U.S. GOVERNMENT PRINTING OFFICE

70–093 CC WASHINGTON : 2001

S. HRG. 106–930

ENERGY AND AGRICULTURE

HEARING

BEFORE THE

COMMITTEE ON AGRICULTURE,

NUTRITION, AND FORESTRY

UNITED STATES SENATE

ONE HUNDRED SIXTH CONGRESS

SECOND SESSION

ON

ENERGY AND AGRICULTURE

JULY 20, 2000

Printed for the use of the

Committee on Agriculture, Nutrition, and Forestry

(

For sale by the U.S. Government Printing Office

Superintendent of Documents, Congressional Sales Office, Washington, DC 20402
COMMITTEE ON AGRICULTURE, NUTRITION, AND FORESTRY

RICHARD G. LUGAR, Indiana, Chairman

JESSE HELMS, North Carolina

THAD COCHRAN, Mississippi

MITCH MCCONNELL, Kentucky

PAUL COVERDELL, Georgia

PAT ROBERTS, Kansas

PETER G. FITZGERALD, Illinois

CHARLES E. GRASSLEY, Iowa

LARRY E. CRAIG, Idaho

RICK SANTORUM, Pennsylvania

TOM HARKIN, Iowa

PATRICK J. LEAHY, Vermont

KENT CONRAD, North Dakota

THOMAS A. DASCHLE, South Dakota

MAX BAUCUS, Montana

J. ROBERT KERREY, Nebraska

TIM JOHNSON, South Dakota

BLANCHE L. LINCOLN, Arkansas

KEITH LUSE, Staff Director

DAVID L. JOHNSON, Chief Counsel

ROBERT E. STURM, Chief Clerk

MARK HALVERSON, Staff Director for the Minority

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C O N T E N T S

Page

HEARING:

Thursday, July 20, 2000, Energy and Agriculture ................................................ 1

APPENDIX:

Thursday, July 20, 2000 .......................................................................................... 49

DOCUMENT(S) SUBMITTED FOR THE RECORD

Thursday, July 20, 2000 .......................................................................................... 157

Thursday, July 20, 2000

STATEMENTS PRESENTED BY SENATORS

Lugar, Hon. Richard G., a U.S. Senator from Indiana, Chairman, Committee

on Agriculture, Nutrition, and Forestry ............................................................. 1

Grassley, Hon. Charles E., a U.S. Senator from Iowa .......................................... 15

Harkin, Hon. Tom, a U.S. Senator from Iowa, Ranking Member, Committee

on Agriculture, Nutrition, and Forestry ............................................................. 3

Conrad, Hon. Kent, a U.S. Senator for North Dakota .......................................... 13

Kerrey, Hon. J. Robert, a U.S. Senator from Nebraska ....................................... 27

Johnson, Hon. Tim, a U.S. Senator from South Dakota ...................................... 17

WITNESSES

Johnston, Hon. J. Bennett, Former Senator [D-La], Johnston and Associates,

LLC ........................................................................................................................ 28

Richardson, Bill, Secretary of U.S. Department of Energy; accompanied by

Dan Reicher, Assistant Secretary of Energy; and Mark Mazur, Acting Director, Energy Information Administration ............................................................ 4

Schlesinger, James, Former Secretary of Defense and Energy ........................... 19

PANEL I

Baumes, Harry S., Ph.D., Senior Vice President, WEFA, Inc., Eddystone,

Pennsylvania ........................................................................................................ 37

Collins, Keith, Chief Executive Officer, U.S. Department of Agriculture,

Washington, DC. .................................................................................................. 36

Hutchens, Don, Executive Director, Nebraska Corn Board, Lincoln, Nebraska 45

McCarthy, W. James, General Manager, Government and Public Affairs,

CITGO Petroleum Corporation, Tulsa, Oklahoma ............................................ 41

Vaughn, Eric, President, Renewable Fuels Association, Washington, DC. ........ 39

APPENDIX

PREPARED STATEMENTS:

Lugar, Hon. Richard G. .................................................................................... 50

Harkin, Hon. Tom ............................................................................................ 52

Craig, Hon. Larry E. ........................................................................................ 53

Kerrey, Hon. J. Robert ..................................................................................... 62

Grassley, Hon. Charles E. ................................................................................ 66

Johnston, Hon. J. Bennett ............................................................................... 79

Baumes, Harry S. ............................................................................................. 97
Page

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PREPARED STATEMENTS—CONTINUED

Collins, Keith .................................................................................................... 106

Eischens, Curt .................................................................................................. 144

Horvath, R. Skip ............................................................................................... 138

Hutchens, Don .................................................................................................. 134

McCarthy, W. James ........................................................................................ 121

Richardson, Bill ................................................................................................ 69

Schlesinger, James ........................................................................................... 74

Vaughn, Eric ..................................................................................................... 90

DOCUMENT(S) SUBMITTED FOR THE RECORD:

Letter to Hon. Richard G. Lugar, from Ali I. Al-Naimi ................................. 158
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ENERGY AND AGRICULTURE

THURSDAY, JULY 20, 2000

U.S. SENATE, COMMITTEE ON AGRICULTURE, NUTRITION, AND FORESTRY, Washington, DC.

The Committee met, pursuant to notice, at 9:04 a.m., in room

SD–106, Dirksen Senate Office Building, Hon. Richard G. Lugar,

(Chairman of the Committee,) presiding.

Present: Senators Lugar, Grassley, Harkin, Conrad, Kerrey, and

Johnson.

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

SENATOR FROM INDIANA, CHAIRMAN, COMMITTEE ON AGRICULTURE, NUTRITION, AND FORESTRY

The CHAIRMAN. This meeting of the Senate Agriculture Committee is called to order. We are privileged to have today a number

of distinguished witnesses to discuss energy policy in our country

with special pertinence to agriculture.

I will issue an opening statement. When Senator Harkin, our

Ranking Member, has arrived, he will be recognized, and then we

will hear from the distinguished Secretary of Energy, Secretary

Richardson, and members will ask questions after each of our first

three witnesses, and likewise the distinguished panel that will follow.

I begin the hearing by raising what I believe is a very important

question: Are Americans prepared for the inevitable consequences

resulting from the lack of a strategic energy policy? Does an energy

policy exist with our government or with private industry that will

guarantee adequate energy supplies for a growing American economy? And, if not, who will tell the American people that we are

headed for lower growth in jobs, income, comforts, standard of living, and competitive position in the world?

In my judgment, our Nation is facing an emerging energy crisis.

Demand for energy is rapidly increasing, and supplies may not be

emerging to meet this demand, even at high prices. We are here

today to assess present energy policy and determine if amendments

to our policy are appropriate. And in addition to high prices at the

gasoline pump, we have been alerted recently to possible shortages

of natural gas, and will discuss this morning potential electrical

brownouts.

In reviewing our energy policy, we must consider the fact that

events beyond our borders have tremendous impact. As economics

of developing nations continue to grow, so will their demands for
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energy. Such growth will fuel the greenhouse gas problem and increase world dependence on Persian Gulf oil.

OPEC decisionmaking is a major factor. I invited the oil minister

of Saudi Arabia, Ali Naimi, to participate in today’s hearing. He replied he is unable to attend due to previous commitments.

Economic growth in the United States has produced a tight market for many forms of energy. Electricity demand in the first half

of the year 2000 is up 3.5- to 4-percent from the previous year.

Over half the increase in world oil demand from 1998 to 1999 was

attributable to increased United States demand for oil. The price

of natural gas and diesel have risen dramatically due to increased

demand, tight supplies, low inventory. We know the United States

needs to build new power plants, but current plans are for these

plants to be fired by natural gas. Are natural gas supplies adequate to meet that demand?

At the Federal level, are we doing enough to address the transmission problems that could be associated with increasingly deregulated electricity markets? The Energy Information Administration forecasts the demand for natural gas is likely to increase by

2-percent per year over the next 20-years. Energy security expert

Daniel Yergen asks whether we are prepared to make the investments in exploration, new pipelines, and distribution facilities

needed to meet this rapidly growing market.

At the same time the demand for energy is growing, new environmental regulations are being imposed upon energy facilities and

fuels, and many of these policies are needed to produce a cleaner

environment. The Reformulated Gasoline Program is one example.

We also need to assess our energy research and technology policies in light of the greenhouse gas problem. I have cosponsored

Senator Murkowski’s legislation to further the growth of new energy technologies. Senator Daschle and I have introduced a bill to

solve the MTBE problem and triple the use of renewable fuels by

the year 2010. We have introduced a market trading system to

allow oil companies to produce renewable fuels in the areas of the

country where they can most economically be marketed.

President Clinton recently signed into law my bill to establish an

aggressive research, development and demonstration program,

making it easier to convert biomass into ethanol. Since biomass

feed stocks tend to have very low cost, this program could lead to

dramatic reductions in the cost of making ethanol.

One additional idea I think needs to be considered is the creation

of a presidentially led energy and environmental security task force

to coordinate our environmental and energy security programs.

Such a task force, in my judgment, should include at least representatives of the National Security Council, the Council of Economic Advisors, the Departments of Agriculture, Energy, EPA,

Transportation, and Treasury.

[The prepared statement of Senator Lugar can be found in the

appendix on page 50.]

I would welcome comments from our distinguished witnesses on

any of these legislative initiatives.

Finally, I simply thank the witnesses for coming, for their preparation for what I think will be a very important hearing, and I now
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turn to my distinguished colleague, Senator Tom Harkin of Iowa,

for his opening remarks.

STATEMENT OF HON. TOM HARKIN, A U.S. SENATOR FROM

IOWA, RANKING MEMBER, COMMITTEE ON AGRICULTURE,

NUTRITION, AND FORESTRY

Senator HARKIN. Mr. Chairman, first of all I want to thank you

for calling this important hearing on energy policy and the impact

on energy policy and the impact on American agriculture. I also

want to commend and thank you for your leadership on the initiative you took to get the administration to start moving ahead on

the research needed to convert biomass to some of our renewable

fuels, especially in the cellulosic area. I think that really holds a

great promise, and again I commend you for your leadership in

that area.

In March I sent a letter to you, Secretary Richardson, and to Secretary Glickman. I am pleased by your decision to form a working

group to examine the implications of high oil prices for farmers. I

have also hoped that we can try to get to the bottom of some of

these exorbitant increases in gasoline prices in the Midwest.

Farmers have a lot at stake with respect to energy costs and our

national energy policies. Even though farmers have greatly increased their energy efficiency over the years, they are still highly

vulnerable to these price increases, especially now, when corn in

Iowa is down to about $1.40 a bushel and beans are about $4.40

a bushel. Things are pretty tight in the Midwest right now.

And right now USDA estimates that direct fuel expenses for farmers will increase by $2.5 billion or 40-percent this year compared to 1999—40-percent compared to last year. Higher energy

prices are also reflected in the greater costs for grain drying, fertilizer, pesticides. The Iowa Farm Business Association estimates

that higher energy costs will add more than $1,300 to this year’s

expenses for a 660-acre-corn-and-soybean farm. So any actions that

can be taken to alleviate the impacts on farmers would certainly

help.

Frankly, though, as the Chairman does, I see agriculture more

as a solution to our energy challenges than as a problem area. I

think we have barely scratched the surface of the potential for agriculture to supply domestically produced renewable and environmentally friendly energy.

Renewable sources now constitute only about 3-percent of U.S.

energy supplies and only about 1.2-percent of gasoline, but our reliance on foreign petroleum is growing dramatically, to the point

where we now import about 60-percent of our petroleum. We are

far more reliant now than we were in the 1970s.

But renewable fuels like ethanol and biodiesel enhance our energy security. They improve our environment. They increase farm

income. They create jobs and economic growth in rural communities. Ethanol use already adds about 20-cents-a-bushel to the

price of corn. Replacing MTBE with ethanol would add another 14-

cents-to-corn-prices and increase farm income by about $1 billion a

year.

There is also tremendous potential in biomass such as

switchgrass, and wind energy, which is a growing industry, by the
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way, in my State. I saw your comments on that, Mr. Secretary. Hydrogen used in fuel cells will allow efficient use of biofuels and the

storage and transportation of wind and solar energy.

If renewable energy is going to have a chance to get a footing

and grow, it will have to be given an opportunity to do so. That

is why I was so outraged by the efforts to lay the blame for high

Midwest gasoline prices on clean air rules and the use of ethanol.

The facts are now out, and the facts show the blame was unfounded and unfair, but this experience is a harsh lesson in how

hard we are going to have to continue to fight for the increased use

of renewable fuels.

Mr. Chairman, again, I thank you for calling this hearing and for

your great leadership in this area.

[The prepared statement of Senator Harkin can be found in the

appendix on page 52.]

The CHAIRMAN. Thank you very much, Senator Harkin.

Secretary Richardson, we are delighted to have you, and would

you please proceed?

STATEMENT OF HON. BILL RICHARDSON, SECRETARY. U.S. DEPARTMENT OF ENERGY, ACCOMPANIED BY DAN REICHER,

ASSISTANT SECRETARY OF ENERGY FOR ENERGY EFFICIENCY AND RENEWABLE ENERGY; AND MARK MAZUR, ACTING DIRECTOR, ENERGY INFORMATION ADMINISTRATION

Secretary RICHARDSON. Thank you. Mr. Chairman, Senator Harkin, I want to commend you for the very broad, gracious way you

tied all the issues together, and I commend you, especially this

committee, for holding this hearing and for your singular contribution in the area of bioenergy, which could be the future for our energy security.

Senators I first would like to join you in expressing my personal

condolences to the death of a member of your committee, Senator

Coverdell, and I would express my sympathy to his wife, Nancy. I

would like to just state that for the record.

Mr. Chairman, I want to thank you for giving me the opportunity

to speak with you about some of the issues you discussed. I also

would like to address the alternative opportunities we now have,

specifically in biofuels, on which your committee has worked very

hard, which can help ease our Nation’s excessive dependence on

fossil fuels.

Mr. Chairman, Senator Harkin, we both have opportunities to

answer the Nation’s energy challenges. My responses to the energy

issues of this year have been grounded in the Clinton-Gore administration’s energy policy. These are the six points that we believe

are the key foundations of our policy:

One, market forces and not artificial pricing. Two, diversity of

supply, and strong diplomatic relations with energy producing nations. Three, improving the production and use of traditional fuels

through new technology development. Four, diversity of energy

sources, with long-term investment in alternative fuels and energy

sources. Five, increasing efficiency in the way we use energy. And,

six, maintaining and strengthening our insurance policy against

supply disruption, the Strategic Petroleum Reserve.
5

Let me just mention, members of the Committee, some relatively

good news on pricing, although I am most sensitive to some of the

serious problems in America’s farm economy. Mr. Chairman, as you

know, we are seeing some recent signs of encouragement in our oil

and gas markets, thanks to our adhering to this policy.

The Energy Department’s Information Administration is now reporting that conventional regular gasoline has dropped 13-centsper-gallon since this time last month nationwide, from $1.68 to

$1.55. In the Midwest, regular gasoline is down 28-cents, from

$1.87 to $1.49. And also in the Midwest, reformulated gas has gone

down 48-cents in the last month. This is good news for the American consumer. It has gone from $2 to $1.52. Hopefully these are

some favorable trends. We think they may be some trends that will

continue.

And, as you know, diesel is in the same family as heating oil,

and we are concerned about heating oil supplies for the upcoming

winter. We need to build stocks, so this is creating some price pressure on diesel which affects our Nation’s farmers and truckers.

I also want to state my concern over the current low inventories

of natural gas, which you did, too. We need to watch these levels

carefully. Continued low inventories when the cold weather comes

could force prices up considerably and put the pinch on America’s

families.

But we do have some good news. According to the Energy Information agency, retail, on-highway prices of diesel are down about

2-cents in just about the past 3-weeks, nationwide. In the Midwest,

diesel is down 3-cents over that period. Still, they are unacceptably

high.

Part of this relief stems from our work of the past 7-months,

when we moved vigorously to boost supply. As you know, I have

talked extensively with oil producing nations. OPEC and other producers have heard our concerns and have twice boosted their output. We hope they continue to keep an open mind.

Our latest data shows that there are roughly 3.5-million barrels

per day more oil on the market than during this time last year.

That is a welcome addition to the world market, and it is exerting

downward pressure on gas prices.

But we can’t claim victory. Regular gas is, on the average,

around 38-cents more expensive than it was at this time last year.

This is mainly because we simply have not been able to replenish

stocks as demand continues to soar. We need to exercise longer

term solutions. We need not only to ease this demand, we need to

ease America from its dependency on imported energy sources,

which you stated in your opening statement.

Here is a solution on meeting demand, and that is the bioenergy

solution. The President is committed to such a vision, introducing

proposals to boost domestic production, spur energy efficiency, and

increase the use of alternative energy resources.

We have extensive opportunities in the field of bioenergy. Mr.

Chairman, I know that this issue is of great personal interest to

you and every member of this committee. And I see that Senator

Conrad has come in. He has been a champion on these issues, too.

Examples of your leadership, Mr. Chairman, include this committee’s previous hearings on the importance of biofuels; second,
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your attendance and presentation at the signing ceremony, and

subsequent hearing on Executive Order 13134, Developing and Promoting Biobased Products and Bioenergy; and most recently, as

you stated, passage of a law, the Biomass Research and Development Act of 2000, signed by President Clinton on June 22, 2000,

your bill.

Finally, I would be remiss if I didn’t acknowledge your role and

this committee’s role in aligning the research programs at the Departments of Agriculture and Energy in this extremely important

area, and the office director that is heading up these joint efforts

is here with me today.

Mr. Chairman, bioenergy resources already meet over 3-percent

of our Nation’s energy requirements, and consumption has been

rising by nearly 3-percent annually since 1990. But even this

growth cannot meet our growing concerns on air quality, climate

change, dependence on foreign energy supplies, and the sluggish

economic conditions in the Nation’s farm and forestry sectors.

If we are to see a meaningful decline in our future reliance on

fossil fuels, if we are to lessen our vulnerability to interruptions in

energy supply, if we are to kindle a whole new field of agricultural

and forestry economics, then we need a cooperative national effort

to develop a range of renewable energy sources, and bioenergy can

be at the heart of such an effort.

Creating such a vigorous market will boost demand for dedicated

energy crops, providing new revenue streams for farmers and new

cash flow for rural economic development. The current uncertainties on the farm and in our forestry industry could be eased by long

term energy crop contracts with biorefineries. This is the focus of

the bioenergy initiative, integrating the existing bioenergy and bioproducts programs within the Energy Department and the Department of Agriculture. In FY 2000, we awarded more then $18 million in contracts to promote the biorefinery industry.

Mr. Chairman, I want to take a moment to commend you also

for the bill you forwarded to make sure we take aggressive action

on the promise of bioenergy. As you know, we have been working

under the President’s executive order since August of last year.

That order set a goal of tripling the use of bioenergy in the U.S.

by 2010. We can get there. I also want to thank Senator Harkin

for his initiative in making sure we have coordinated efforts within

the bureaucracy.

We have also already established the National Biobased Products

and Bioenergy Coordination Office, and have produced our first integrated, multiagency strategic plan for biofuel and biopowered research. Our FY 2001 budget includes substantial increases for

biofuels and biopower, $40 million at the Department of Energy

and $44 million at the Department of Agriculture.

With your bill’s enactment, we have taken an important step towards that goal. The world is demanding more energy. It is wise

that we position America’s farmers as the supplier to meet that demand.

We would like to ask that this committee lend its support to our

research and development budget requests, so that we can make

our research plans a reality and meet our goal of tripling the use

of bioenergy in the United States.
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There are also ample opportunities in wind power, which I know

is of interest to this committee, and especially to Senator Harkin.

Of the top 15 wind resource States, 12 are located in America’s agricultural heartland.

To take advantage of this, in June of 1999 I announced the Wind

Powering America Initiative, which challenges the country to harvest enough of this area’s vast wind resources to generate just 5-

percent of America’s electricity needs. Just 5-percent will return

economic benefits of over $60 billion by the year 2010.

A successful example of a good wind program is Storm Lake in

Senator Harkin’s home State of Iowa, which has developed the

world’s largest wind farm. Total annual payments to landowners in

that area are already $500,000, and will continue over 20-years.

Imagine what we can do nationwide.

Let me close, Mr. Chairman, with what the Clinton administration, what steps we have taken during this year to ensure that

America has the energy resources it needs. You will recall the

President’s vigorous actions when we had a heating oil shortfall

this spring, that he has proposed a heating oil reserve, and has

taken aggressive actions to ensure that those who need help when

cold rolls around, receive it.

We are also helping America’s oil producers, testing new technologies and giving a hand to those already in the field. We have

got some domestic oil and gas initiatives that we need approved by

this Congress.

But there is still more that we can do to get relief to consumers.

Mr. Chairman, last month the President sent a letter to Majority

Leader Lott, urging that the Congress work with the administration to enact the President’s pending energy proposals without

delay.

The President has asked for a $4 billion package of tax incentives to encourage domestic oil and gas production, and for consumers to purchase more efficient cars, homes, and consumer products.

It has idled on the Hill for 2-years.

In FY 2001 the President advanced a $1.4 billion investment for

Energy Department programs in energy efficiency, renewable energy, natural gas, and distributed power systems. The Senate

should be commended for supporting 97-percent of the department’s FY 2001 budget for renewable energy resources, an increase

of $50 million above the final House mark. I hope that the Senate

prevails in budget reconciliation deliberations before the conference

Appropriations Committee.

The Department is urging the Congress to appropriate our entire

request of $154 million for our Weatherization Assistance Program

in 2001. This will be a step towards full restoration of this vital

program that reduces the heating and cooling costs of low income

families by an average of $200 per year, thus helping them cope

with the high prices of fuel that they, of all Americans, are least

able to afford.

Also of concern, the Congress has postponed action to extend the

Energy Policy and Conservation Act, which authorizes two central

components of our Nation’s energy security, the Strategic Petroleum Reserve and our participation in the International Energy
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Agency. Mr. Chairman, I need that authority to use that Strategic

Petroleum Reserve in case of an emergency.

The President also submitted—and you mentioned this, Mr.

Chairman, in your opening statement, the issue of electricity reform—we have submitted the Comprehensive Electricity Restructuring Act 2-years ago, and we need Congress to enact a bill. We

are encouraged by recent action in both the House and Senate, but,

as you mentioned, the possibility of brownouts and blackouts and

a weak electricity grid nationally is of great concern.

Mr. Chairman, it is no longer a question of if the electric utility

industry is going to change, it is when. And I know that this is an

issue of particular interest to rural communities, to the farming

sector. We need to act on this issue now.

I have crossed the country, talking to Americans, having electricity summits, warning them about brownouts this summer.

Power went out in the San Francisco Bay area last month when

temperatures soared, and 3-week days ago utilities in New England and on the West Coast were stretched to the limit as the onetwo punch of hot weather and the unexpected loss of several power

plants nearly brought on blackouts.

Mr. Chairman, I welcome this challenge that you have offered to

develop a bipartisan energy policy, and as you mentioned, we have

a lot to do. I thank you for your time.

[The prepared statement of Secretary Richardson can be found in

the appendix on page 69.]

The CHAIRMAN. Well, thank you very much, Secretary Richardson. Let me thank you for mentioning our colleague, Senator

Coverdell, at the beginning of your comments. As I mentioned on

the floor yesterday, he was a very valued member of this committee

and participated vigorously with us, and we will miss him.

I simply want to start by saying I appreciate the initiatives you

have outlined, and you have indicated six principles, and right at

the top, market forces, diversity, diplomacy, in which you have

been involved.

But my basic question still is one that must come to you and

your associates almost every day, and that is, the infrastructure

needed in this country to provide for the projected increases in

growth year-by-year and the time frame required for all of these

things to happen are not working for us. These again and again are

mentioned, that even after people make decisions, there are time

lags in large capital investments.

For example, the New York Times points out that even given all

of the disruption of this year with regard to very high prices for

gasoline and protests throughout the country, that the demand for

gasoline at the pump has gone down by only seven-tenths of 1-percent. Now, the Times points out that, that is different from a 2-percent increase year-to-year the year before, 2-percent or 3-percent

the previous 2-years before that.

But nevertheless we are dealing with a very big figure, the consumption of gasoline, for example, in the country, and even the escalation of prices to that level did not change demand by more than

seven-tenths of 1-percent, which means that even if market forces

work, and they surely will with regard to natural gas.
9

You have cited the low inventories. Many observers point out

that they are so low that they are almost beyond remedy at this

point; that it would be impossible physically to get natural gas at

inventory levels that would be at all comfortable into the country.

Prices already are rising. The markets speculatively take a look at

that, whether it is in spot markets or in the stock market for energy companies.

And, as a matter of fact, as you point out, whether it be a brownout this summer or a plant disruption. I receive letters now from

my State routinely, from heavy industrial users of natural gas who

point out that if we have a very severe winter, that they may have

to shut down. In addition to inconvenience at the pump, unemployment, layoffs of people occasioned by our failure to have adequate

supplies.

And this is why I sort of come back to the thought, is there any

comprehensive effort involving yourself, the President, the Vice

President, everybody, to try to give some confidence to the American people that even though we have disruptions now that are

fully foreseeable, and in some cases not easy to remedy, there is

some overall plan?

Now, you point out government doesn’t do this alone. Market

forces, other countries, all sorts of suppliers, energy research still

undone. But I just think there is a growing lack of confidence in

the American people that those of us who are in charge have some

idea.

And what is suspected is that the supplies will be inadequate,

that prices will continually go up, and worse still, that even at any

price energy will be unavailable to some of our communities. The

thought will come back, well, we should have done more to conserve, that in essence we have been a wasteful people, that somehow growth of jobs and industry and what have you really is not

going to be accommodated.

This is why I started with, who will give this news to the American people, that essentially we are now headed for a lower growth,

lower comforts, hazardous level? I think that is unacceptable. I

think the people are going to say, get the supplies, stop horsing

around with this situation; find it, invest the money that is required, tell the truth as to how much it is going to cost, but we

want to be supplied. In other words, we do not want to be constrained.

Now, if this is a philosophical issue, then we need to sort of fight

this out. There may be those in our society who would say that we

are profligates and we shouldn’t want that much, but I think the

majority are going to say that we do want that much. As a matter

of fact, we can have that much, if we use our brains, our capital,

our ingenuity, we have some framework of leadership.

Now, how do you address this overall, big problem? You have

tried to address, I think correctly, the reserves that might help in

New England, helping maybe a little more reserve of natural gas

generally, working with the Saudis as you have, but these at best

are small fixes in what is a fundamental problem, as I see it.

Secretary RICHARDSON. Mr. Chairman, you are absolutely right.

The administration does have a plan. We are refining that plan.

We recognize that there are potential home heating oil shortages.
10

We are concerned about natural gas, too, both the prices and access, and other issues.

We are concerned also about the whole issue that you mentioned,

the demand for gasoline in the course of 1-year increased 4-percent,

the highest ever. Now, we can pat ourselves on the back and say

this is because of a booming economy and more technology, but

that would be wrong.

Senator I think we need a joint strategy. I have laid out some

initiatives that we would like to see passed. I think the Congress

can contribute enormously by working with us. I think we need a

dialogue with industry. I just met with the home heating oil industry yesterday, and I think through collaboration and partnership

we are addressing some of the problems in the home heating oil situation in New England this year.

Senator, you mentioned the brownout issue. Again, I am really

worried about that. I am worried about our distribution, our generation, our transmission system. We have a grid that is a Third

World grid, for a booming economy for the world’s biggest superpower. And that is going to take investing in more power, in regional transmission organizations, in more renewable energy.

In order to do that, Senator, we need legislation that restructures, and enables the utility industry to invest more, that allows

the rural co-ops to compete and invest more, too. We need a reliability standard. Will that deal with the brownouts next month?

Maybe not necessarily those, but at least it will lay us a foundation

for a more modern electricity grid.

On natural gas, we need to work together. We have set up an

interagency natural gas task force. We need to find ways to have

the deep water royalty relief. Natural gas is clean. It is going to

mean some hard choices in terms of pipelines. We think is the fuel

of the future.

Senator I think in your area, bioenergy, if we can in America’s

heartland use crops that help our farmers, that give us energy security.

My point is, Senator, we are developing a plan, but it is going

to require a national dialogue, and you accenting and pointing out

these problems and these issues is very helpful, and we need to

continue. I think this hearing you are having is good, I have seen

the witness list, the very, very broad range of expertise. I am going

to read this transcript very carefully and see if we can crank it in

and move forward.

The CHAIRMAN. Thank you. Let me point out that even as we

have this hearing here, on the floor is the agriculture appropriation

bill. I know the distinguished Ranking Member will be involved

shortly in that, so I am going to recognize him, and constrain each

of us to 5-minutes or a little bit more, so that not only we can all

be heard but we can hear the distinguished witnesses, and go back

and forth to vote as required.

Senator Harkin.

Senator HARKIN. Thank you very much, Mr. Chairman.

Mr. Secretary, I for one want to commend you, and I want to

commend your department, I want to commend the Clinton-Gore

administration for their leadership on a number of issues in the energy area. Especially I want to commend you, Mr. Secretary, for
11

taking the leadership to establish the National Biobased Products

and Bioenergy Coordinating Office which you mentioned in your

opening statement. My information is that they are doing well,

they are getting some proposals together, and I look forward to

meeting with them myself.

I also want to commend you for the increase that you have put

into your budget request for FY 2001 for biobased and bioenergy

fuels. I think that is a good step in the right direction.

I also again want to commend you, and through you the ClintonGore administration for their energy initiatives. We have had it

here now for about—it is one thing to provide leadership. You have

got to have some followers hip, too. We have had $4 billion in tax incentives for oil and gas production, for more efficient cars and homes and products. Congress

hasn’t done anything on it. We haven’t acted on it. It has been sitting here for at least two or 3-years, if I am not mistaken, and not

one thing has been done. And Congress has not acted to reauthorize the Strategic Petroleum Reserve, either.

So, quite frankly, I think, having been in Congress for a number

of years, it just seems like we don’t do anything unless a crisis

stares us in the face. I remember when I was on the Science and

Technology Committee in the House back in the 1970s, and then

once the oil crisis was over with and the Reagan administration

came, we dropped all of our research programs on alternative fuels

because everyone just, well, everyone felt we didn’t need it then.

And so we just drifted through another decade, another almost two

decades, without understanding what was happening with our oil

and gas supplies.

One other observation, Mr. Secretary. You know, I might take a

little issue now with you or with those that are saying that we

should be feeling pretty good now because gasoline prices are coming down. In July of 1999, regular unleaded gasoline in Iowa was

$1.10 a gallon. In June of this year it was about $1.80-these are

round figures—$1.80 a gallon.

And guess what, it has dropped now down to $1.52, and we are

told to feel good. You know, they boosted it up 70-cents and they

have dropped it about 20-cents, and we are supposed to feel good.

Nonetheless, it is still about 40 some percent higher this year than

it was last year, as I said in my opening statement, with farmers.

And that is hurting all of our production. It is hurting our income

picture in rural areas.

Mr. Secretary, I guess the only question I really have that I

would just again like to ask you about is the amount of energy and

effort that you, your department, is putting into the mid and long

term. You know, it just seems like we get caught up in these crises,

and it is sort of the old story about the alligator and the swamp.

You know, you don’t really tend to think about the long term.

But once again, I think we have to begin laying the groundwork

and the plans for the mid and long term production of energy in

this country. And again, I just want to hear from you as to your

thoughts of what your department not only is doing but what you

think we should be doing in the area of biobased fuels and biobased

energy production in this country, and what the potential is for

wind. You mentioned we have the largest wind farm in the world
12

in Iowa. We do, and it is working well, and farmers are making

money off of it, and it doesn’t take very much land, either. The capacity there is tremendous for more of that.

So tell me what you see down the pike. I mean, what should we

be doing now, not for next year, not for this year, what should we

be doing for 10-years and 20-years from now?

Secretary RICHARDSON. Senator, first of all, I think you were getting some very good advice from your able staff when they said

that even though the trends are good, these prices are still unacceptably high for the farm economy. So, I am not gloating over

those decreases. I think we have got a favorable trend, and hopefully we are going to continue that.

I think you are so right, Senator, that we have to look at the long

range because of what has happened with our economy. What

would I say is something that we need to do together? You mentioned wind. I am very bullish on wind, and I think your support

for continued research is key.

I didn’t mention in my remarks to Senator Lugar the importance

of America’s refining capacity. Our refining capacity has weakened.

We need to boost that. A lot of small refineries have closed in the

past decade. In fact, I saw a couple in Iowa. Right near the airport

there was one that closed, that I saw, that I was very concerned

about. Even though total U.S. refining capacity has expanded and

become more competitive, we have to be clear and careful about

that.

I mentioned electricity restructuring. This is a long range investment, that we should invest in our electricity grid so it can deal

with the growing demand, and that means not just investing in

new power sources, not just investing in regional transmission organizations, but also in renewable energy and renewable technology, biomass, solar, wind, geothermal. I think these are investments that we delayed and somehow we have put aside, and we

need to bring back.

I think renewable energy—you mentioned the tax credits—this is

long range. For farmers, we recently announced an initiative that

affects farmers, fuel efficiency for lighter trucks. I think there is

tremendous potential here. This will involve a lot of farm equipment, farm vehicles. This is an investment that we need to work

with in the future.

Natural gas, this is something that I think is going to require a

national bipartisan effort, because it is not just a question of access

to natural gas, it is a question of transportation, it is the whole

issue of ‘‘not in my back yard.’’ But, you know, I have encouraged

a lot of our Federal buildings—and the Federal Government is the

biggest consumer of energy—to do more with natural gas.

Senator I could go on and on, except to say that we do have an

office of emergencies at the Department of Energy. We have a policy office. I have all of my people here.

You did ask for what specifically in biodiesel, biodiversity, bioenergy we have, and what we have planned. Dan Reicher, my expert on this is here. Mr. Chairman, could I call him up, or is

that——

The CHAIRMAN. Yes, please do. Please identify yourself and your

office, if you would.
13

Mr. REICHER. Mr. Chairman, I am Dan Reicher, Assistant Secretary of Energy for Energy Efficiency and Renewable Energy, and

I will just say quickly, we are, as the Secretary noted, very excited

about the opportunities for biomass. We are focused on programs

that will allow us to use biomass to make power, electric power; to

make liquid transportation fuels; and indeed, Mr. Chairman, to replace some of the petroleum now used in the chemical industry

with biomass.

Added together, that investment in technologies to support the

use of biomass for power, fuels, and chemicals, we think we can triple U.S. primary energy use from biomass to almost 10-percent by

2010, and that would be a big step forward for us. What it is going

to take is increased investment in the technologies. It is going to

take some smart policies. The Secretary talked about tax incentives, for example and the right environmental policies.

And it is going to take stimulating markets, as well. We think

with our large energy demand in the Federal Government itself,

powering our 500,000 buildings, we think we can help drive some

of these new markets for biomass and bioenergy as well.

Secretary RICHARDSON. Mr. Chairman, the key is also a partnership with the private sector. Technology can take us to more energy security and fuel efficiency. New natural gas technology, new

technology for wind, new technology for fuel efficiency, fuel cells,

hybrid vehicles, cars, and SUVs that are 40-miles-per-gallon. That

last technology is something that I wanted to underscore, too it

should be a long term priority.

The CHAIRMAN. Thank you very much.

Senator Conrad.

STATEMENT OF HON. KENT CONRAD, A U.S. SENATOR FROM

NORTH DAKOTA

Senator CONRAD. Thank you very much, Mr. Chairman.

Thank you, Mr. Secretary, for being here. Thanks for your leadership and your warning us repeatedly that we were headed for

trouble. I can’t remember how many meetings I have been in with

you, or speeches that I have heard you give.

I remember very distinctly when you discussed with the Energy

Research Institute at the University of North Dakota, you gave the

keynote address several years ago, and warned there very clearly

that we were headed for trouble, outlined a series of steps that

needed to be taken, including incentives for greater production and

incentives for renewables, and unfortunately precious little has

been done by the Congress in response to your repeated warnings.

I think we do function kind of in a crisis mode. That is, I am

afraid, more typical than not for Congress.

But this is a circumstance that just a crisis response is not going

to work, because when you head over the cliff and your are in a

brownout, you can’t respond quickly enough. That is the hard reality that we confront. These are long lead time investments that

need to be made to expand capacity in oil and gas, expand capacity

in renewables and all the rest.

I just put up a couple of quick charts that talk about what our

farmers are facing out there, and I come from one of the most agricultural States in the Nation. This is the index of fuel prices, with
14

1990-’92 being the base of 100-percent. You can see what has happened from 1999 until now. It doesn’t reflect fully the last little dip

we have had, about 2- to 3-cents that has come off diesel in the last

several weeks, which is welcome. But when we look at the movement from 95-cents a gallon last year up to over $1.50, it is pretty

stunning out there. My State university says it is going to cost

every farm in my State, on average, $4,000.

Let me just put up the context within which we are operating

here, to show why that is a very serious blow. This chart shows in

green the prices that farmers paid for inputs, and the red line is

the farmers’ prices received, what farmers are receiving for what

they sell. I think this tells it about as dramatically as it can be

told. The farmers are receiving dramatically reduced prices for

what they sell. In fact, we have got record low prices. Inflation-adjusted, this is as low as it has been.

And we look at the input costs, the things that farmers have to

buy, including energy, they have continued to go up, and with respect to energy they have risen dramatically. This has put farmers

in a cost-price squeeze that is literally unprecedented.

I am going to my State fair this weekend. What would you say

to the farmers who are going to come up to me and say, ‘‘Senator,

what is being done?’’ alternatively, ‘‘What can be done?’’ If you had

a very brief conversation with a North Dakota farmer and he said

to you, ‘‘Mr. Secretary, what are the things that are being done

right now, and what can be done,’’ in a very thumbnail response,

what would it be?

Secretary RICHARDSON. Senator, I would say five things to your

farmer and your constituents. I would say first that prices are

turning downward this week, that we are looking at some favorable

trends.

The second thing I would say to them is, we are looking beyond,

we hope to go beyond, soon, the pipeline and refinery problems that

we have been experiencing.

The third thing I would say is, we need inventories to be built.

I think that is key.

The fourth thing I would say is that we are hopeful that this

week’s downward trend is going to lead to, as I said, lower prices

this summer and this fall, that red chart you had.

And then the fifth thing I would say is that we have to focus on

the long term; that we have to have bipartisan support for a lot of

the initiatives that you have outlined and Senator Lugar has outlined. That is funding energy R&D. That is boosting tax incentives

to increase domestic production. I see Senator Johnson is here. He

has been a champion of the oil and gas industry. What we have as

a marginal well tax credit for oil and gas; geologic expensing; payback provisions to improve and incite exploration. And then, lastly,

and you have been a champion on this, too, and that is electricity

restructuring, that grid, that grid that we need to modernize and

be more competitive.

So those are the five things, it sounds like 14, but it really is

under five, that I would say to your constituent. And the last one,

Senator, is the technology that I believe we are investing so that,

that farmer can participate in America’s energy future, not just for

survival but can make money. I think that is the key, and I think
15

this is something that our programs, through the leadership of this

committee, have enabled us to do.

Senator CONRAD. One last question, if I could, Mr. Chairman.

What is your forecast—you have got the experts there—in terms

of trends and prices? What is the forecast for fall, as we go into

fall harvest, for diesel prices?

Secretary RICHARDSON. The new Energy Administration Acting

Director is here, and I would like to call him forward. Is it permissible?

The CHAIRMAN. Please come forward, and identify yourself and

your office, please, for the record.

Mr. MAZUR. Mr. Chairman, I am Mark Mazur from the Energy

Information Administration.

Mr. Conrad, generally for going into the fall we project prices to

be roughly today’s levels with slight downward trends for diesel

and gasoline.

Senator CONRAD. And when you say ‘‘slight downward trend,’’ you are talking a couple of cents?

Mr. MAZUR. A couple of cents, yes.

Senator CONRAD. All right. Thank you.

The CHAIRMAN. Thank you very much, Senator Conrad.

Senator Grassley.

STATEMENT OF HON. CHARLES E. GRASSLEY, A U.S. SENATOR

FROM IOWA

Senator GRASSLEY. I have had a chance to get here late, and

what I have heard is that the problems we have are Congress’s

fault for not acting.

And I am not here to say that Congress can’t do a lot of things

to help this, but I wonder if it is fair to blame Congress, if it also

isn’t then fair, as a matter of equity and laying everything out on

the table—and this doesn’t come within your jurisdiction, Secretary

Richardson—but when we have pipeline and refinery problems, as

we did during April and May, and creating part of the problems in

June, particularly in Chicago and Detroit, isn’t it fair at the same

time to raise the question why the Environmental Protection Agency couldn’t delay the reformulated gasoline Phase II provisions for

three or 4-months to accommodate what was unpredictable at the

time they initiated their regulations, when the refineries and the

pipeline problems weren’t there? But they did not respond with

that sort of request on the part of the Governor of Wisconsin or the

Governor of Illinois, as an example.

More in your area, couldn’t we have seen downward trends in exploration for oil and downward trends in exploration for natural

gas, and the Senate Energy Committee tells us about two-thirds of

the known supply of, on-tap supply of natural gas is under Federal

lands, and we have seen this trend, because so much of exploration,

so much of our country has been taken off bounds for exploration.

And when you have lower supply, you have higher prices, obviously. Isn’t it about time that we start looking at encouraging

greater exploration in the continental United States?

Secretary RICHARDSON. Senator Grassley, first let me just say

that I think we need a bipartisan energy policy, and I am not here

to blame anybody. I think, as Senator Lugar said in his opening
16

statement, I think it is important that we have joint efforts, short

term and long term.

On your first point, Senator Grassley, here are the reasons for

higher gasoline prices, and you mentioned two of them. The reasons are the high price of crude, and the refinery problems. You

talked about the pipeline problems, the Wolverine, the Explorer

problem. High demand, as I mentioned, the highest demand ever.

Low inventories. Temporary market dislocation from the introduction of RFG–II into the market. And the utilization rate of refineries at about 96-percent nationwide.

Now, what I mentioned earlier, the price of Midwest gasoline has

gone down substantially. Now, it is still unacceptably high. And

what we are attempting to look at Senator, is the whole issue of

the price differential for reformulated gas, RFG of 2- to 5-cents.

And why was there such a spike at one time? I think this is the

focus of the Federal Trade Commission, and they should be looking

at all of these issues and reporting back to us, to you, to us, sometime this month.

Again, it is a combination of forces that have hit us all at once,

and I do think we do have a policy. We have been prepared. I think

it is commendable to have reformulated gasoline. That was the

1990 Clean Air Act. We all participated in that.

I think what we now need to do, Senator, is deal with this whole

supply issue, this whole demand issue, find ways to increase production, you are absolutely right, domestic oil and gas production.

We need to reduce our reliance on imported oil. We have proposals

before you to help the domestic oil and gas producers with some

tax credits. I think we need to do that. We need to find ways—— Senator GRASSLEY. But on that point, could I interrupt you? Isn’t

it under our law allowing the President to take certain lands out

of bounds for exploration? The President can then take action to

put that land in bounds, it would seem to me. I have not studied

the law, but I know that it is presidential decisionmaking or

through the Interior Department that, that has been done. Can’t

they undo that in such an emergency situation as we have right

now?

I mean, are we concerned about less reliance upon importation

of energy or are we not? And the extent to which we aren’t, and

we are always going to be terribly too dependent upon it, but we

can do more, and alternative fuels are one of those, and tax credits

are one. But when we aren’t making adequate use of what God has

given us, it seems to me we ought to.

Secretary RICHARDSON. Senator, I think we need to balance domestic production—the private market, boosting our oil and gas

and our energy producers—with protecting the environment. Now,

we believe that there is enough potential for exploration in existing

Federal and offshore land to do the job you mentioned.

Now, what has happened a lot to our domestic producers, especially in the oil and gas area, is even though gas is at $30, you

know, a lot of them are still hurting, because when it was $10 a

barrel, many went out of business. Rig counts are still down. They

are getting back up.

And so we think a combination of finding ways that access can

be improved, making it an environmentally sound matter, getting
17

rid of a lot of red tape that exists there. I mentioned the importance of deep water royalty relief that we need to have extended

again for natural gas.

But I think, Senator, this is why we need to make a national energy policy a priority for both sides. At the end of this session we

should have a tax credit bill of initiatives that are important to

you, that are important to us, so that we can get on with a long

range policy that you mentioned.

Senator GRASSLEY. This is my last point. We decimated the exploration and oil drilling business. Last month the number of rigs

exploring was down once again, I don’t know whether down to a

particular historic low. Qualified people to work in the industry are

down. It is very difficult to find the type of people you need. Just

the last few years of not being able to explore as freely as in the

past has put us in a condition where, even if the change in policy

came now, there would be a long lead time to get back to where

we ought to be, to find more sources of domestic production.

[The prepared statement of Senator Grassley can be found in the

appendix on page 66.]

The CHAIRMAN. Thank you very much, Senator Grassley.

Senator Johnson.

Senator JOHNSON. Thank you, Mr. Chairman. I have a markup

going on right now, as we speak, dealing with CARA legislation,

and it is important for me to return there, and I will be very, very

brief. I would like to submit a statement, with your consent.

The CHAIRMAN. It will be accepted, and likewise Senator Grassley’s statement will be published.

STATEMENT OF HON. TIM JOHNSON, A U.S. SENATOR FROM

SOUTH DAKOTA

Senator JOHNSON. Very good. Thank you, Mr. Chairman. I commend you for holding this hearing today on what is a critical and

timely issue.

Currently in my home State of South Dakota, gasoline prices are

second highest in the Nation. It is particularly frustrating, particularly in light of recent data that has been shared with us indicating

that retail prices continued to go up at the same time that wholesale prices were plummeting for petroleum in the Midwest.

These high fuel prices couldn’t come at a worst time for South

Dakota consumers, particularly those in our farm and ranch sector

of our economy, as commodity prices have bottomed out. As my

good friend from North Dakota has so ably shown with his charts,

input costs continue to go up sharply while return on the farmer’s

labor, particularly in the grain sector, continues to go down.

This requires a long term plan, and I appreciate the discussion

that has taken place here relative to a consensus that we do need

less reliance on imported petroleum, but I would have to observe

that we need less reliance on petroleum, period. This is a finite,

nonrenewable source of energy.

There may be more that we can do to generate more production

in the United States, although I think, as Secretary Richardson has

ably pointed out, this involves some balancing going on. We would

like to see more production. On the other hand, my constituents
18

are not clamoring to open up wilderness regions particularly right

now, either, and there is a balancing act that has to go on there.

So long as this is a finite fuel, so long as we continue to be significantly reliant on foreign nations, we are going to continue to be

vulnerable to market shocks such as we have just witnessed this

year. I commend Secretary Richardson for his very hard work to

negotiate with OPEC and the non-OPEC oil producing nations,

Norway, Mexico and so on, that has at least begun to move us back

in a better direction. But I think that we are going to continue to

be vulnerable until we become far more serious than we have been

with development, research and development of alternative renewable fuels, with a particular eye on agriculturally based fuels.

In my home State of South Dakota, the one area where you have

an opportunity to save some money right now is to utilize the existing E–85 fuel pumps that we have positioned around the State of

South Dakota. We don’t have enough of them, but they pump 85-

percent ethanol, 15-percent gasoline. They work very well. The experience has been good with the vehicles in our State, and you can

buy that fuel for 35-cents a gallon less than standard gasoline.

So some of this is not far distant rocket science that we haven’t

figured out. Some of this is doable and capable of implementation

on the more near horizon, and it is my hope that as we continue

this debate about how better to generate a good level of continuity

in petroleum production, that we also continue to become more aggressive than we have been up to now on the development of these

alternative fuels.

Ethanol certainly is not the sole answer to our problems with energy in America, but it is one piece of the puzzle, and I think that

we can do better in that regard. It is my hope that with the phaseout of MTBE, that we not give up concern about oxygenating fuel,

and again I would hope that ETBE would be viewed as a very serious option in that regard. It has to do with clean air rather than

fuel availability.

Again, I just want to share with the Secretary my concern that

while we do need to continue to negotiate aggressively, I think we

need to regroup in terms of our conservation strategies as well, but

we need also to be thinking beyond petroleum as a source of energy

in this country. And, Mr. Chairman, you have been very helpful in

that regard. This committee I think has been focused significantly

in that direction, but we need to reenergize that effort, given the

experience we have had these past months.

And so I simply want to share that with the Secretary, and I am

going to have to excuse myself for votes that I have to take in the

Energy and Natural Resources Committee right now. But I do appreciate this hearing, and hopefully this will lead to a better understanding and a greater bipartisan effort on this urgent issue.

The CHAIRMAN. I thank the Senator for all of his contributions

to that bipartisan effort in our committee.

And I thank you, Secretary Richardson, for coming this morning,

for exploring with us as you have. I hope you will stay closely in

touch, and we will be closely in touch with you, because this issue

will likely increase in some intensity and severity as we have described, and the public will be asking us for answers and explanations. But we thank you for coming.
19

Secretary RICHARDSON. Thank you, Mr. Chairman. Thank you.

The CHAIRMAN. The Chair would like to call now the distinguished former Secretary of Defense and Energy, James Schlesinger.

Secretary Schlesinger, welcome once again to the Agriculture

Committee. We have appreciated your coming before us on several

occasions in the past. This is another timely appearance, and we

look forward to your testimony this morning.

STATEMENT OF HON. JAMES SCHLESINGER, FORMER

SECRETARY OF DEFENSE AND ENERGY

Mr. SCHLESINGER. Well, thank you, Mr. Chairman.

Let me start by joining with you and with Secretary Richardson

in paying respects to Senator Coverdell. I worked closely with Senator Coverdell on the question of aid to Colombia. He was an extraordinarily good Senator, hardworking, but more important than

that, he was a good man, and we shall miss him.

Mr. Chairman, you have my statement, and I shall not read it

at this time. I will simply mention a few highlights.

The CHAIRMAN. Excellent.

Mr. SCHLESINGER. The first point that I would like to make, and

I want to emphasize this point, is that all too frequently we use

the phrase ‘‘energy policy’’ or ‘‘national energy policy’’ as a kind of

incantation, as a talisman that will ward off distress in the energy

area. By contrast to that, we must recognize that an energy policy

will have to choose a specific goal or goals, and that means sacrifice

of other objectives.

In the past, starting with the Arab oil embargo, with President

Nixon’s Project Independence, all through the 1970s the great

stress was on reducing dependency on foreign oil imports, reducing

dependency on OPEC. That has become less relevant from a national security standpoint than it was in those past decades, because of the collapse of the Soviet Union, and therefore the collapse

of the Soviet threat to the oil tap in the Middle East, and also because of the Gulf War. Saddam Hussein will be the last Middle

East potentate to seek control over the oil supplies of the Middle

East.

That is not to say that the national security objective has gone

away. Oil affects both our foreign policy and our foreign policy calculations, but it is far less serious than it was in the 1970s when

there was a Soviet Union.

In the intervening years we have moved away from that willingness to use government intervention in the attempt to reduce dependency on foreign sources of supply, and towards reliance on the

market. Sometimes it is presented as if reliance on the market

were a free good, as it were, that solves problems. It solves some

problems; it creates other problems.

Prices in the marketplace, as we have just experienced, will fluctuate, and when prices go up, consumers are unhappy, users are

unhappy. When prices go down, producers are unhappy. Avoiding

price fluctuations, of course, implies that one controls the market,

which is the opposite direction from which we have moved.

Also, we depend upon price signals, price signals to create the

new infrastructure for expanded capacity. We will not have ex-
20

panded capacity until those prices go up, and as a consequence, at

this time we have problems with the infrastructure for our energy

industries, perhaps most immediately, the infrastructure facing the

electric power industry in what Secretary Richardson referred to as

the ‘‘Third World’’ grid.

The reason that we have that, Mr. Chairman, Senator Conrad,

is that we moved enthusiastically into competition in the electric

power industry without considering the need for expanded capacity

in the grid. And as cheap power moved around in the grid, we discovered that we were operating at close to 100-percent of capacity.

If we want to move towards competition and move cheap power

around the country, we have got to be prepared to take national

measures to encourage strengthening of the grid.

I should mention something also, Mr. Chairman, that you and

Secretary Richardson have referred to, and that is the existing

problems or the prospective problems with regard to natural gas

supply. We are not moving enough natural gas into storage at this

time. It may or may not be a serious problem next winter. In your

remarks you indicated that it could be a serious problem.

If we have a normal winter this coming winter, we are going to

have serious problems with supply come late January, early February. We only are moving perhaps as little as 2.5-trillion cubic

feet into storage, and that is far less than we would need to get

us through the winter. It also means that we are producing less

natural gas than we should, and the consequence of that is that

when winter comes, we may have a problem. We should pray for

warm weather.

Why are we producing less natural gas? Because the price signals earlier were not right to encourage the drilling activity that

is necessary to have the degree of deliverability that is essential to

have ample supplies. Moreover, we have a very high depletion rate

with regard to natural gas, depletion rates of 30-percent, sometimes greater, and that means in order to sustain the present level

of production, we must be finding 7-trillion cubic feet a year. That

is going to be quite a major effort.

So these matters are a reflection of, in large degree, the decision

to move towards reliance on the market mechanism. That has

many advantages, but it does create the potentiality for price

spikes.

You have discussed amply, I think, the conditions in the Midwest

this year. It is plain that when the Congress passed the Clean Air

Act amendments and called for Phase II of RFG on June 1st of this

last year, that they did not anticipate, one, that the OPEC nations

would hold down the availability of petroleum and, two, that the

price signals to refiners as well as a shortage, a relative shortage

of supply, would result in low operating rates of refineries.

Since oil has become available, since refinery margins have improved, the refineries are now operating at 95- or 96-percent of production. But no one could have anticipated those changes. It points

to the need for careful coordination between environmental considerations and energy considerations. We sometimes make these decisions independently, and then we have reason to regret them.

Thank you, Mr. Chairman.
21

[The prepared statement of Mr. Schlesinger can be found in the

appendix on page 74.]

The CHAIRMAN. Thank you very much, Secretary Schlesinger.

You have made, I think, an important point, that in moving toward

market forces, clearly the market must see price signals, and that

leads to commitment of private capital for investment and the time

lag that we have discussed a little bit earlier on, that even after

the investment is made, the infrastructure, the construction of this

takes time, as well as the filling of the pipelines or the transmission lines or what have you.

I just query, from your standpoint, you have been involved in

government in many capacities, likewise in private industry, what

is the responsibility of the Government in these situations? We

could, I think, take sort of a laissez faire attitude Towards that

now, given this price spike in natural gas that is apparent, it probably will be clear to many companies that investments in both

drilling as well as thinking through the transportation thing are

warranted. Boards of directors will be committing that money. People will be out in the field doing this.

But here we are in government, people coming to Washington

and pointing out that they are not only being inconvenienced but

maybe severely hurt if there are shutdowns of plants due to a very

severe winter, quite apart from the problems of poor people in our

country. We wrestle with this question each year in terms of the

home heating legislation. How much is to be appropriated for our

States that are in the northern part, in particular, or for low income people everywhere throughout the country?

The market works, sort of roughly, with jerks and starts and

spikes, but there are a lot of human problems here. There are a

lot of people who are badly hurt in the process, and then government responds to those situations with ad hoc income supplements

or strange machinations one way or another, really to ameliorate

discontent.

You know, I think you are correct, that the thought of an energy

policy out there that somehow guides all this is probably not an appropriate idea for a government that, after all, is so diffuse as ours

in the number of responsible people. But at what point will it become more apparent, given the fact we don’t have the Soviet Union

and we don’t have this external, to think about our own growth,

our own prosperity?

And maybe this starts with the President. I suggested roughly in

my opening remarks a coordinating council that somehow brings

together EPA and the Department of Energy, but also Agriculture

and Defense, and the President, because this is big stuff.

And without coming to that point, I think the lack of confidence

of the American people in our government, whether it is the executive or the Congress or people throwing bricks at each other as to

why it all failed, leaving aside private industry, vitriolic, demagogic

attacks on oil barons, gas barons or what have you, we are going

to go through this many, many times. So maybe it is inevitable.

But can you give us any general wisdom as to how you would

begin to formulate a governmental response that takes private capital into consideration so that we get better results?
22

Mr. SCHLESINGER. Well, Mr. Chairman, that is a very complex

question. Ideally, governments will be flexible and they will anticipate change. We have not been very good at that.

You mention a coordinating council. The administration set up

the National Economic Council, and I would have thought that this

energy problem and environmental problem might have fallen

under the purview of the NEC. It may be desirable to have an additional body to coordinate within the Government.

The first rule, it seems to me, is that of Hippocrates, which is

‘‘do no damage,’’ or do as little damage as possible. It is clear, I

think, that we have changes in our policies that are serious

changes.

For example, the Project Independence of President Nixon

stressed nuclear power. In the subsequent years, to say the least,

the stress on nuclear power has gone away. Both President Nixon

and President Carter stressed coal conversion. In the light of

change, changed attitudes towards greenhouse gases, going towards coal is less than an ideal policy, and national policy has

changed as a practical matter.

But, in addition to these serious changes in policies, we change

policies capriciously, and that, it seems to me, is something that

can be avoided. One of the great advantages of a focus on the long

run as you suggest, is that it will hold down these capricious

changes in policy.

The view of the world has changed. For example, in the 1970s

it appeared that we would have less natural gas than appeared in

the subsequent 20-years. The industry will tell you today that we

will be able to deal with our natural gas problems next winter, but

the public may not like the price.

Well, it is true that prices will always equilibrate markets when

they are permitted to do so. But I think that the U.S. Government

might begin to look seriously at moving the 35-trillion-cubic-feet of

natural gas that is up there in Alaska, starting with Prudhoe Bay.

For over 25-years, as you will remember, Senator, Congress has

had the Alaska Natural Gas Transportation Act to deal with the

choice of a pipeline to move that fuel down to the lower 48 States.

Nothing has taken place in the early years because it was not economically feasible.

We have now reached the point of feasibility, and it seems to me

that this is something that Congress can do, that government can

do, and that is to smooth the path to the development of this kind

of infrastructure which will, I think, be necessary, as we continue

to move towards the use of natural gas in power plants, to supplement the production in the lower 48 States. I commend it to you.

I commend it to Chairman Murkowski, to take a look at that issue.

Those are the things that you can do if you anticipate what will

happen in the future, and we have good judgment about the longer

run future, far better than short run judgment. We have good long

run judgment.

I trust that, that response sort of responded to your question.

The CHAIRMAN. I think that is very helpful, and you have raised

really three areas in which perhaps it would be appropriate, as opposed to lamenting the lack of an energy policy.
23

As you said, we have had a debate in the past on nuclear energy,

and we haven’t had much of a debate recently. The whole issue has

been how can we store waste from the past, not do you extend or

expand nuclear energy in this country. Other countries are having

that debate and are expanding the use of nuclear energy.

Now, it could very well be, as we raise this, that the emotions

involved in this, or the practical problems of storage of the unspent

fuel and the debate we are still having over where it is to go and

under what circumstances. But up front the public needs to know

this is a big issue, that this is one way in which some energy might

come to some parts of the country.

Another, as you say, is in the coal conversion area. Clearly, for

reasons you have mentioned, the greenhouse gas debate, other environmental considerations, coal has not been favored, certainly

soft coal. Some hard coal, on occasion, but nevertheless cost is involved in that, and availability. But there is a lot of coal left in the

country. You know, in the same way that presumably, theoretically, the supply of nuclear energy is huge, likewise for coal.

So if we are interested on the supply side of this, those are two

items which in other fora have been more or less put out of the picture of our energy debate. Now, you mentioned finally Alaska, and

this, Senator Murkowski clearly would be in favor of a policy that

got to the natural gas in Alaska, and in fact espouses that, has

many supporters.

But that is sure to become an environmental issue, almost an

icon situation. Beyond our practical aspects of that transmission, it

probably is going to have to come back into debate, same as coal

and nuclear, hazardous as those pursuits are, because there is a

very large supply.

And, as you say, when we were having the deregulation of natural gas debates in the latter part of the 1970s, the MetzenbaumAbouresk filibuster on the Bentsen bill, the assumption was that

natural gas is so limited, that if we ever deregulated natural gas,

the price would spike up and never come down. It was almost a

theological view of the parties that were held at that point. Now,

that has changed, thank goodness, in only 20-years.

Mr. SCHLESINGER. Those who were concerned about deregulating

natural gas are now its most enthusiastic supporters because of its

limited environmental effects.

The CHAIRMAN. So I have noticed. I mean there is a shift in the

generation. So I think that is a helpful contribution to this hearing,

that it is not just a question of gasoline spikes in Chicago. You

know, the question that we are trying to look at is, is there a will

of the American people, of our government, of our industry, to provide adequate supplies for the growth of this country, for the comfort of this country?

You point out correctly, as we all would, that there are tradeoffs

and they involve the environment, and the environment involves

the health of the American people, the well-being of people likewise. Now, these may or may not be compatible. You know, you

suggested that sometimes, in your opening comments, that the

tradeoffs are very severe. You finally have to choose one another.

You know, maybe it is question, I suppose, of the ingenuity of the

American people that are researchers, as to how many formula-
24

tions we come up with that are good on supply and good on environment, good on health. I don’t know the answer to that question.

This is why the biomass area, which at best, as we heard today,

by 2010 might formulate 10-percent of our power, not a solution

but still an incremental change that at the margins is helpful,

given the big figure for energy in our country, and there does appear to be a lot of promise there of renewable supplies. And strategically, as we look at the world, we don’t have the Soviet Union but

we may have somebody some day, and this is a good time to put

our house in order so that we do not have the perils that President

Nixon and you and others faced back then.

Let me now recognize my colleague——

Mr. SCHLESINGER. Could I comment for a moment, Mr. Chairman?

The CHAIRMAN. Yes, yes.

Mr. SCHLESINGER. I strongly support the work on biomass. It is

not going to be a solution for this decade, but if indeed we are able

to find the enzymes that can break down cellulosic biomass, we

would have a new energy option that is serious. We don’t know

whether we can be successful, but we should work on it.

With regard to environment and Alaska, there are two aspects.

One is the opening up of the National Petroleum Reserve to exploration. That is objected to by the environmentalists, strongly.

The other aspect, which is to bring down the natural gas in

Prudhoe Bay and elsewhere, we have already solved the environmental problems in the sense that under the Alaska Natural Gas

Transportation Act there was chosen an Alaska natural gas transportation system that goes down the very same transportation corridor as does the Alyeska pipeline, and has all of its permits in

place still after 20- or 25-years. So I think on that point the environmental issue is manageable.

The CHAIRMAN. That is a very important distinction. I appreciate

your mentioning that.

Mr. SCHLESINGER. We also have, I think, the question that Senator Grassley raised about opening up additional areas for exploration. There is a clear conflict between closing off areas, particularly the most promising areas, and reducing the growth of our dependency on foreign sources of supply.

The CHAIRMAN. That is right, and there probably the American

people do have to make some choices, because by and large we are

enthusiastically in favor of larger national spaces, and we also are

in favor of lower price of gasoline, natural gas, both, and at the

same time.

Mr. SCHLESINGER. And they expect you to deliver both to them,

Mr. Chairman.

The CHAIRMAN. That is right, and that is why we are meeting

today, to call upon Senator Conrad.

Senator CONRAD. I thank the Chairman, and thank you, Mr. Secretary. I am struck once again how fortunate our country is to have

people of your quality and ability who are willing to come to public

service as you have in the past, and we appreciate that service very

much.

Mr. SCHLESINGER. Thank you very much, Senator.
25

Senator CONRAD. You mentioned in your testimony that one

place that government may have a role and a responsibility is with

respect to the capacity of the grid. Could you tell us what steps you

think the Congress should take with respect to improving the capacity of the grid? What are the practical steps that we need to

take?

Mr. SCHLESINGER. There are two aspects of that. One is the capacity and the other is the reliability of the grid. I worry about the

latter, for several reasons.

As I indicated earlier, when we moved to competition, this meant

that much greater volumes of electric power would pass over the

grid, and that meant that the grid would be loaded up. The electric

power system is this delicate alternating current system that is always subject to instability, and a breakdown somewhere in the system may lead to a larger breakdown.

I believe—correct me if I’m wrong, Mr. Chairman—that Senator

Gorton has a bill with regard to the reliability of the electric power

grid?

The CHAIRMAN. I am uncertain of that, Sir.

Mr. SCHLESINGER. Anyway, that is one thing that I think that

the Congress should look at very hard. Over the years since the

1967 blackout in New York State, industry has been left to worry

about this problem on its own. It established the NERC in the late

1960s to worry about reliability problems, and it has served well

until this much greater demand was placed upon the grid by the

encouragement of competition.

I think that the Congress needs to look at that. I think the administration needs to look at that. Enhancing the reliability of the

grid would be the first thing that I would worry about. I would particularly worry about it, Mr. Chairman, Senator Conrad, because of

the possibilities of cyber warfare, information warfare.

The existence of the grid, the reliability of the grid, is a prime

target in asymmetric warfare, as a war game of the NSA showed

a few years ago, ‘‘Eligible Receiver,’’ in which hypothetically power

was shut down along the East Coast. This would have a devastating effect on the country, and worrying about the reliability of the

system is particularly germane at this time.

Expanded capacity, it will come only as a result of pressure on

the industry, because it is uneconomical. Once again, the price signals are not there, Mr. Chairman. It is uneconomical to expand capacity unless there is pressure to bring about capacity expansion.

Senator CONRAD. Thank you for that. Let me ask you, as I said

to the Secretary, I am going to my State fair this weekend. I am

going to be asked, I am sure often, what should be done?

Mr. SCHLESINGER. I beg pardon?

Senator CONRAD. I will be asked repeatedly, what should be done

about the spike in prices? What would your answer be to those

farmers?

Mr. SCHLESINGER. I would say several things, Senator. The first

one is, I think, indicated by the dialogue between Senator Grassley

and Secretary Richardson, that we probably need to have more

flexibility with regard to the imposition of environmental restrictions on a particular date certain, if the circumstances, that were

imagined at that date was laid down, have changed.
26

That has resulted in an unforeseen—largely unforeseen, there

were warnings of this—but unforeseen 6- or 8-months ago, problem. And flexibility with regard to these rules I think is essential,

and the Chairman’s suggestion that we have a coordinating council

that watches this from the standpoint of the executive office might

be a very good idea.

The second thing is. It may be cold comfort in light of the charts

that you showed to those who are watching the gap between input

prices and output receipts increase but the fact of the matter is

that last year oil prices had hit $10 a barrel, which had basically

crushed the desire to invest in exploration in the world outside of

OPEC and forced us to become more dependent on Middle East

sources of supply, such that when demand revived, there was less

spare capacity around the world.

The benefits of last year, as it were, with regard to fuel prices,

are part of the cause of the high prices of this year, and we should

as a country be looking at ways, in my judgment, to stabilize

prices. That may include the imposition and then the reduction of

taxes on gasoline, for example, such that the price is more stable

than it has been. It puts a terrible burden on an independent producer, as being the most dramatic example, to have these kinds of

price fluctuations while they are operating on narrow margins.

Mr. Chairman, you might think in this committee about the possibilities of stabilization of prices through the fiscal system. It

would permit greater security in planning for farmers, and it would

being in over time, I believe, some considerable revenue to the Federal Government that will, of course, diminish whenever prices go

up.

But we are living in a peculiar period in which OPEC’s strength

has returned. It is sometimes said, Mr. Chairman, that modern

OPEC is like a tea bag, in that it works only when it’s in hot

water. And when the prices of oil got down to $10 a barrel, the

OPEC nations pulled themselves together, achieved the necessary

cohesion to cut production. Normally, unless they are right up

against it, they don’t do that. Most of the time, I think, in the period ahead we are going to see lower prices than we see today.

Senator CONRAD. Thank you.

The CHAIRMAN. Thank you very much, Senator Conrad.

Let me just, without alarming the hearing by asking a question

like this, when you talk about stabilizing, are you suggesting perhaps that if the coordinating council in government, including the

President, said we are growing at the rate of 2-percent in our energy needs, this country, every year, and so as a result we are

going to need 2-percent more of something that provides us energy.

So OPEC comes along and says, ‘‘Well, for reasons of ours, we

are going to restrict so many barrels this year.’’ And the President

counters and says, ‘‘Well, if you are going to do that, we are going

to release X number from the petroleum reserve, and we will sell

those on the market, have revenue in our kitty back here.’’ And

then OPEC moves the other way and we move the other way. We

store more in the reserve.

I mean, is this essentially the kind of mechanism that a government has, not as a countercyclical affair or to disrupt the price

mechanism, but we are in that business in a way. We have this
27

emergency reserve, although there is argument as to the conditions

under which it should be used. Secretary Richardson has touched

upon this a little bit today. We are going to use a little bit of it

for New England’s problems, as perceived, but that is sort of an ad

hoc fix of a particular geographical location. You are talking, I

think, about a much broader stabilization effort.

Mr. SCHLESINGER. Yes. The reserve in New England, Mr. Chairman, is not going to do that much good, in that it is projected at

2-million-barrels of heating oil. That is trivial in relation to the

total requirement. It is a gesture, and it may be a desirable gesture, but it is not going to significantly affect the market.

It would seem to me that this is an area in which we might well

consider a fluctuating tariff, and particularly if the OPEC nations

continue to have cohesion, which I doubt, and maintain an excessive price, that we be prepared to use a fluctuating tariff for the

purpose of stabilizing prices.

The CHAIRMAN. I would just point out parenthetically, I mentioned in my opening statement we invited the Saudi oil minister

to testify. He is prepared to respond to questions in writing. But

one point that he and others have made, with OPEC, is that with

the exception of the Saudis and perhaps slightly more capacity in

Kuwait, they are already going full steam.

So, in essence, they are pointing out this is still a worldwide supply and demand problem in which they do not bear the onus, at

least in their judgment, for having precipitated the prices. But it

is an interesting point of view, and we will have the record replete

with those thoughts.

Mr. SCHLESINGER. The Saudis, in the late 1970s and in recent

years, have been amongst the doves of OPEC right now the Saudi

policy is to pull that price down, not entirely for our benefit but to

prevent the erosion of oil’s share in the energy market.

The CHAIRMAN. We have been joined by Senator Kerrey. Senator,

do you have questions of this witness, or are you prepared to let

Secretary Schlesinger move on, and we would then hear from Senator Johnson?

STATEMENT OF HON. J. ROBERT KERREY, A U.S. SENATOR

FROM NEBRASKA

Senator KERREY. He seems to be appealing for release.

Mr. Chairman, I just thank you for holding the hearing. It is obvious that gasoline prices have dropped a bit, from the attendance

here this morning, but in Nebraska our energy price increases for

a single year are in excess of about $400 million of additional payments that we just voted in the crop insurance bill, so it is a very

big issue for the most important part of our economy.

And I appreciate, Mr. Secretary, your historical analysis and

presentation of how easy it is for us to sort of lose sight of the fact

that we still have significant dependency on foreign sources, even

though OPEC has weakened, and that it is very important for us,

if we want to be productive and we want to have higher standards

of living, we still have to have energy to produce those higher

standards of living. And we in Nebraska are very much aware of

that.
28

Mr. Chairman, I appreciate very much your holding this hearing,

and I would not ask any additional questions to Secretary Schlesinger, and look forward to the additional panel and the additional

witnesses.

[The prepared statement of Senator Kerrey can be found in the

appendix on page 62.]

The CHAIRMAN. Thank you very much, Senator Kerrey. I would

point out Senator Kerrey was a major factor in moving the Committee toward having these hearings. He has sounded the alarm

consistently, along with Senator Conrad, and I appreciate both of

them participating.

And we thank you especially for coming, and look forward to seeing you again.

Mr. SCHLESINGER. Thank you, Mr. Chairman. And Senator

Kerrey, may I express my and I think the country’s sorrow at your

retirement.

Senator KERREY. Thank you. Thank you.

Mr. SCHLESINGER. You have been a fresh breath here in Washington. Thank you.

Senator KERREY. Thank you.

The CHAIRMAN. Thank you very much.

The Chair would call now our former colleague, Senator Bennett

Johnston of Louisiana. It is really a special privilege to have you,

and you are welcomed by your former colleagues and your current

friends, and we look forward to hearing your testimony.

STATEMENT OF HON. J. BENNETT JOHNSTON, A FORMER U.S.

SENATOR FROM LOUISIANA, JOHNSTON AND ASSOCIATES,

LLC

Mr. JOHNSTON. Well, Mr. Chairman, thank you very much, and

thank you for the invitation to appear. And may I say, just as an

aside, that daughter Sally had a little girl last night.

The CHAIRMAN. Well, this is very good news, because that is a

new constituent of mine, as it turns out, without becoming very

personal.

Mr. JOHNSTON. Indeed, and I am sure she will be a Lugar voter.

The CHAIRMAN. I hope so. That will be great.

Mr. JOHNSTON. Mr. Chairman, first of all I want to apologize for

my written statement, which is made on my own behalf, prepared

by me, as you could probably tell, which means that I don’t have

staff. And don’t laugh, because you all will 1-day be in that kind

of situation. I tell Senator Kerrey he will soon lose his staff, and

it is not a very good situation when you have to do your own work,

and you can see how the quality suffers.

Mr. Chairman, we have gone through another one of these same

old, same old price gouging accusations of the big oil companies,

and still another FTC investigation of oil, as to why these prices

went up so fast. By my count, Mr. Chairman, this is the 17th investigation of price gouging. Not one, not one single one of those

investigations has shown any evidence of collusion or market power

or price gouging, and so this one will be.

There are, in fact, two investigations that have been done on the

reasons for these prices, one by EIA, Energy Information Administration, one by the Congressional Research Service, both of which
29

found no evidence of price gouging. And indeed the Congressional

Research Service accounted for the difference between the Midwest

prices, particularly in the Chicago market and elsewhere, and virtually to the penny, and I can go into what those reasons are, and

you probably, I know staff has a copy of that.

The EIA investigation talked about refinery margins being

squeezed. Now, how can that be, that you can have refinery margins squeezed while at the same time oil companies are announcing

the biggest profits in history? I mean, at Chevron, for example, I

think we had the best first quarter that we have ever had, and yet

we made no money on motor gasoline, and that is a pattern

throughout the industry. How can that be?

Well, it is very, very simple. That is, you sell crude oil on the

international markets at world prices and you make a lot of money

on that when OPEC has the prices high. When prices are low, as

they were in 1999, down around $10 a barrel, we weren’t making

any money on crude oil but we were doing okay on motor gasoline.

And so it is that, that is the reason why, among big profits, you

have no profits on motor gasoline.

Actually, historically the big oil companies, I might say, have enjoyed about one-half the profits on a percentage basis as the S&P

Industrials have, and I might add, I don’t know what do you tell

your farmers when you go to the fair. One thing you could tell

them is that crude oil is now less than half, in real terms, what

it was in 1981, if that makes them feel any better. You can also

tell them gasoline is now, in real terms, below where it was in the

1950s and 1960s, which we think of as the halcyon days of oil and

gas. I know politically that is probably not going to sell, because

people look——

Senator KERREY. You know what they will do. They will come

back and tell you what has happened to the price of wheat and

corn over that period of time, as well.

Mr. JOHNSTON. That is exactly right. There are problems, and

you can summarize those as being supply, price, and volatility.

On the question of supply, when I was last talking about oil here

in the Senate we were importing about 50-percent. We are importing 56-percent now. EIA says we are going to import 70-percent by

2020. So, Mr. Chairman, anybody who thinks you are going to reverse that trend is—I mean, I have been hearing this for over a

quarter of a century. Nixon’s energy independence was no foreign

imports, and it is all a pipe dream. I mean, we don’t have the oil

and gas in this country to avoid it.

There is plenty of crude oil in the world today. You know, when

you look at where it is, sometimes that is a problem: Kazakstan,

the former Soviet Union, Venezuela, of course Iraq, Iran. There is

plenty of crude oil, and eventually the price will elicit that crude

oil to come on the market.

The problem is, of course, the price, which was $11 in late 1998,

went up to $34 in March, down now to a little more than $30 a

barrel, but as I say, still less than one-half what it was in 1981.

The real problem with energy is volatility. I mean, that is the political problem. What is the proper price of oil? I mean, is it really

$10 or $11 a barrel, as it was in late 1999? It really is not, because
30

if it stays there for very long, you put people, the producers, out

of business, and you allow OPEC to do its thing.

Now, those who say that we don’t have an energy policy and that

we need an energy policy are suggesting that volatility is the problem, that it can be controlled by government, and that it is your

job to control it. Mr. Chairman, I want to tell you in the strongest

way possible, I have been through this.

In 1973, when I came here, and we were holding hearings on

OPEC and the price of oil, this very problem, everything was regulated. Crude oil was regulated, you know, gasoline was regulated.

We had all this old oil and new oil. Natural gas was regulated from

the well head to the burner tip. Electricity was thought of as being

a natural monopoly.

Mr. Chairman, the most controversial and difficult legislative

battles I went through in all of those years were with respect to

the price of energy, particularly natural gas but also crude oil.

Back in those days they were seriously talking about rationing.

They were saying we were going to run out of natural gas and

crude oil about the turn of the century. You know, it was going to

be over $100 a barrel. It was going to be just awful. And if we deregulated natural gas, Ralph Nader and his crowd said, oh, the

price is going to go through the roof.

Well, Mr. Chairman, we know what happened. We deregulated,

after a huge fight, and the price of natural gas went down and

stayed down, and frankly until recently. It has doubled over the

past year, but even so, in real terms, even at $4 an MCF, it is

about 15- or 17-percent what it was, the maximum spot market

price, which got up to about $9. And inflation-adjusted, it is just

15- or 17-percent what it was. Now, I think it is going up. I think

we are going to have a problem with the price volatility of natural

gas, for a whole lot of reasons.

But the point is, we fought all those battles, and successfully so.

There is plenty of oil. There is, according to the National Petroleum

Council, there is going to be enough natural gas to provide some,

I think it is 34-percent increase by 2010, if we do everything right,

if we allow drilling where we are supposed to be allowing it and

what have you.

The CHAIRMAN. Let me just ask, if I may at this point, I hate

to interrupt you, Senator Johnston, but we are in the last 5-minutes of the roll call vote. And so before any of my colleagues become

anxious or I become anxious about that situation, Senator Harkin,

our colleague, has offered an amendment, and that is the subject

of the vote. So, if I may, I would like to call for just a short recess

at this point in your testimony, where you have got us to the point

that there are supplies, at a price, and then if you could pick up

your thought after we return, which will be 5-minutes or so from

now, I would appreciate it. Thank you.

Mr. JOHNSTON. Thank you, Mr. Chairman.

[Recess.]

The CHAIRMAN. Our hearing is called to order again, and would

you please proceed, Senator Johnston?

Mr. JOHNSTON. Thank you, Mr. Chairman.

Right before you left I had stated that I believe that there are

adequate supplies of oil and gas. The problem is one of volatility,
31

and it is a serious problem, and I think the problem is likely to get

a lot more serious as we face blackouts, brownouts, rapid escalation

in the price of natural gas and continued fluctuation in oil.

The question is, what do you do about it? I would say first, Mr.

Chairman, that you should avoid impeding market forces. It is a

great temptation. Let me give you just one example of the current

solution du jour for dealing with the problem, and that is the

Northeast heating oil reserve. It proposes to take 2-million-barrels,

which Secretary Schlesinger says is not enough—it is a pretty good

amount—but put that in a government storage.

Now, what is wrong with that? Well, first of all, heating oil has

got to be turned. You can’t keep it there for years like you can the

Strategic Petroleum Reserve. It will chemically degrade if you don’t

turn it. Typically, private people turn it five times a year. The government would do so less often, probably once a year.

So the Government will go out and procure storage. Where are

they going to get it? Private sector. They don’t have any themselves. So they are going to take out of private sector storage the

2-million-barrels which they will buy. Then that will actually take

out of use some 10-million-barrels. If they turn it five times and

they have got 2-million-barrels, you take out of use 10-million-barrels in order to get 2-million-barrels of government reserves.

Then what is the Government going to do with it? Well, the Government presumably would let it go in times of high prices. Well,

you can guarantee high prices because the private people who—it

is expensive, you know, to procure and store, private storage. If

they see the Government with 2-million-barrels out there overhanging the market, they are not going to put in their usual

amount of heating oil. They are going to put in less.

So you create the shortage and then you have got to figure out

how the Government is going to release it and what kind of regulations you have. I mean, are you going to let people buy it and then

resell it at a higher price? It recalls the crude oil allocation problems of the 1970s.

I can predict, Mr. Chairman, it is going to be a grand and glorious mess if they do it. Looks like they are going to do it. And it

is not going to work, and when it is not going to work, then they

are going to say, ‘‘Well, we didn’t have enough in storage, we’ve got

to get more,’’ which is only going to exacerbate the situation.

Same thing is true on the Strategic Petroleum Reserve. We created that for the purpose of dealing with serious supply interruptions, not price spikes. The Congress is simply not capable of setting a price which is a proper price and adhering to it. And then

the market gets used to that supply, and it makes matters worse

rather than better.

What can we do? Let me suggest a number of very simple things,

not easy to do, maybe, but they are simple. You need to drill in

those places where you can drill: Arctic National Wildlife Refuge.

I cannot understand why this Congress will not drill in the Arctic

National Wildlife Refuge. There is no commercial fish there. Caribou is no problem. Right next door in the Prudhoe Bay they drilled,

and the caribou population went up 700-percent. That ought to be

proof enough. There is enough oil there, we think, to at least reverse the decline. We drill out in the Gulf of Mexico, which has
32

over 1-billion-pounds-of-commercial-seafood, great recreational

areas. No recreation up on the North Slope. I can’t understand why

we don’t drill there.

We ought to be drilling in places like, for example, Lease Sale

181 out in the Gulf; in the Destin Dome. Let me tell you, in the

Destin Dome, my company, Chevron, has a lease out there. I don’t

know if they are going to be allowed to drill, but it is over 100-

miles offshore. We think there are over 2-trillion-cubic-feet of natural gas.

Florida has said you can’t drill out there, and it is due for a decision by the Secretary in, I think, next month. This being a political

year and Florida being a big State, you can predict how that is

going to come out. This is natural gas. It can’t spill. You can’t see

it from the beach. It is serviced out of Alabama. And yet Florida

says we can’t drill there. And let me tell you, Florida is going to

have a natural gas shortage.

It is simple. It may not be easy to do. Electricity, yes, I fully

agree we need to go to electricity competition. Someone asked what

we should do about the grid. Well, for one thing, you need to build

more transmission. Transmission is about 6-percent of the cost of

delivering that electricity, and yet we are woefully short on transmission facilities.

And one of the reasons is that FERC is not allowing a rate of

return—actually, they haven’t set the rate of return, but their administrative law judge has recommended, I think it is 9.6-cents, I

think, which is not enough. You are getting more at the State level,

allowed by the State commissions, than the 9.6. And they are not

going to build any transmission. I mean, this is very, very bad policy, very clear. Members of Congress ought to be writing to FERC

now and say give a rate of return that will bring forth transmission

supplies.

As far as, I mean when you are talking about reliability, you

have got to build more transmission, first of all. That is the biggest

thing, because our electricity industry grew by a group of local companies which, you know, it might be State-wide, it might be multiState, but they were local, and their reliability margins were set

by their public utility commissions, and they didn’t basically send

a lot of energy outside of their own grid.

Now we are interconnected, imperfectly and not well interconnected, and you need to build much more of that transmission.

It is going to be a very, very serious problem, the problem of transmission, as well as the problem of additional electricity generation.

One of the problems there is there are no more—you can’t go out

and buy a turbine now. G.E. has got all of its turbines bought up

for years to come. Intergy, in a very smart move, I think, bought

them all up. And so if you want to build a new gas-fired power

plant, which is the cheapest and the best way to do it now, you

have got to wait in line for a long time to get your turbine. So

things are going to get worse in electricity before they get better.

We ought to do something about siting, siting plants, siting pipelines. It takes too long. California, let me tell you, people are pulling their hair out in San Diego now over the price of energy because they are way—the price has spiked way up because there is
33

a shortage of supply and there is a transmission problem. We need

to speed that along, the siting.

I remember back in the 1970s I chaired a conference. The bill

passed, I think, both houses, as I recall, on critical energy supply

facilities, siting of critical energy supply facilities. It didn’t pass,

but it is the kind of thing that ought to be considered.

And, finally, there are some other things I could say, but perhaps

most important, you need to pursue the nuclear option in this

country. You can talk about renewables, but look, renewables are

going to be a small part of the solution. Nuclear is 20-percent of

our electricity now, and could be much bigger. It is nonemitting,

doesn’t cause any greenhouse gas problems.

And if you lose what you have now, you are going to exacerbate

that natural gas price problem, because the reasonable prices for

natural gas depend upon keeping your present nuclear facilities

going. That could be a whole hearing in itself, of how you do that,

but let me just say that is what you need to do.

So, Mr. Chairman, you are going to have political energy problems, but I would, in the strongest way I can tell you, say stick to

the basic policy of market forces. We do have an energy policy

which was procured at great political loss of blood, and it is called

market forces. We need to perfect that, preserve that, and expand

it.

Thank you.

[The prepared statement of Mr. Johnston can be found in the appendix on page 79.]

The CHAIRMAN. Thank you very much, Senator Johnston.

Let me just highlight for a moment the point you have made that

volatility is the problem, and you have cited the swing in a short

time from $10-a-barrel oil to $34, or $30, as it may be now, and

the inadequacy of government in attempting to define what the

proper price ought to be.

There is at least some more than anecdotal material that the

OPEC countries, in trying to think through their policy, have come

out with the thought maybe that $25-a-barrel is a proper price.

Now, this may be a tactical point of view with regard to the politics

of oil in the world, and pressures from our country and others may

have something to do with at least a profit level that makes possible the infrastructure building for themselves or other considerations we would have in trying to bring those investments.

With Secretary Schlesinger, I pursued at the last of his testimony this thought: If we were to try to combat volatility, is it a

reasonable proposition that our government would try to make an

estimate of the growth of the economy or the growth of energy resources, and the two are somewhat correlated, and say that we are

going to try to facilitate 2-percent growth every year? Now, in order

to do that, we will need to have X number of units of energy in

some form, and so we are prepared really to act as a government

to try to bring that about.

I would suggest, and you mentioned a little bit in your testimony

with regard to oil, if we finally come to that, that we have the Strategic Reserve, and so there would be at least the viability or a possibility of utilizing some of the strategic reserve, not with the

thought of depressing the price of oil all-time, but having stated
34

that we are going to need so much, that we would supply that

much. OPEC, others, would all know that is where it is headed,

that we are not dumping the entirety of the reserve or doing something irrational.

I think you raised some very good points which in a larger hearing we would have to try to think through, that is, the distribution

of this oil and physically, even if you have on paper an idea of equilibrium, how in the marketplace and given the facilities we have,

all of this occurs.

And it may be that practical people will say finally, because you

have suggested with regard to the New England heating oil thing,

that this is not going to work. Even though it sends signals, the

practical aspects of this, in this time frame and so forth, are beyond what they are going to be able to do. That may be the case.

I am just trying to get to what I think the common sense question many Americans would say, is surely there must be someone

who can do something about a situation that goes from $10 to $34,

that jerks all of us completely out of shape. And you may say,

‘‘Well, what’s sauce for the goose is sauce for the gander.’’ People were suffering in oil country last year, and this year it is

very high, but even then oil newsletters point out people want to

make sure it stays there a while before they begin to make these

sorts of investments and begin to build the infrastructure and all

the rest, and it may not have lasted that long. They sort of suspect

somewhere it might go down again, therefore even in these conditions the market works, but haltingly, with great reservations,

with a lot of skepticism on the part of people who may lose money,

who have to put the money out there.

And I am just trying to figure out, where does government or any

public group come into this picture? We are all watching the drama

of why people make investments, how high does it have to be, how

high does it stay, while on the other hand consumers of the product

all over the country come not only to Washington but to State capitals, to mayors and so forth, and demand relief, and all sorts of

ad hoc solutions are a result of that.

Mr. JOHNSTON. Mr. Chairman, all I can say is, almost invariably,

I will say invariably, when the Government steps in, they make

matters worse.

Now, with respect to the $25 target, is it ploy with OPEC? I personally don’t believe so. I think $25 is about as much as, as high

as you can have without eliciting a big supply response by the

world, a big efficiency and conservation response.

Now, I remember back in the 1970s when the experts came in

and said that there was no elasticity in the consumption of gasoline. It didn’t matter where the price of gasoline went, it is inelastic. You are not going to use any more or any less. And the problem

was that they had these computer models that showed, you know,

at 32-cents there is so much consumption, at 36—you remember

when gasoline was 32-cents?—at 36-cents it is not that much more.

Well, they were using a very narrow range.

What we found was that there is huge elasticity in consumption,

but there is a big lag time. If you are driving a big SUV, I call

them urban assault vehicles, you can’t easily and quickly make a

change to a more fuel-efficient car. But believe me, if that price
35

would stay up very high, $1.75, $2 a gallon, those SUVs are not

going to be worth much because people are going to be getting into

something smaller.

That is what happened in the 1970s. The Saudis remember that

better than anybody. Not only did it bring forth conservation, huge

conservation, but it also—I mean, look at natural gas consumption.

It is, in the industrial sector, it is down from what it was back in

the 1970s, because of conservation, not because we are producing

less.

So what you have got to be able to do is sort of weather the

storm and wait for the supply reaction. The supply reaction will

happen, and it will happen much better than we as planners and

the Government can do. Believe me, I mean, I have watched our

budgets at Chevron. I mean, we had a planning budget last year

of $19 a barrel, and we are still doing some additional exploration.

If we thought the price was going to be up around $30, we would

do much, much more in terms of exploration.

That is just one company, and I can tell you the other companies

do exactly the same thing. It is economics. The market system

works just like they say it does, but again, the problem is lag time.

Probably the best thing to do, you know, if you can’t think of

anything else, is call for an investigation by the FTC. The results

are going to be predictable, but it doesn’t do much harm and it is

not taken too seriously by those who know about it. But if you can

get by with doing that kind of thing, without really tinkering with

the marketplace, you are a lot better off.

It took me a long time to come to these conclusions. I mean, I

came here as a little lawyer from a medium-size town, and not

knowing much about energy. I found out, in a quarter of a century,

how this thing works, and the market makes it work.

The CHAIRMAN. Senator, we thank you for distilling that wisdom

of the quarter century today for us, and, as always, it is great to

have you here in our committee.

Mr. JOHNSTON. Thank you very much, Mr. Chairman.

The CHAIRMAN. The Chair would like to call now a distinguished

panel composed of Keith Collins, chief economist, U.S. Department

of Agriculture, Washington, DC.; Harry S. Baumes, senior vice

president, WEFA, Inc., Eddystone, Pennsylvania; Eric Vaughn,

president of Renewable Fuels Association, Washington, DC.; W.

James McCarthy, general manager, Government and Public Affairs, CITGO Petroleum Corporation, Tulsa, Oklahoma; Don

Hutchens, executive director, Nebraska Corn Board, Lincoln, Nebraska; and R. Skip Horvath, president of the Natural Gas Supply

Association, Washington, DC.

Gentlemen, we appreciate your coming. We appreciate your patience. At this hour you are still with us, and we are grateful. Now,

if you could summarize your statements in 5-minutes more or less,

I would appreciate it. The statements, I will say, for all six of you

will be published in full in the record, so they will be a part of our

permanent record.

Dr. Collins, it is always a privilege to have you before the Committee. Will you please proceed?
36

STATEMENT OF KEITH COLLINS, CHIEF ECONOMIST, U.S.

DEPARTMENT OF AGRICULTURE

Mr. COLLINS. Thank you very much, Mr. Chairman. On behalf of

USDA, we appreciate the opportunity to participate in your hearing today on energy issues. In my 5-minutes I would like to make

five points.

Point number one is that U.S. agriculture uses a lot of energy in

a lot of alternative forms. Each year agriculture accounts for about

2-percent of the energy use in the United States. Diesel fuel is the

largest energy input among the direct uses of energy, and fertilizer

the largest among the indirect uses of energy.

An important trend in American agriculture has been that energy efficiency has been steadily improving. Farm output per unit

of direct energy used has increased 60-percent since 1980. Now,

that means that agriculture is less vulnerable to energy price

shocks than it was back then, although it is still vulnerable. It also

means that agriculture is making an important contribution to energy conservation, and I think it illustrates Mr. Johnson’s point

about long term price elasticities of energy demand in agriculture.

Point number two: The energy price increases this year are reducing farm income, and this is coming from two different sources,

on the price side and on the cost side. When a consumer spends

$1 on food, about 8-cents goes to cover transportation and energy,

for those energy and transportation costs after the commodity

leaves the farm.

These marketing costs are increasing the business costs, the operating costs, of processors and transporters and so on. And what

they do, then, is they will pass forward to consumers and back to

farmers those costs in the form of lower prices being bid at central

markets, and as well higher basis or even lower prices in more remote farm markets.

At this point we don’t see a whole lot of price effects; we are

mostly unable to measure price effects because of all the other factors that are going on right now that are affecting prices at the

farm. However, I would note that truck rates have risen for moving

some agricultural commodities, but spot rail and barge rates are

actually lower so far this summer than they were a year ago.

Well, in addition to the reduction in farm revenue, net farm income is also reduced by higher farm production expenses on energy. When a farmer spends $1 on total production costs, about 3-

cents goes to direct fuel and oil costs. This year we expect that is

going to rise to about 4-cents, which would be the highest rate

since 1986. In dollar terms, this translates into direct fuel expenses

being $8.1 billion this year. That is up $2.3 billion over last year.

That is a 40-percent increase.

Thus far, prices of indirect energy inputs such as fertilizers and

chemicals have not changed very much. We do forecast a small increase in expenditures on those inputs. However, as natural gas

prices and oil prices remain elevated, the higher production costs

will be for chemicals, fertilizers, machinery, custom work. Things

are going to get reflected into the prices farmers pay for those inputs down the road.

Point number three: In the short term, farmers can do little to

avoid these higher fuel costs, and these costs will reduce farm in-
37

come dollar-for-dollar. However, over time, particularly if the high

prices persist, there are a number of strategies that farmers can

employ to reduce the impacts, including planting less energy-intensive crops, using alternative practices such as reduced tillage, contracting fuel supplies, storing fuel, investing in smart and energyefficient machinery and buildings.

Point number four: The higher energy prices and the impending

large corn crop are expected to increase the demand for ethanol

this year, reduce ethanol’s production cost, increase ethanol profitability. This is going to increase incentives to expand ethanol production capacity, and that is going to make more ethanol available

to replace MTBE and help solve the water contamination problem,

and it should help make more ethanol available to be blended with

conventional gasoline as well as an RFG to help solve the Nation’s

tight gasoline supply problem.

Point number five: On the farm program side, I can report that

USDA and DOE are working together to implement the President’s

Executive Order 13134, as well as your bill, the Biomass Research

and Development Act of 2000.

I am also pleased to report that we have about completed our

proposed rule on the bioenergy program which Secretary Glickman

announced several months ago, under which the Commodity Credit

Corporation would share input costs with ethanol and biodiesel

processors. We plan to send that rule to the FEDERAL REGISTER

late next week. And I also report that we are about complete with

our solicitation, as required under our appropriations bill for FY

2000, that will allow us to take applications for biomass pilot

projects up to 250,000 acres on CRP land.

We are optimistic that bioproducts and bioenergy will become an

important new income opportunity for more and more farmers as

we move through this decade, as well as reduce the national dependence on fossil fuel.

And that completes my statement.

[The prepared statement of Mr. Collins can be found in the appendix on page 106.]

The CHAIRMAN. Thank you very much, Dr. Collins.

Dr. Baumes.

STATEMENT OF HARRY S. BAUMES, SENIOR VICE PRESIDENT

FOR INDUSTRY AND AGRICULTURE, WEFA, INC.

Mr. BAUMES. Mr. Chairman, it is a pleasure to be here this

morning to talk about energy issues in agriculture, and I am sorry,

but I must digress a little bit because I am especially happy to be

here this morning, because I took the train down from Philadelphia. I missed your opening comments, and one of the reasons, not

one but the reason I missed your opening comments was that we

had an electrical problem with Amtrak and the train broke down

outside the BWI station. So I am very sensitive to blackouts and

power outages this morning.

I am happy to be here, though, to share my comments on energy

issues in agriculture. Many of my comments will mirror Mr. Collins’. I would like to focus my remarks on four areas. One is direct

usage of energy inputs in agriculture, production agriculture in

particular; indirect usage of energy inputs in production agri-
38

culture. And then discuss very quickly the short-run implications,

and longer-run implications as well.

In the farm operation, whether crops or animal production, farmers demand energy inputs for different types of energy inputs, different types of production activities. Planting, harvesting, primarily

require diesel fuel or fuels to operate equipment. Electricity powers

irrigation systems milking parlors, air conditioning and dryers.

Natural gas and liquid propane powers dryers too. Gasoline, diesel,

and lubricants are necessary to run equipment.

In the aggregate, farmers expended on direct energy inputs an average of over $9 billion per year between 1996 and 1999. By my

calculations, that is nearly 5.5-percent of total cash expenses and

about 5-percent of total production expenses. Estimates of energy

expenditures on cash costs are expected to rise considerably for the

year 2000.

By my estimates, we are looking at a rise in direct energy costs of close to $2.5 billion, pushing the figure to almost $12 billion for

the year 2000. Total cash expenses are also estimated to rise, but

at a slower rate, so as a consequence we are looking at direct energy costs to increase their share of total cash costs to about 7-percent from 5-percent.

If we look at individual crops, direct energy costs expended by farmers on corn per acre have averaged somewhere between $24 to

$25 per acre, according to USDA estimates and WEFA’s estimates

over the past 4-years. That is about 15-percent of variable cash expenses. Soybeans is not as energy-intensive, takes about $6 to $10 in direct energy expenses, only 7-percent of variable cash expenses.

Wheat is similar in terms of absolute magnitude. It requires about

$10 in direct energy costs and it accounts for 14-percent of cash expenses.

So, as Mr. Collins said, energy is a major input and clearly an

important factor to agriculture production, and as these costs rise,

the farmer has very little opportunity to adjust and his returns are

adversely affected.

Indirect usage by agriculture reflects the amount of energy consumed in production of manufactured inputs, primarily fertilizers

and pesticides. Farmers use millions of tons of fertilizer and millions of pounds of pesticide. Fertilizer production, particularly nitrogen production, is extremely energy-intensive.

Anhydrous ammonia, the primary feedstock to produce fertilizers, nitrogen fertilizers, is also a product used by farmers.

Every ton of ammonia produced in the U.S. requires somewhere between 33- to 34-million BTUs of natural gas. For the past 4-years

the price of natural gas has been fairly stable and energy costs in

ammonia production have accounted for 75-percent of the total production cost.

Now, more recently, energy prices facing the fertilizer producers

are closer to $4 per million BTU of gas, and this has raised the cost

considerably. In the absence of being able to pass these costs on to

farmers or to buyers, 15- to 20-percent of the U.S. ammonia capacity has shut down in response to these higher gas prices.

Energy-intensive fertilizers and crop chemical costs account for

about 43-percent of the variable cash expenses for corn production,
39

35-percent for wheat production, and 40-percent for soybean production. Couple these with the direct energy costs of 10- to 15-percent for these crops, and you can clearly see that energy is an important input to agriculture.

In the short run, the farmer has little opportunity to adjust. He

has to ‘‘suck it up,’’ in the vernacular. He has to pay higher costs

for his diesel fuel, and operate, and that will directly affect his bottom line. In the longer run, when a farmer can alter his production

schedule, change his complement of energy inputs, move to alternative or less energy-intensive crop production or animal production, he can ameliorate or mitigate some of the costs of higher

priced energy.

Mr. Chairman, this concludes my comments this morning. I

would be happy to answer any questions the Committee may have.

[The prepared statement of Mr. Baumes can be found in the appendix on page 97.]

The CHAIRMAN. Thank you very much, Dr. Baumes, and we are

grateful that you made it despite the hazards of energy in your

transportation this morning.

I am delighted that Eric Vaughn is with us again. His association with renewable fuels obviously strikes a chord with many of

our members, as has been mentioned today, and we look forward

to your testimony.

STATEMENT OF ERIC VAUGHN, PRESIDENT AND CHIEF

EXECUTIVE OFFICER, RENEWABLE FUELS ASSOCIATION

Mr. VAUGHN. Mr. Chairman, we always strive to strike chords,

so it is once again an opportunity I greatly appreciate to appear before you and your committee.

My name is Eric Vaughn. I am the president of the Renewable

Fuels Association. We are the national trade association for the domestic ethanol industry. There are 61-ethanol-production-facilities.

Probably the finest ethanol production facility, though, is in South

Bend, Indiana, New Energy Corp.

Over 600-million-bushels-of-corn are going to be processed into

ethanol this year. According to the Energy Information Agency, for

the past 9-months we have hit record production levels. This past

month 110,000-barrels-a-day of ethanol were produced.

The great news, in addition to all that, is that since 1990, the

passage of the Clean Air Act Amendments, the domestic ethanol industry has doubled in size, and some 600,000 farmers today own

and operate ethanol production facilities. Again, we have doubled

in size since 1990.

I listened this morning, and always, Mr. Chairman, coming before your committee is an education. I wasn’t certain we were in

the Energy Committee—excuse me, the Agriculture Committee—all

morning long.

I have noted with some degree of real satisfaction that virtually

every major environmental, agriculture, and energy issue that has

affected renewable fuels, ethanol, biobased diesel, has started, has

gotten its push, and has been supported by you, Mr. Chairman,

and this committee, not the Environment Committee and not the

Energy Committee, not to slight them for not being here, but it is

you and your committee.
40

It was the clean octane amendment that was added to the 1990

Clean Air Act amendments, the only amendment, by the way, that

passed on the floor that year, that instructed the oil companies to

begin to use alternative sources of clean octane and not ever-increasing levels of aromatics. There was a huge outcry of support for

that at the time, because it was just about that time, almost exactly 10-years ago, that we were in the Persian Gulf.

In fact, August 2nd, coming up, is the 10-year anniversary of

that activity.

There was a tremendous amount of interest in energy security,

energy policy, and energy prices, just like we are facing today. But

instead of beating your chest, instead of giving long-winded speeches, this committee took action, and you, Sir, are to be congratulated

for that action.

But you didn’t stop there. A couple of years later you worked

very closely at lifting the oxygenate cap that EPA imposed. You

also worked with the Environmental Protection Agency to try to

adopt a carbon monoxide credit for these alternative fuels and their

use in reformulated gasoline. You have worked aggressively to promote tax policies, and are to be specifically congratulated for your

co-op provisions in the tax provisions that helped to develop these

co-op operations and activities all across the country.

And now you are working again on biomass provisions, and you

are to be congratulated for the work that you are doing not to just

talk about energy policy but to produce results, and results that we

are already beginning to see in many of our ethanol production facilities.

You haven’t stopped there, though. This committee has been very

busy. You are now working with the Environment and Public

Works Committee to try to fix the problem of MTBE in reformulated gasoline. It is not an easy fix, as you know. You have been

the principal cosponsor of two major legislative initiatives, and I

daresay to you and members of this committee who have put the

bridge together, you are bridging between the East and West

Coasts, where MTBE is so dominant, and the Midwest where ethanol is so dominant, and attempting to bridge the differences, concerns and problems associated with Federal reformulated gasoline

regulations.

But you are not simply looking at MTBE, you are also taking a

very honorable position in trying to make sure there is no backsliding, a critical component of this program. That was the intent

of the Clean Air Act Amendments in the first place.

What does all this have to do with agriculture and farmers and

this committee? Everything. Six-hundred-million-bushels-of-corn

have been processed. We have doubled the size of this industry.

Mr. Lugar, we have doubled it because of leadership like yours and

members of this committee.

The recent run-up in gasoline prices across the country frightened, angered—frankly, there are words I can’t use in open public

committee about what they did to members of our industry, angering our industry because many people in the oil business blamed

ethanol, blamed the ethanol industry for the run-up in prices. In

12-months conventional gasoline prices in Chicago ran up 29-per-
41

cent, while reformulated gasoline prices went up 34-percent. MTBE

prices went up 30-percent. Ethanol prices remained steady.

We have oversupplied for this market. We have over a quarter

of a billion gallons of excess capacity today, ready to meet the demands of reformulated gasoline. And this industry is now looking

at gasoline prices, both conventional and reformulated gasoline

with ethanol, at 92-cents wholesale today. We didn’t run the prices

up, Mr. Chairman, as you know, and unfortunately I can’t claim

credit for running them down, but I have three very quick recommendations.

Number one is supply management. The oil industry today has

adopted a just-in-time delivery mechanism, which essentially

means about a two-day supply. While I am not calling for regulations to increase that supply availability, the oil industry should be

prodded, maybe encouraged by this committee and others, to adopt

a more reasonable plan of action in terms of supply. Maybe 4-days

of supply, just to help smooth out some of those rough edges, especially when it comes to prices.

Second, environmental regulations, we still have a North and

South reformulated gasoline program. We ought to have one national reformulated gasoline program. It would help out tremendously. And, Mr. Chairman, while the Federal Environmental Protection Agency, after 5-years, has issued a Notice of Proposed Rulemaking on a CO credit, it is inadequate, it is not worthy of the action that this committee has put toward that issue, and needs to

be strengthened.

