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52–393 2009

S. HRG. 111–171 

OIL AND THE ECONOMY: THE IMPACT OF RISING 

GLOBAL DEMAND ON THE U.S. RECOVERY 

HEARING 

BEFORE THE

JOINT ECONOMIC COMMITTEE 

CONGRESS OF THE UNITED STATES 

ONE HUNDRED ELEVENTH CONGRESS 

FIRST SESSION 

MAY 20, 2009 

Printed for the use of the Joint Economic Committee 

( 

(II) 

JOINT ECONOMIC COMMITTEE 

[Created pursuant to Sec. 5(a) of Public Law 304, 79th Congress] 

HOUSE OF REPRESENTATIVES 

CAROLYN B. MALONEY, New York, Chair 

MAURICE D. HINCHEY, New York 

BARON P. HILL, Indiana 

LORETTA SANCHEZ, California 

ELIJAH E. CUMMINGS, Maryland 

VIC SNYDER, Arkansas 

KEVIN BRADY, