized than oil, as has been already expressed by the previous 

panel that is absolutely a predominantly international market. 

 In the crude oil market, there are hundreds of different streams. 

There are dozens of locations where these streams are produced. There 

are probably hundreds of locations where it is refined. And all of this oil 

physically trades. 

 Commercial trends and conditions regarding the trade of that oil 

have developed over the years, and we have, as we make distinctions to 

cash in the physical market, transactions there. And sometimes, we even 

call the cash or the physical market the OTC market, but the over-thecounter market, these days, in those transactions, typically refers to 

financially-settled derivatives. And then we have the futures market, 

which is the most transparent of all of these markets. In all fairness, 

there is a degree of transparency in the other markets as well, but not all 

of those markets are transparent, and not all parts of them, and 

admittedly, we do note that for some participants in the market, lack of 

transparency is seen as a commercial advantage. However, we do see the 

transparence and liquidity that currently exist in crude oil markets, 

especially futures markets, and especially the NYMEX futures markets, 

has an unambiguous public benefit at all times. 

 There has been a great deal of standardization in the cash and 

physical market, the OTC market, over a time, and terms and conditions, 

there are many sort of standard transactions, and one can follow the 

trading of those. And there is reporting of trading and prices in those 

markets. These terms and conditions govern not only the trading but the 

delivery and the title transfer. 

 Between those markets and the futures markets, which is also, of 

course, standardized, and in our market, delivery is called for in our basic 

crude oil product. There is a substantial interaction between transactions 

in all of these different markets. What we find happens is there is 

arbitrage, there is competition, and there is a significant degree, as I said, 

of transparency in cash and OTC, and there is complete transparency in 

the futures markets. 

 Transactions in all of these markets are constantly taking place. Oil 

is an international market. It is a 24-hour market that tends to be a 7 day 

market. And consequently, there are prices that result from all of these 

transactions. And they take place and they emerge all of the time. In a 

very real sense, prices are determined simultaneously as well as 

reactively between all of these markets. To say one market leads another 

market could be very misleading. 
78

 In terms of geopolitical impacts, I think some things have already 

been mentioned. I can certainly agree that there is a coincidence in some 

news reports and changes of prices in our markets and other markets. 

For example, on April 10, our price increased $1.35 a barrel, so there 

were headlines about Iran and potential military response. 

 In addition to other important factors that influence, ultimately, 

gasoline prices, crude oil is very major. We have had some discussion of 

some of the others. You talked about refinery utilization, and of course 

the transition from MTBE to an ethanol-based gasoline, and none of this 

is to say that we have a negative view, or any view, on environmental 

impact, because coincided, perhaps not the best timing, all other things 

considered as far as price impacts, but it does have an adjustment factor 

on the market. And we have recently incorporated and are making a 

change from the MTBE-based reformulated to the gasoline reformulated 

and probably have other plans to offer other types of products as well. 

 That concludes my oral testimony, and I look forward to your 

questions. 

 [The prepared statement of Robert Levin follows:] 

PREPARED STATEMENT OF ROBERT LEVIN, SENIOR VICE PRESIDENT FOR RESEARCH, NEW 

YORK MERCANTILE EXCHANGE

Mr. Chairman and members of the Committee, my name is Bob Levin and I am the 

Senior Vice President of Research at the New York Mercantile Exchange (NYMEX or 

Exchange). NYMEX is the world’s largest forum for trading and clearing physicalcommodity based futures contracts, including energy and metals products. We have been 

in the business for 135 years and are a federally chartered marketplace, fully regulated by 

the Commodity Futures Trading Commission (CFTC) both as a contract market and as a 

clearing organization. On behalf of the Exchange, its Board of Directors and 

shareholders, I thank you and the members of the Committee for the opportunity to 

participate in today's hearing on the futures market and gasoline prices. 

INTRODUCTION

NYMEX provides an important economic benefit to the public by facilitating 

competitive price discovery and hedging. As the benchmark for energy prices around the 

world, trading on NYMEX is transparent, open and competitive and heavily regulated. 

Contrary to some beliefs, NYMEX does not set prices for commodities trading on the 

exchange. NYMEX does not trade in the market or otherwise hold any market positions 

in any of its listed contracts and, being price neutral, does not influence price movement. 

Instead, NYMEX provides trading forums that are structured as pure auction markets for 

traders to come together and execute trades at competitively determined prices that best 

reflect what market participants think prices will be in the future, given today’s 

information. 

There is a strong beneficial and interdependent relationship between the futures and 

the underlying physical commodity or “cash” markets. The primary motivation for using 

the futures market is to hedge against price risk in the cash market. Price volatility drives 

many into the futures markets. Many prudent business managers rely on the futures 

market to protect their business against price swings in the cash market. 
79

Futures markets provide a reference point for use in executing off-exchange trades at 

competitively determined prices. An understanding of the NYMEX market, its pricing 

mechanism and the relationship between the futures price and the cash price will provide 

useful instruction and clarity to what is often perceived as an esoteric area of the broader 

financial marketplace. 

OVERVIEW

Futures markets fulfill two primary functions: (1) They permit hedging, giving 

market participants the ability to shift price risk to others who have inverse risk profiles 

or who are willing to assume that risk for potential profit; and (2) They facilitate price 

discovery and market transparency. Transparency involves many factors, including: (1) 

continuous price reporting during the trading session that is disseminated on a real-time 

basis worldwide by various market data vendors; (2) daily reporting of trading volume 

and open interest; and (3) monthly reporting of deliveries against the futures contract. 

NYMEX’s futures and options contracts are listed and traded by calendar month. 

For energy contracts, trading terminates in the month preceding the month of actual 

delivery of the underlying commodity (if positions are not offset and instead are held 

through the termination of trading for that contract month). Consequently, the front or 

spot month listed for trading during most of the month of May would be the June 2006 

contract month. The daily settlement price for each contract month of a listed contract is 

calculated pursuant to Exchange rules. The rules governing the calculation of our 

settlement price reflect the business judgments exercised by Exchange officials. 

By listing contract months for trading out into the future, a common convention in 

the futures industry, our prices at all times reflect the collective consensus of the 

marketplace as to the future direction of commodity prices. By contrast, many cash 

markets of the underlying commodities for our products, such as for gasoline, are quoted 

and traded in the cash market as day-ahead products. Consequently, there can be at times 

significant differences between futures prices on our markets and prices in the day-ahead 

cash market. 

NYMEX energy futures markets are highly liquid and transparent, representing the 

views and expectations of a wide variety of participants from every sector of the energy 

marketplace. Customers from around the globe can place buy and sell orders through 

brokers on the NYMEX trading floor. On behalf of the customers, buyers announce their 

bids and sellers announce offers. The price agreed upon for sale of any futures contract 

trade is immediately transmitted to the Exchange’s electronic price reporting system and 

to the news wires and information vendors who inform the world of accurate futures 

prices.

Price signals are the most efficient transmitters of economic information, telling us 

when supplies are short or in surplus, when demand is robust or wanting, or when we 

should take notice of longer-term trends. NYMEX futures markets are the messengers 

carrying this information from the energy industry to the public. The wide dissemination 

of futures prices generates competition in the establishment of current cash values for 

commodities. 

Price Discovery

The institutional setting of futures trading helps discover the competitive price 

which best represents what the market thinks prices should be in the future, given today’s 

information. As such, futures markets provide reference points for use in buying and 

selling commodities at competitively determined prices. The widespread dissemination 

of exchange-generated prices fosters competition in the establishment of current cash 

values for commodities. Because of the liquidity and transparency of the futures market, 

the marketplace uses the futures price to provide the reference for setting prices in the 

cash market. This is referred to as the “price discovery” function. 
80

Relationship between Futures Prices and Underlying Cash Prices

Futures markets are a derivative of the cash market and are designed to ensure that 

the cash and futures market prices converge to a single price at expiration of the futures 

contract. The cash market typically consists of a variety of transactions that differ in the 

timing, location and form of delivery (as well as in other important commercial terms and 

conditions). In many cases, the general terms governing these transactions are 

standardized which results in development of a series of fundamental products or 

commodities for the underlying market. In the oil market, historically, there have been a 

number of specific transaction types serving in this role. Generally, market competition 

results in arbitrage by market participants between these commodity-types of transactions 

and other less-standardized transactions such that fairly reliable statistical correlations 

develop between different types of products. Futures contracts are expressly designed to 

either correspond to an existing cash-market “standard” product or fill that role on its 

own. 

Although futures and all cash prices often do not always move in parallel, there is 

considerable support for the proposition that price changes in one part of the market, cash 

or futures, are frequently transmitted to other parts of the market and result in similar 

changes elsewhere. The futures markets, therefore, reflect cash market prices and, as a 

result, are able to be used as a hedging vehicle. The difference between the cash and 

futures price at any time is known as the “basis.” Usually, basis is measured as the 

differential between the cash price and the nearby futures price. The size of the 

differential provides a benchmark against which the closeout prices of both the cash and 

futures positions may be measured. Historically, NYMEX futures have proven to be 

extremely reliable vehicles for converging to the cash market; a marketplace that 

consistently has performed with integrity. 

MARKET ANALYSIS

NYMEX staff monitors the supply and demand fundamentals in the underlying cash 

market to ensure that NYMEX futures prices are consistent with broad, ongoing, cash 

market price movements and that there are no price distortions. Our analysis of the 

market has identified three key factors that are contributing to higher gasoline prices in 

the cash and futures market: 1) high crude oil prices; 2) methyl tertiary butyl ether 

(MTBE) phase-out; and 3) reduced refinery utilization rates. 

High Crude Oil Prices

NYMEX trades light sweet crude oil futures contracts, one of our most actively 

traded energy products. Crude oil is a strategic commodity that responds to global 

political tensions, particularly in the Middle East and West Africa. In fact, crude oil 

prices are determined in a global market place. That global market place is highly 

sensitive to geopolitical events, and the price of crude oil responds immediately. 

For example, recently, the Iranian nuclear threat appears to have contributed to price 

volatility as the market responds to the latest political developments. For example, on 

April 10, the May NYMEX crude oil futures price increased $1.35 per barrel to $68.74 at 

the same time that there was a headline story about Iran and the potential for a military 

response. Two weeks later, on April 21, the NYMEX June futures price reached an alltime high of over $75.00 coinciding with continued concerns about Middle East security 

and reports of Nigerian supply cuts arising from militant attacks. During this same time 

period, there has also been reduced production in other oil producing countries due to 

political unrest. Chart A (attached) reflects global crude oil prices using the front month 

NYMEX Light Sweet Crude Oil (WTI) futures and Brent Crude Oil futures prices. 

Crude oil is the main feedstock for gasoline production and, consequently, crude oil 

prices can have a very strong influence on gasoline prices. As such, the strength in crude 

oil prices has been an important factor leading to higher gasoline prices. 
81

Gasoline is the largest refined product by volume sold in the United States and 

accounts for almost half of the national oil consumption. It is a highly diverse market, 

with hundreds of wholesale distributors and thousands of retail outlets, often making it 

subject to intense competition and price volatility. 

NYMEX trades New York Harbor unleaded gasoline futures contracts. Market 

conditions in the gasoline market reflect the basic market fundamentals such as 

imbalance between supply and demand. Tight gasoline supplies due to lack of refinery 

capacity, compounded by the lingering impact of Hurricane Katrina, and, more recently, 

the transition from MTBE to ethanol have driven prices upward dramatically in the cash 

and futures market. 

MTBE Phase-Out

The gasoline market is currently in a difficult transition period due to the phase-out 

of MTBE, and the related transition to ethanol. As companies eliminate the use of 

MTBE and replace it with ethanol, gasoline refiners and importers must adjust their 

practices and systems. Ethanol, which is chemically different than MTBE, contains more 

volatile compounds than MTBE and, therefore, is harder to use in reformulated gasoline 

in the summertime. In addition, ethanol cannot be carried in the nation’s pipeline system, 

and must be segregated from the wholesale distribution system until its addition at the 

truck rack. Finally, ethanol presents new demand and supply implications, which must 

be factored into the pricing of gasoline. 

There is a level of uncertainty involved in this transition process as the marketplace 

adjusts to the new supply situation. This uncertainty typically leads to higher gasoline 

prices in the short term. Buyers and sellers have concerns about demand and supply 

fundamentals, and the higher costs are then passed on to consumers. The transition 

process is now well underway but not yet completed, as the gasoline market begins to 

phase out MTBE-blended gasoline. Most energy firms likely will continue to draw down 

and use up their reformulated gasoline (RFG) inventory during the remainder of the 

month of May. Market observers continue to believe that sometime this summer the 

Reformulated Gasoline Blendstock (RBOB) product will largely replace reformulated 

gasoline as the predominant gasoline product in the cash market. 

Chart B, attached, shows the wholesale price of ethanol and MTBE in the New York 

Harbor area. As you can see, ethanol prices are currently $1.00 per gallon higher than 

MTBE. This large price differential indicates the strength of ethanol demand as 

compared to MTBE. The ethanol is then added to RBOB to make finished gasoline. 

NYMEX first listed RBOB gasoline futures for trading last October in anticipation of the 

phase-out of MTBE from the gasoline pool. Chart C, attached, shows recent prices for 

finished RFG (with MTBE included) and RBOB (before the addition of ethanol). The 

current RBOB price is about 10 cents per gallon higher than finished RFG (with MTBE), 

and when the ethanol is added (at a 10% blend by volume) the finished ethanol-blended 

gasoline recently has been priced even higher, at 15 cents higher than RFG with MTBE. 

This accounts for some of the recent price rise in gasoline. 

Reduced Refinery Utilization Rates

Gasoline prices have been supported recently by lower refinery utilization rates due 

to increased refinery maintenance this spring. Some refineries reportedly had delayed 

maintenance work in the aftermath of Hurricane Katrina to ensure adequate gasoline 

supplies. Furthermore, additional refinery work is needed this year to comply with new 

low-sulfur requirements in diesel and gasoline. The end result is tighter gasoline supplies 

in the short-term until the higher refinery utilization rates can be restored. 

Even though no new gasoline refineries have been built in the U.S. in several 

decades, this imbalance has been mitigated to some extent by higher efficiencies from 

existing plants, which have generally operated at a high rate of utilization in recent years. 
82

However, such a high utilization rate also means that when utilization rates are reduced 

for any reason, there will be an immediate impact on the availability of new supplies of 

gasoline. 

In the face of these market factors, the NYMEX system continues to work according 

to design. As intended, NYMEX’s highly transparent, open and competitive market 

place adds a level of economic stability to the situation by providing a reliable and wellregulated price discovery and risk management forum. 

CONCLUSION

At all times during periods of extreme uncertainty in the market, NYMEX has been 

the source for transparent prices in the energy markets. Our price reporting systems, 

which provide information to the world’s vendors, have worked flawlessly and without 

delay. 

The NYMEX marketplace continues to perform its responsibility to provide 

regulated forums that ensure open, competitive and transparent energy pricing. We can 

only imagine the market uncertainty and further devastation to consumers if NYMEX 

were unable to perform its duty and prices were determined behind closed doors. 

I thank you for the opportunity to share the viewpoint of the New York Mercantile 

Exchange with you today. I will be happy to answer any questions members of the 

Committee may have. 
83

Chart A: NYMEX WTI and Brent Crude Oil

1/

55.0060.0065.0070.0075.0080.00

3/2006 1/10/200 1/176/200 1 6 /24/200 1/316/2006 2/7/2006 2/14/200 2 6 /21/2006 2/28/2006 3/7/2006 3/14/200 3/21/2006 63/28/2006 4/4/2006 4/11/200 4/186/200 4 6 /25/2006

In Dollars per Barrel

Brent (UK)WTI in Cushing, Okla.
84

Chart B: Ethanol vs. MTBE (NY Harbor)

1.401.501.601.701.801.902.002.102.202.302.402.502.602.702.802.90

1/3/2006

1/10/2006

1/17/2006

1/24/2006

1/31/20

2

06

/7/2006

2/14/2006

2/21/2006

2/28/2006

3/7/2006

3/14/2006

3/21/2006

3/28/2006

4/4/2006

4/11/2006

4/18/2006

4/25/2006

Dollars per Gallon (Source: Platts) MTBE Ethanol
85

 MR. SHIMKUS. Thank you very much. 

 And now we turn to Ms. Orice Williams. You are recognized for 5 

minutes. And welcome. 

MS. WILLIAMS. Thank you. 

vs. NYMEX RBOB Gas Blendstock w/o Ethanol

Chart C: NYMEX Reformulated Gas with MTBE 

1.30001.40001.50001.60001.70001.80001.90002.00002.10002.20002.30002.40002.5000

1/3/2006

1/10/2006

1/17/2006

1/24/20

1/31/2006

06

2/7/2006

2/14/2006

2/21/2006

2/28/200

3/7

6

/2006

3/14/20

3/

06

21/2006

3/28/20

4/4/

06

2006

4/11/2006

4/18/20

4

06

/25/2006

Dollars per Gallon RBOB RFG with MTBE
86

 Mr. Chairman and members of the committee, I am pleased to be 

here today to discuss our ongoing work on CFTC’s oversight of energy 

futures. As you are well aware, ever-rising prices have resulted in a 

number of questions about oil and petroleum prices and the role that 

derivatives markets play. 

 Given the breadth of interest in these issues, GAO initiated work 

under the authority of the Comptroller General. My remarks today focus 

on this ongoing body of work. While it is too soon to provide findings 

and observations, we hope you find the overview of our work to date 

useful. 

 By way of background, futures markets consist of a variety of 

participants, including hedgers and speculators. Hedgers use futures to 

shift the risk of a price change onto speculators. Speculators assume the 

price risk that hedgers try to avoid in hopes of making a profit. Although 

speculators usually have no commercial interest in the commodities they 

trade, the potential for profit motivates them to collect market 

information regarding the supply and demand of commodities to 

anticipate the potential impact on prices. Oversight of futures is 

provided by CFTC and the exchanges where they trade. 

 Our ongoing work focuses on two broad issues: one, the players in 

energy futures markets, their activities, and changes in price volatility 

since 2000; and two, the oversight of the energy futures markets 

provided by CFTC. 

 In addressing the first issue, our ongoing work is designed to 

describe how energy derivatives function and to what extent market 

participants with different investment objectives affect the prices of 

energy futures. 

 To do this, we are focusing on markets and market participants, price 

discovery, market liquidity, and risk management practices. We are also 

collecting information on the over-the-counter settlement process and 

NYMEX prices. 

 We will discuss changes in the mix of participants and the use of 

new trading platforms in futures products. As part of this work, we are 

building on existing research by analyzing CFTC market data to 

determine historical trends in volatility for certain commodities, 

including oil and petroleum. 

 Our work will focusing on why volatility is an issue, how it is 

measured, and what the trends show. Through our analysis, we hope to 

address issues such as causes and implications of volatility. 

 The second area we are studying is how energy futures are overseen. 

While CFTC is the primary focus, we will also include other relevant 

regulators and self-regulatory organizations, such as NYMEX. 
87

 Specifically, we are reviewing CFTC’s and NYMEX’s surveillance 

programs, oversight provided by other agencies, and information 

collected through CFTC’s large trader reporting system. We will also 

explore oversight of the over-the-counter and any other relevant markets. 

Our work will also include reviewing CFTC’s and NYMEX’s 

enforcement programs and analyzing settled cases. 

 Finally, we are in the process of assessing how CFTC is positioned 

to protect market users by focusing on CFTC’s regulatory approach, 

structure, and resources as well as any potential gaps. 

 In closing, I would like to note that we fully appreciate the 

significance of these issues and hope that our report, which is scheduled 

to be issued later this year, will provide useful information to this 

committee and others. 

 This concludes my oral statement, and I would be happy to answer 

any questions that you may have. 

 Thank you. 

 [The prepared statement of Orice M. Williams follows:] 
88

PREPARED STATEMENT OF ORICE WILLIAMS, DIRECTOR, FINANCIAL MARKETS AND 

COMMUNITY INVESTMENT, GOVERNMENT ACCOUNTABILITY OFFICE
89
90
91
92
93
94
95
96

 MR. SHIMKUS. Thank you very much. 

 Now the Chair recognizes the Chairman of the Full Committee, Mr. 

Barton, for 5 minutes. 
97

 CHAIRMAN BARTON. Thank you, Mr. Chairman, and thank you for 

chairing in my absence. I have done three things since I left here, and I 

am due to be doing another one right now, actually. 

 Thank you, each of you, for being here. 

 Let me start with you, Mr. Levin. 

 What is the futures margin? What is the margin requirement for 

energy futures right now on the market in the NYMEX? 

 MR. LEVIN. Understood. Mr. Chairman, it depends on which 

market you are speaking of. The futures margins are deposits, and we 

assess them and base them on our estimate of the risk that prices may 

move between now and the next settlement, which is the next day. 

 CHAIRMAN BARTON. Well, give me a range, then. 

MR. LEVIN. Sure. In the crude oil market, for members and nonmembers, right now, it changes. We have different ones, because the 

members often do not hold positions overnight, many of them trade 

through their account and provide liquidity, is $3,500 per 1,000 barrels, 

but our contract right now-- 

 CHAIRMAN BARTON. So that is three and a half cents on a dollar? 

 MR. LEVIN. No, three and a half dollars, I think. Yes, sir. And that 

is $4,750 for non-members. In the gasoline market, right now, it is 

$6,000 per contract, the same amount, 1,000 barrels, and for 10,000 

BTU, which is natural gas, it is $7,500. 

 CHAIRMAN BARTON. So the most it is, on a percentage basis, is 7.5 

percent? 

 MR. LEVIN. Yes, I think that is about right. That is a current right. 

 CHAIRMAN BARTON. Okay. And under current practices, that is not 

a regulated fee. It is set by the market makers themselves and the board 

of directors. Is that correct? 

 MR. LEVIN. We actually set those-- 

 CHAIRMAN BARTON. Percentages. 

 MR. LEVIN. --contract costs, whatever you want to call it. It is more 

of a staff-driven process, and in fact, I am involved quite a bit on that. 

 CHAIRMAN BARTON. So you are looking at it. 

 MR. LEVIN. We are looking at it. 

 CHAIRMAN BARTON. There are lots of reasons that I want to 

participate in the futures market. I can be a producer who wants to lock 

in a specific price. I can be a consumer who wants to lock in, again, a 

specific cost. In my State, Southwest Airlines has publicly said that one 

of the reasons they have been able to maintain profitability is because 

they hedged in the futures market and locked in prices for aviation fuel, 

which is a good thing. It is good for Southwest. Now how high would 

you set that fee before it would be non-economic or problematic for the 
98

producers and the consumers of the commodity in question to take a 

position for business reasons only? 

 MR. LEVIN. I think it really depends, Mr. Chairman, on each of 

those individual companies. Some companies may already believe that it 

is at that level, and they believe that their credit is so good that nobody 

should be requiring them to put any good faith deposit to participate in a 

market. It would be very difficult for me to speculate on what that level 

is. I am not sure for them, or for any company that, in general, it would 

be much different. And I don’t want to take too much of your time, but-- 

 CHAIRMAN BARTON. Oh, no. Every consumer in America is paying 

approximately $3 a gallon for gasoline, and Dr. Yergin was on the panel 

before you, and said in his testimony that $10 to $15 of the current price 

of oil is due to speculation. Now that is his opinion. What I am trying to 

get at is I believe in the futures markets and the derivatives markets as 

economic tools for our Nation’s future prosperity. I am not down on 

that. But I am willing to think seriously about getting with the CFTC or 

the SEC or whatever the relevant regulator is and in the energy’s futures, 

let us set some floor levels on margin costs to try and make it more 

difficult for speculators to speculate. There has got to be a level where a 

producer or a consumer who is using the commodity believes the price is 

too high and it is not economic for them to hedge. On the other hand, if 

we go the other way and set the price as low as possible, there is almost 

no risk for a speculator, especially somebody who is making the market, 

to take a position overnight, and if the market moves a certain way, you 

would make a pretty good piece of change, and they have really not put 

up any money. 

When times are flush and prices are low, requirements can be low, 

but right now, if we can knock $10 or $15 a barrel off the price of oil by 

raising the margin requirement on the futures market for oil futures I 

would put that bill on the floor next week. Do you understand what I am 

saying? Now, I am not negative on what you are doing. I support the 

free market, but you have got an unregulated situation where guys in a 

back room somewhere are setting these levels. If you set it so low, there 

are a whole lot of folks that say, “Well, heck. I can take a position. I can 

scrape up $3,000 or $4,000 and take a position. And if things work right, 

boom, I am going to make a lot of money. And even if I lose my whole 

investment, I have only lost $3,000 or $4,000.” And the people that are 

taking the short end of the stick are every one of our consumers who are 

paying at the pump. You know, if it is $20 a barrel out of $60, they are 

paying 33 percent more than they should, and 33 times 3--they are 

paying 99 cents a gallon more for gasoline than they should. 
99

 MR. LEVIN. I would like to respond to that. And I think you covered 

a lot of areas, and I think that, at least if I understood your understanding 

of how things happen in the market. 

 CHAIRMAN BARTON. And I am not an economics major. 

 MR. LEVIN. I may change some of the description that you just 

applied. But first off, I also state this may not change your view on 

anything that you said, but I think Dr. Yergin’s point was not that 

speculators are causing $10 to $15 additional to market. I think he called 

it a security premium that he thinks is really there because participants in 

the market are not certain about future performance and ability to get 

supplies. And I don’t think he suggested it was only in the New York 

Mercantile Exchange market, but I think he is suggesting that it is in the 

world market. And I am not even here agreeing that there is such a 

security premium or not. I certainly respect Dr. Yergin’s opinion, but I 

think there was a big distinction. And I don’t think he attached it to 

speculators. 

 CHAIRMAN BARTON. Let me put it this way. If the futures market in 

the next week, across the board, went down to $50 a barrel, wouldn’t 

retail prices go down? 

 MR. LEVIN. I am not so certain how fast retail goes. 

 CHAIRMAN BARTON. Would it go down? You are not going to sit 

here and tell us that the futures market doesn’t influence the retail price. 

The price that is on the New York Mercantile Exchange today affects the 

perception of where the price is going to be and the supply-demand 

availability. To err on the side of caution, if they see that price going up, 

everybody in the retail chain, from the refiner to the distributor to the 

retailer, is going to raise their price up. That is a fact. We have seen that 

happen. We have seen it go up 30 or 40 cents a gallon in Texas in the 

last 2 1⁄2 weeks. Now there are a lot of reasons for it, I mean, Iran, 

Nigeria. And again, I am not negative on the futures market. I am not at 

all. But when I found out what the percentage for a margin is, if I want 

to go to a New York Stock Exchange and buy a common stock, I would 

put up 50 percent of the money, and in some cases, I think you have got 

to put up even more, but I can go buy a futures contract and put up 3 1⁄2 

or 4 1⁄2 cents on the dollar. That is pretty good leverage, you know: 90/10 

leverage, 95/5 leverage. That is not bad. 

 MR. LEVIN. But once again, and as far as a particular margin 

moment, but the New York Mercantile Exchange’s prices, we believe, 

and I think evidence supports, do not just unilaterally go up. They go in 

tandem. Sometimes you do see other prices ahead of them. Sometimes 

you see it first. 

 CHAIRMAN BARTON. I understand. 
100

 MR. LEVIN. But to say that the prices fall, I appreciate that you 

understand, sir-- 

 CHAIRMAN BARTON. I am not negative on the futures market. What 

I am is trying to find out is what we would need to do to raise the margin 

requirements so that the producers and the consumers of the commodities 

still can participate, but make it more expensive for the purely 

speculative player. The young lady to your left and her study, or the 

study that she is testifying on, indicates that speculators in the market are 

becoming a bigger factor. When pension funds are buying futures 

contracts, that, to me, sends up a red flag. You know? I don’t have a 

problem with Boom Pickens, my good friend down in Dallas. He can 

play the futures market all he wants. But he also has enough money that 

if you raise the margin requirement--he is a smart boy and a wealthy 

boy--he is still going to be a player. But my God, you just said that you 

and a few guys kind of sit around the coffee table and decide what the 

requirements are going to be. 

 MR. LEVIN. No, I don’t think that is how I said it. I said that it 

sounded like that. We aren’t sitting around a coffee table. But getting 

back-- 

 CHAIRMAN BARTON. Maybe you just send e-mails back and forth 

between your computer terminals, but-- 

 MR. LEVIN. And also, just to make a distinction, when you have 

margin at the New York Stock Exchange, for that partial payment, you 

own that stock outright. When you have a margin at a futures exchange, 

you don’t own anything. 

 CHAIRMAN BARTON. But you have a right to it. 

 MR. LEVIN. No, no. You don’t have a right. In fact, you-- 

 CHAIRMAN BARTON. If you exercise the contract, you do. 

 MR. LEVIN. But that is when it terminates. 

 CHAIRMAN BARTON. Right. 

 MR. LEVIN. At that point, you have to put up full value, and as we 

get closer to termination, you have increasing amounts of that. 

 CHAIRMAN BARTON. And as we all know, what percentage of those 

contracts go to term? 

 MR. LEVIN. A smaller percentage. 

 CHAIRMAN BARTON. Less than 1 percent? 

 MR. LEVIN. In terms of the form of delivery, I would say yes. 

 CHAIRMAN BARTON. Yes. Okay. We will be in touch. 

 MR. LEVIN. For the purposes that you said, sir, but we base our 

margin calculation, as I said, on the assessed risk in the market. We are 

able to utilize parameters from the market, a technical term, but one that 

is not that difficult to understand. We call it the implied volatility that is 

derived from some of the options and the futures pricing, but what 
101

volatility refers to is the percentage representing a standard deviation of 

pricing. 

 CHAIRMAN BARTON. We have a volatility test, too. It is called the 

election. And the political volatility is pretty high right now on this. I 

don’t begrudge the traders, but I am a lot more worried right now about 

the consumers of every Member of Congress on both sides of the aisle 

and that volatility in the marketplace, on the retail price of gasoline, is at 

a level that I think it is worthy of serious inquiry on how these margin 

requirements are set. And I think you can make a fairly good case that if 

we set them higher, the volatility in the oil market would go down, and 

the price in the oil market would go down. And at least in the short term, 

I think that would be a good thing for the American consumer and 

American economy. And I guarantee you, it would be a good thing for 

those of us that run for election. 

 Thank you, Mr. Chairman. 

 MR. SHIMKUS. The Chair now recognizes my colleague from 

Kentucky, Mr. Whitfield, for 5 minutes. 

 MR. WHITFIELD. Thank you, Mr. Chairman. 

 Ms. Williams, in your study, you note that you are looking at 

fraudulent, manipulative, and abusive practices that have been identified 

by the Commodity Futures Trading Commission and also enforcement 

that they are going to take. Could you elaborate on the type of practices 

that you found to be fraudulent or abusive? 

 MS. WILLIAMS. I think, based on the information we have collected 

to date, most of the activity taken by CFTC in the energy area involve 

natural gas in fraudulent reporting. 

 MR. WHITFIELD. Involve natural gas? 

 MS. WILLIAMS. False reporting was the specific issue in the natural 

gas market. 

 MR. WHITFIELD. Maybe you could give me an example of false 

reporting. 

 MS. WILLIAMS. I think it actually has to deal with certain reporting 

requirements, primarily in the over-the-counter market and the 

information that was being provided by participants in that market to the 

reporting body, that they weren’t providing accurate information to the 

reporting body. And CFTC took action, because that could potentially 

affect the futures market. 

 MR. WHITFIELD. Was that a live threat or not? 

 MS. WILLIAMS. Based on what we have collected to date, I am not 

sure I could say that it was characterized as a live threat. 

 MR. WHITFIELD. Okay. Mr. Levin, we appreciate you being here 

today. And it is my understanding that there are other future exchanges 
102

trading energy products in the United States other than your company. Is 

that correct? 

 MR. LEVIN. That is correct, Congressman. 

 MR. WHITFIELD. And does the Commodity Futures Trading 

Commission have authority to monitor trading of those markets to ensure 

that the prices are not manipulated? 

 MR. LEVIN. One of those markets is actually subject to regulation by 

the FSA, which is the authority that oversees commodities and securities 

regulation in the UK. The reason being that that is where their authority 

emanates from, and there are courtesies provided between the 

Commodity Futures Trading Commission of the United States to other 

exchanges that are under foreign authority. In this case, since I think you 

are talking about domestically-traded products, that, I think, the 

interpretation of that courtesy for foreign regulators and other exchanges 

was with the understanding it would be for products that are really 

foreign-based products, that there may be some interest in the United 

States to trade as well. And in this case, there is an exchange that is 

trading U.S.-based product very similar to our product, but it is subject 

not to the CFTC as the ultimate authority, but to the FSA. 

 MR. WHITFIELD. Do you view that as a significant issue? 