And, finally and lastly, with your leadership on renewables, we

need a renewable energy program. And while I would be the last

to admit, unfortunately, for some in this room, that renewables

can’t make a huge impact, it is making an impact and a positive

one toward energy security, environmental security, and agricultural security all across the country.

Again, I appreciate the opportunity to be here, Sir. I look forward

to your questions.

[The prepared statement of Mr. Vaughn can be found in the appendix on page 90.]

The CHAIRMAN. Thank you very much, Mr. Vaughn.

Mr. McCarthy.

STATEMENT OF W. JAMES MCCARTHY, GENERAL MANAGER,

GOVERNMENT AND PUBLIC AFFAIRS, CITGO PETROLEUM

CORPORATION

Mr. MCCARTHY. Thank you very much, Mr. Chairman. I am Jim

McCarthy, and I head up the Government and Public Affairs for

CITGO Petroleum Corporation. According to the latest available

data, CITGO is the second largest marketer of gasoline in the

United States, with about a 10.3-percent share. We do not do any

exploration and production, and we also do not own or operate any

CITGO retail sites. Those are all independently owned by local

business people.

I too am pleased to be here, to have this opportunity to speak

about the overall issue of providing energy that is so critical not

only to the American farmer but also to the economic well-being of

our country. We empathize with those families whose household
42

budgets felt the impact of the rapidly rising gasoline prices, and it

is our sincerest hope that a sound, cohesive national energy policy

emerges from hearings such as this, because what America does

need is an energy policy that ensures the quality of life that the

American people expect and deserve.

Unfortunately, it is our opinion that Americans’ ability to have

dependable supplies of transportation fuels when and how they

want it is in jeopardy as a result of our regulatory policies. The situation that we saw earlier this summer is a classic case of the relationship between supply, demand, and resulting price.

In a free market system, the price of a commodity like gasoline

is not so much a factor of the cost of manufacturing but rather the

relationship between the consumer’s demand for a product and the

manufacturer’s ability to supply it to the marketplace. The current

situation, the price of gas in the Midwest was driven up by the inability to manufacture and distribute it to the marketplace to meet

that consumer’s demand. Once again, the consumer paid the price,

the hidden price, of the impact of the regulatory policies, primarily

driven by the EPA.

I know you are familiar that both the recently released June 5

DOE memorandum and the June 15 Congressional Research

memorandum attributed the price swings to five major factors, so

I won’t go into them.

However, clearly refiners’ crude costs have gone up the equivalent of 30-cents per gallon over 1-year ago today. We had exceptionally low inventories which were drawn down, in order to turn our

tanks, or in order to meet the new lower Phase II RFG program

restrictions, and that was the only way to bring the new product

to the market. There was an unusual rash of operational problems.

Refineries, pipelines, and even marine channels were under—could

not be fully utilized because of these operational problems.

I am sure you are familiar that a recent Federal court ruling

gave Unocal a valid patent on a blend formulation, which quite

frankly caught the industry off guard and caused RFG production

to be scaled back, further restricting our production.

And, finally and most importantly, and the point I am trying to

make today, is the inescapable fact that there are too many fuels

out there, not just a North and a South fuel, but this summer alone

there are 13-grades-of-gasoline, making about 39-different-types-ofgasoline that we have to deliver over the summer.

Now, this is being manufactured and delivered in a system that

was basically designed for six different fuels, so the strain on the

system is incredible. We have a patchwork of fuels that unintentionally constrains refiners’ ability to manufacture and then supply

the fuels that are mandated by the various governments.

About 30-percent of the gasoline sold in the U.S. is RFG, including the Midwest markets in Chicago and Milwaukee. In those markets, however, we do not use MTBE, but rather we do use ethanol,

and this means that the RFG that we utilize around the rest of the

country cannot be moved in to meet a short demand, because we

have to have a special blend stock called RBOB. This RBOB was

more difficult to manufacture than any of us had anticipated, and

so supplies were exceptionally low. Nevertheless, the marketplace
43

did take over and the supplies of RBOB were brought in and the

price came down.

The important point is that this is a recurring theme around our

country. As local regulators have created new and different gasolines, refiners no longer have the flexibility to quickly shift supplies

to the area of greatest need. The result is situations that previously

we could have corrected very quickly, and no longer can do in the

same time frame. It takes longer to turn these products, create the

products, and then ship them to where they need to go.

This summer’s price/supply situation is not the first occurrence

and we do not believe it will be the last, unless our industry’s

warnings are heeded. Similar situations occurred in 1989 with the

advent of EPA’s RVP program; again in 1991 during Phase I of the

Reformulated Gas Program; again in 1999. According to industry

experts, we are in a nightmare of patchwork environmental regulations which are wreaking havoc with gasoline supply and price stability, and we agree with that point.

The important point to recognize is that the root cause stems

from the unfortunate fact that this Nation’s only energy policy appears to be, at least from a petroleum perspective, driven by the

Environmental Protection Agency. And in reality it is not a policy

at all, but rather a hodgepodge of regulations which has changed

every year since 1970, when the Clean Air Act was originally

passed.

And it appears that unfortunately there is no end in sight. Our

industry is already faced with the next wave, EPA’s requirements

for ultra-low sulfur gasoline and the diesel specifications. CITGO is

concerned that the EPA again is not listening to the warnings, and

that there will be shortages again , causing price spikes, as a result

of the recent Tier II gasoline regulations and the sulfur regulations

for diesel. Unless EPA changes its approach, we will see more and

greater price spikes. Meeting the new gasoline regulations will cost about $8 billion

for our industry, and will present significant challenges to our engineering abilities. Because it is high capital cost, it is likely that

some refiners will be unable to justify that investment and will

simply shut down that particular stream. This will tighten supply.

Others, however, have already said that due to the high cost of

conventional desulfurization technology, they will try new but

unproven technologies to reduce sulfur content of fuels. These new

technologies will be less costly but will have limited commercial experience, and will likely result in initial operating problems, which

will further tighten supply and cause price spikes.

In addition, in order for us to meet the 2004 deadline required

by the EPA, the industry will face significant hurdles just to obtain

the necessary permits, to put together the necessary engineering

and construction resources and hardware to get it done in time. If

EPA somehow does not properly facilitate the permitting, or if

other regulations, such as the proposed diesel sulfur regulation or

the ban on MTBE, overlap this Tier II work, then we are clearly

on a course for disaster.

I have additional concerns about EPA’s proposed diesel fuel sulfur rule, which carries a $10 billion price tag. Specifically, whether

it is even possible to provide the needed supplies of diesel within
44

the 15-ppm sulfur level cap imposed within the rule. With the current distribution system, it will be extremely difficult to deliver

this fuel with 15-ppm to the consumer.

The problem is that the new diesel must share the same distribution system with other products that will have significantly higher

sulfur levels. More fundamentally, due to the cost to produce the

15-ppm sulfur diesel, many refiners, once again, will drop out of

that marketplace, and we know what will happen. This could drastically reduce the supply of diesel, and supply disruptions will

occur, and once again, price spikes.

The bottom line is that the diesel sulfur rule is being proposed

with a number too low, and the timing is far too soon. Similar

health and environmental benefits can be obtained with a more

reasonable 50-ppm sulfur cap.

Nevertheless, EPA has arbitrarily selected standards for the proposed diesel sulfur without the technology to support the standard.

In summary, the automobile engine manufacturers don’t have the

after treatment technology to meet the standard, and the oil industry doesn’t have the desulfurization technology to manufacture it in

a cost effective manner.

Even more importantly, next year EPA plans to propose another

rule to lower the sulfur content of off-road diesel. Here again, due

to the manufacturing, supply, and distribution issues already mentioned, the supply of off-road diesel will drop and prices will increase, specifically for the agricultural community.

In my written testimony I have provided what we think are the

solutions to this particular situation, and they are very basically

six.

Number one, regulations must address greatest environmental

and health concerns first.

Number two, regulations must be based on sound science and

current data.

Number three, regulations must carefully balance the total anticipated cost of compliance, both capital and maintenance, over a

specified period of time, against the anticipated benefits over those

same time frames.

Number four, the regulated community must have a more active

role in setting the priorities.

Number five, regulations should set performance requirements

but allow for creative, innovative solutions as well as sufficient lead

time.

And, number six, each regulation should include an automatic

sunset provision that can be overridden if necessary.

With that, I will close my remarks, and I look forward to your

questions. Thank you very much.

[The prepared statement of Mr. McCarthy can be found in the

appendix on page 121.]

The CHAIRMAN. Thank you very much, Mr. McCarthy.

Mr. Hutchens.
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STATEMENT OF DON HUTCHENS, EXECUTIVE DIRECTOR,

NEBRASKA CORN BOARD

Mr. HUTCHENS. Chairman Lugar and Members of the Committee, thank you for the opportunity to put a farmer face on this

issue, and we do appreciate that opportunity.

I have got to tell you that my name is Don Hutchens and I represent 30,000 corn farmers in the State of Nebraska, but I am also

knee deep in this industry of agriculture, because I am also a producer. I try to spend my weekends, but anymore it is difficult to

spend weekends on the farm when your neighbors are stopping by

and asking the very question that Senator Conrad has to answer

when he goes home to the North Dakota State Fair.

I was also looking forward to having Senator Kerrey here, because it was 18-years ago when a younger farmer in my community

met up with a young Senator, then running for Governor, so it is

a pleasure for me to cross paths with him again in his waning

months of his term here in Congress.

When I came into State government when Senator Kerrey was

Governor, it was in the mid-1980s, and it was a very difficult time

for agriculture, as you well know, Senator Lugar. But I continue

to farm with a 91-year-old father, who probably saw times that

make these times pale in comparison.

And as I was sitting listening to the testimony today, I thought

of the two happiest times in my father’s life dealt with energy, and

it was when REA put electricity on the farm, and when he could

finally sell the horses and buy a gas-powered tractor. He is still on

the farm. He uses diesel, and he is still actively in the field, not

as much as he would like. But I think it is interesting, the changes

that we have seen in production agriculture as it relates to energy.

I want to compliment this committee on what you have done in

the past in addressing farm legislation that would put $5.4 billion

in market loss payments in farmers’ pockets. My concern, though,

Senator, is that $5.4 billion, in comparison to the numbers that

ERS have put together, may be lost this year just in the having to

pay for those increased energy costs. That means that $5.4 billion

isn’t going to go to capital costs. It is not going to write down operating loans. It is not going to flow through the economy the way

it normally would, and it is not going to put kids through their

education.

Nebraska farmers have been hit extremely hard. In fact, my

farming interests lie in the southwestern part of Nebraska, where

the drought is the most severe across the corn belt. Those farmers

are using more energy, and they have no choice but to continue to

use energy in the production of our State’s leading crop, and that

is corn, because if you don’t produce, you don’t qualify for crop insurance. And right now the only way that you can really come out

of the program is farming for the loan deficiency payments, so we

have to crank out every possible bushel that we can, so it hits Nebraska farmers extremely hard.

And the sad part about it is that the consumer will not help us

incur those costs, because you and I will not pay a penny more for

a pound of meat or a loaf of bread, because we have that inability

in agriculture to pass those costs on down to the consumer.
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In Nebraska, and you have heard the statements on energy

prices so I won’t repeat those on diesel, propane, and gasoline, but

in Nebraska we have 79,000 wells. And I will give you an example,

that our normal irrigation cost per well would be about $2,200.

Given the fact that we have already pumped, about 3-weeks ago,

as much as we normally would all summer, our potential costs on

those irrigation wells are going to move to about $6,600 per well.

You do the math. We can eat up, Senator Lugar, the $390 million

of market loss payments very quickly.

Some comments made about our already practices in energy conservation with new equipment, new farming practices, even using

genetically modified crops to reduce applications in fields. But I can

guarantee you that it has been the American farmers that have

paid for those costs, and as we talked, and it was mentioned earlier

that we can adapt new farming practices, we can, but it comes at

a cost. And you know it is energy, it is fertilizer, and it is seed and

it is chemicals that capture the majority of the costs for farmers.

The next issue I want to mention, because it is the most recent

one, the thought process in the country has moved away from gasoline and diesel, even though it is a major concern and a major draw

on our financial capabilities, but now it has moved to natural gas.

Predominantly, natural gas is the predominant product within anhydrous ammonia, and you know this fall and this spring farmers

will use over 4-million-tons-of-anhydrous-ammonia. Your State, Illinois, Iowa, Nebraska, we use about 50-percent of the anhydrous

ammonia in agricultural production.

My numbers say that anhydrous ammonia per ton has risen from about $140 a ton to about $270 a ton over the last year. Farmers

are going to find it very difficult to absorb energy costs and fertilizer costs within the same growing season.

My fear is that we are on the brink of another financial disaster

in agriculture, and I don’t want to sound just like the issues that

farmers always bring to the table, so I guess I want to draw some

potential solutions to that. Eric Vaughn is probably one of the most

adequate spokesmen for the ethanol industry, and so I yield that

he has given most of that information to you over the past.

But 99-percent of the farmers tell us they find it so ironic that,

as big energy users, we can’t find the opportunity to use more and

more corn in the production of ethanol. And I think you have stated in the past that there is probably higher cost to a barrel of oil

than maybe the $30 that we recognize.

Also, there is an opportunity to expand the production of natural

gas, and whether it is additional drilling here in the United States

or importing additional reserves of natural gas, we should do everything possible in that vein.

Expand the market for biodiesel. Biodiesel and ethanol together

helps. As Eric mentioned, we are not going to solve the energy

problem with using agricultural products, but we do play a larger

role in that.

Expand the breaks for farmers to adopt new technology that uses

less energy. One that hasn’t been mentioned here today is more research and understanding of carbon sequestration. Can we pay

farmers a green payment, or can we pay them to store carbon and

help in the aspect of cash flow?
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And then, as was mentioned here by the last testimony, an aspect of sulfur in diesel, I believe that you can find some advocates

who will work with you in saying that maybe 15-ppm is too low,

and it is going to transfer some additional costs onto production agriculture that we can’t bear at this point in time.

There is a number of other areas. I would like to also mention

that Senator Conrad’s question of what do we tell the American

farmer out there, I haven’t heard the right answer yet this morning

in Secretary Richardson’s or Schlesinger’s comments, with all due

respect.

There is also one other way, Senator, that we address the problems of higher energy costs for agriculture. We can do it in the energy arena, but we also have to do it in the aspects of farm policy

that provide farmers the capability of tolerating periods of higher

energy prices, and we are going to have to look at some alternatives or some additions or improvements on foreign policy that

will add to the ability of farmers to pay for higher energy.

Thank you for the time, and I appreciate the opportunity.

[The prepared statement of Mr. Hutchens can be found in the appendix on page 134.]

The CHAIRMAN. Thank you very much, Mr. Hutchens.

Before I call upon you, Mr. Horvath, let me mention that on the

Senate floor I have just been advised that the Senate Democrats

have objected to a committee’s continuing to meet. They have got

that right. Therefore, we have been advised that the hearing

should conclude. So the formal part of the hearing will conclude.

I will ask the recorder to cease recording.

[The prepared statement of Mr. Horvath can be found in the appendix on page 138.]

[The prepared statement of Mr. Eischens can be found in the appendix on page 144.]

[Whereupon, at 12:10 p.m., the Committee was adjourned.]

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DOCUMENTS SUBMITTED FOR THE RECORD

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