 MR. LEVIN. We have certainly been concerned about it and have 

raised it with the Commodity Futures Trading Commission, because it 

opens up the possibility of differential regulation. As examples, and with 

no disrespect intended to FSA, there are really different views on 

position limits between the CFTC and the FSA. But NYMEX products 

are subject to position limits. The FSA-regulated products are not, even 

though they are very similar. Also, there is a large trader reporting that 

takes place rather extensively under the CFTC, so we are subject to that 

for our U.S.-based products, but this other exchange is not for its U.S.-

based products, because the FSA does not require that. 

 MR. WHITFIELD. Now would legislation be required to regulate that 

exchange, or can that be done administratively by the Commodity 

Futures Trading Commission? 

 MR. LEVIN. I think it can be done administratively by the CFTC, sir. 

 MR. WHITFIELD. And you are having ongoing discussions with them 

about that? 

 MR. LEVIN. Yes, officials from the exchange have raised that with 

the CFTC. 

 MR. WHITFIELD. Okay. Okay. I yield back the balance of my time. 

 MR. SHIMKUS. The gentleman yields back. 

 I would like to recognize myself for 5 minutes. 

 And Mr. Levin, in your testimony, you give an overview of the two 

primary functions of future markets, including that they permit hedging, 
103

giving market participants to shift price risk, and that they facilitate price 

discovery and market transparency. Who regulates these functions? 

 MR. LEVIN. They are regulated at two levels, Mr. Chairman. They 

are regulated by the Commodity Futures Trading Commission. And we 

also, the exchange itself, has self-regulatory responsibilities that are the 

result of Congressional legislation, so we regulate it as well. 

 MR. SHIMKUS. Is the NYMEX the only futures exchange that is 

trading energy products in the United States? 

 MR. LEVIN. No, sir. There is another one that we were just 

discussing, but it is the International Commodity Exchange. It took over 

the International Petroleum Exchange, IPE, that was based in London. 

And it also trades in the United States. And it trades U.S.-based products 

in the United States, but subject to that foreign regulation. 

 MR. SHIMKUS. So it is not regulated by the CFTC? 

 MR. LEVIN. No, it is not. And I do not believe it is at all subject to 

the same self-regulatory responsibilities, but by no means do I mean that 

to say that they do not take oversight of what trades there seriously, but it 

is not subject to the same rigor as the CFTC. 

 MR. SHIMKUS. Well, would you say it is regulated or unregulated? 

 MR. LEVIN. Well, there are aspects that are much less regulated, 

because on the natural gas side, which is a different component. The 

product that is U.S.-based that is subject to the FSA are its crude oil 

futures, its WTI cash-settled product. And that is less regulated, far less 

regulated than we are, because of the position reporting, large trader 

recording position limits they are not subject to on the natural gas side. 

That is a lesser type of regulation. It is under CFTC authority. There are 

also the cash-settled based on a NYMEX product, in this case, our 

natural gas product. And it has even less regulation under the authority 

that they operate. 

 MR. SHIMKUS. Can trading in that market impact crude oil prices in 

the United States? 

 MR. LEVIN. I would consider that market to be part of the market in 

the same way that NYMEX and all of the other components that I 

identified are, and I would say absolutely. It is part of the world oil 

market. And trading in that market has an influence, as these other 

components do. 

 MR. SHIMKUS. But would you consider it a foreign market if it is 

located in the United States? 

 MR. LEVIN. Well, I think that, from our perspective, we certainly 

questioned that interpretation because it is a U.S.-based price. It is 

largely for U.S. participants and it is very relevant as a U.S. market. 
104

 MR. SHIMKUS. And going at some of the issues the Chairman had, 

and he is pretty impassionate. There is a function for you all. And you 

defined the margin as a good faith deposit, is that correct. 

 MR. LEVIN. I did, yes, sir. 

 MR. SHIMKUS. Have the current margin-setting procedures proven 

effective in preserving the financial integrity of the market? 

 MR. LEVIN. Well, they absolutely have. As everyone knows, there 

is a lot of volatility in the market, but the basis for which we set our 

margins have been very effective, and it is very infrequent that we find 

that we are under-margined. We consider it a very bad policy to be 

either under-margined, because we are not protecting ourselves against 

risky performance in our market. But over-margined, too, because that 

could lead to a lack of trading and the lack of a server to perform our 

role, the market would, thus, suffer and be a lot less transparent. 

 MR. SHIMKUS. And I wish you had had a chance to really get 

involved with the Chairman on that. How does the small percentage of 

the contract value protect the market against major market move, or does 

it? 

 MR. LEVIN. It is not that it protects against the major market move. 

Literally, it is that we have found that the means in which we apply our 

margins, that this implied volatility has been a very effective indicator of 

boundaries of where price may move until the next collection of 

payments. The risk management is also because every participant in the 

market is sponsored and guaranteed by a financial overseer of the many, 

many international banks, domestic banks, major financial entities, or 

others on the market. We found that there are margins in that collection 

and those guarantees that, despite bouts of volatility in the market, we 

have had very good financial performance in the market. 

 MR. SHIMKUS. And the Chairman, I ask my colleagues for 

forgiveness here, but if you raised the margins that the Chairman is 

addressing, what does that do to your market and what does it do to 

prices? 

 MR. LEVIN. Well, he had indicated, I think earlier, if I heard 

correctly, a percentage which was arbitrary. There may be times in our 

market where we have had margins that high because of our risk 

assessment. I think that would drive virtually all participation away. 

And then our concern is that we will lose the benefits of the futures 

market. 

 MR. SHIMKUS. Thank you. 

 The Chair recognizes the gentleman from Michigan for 5 minutes. 

 MR. STUPAK. Thank you, Mr. Chairman. 

 I am glad to see that members are starting to focus on this futures 

market, because we have been pushing legislation and trying to get 
105

hearings on our legislation, and I tried to help investigate this high price 

of oil. And one of the issues we came up with and thought of on how 

there may be some things that we can help to bring some stability to the 

price and then also give the relief to the taxpayer, or I should say to those 

that are caught up with gas. So I am glad to see all of the interest in it. I 

am sorry the Chairman is back and forth. I was actually on the floor on 

that amendment, so we have votes on the floor. 

 So let me get to it. 

 Mr. Levin, as you put in your statement, trading on NYMEX is 

transparent, open, and competitive because of your reporting system. So 

does it not make sense to provide this same transparency, open process 

of reporting to the off-market traders or the OTCs, as they are called? 

 MR. LEVIN. Congressman, obviously, given the transparency we 

operate under and provide, we are great supporters of it. We also 

recognize that there are transactions in the market that, just in general 

and philosophically, that are private and that maybe do not require or 

maybe are concerned that would become advocates in intruding too 

overbearingly to private company transactions. I certainly understand 

the sensitivity of the topic, and there could be a perspective that supports 

it, but we are also very concerned with even the well-intentioned policies 

that begin to intrude more and more into principal to principal 

commerce. There could be some unintended consequences. And that is 

why we are somewhat timid to come out and endorse something like 

that. I wouldn’t want it, as I said, to be misinterpreted, though. We 

operate as a transparent institution, and we are great supporters of 

transparency. 

 MR. STUPAK. That leaves part of the private operation more 

susceptible then to greater speculation, greater margins, greater price 

increases, greater fluctuation in price, because you need to know what 

are the motivating factors behind some of these. 

 MR. LEVIN. It is so early, it is possible. If they are truly private, 

though, they may have no influence beyond those individual transactions 

and not get reported elsewhere in the market, and I think that is-- 

 MR. STUPAK. But you need to know how much is there, I mean, 

how much is private that OTC is trading. Some estimates, and I was 

going to ask Ms. Williams if she wanted to join in, please do, of the offmarket trading could be as high as 60 to 75 percent. Is that fair to say on 

all future energy trading? 

 MR. LEVIN. In all honesty, we don’t know, either, how much there 

is, and we have ourselves over the years tried to make estimates. 

 MR. STUPAK. So what is your best-guess estimate? 

 MR. LEVIN. You know something? I don’t know what my best 

guess is. I can tell you sometimes people have told us that over-the-
106

counter is much more than on exchange, but we think that when we 

heard more about that, it sounded like there was multiple counting of the 

same transactions. I would say somewhere, maybe it could be, a good 

guess, as much as on exchange, but it could be more. But that would be 

adding all of the exchanges together. So there is a fair amount of overthe-counter trading. There clearly is. 

 MR. STUPAK. I assume that to mean 25 percent? 

 MR. LEVIN. Oh, no, before the market we were referencing before, 

the cash-settled WTI at the other exchange, under the IPE, they are grant 

trading. If you had added their grant trading and our trading, it might be 

as large as all of that volume together. 

 MR. STUPAK. Okay. And Ms. Williams, does the GAO have an 

ability to tell exactly how much futures trading is occurring off the 

market? 

 MS. WILLIAMS. I wouldn’t say that we have the ability. This is one 

of the issues that we are trying to get our arms around, but there is no 

central source for the information. So we are not likely to be able to 

come up with a number for the over-the-counter market. 

 MR. STUPAK. Sure. Okay. Is that something you are going to try to 

address in the GAO report? 

 MS. WILLIAMS. Yes, that is something that we are trying to address. 

 MR. STUPAK. Mr. Levin, you also point out in your statement that 

because of the transparency of NYMEX trading, futures prices use the 

set prices on the cash market, otherwise known as price discovery 

function. Does off-market trading affect this price discovery? 

 MR. LEVIN. We believe, I think indirectly it does, because in many 

cases, the over-the-counter market has some active organizations that are 

dealers in that market. And they have many customers. And sometimes, 

their transactions are more customized. Sometimes they are rather 

standardized. But in their collecting of transactions, they also manage 

their risk in markets such as ours or others like it where with others in the 

cash or over-the-counter markets. So there is a lot of multiple trading 

that finds its way into the collection of transactions. And in that sense, I 

think it has an influence, and I think, as I indicated earlier, there is kind 

of simultaneity as well as a reactor-ship between all of these transactions. 

 MR. SHIMKUS. If the gentleman would wrap, we would give Dr. 

Burgess-- 

 MR. STUPAK. Just one quick question. 

 How many barrels are traded on NYMEX every day, just to give us 

some reference point here? 

 MR. LEVIN. I think these days, in a very active market, there has 

been somewhere in the neighborhood of 250 million barrels a day. I 

think that is a ballpark. 
107

 MR. STUPAK. Thank you both for your interest. 

 MR. SHIMKUS. And thank the Chairman for all of the gracious time I 

offered. 

 MR. STUPAK. Thank you, Mr. Chairman. 

 MR. SHIMKUS. The Chair recognizes the gentleman from Texas for 

5 minutes. 

 MR. BURGESS. Thank you, Mr. Chairman. 

 Ms. Williams, you talk about the CFTC and how they have the 

ability or need the ability for oversight. Do they have all of the tools 

they need at this point? 

 MS. WILLIAMS. That is one of the things that we are looking at in 

the course of our study, and I am not in a position to give a specific 

response now, but we are looking at that. 

 MR. BURGESS. Are you going to follow up with the committee, 

perhaps, with a written response, then, to that? 

 MS. WILLIAMS. I will be glad to do that. 

 MR. BURGESS. I think that would be very, very useful. It would 

give us some direction, or we will come up with some tools, and they 

may not be the tools that you need. 

 Mr. Levin, last summer we passed the energy bill. We put MTBE in 

some legal peril, and it has been abandoned. And maybe that is a good 

thing, ultimately. Maybe it is not. But the result has been, with this 

summer’s driving season upon us, we see the prices increase. How much 

was that anticipated by the market? Did you guys see that coming? 

 MR. LEVIN. We knew that the transition would be difficult, 

Congressman, because there have been other transitions 

environmentally-based for the last, really, 15 or 16 years in the gasoline 

market, in particular. And the full consequence is that there is a lot less 

forward trading and thus forward price protection-- 

 MR. BURGESS. My time is really very short, and we have got to go 

vote, but can I just ask, was there any sort of advisory or warning put out 

by the Mercantile Exchange about this change? 

 MR. LEVIN. No, I mean, I think they really accepted those 

regulations as they went in. And we couldn’t have predicted, because, as 

you indicated, it was really a reaction to something in the bill, which was 

that it was stated explicitly they wouldn’t be given protection by the 

Government. And so a lot of the industry finally decided that they are 

going to abandon it. There was no official date given. It was hard to-- 

 MR. BURGESS. I think that the reasons, and I think the American 

people could accept the reasons. It is going to cost us something to get 

MTBE out of our lives, and if it is worth it to do that, we are willing to 

pay for it. But I guess what bothers my constituents when I talk to them 

is that why didn’t we see this coming? Why was there no warning? 
108

Maybe that is the committee’s fault. Maybe that is the House’s fault? 

Maybe that is the Senate’s fault. I don’t know. But from your 

perspective, with NYMEX, was there any sort of advisory circular put 

out there, “Hey, guys. Watch this, because MTBE is out of the picture. 

When we reformulate next summer, it is going to be big trouble. If 

anything else happens, like two hurricanes, like takeover in Bolivia, you 

name it.” 

 MR. LEVIN. Congressman, it really wasn’t in that context. It would 

be hard to predict the timing. We knew the transition would be difficult, 

but because it would really be commercially driven, we might have 

thought it would coincide with the summer, but even there, we have two 

gasoline products. Reformulated is still trading more at NYMEX than 

the replacement in spite of the fact that there has been this transition 

taking place. So we haven’t seen that full commercial transition, and that 

is why it is difficult to predict even now, and certainly back then, when it 

would take place and exactly how it would take place. 

 MR. BURGESS. Well, looking at one of your charts, I guess chart B, 

it makes me very concerned about price gouging by the ethanol 

producers. 

 MR. SHIMKUS. The gentleman’s time has expired. No. 

 MR. BURGESS. When we look at that, well, can you explain the 

factor by which the price of ethanol has increased? Is it because of 

increased demand because of replacement of MTBE or are there other 

factors? I guess the thing is, we heard this in the policy committee this 

morning, it is the same price as a gallon of gas most places in the 

country, at least in South Carolina. 

 MR. LEVIN. I think it is demand driven. And we are concerned. We 

know, too, that there isn’t a big difference between, as you said, the 

MTBE and the ethanol. I don’t know that it is a one-to-one replacement 

between them, but nonetheless, right now, our blend-stock gasoline is 

trading above ten cents a gallon on the wholesale market, and you still 

haven’t added the ethanol in yet, so that will raise that even more at the 

time that they are combined. 

 MR. BURGESS. So they affect the blend-stock and not just the 

ethanol individually? 

 MR. LEVIN. I think it is mostly the ethanol, but yes, there is a piece 

of that that is blend stock, yes. 

 MR. BURGESS. Mr. Chairman, we have got to go vote. I will yield 

back. 

 MR. SHIMKUS. The gentleman yields back. We have about two 

minutes and 58 seconds to get down to the floor to vote. I think we are 

going to be fine. 
109

 We want to thank the second panel for waiting and then for your 

answers. It has been very, very helpful. And with that, I-- 

 MR. BURGESS. Mr. Chairman, before you adjourn, could I just ask 

unanimous consent that we do get those guidelines from the GAO when 

that report is ready? 

 MR. SHIMKUS. Without objection, so ordered. 

 And with that, I adjourn the hearing. 

 [Whereupon, at 1:44 p.m., the committee was adjourned.] 
110

RESPONSE FOR THE RECORD BY DANIEL YERGIN, CHAIRMAN, CAMBRIDGE ENERGY 

RESEARCH ASSOCIATES

The Honorable John D. Dingell

1. Your written testimony of May 4, 2006, (pages 13-15) criticizes the system 

for reserve disclosure mandated by the Securities and Exchange 

Commission, and states that: “Modernizing the reserves disclosure would 

clearly improve understanding of the resource base and its potential and 

provide clarification for purposes of energy security.” Please describe and 

explain the specific changes that you believe are necessary. 

The basic need is to update the SEC’s "1978" system of reserves disclosure to take 

into account the major and indeed massive changes in four dimensions – in technology, 

the globalization and commoditization of markets, the scale and complexity of projects, 

and the globalization of the energy industries and capital markets. For instance, the 

deep water frontier in the late 1970s was 600 feet; today, it is more like 12,000 feet. 

Computing had only a tiny fraction of the power it has today. Also, at the time the 

system was put in places, prices were controlled by the federal government, and the 

documentation from the time indicated that the expectation was that prices 

would change as the result of decisions involving federal price controls. Finally, it is 

important to note that the 1978 system was created primarily for the onshore U.S. 

industry, and the industry is now very much more than US and very much more than 

onshore. 

In designing the 1978 system, the SEC relied on the primary source for defining 

"proved reserves." That was the definition, and the expertise around it, developed and 

promulgated by the leading professional and technical society, the Society of Petroleum 

Engineers (SPE) in 1965, with some modification thereafter. Since then the SPE has 

updated its definitions three times and is in the process of updating them again. The 

SEC, however, has not revisited its definitions since 1978. Modernizing the SEC’s 

definitions would provide investors with more complete information and would provide a 

more thorough understand of the overall reserve base, grounded in today's technology. 

 To do this, it would be sensible for the SEC to reengage with the contemporary 

expertise and current technical knowledge. The upstream oil and gas industry routinely 

uses definitions and guidance issued by the SPE’s Oil and Gas Reserves Committee to 

calculate reserves. The SPE definitions are the subject of continuous dialogue among 

academics, technical experts, and industry participants; and they reflect the most up to 

date accepted practices. Their evergreen nature makes them robust as a standard and 

benchmark. 

 A striking example of what would be achieved were the SEC to update its 

definitions would be the inclusion of oil produced from oil shale and oil sands in the 

definitions of proved reserves. It is expected that Canadian oil sands could reach 2 mbd 

of production by 2010—the equivalent of a quarter of total current US liquids production. 

The United States will be the major market for this resource. Yet, currently, under the 

1978 system, there is little clarity as to the nature of these resources. 

 

2. According to a March 16, 2006, letter from the Honorable Christopher 

Cox (copy attached), the SEC is working with the International 

Accounting Standards Board’s Extractive Industries Project Team to 

establish a single set of reserve and resource definitions for both the mining 

and oil and gas industries. The project is intended to achieve 
111

modernization and greater convergence between the definitions and the 

related accounting principles. Please explain why this undertaking is or is 

not responsive to your concerns. 

While we applaud the workings of the IASB and the objectives of establishing a 

convergence in accounting standards, including with disclosure of oil and gas reserves, 

we do raise the question as to the speed and momentum of this project. We believe that 

the SEC could effectively undertake a direct and prompt modernization of the 1978 

system, thereby reaffirming its leadership and authority in this area. 

3. The SEC letter states at page 2 that: “Reserve volumes are not included as 

assets in audited balance sheets because of the inherent difficulty of 

accurately estimating them. As a result, SEC and FASB rules direct oil 

and gas exploration companies to provide a significant amount of 

supplemental information relating to their reserves in an unaudited 

footnote to their financial statements.” Do you agree or disagree with this 

treatment, and why? 

 

We agree with the current approach—it is not practical to include reserves volumes 

in the audited balance sheets. However, we think that some re-examination of the current 

SEC treatment may be warranted in a different direction. The SEC permits presentation 

of additional data in an un-audited footnote. However, it appears that the intention of the 

original drafters of the regulations was that the disclosures represented a minimum level 

of disclosure and that companies should be encouraged to disclose additional data if they 

believed it would better inform investors. More recently registrants have been 

discouraged from providing information beyond the proved level. There is a case for the 

SEC's encouraging companies to disclose any additional information they believe 

provides a fuller picture than just the content of the footnotes mandated by FAS69 rather 

than to discourage it, and that case should be examined. 

 

4. The SEC letter further notes that only one (El Paso Corporation) of the 10 

largest oil companies has reported any material weaknesses in its internal 

controls over financial reporting, but warns that “internal controls 

regarding the compilation and presentation of reserve disclosures are not 

covered by the internal control reports.” Should they be? Why or why 

not? 

 There is no obvious reason to require the bringing of oil and gas reserves 

disclosures within the internal control reports. It is not at all clear that the additional costs 

and efforts would be justified nor that it would lead to any increase in the reliability of 

reserves estimates. 

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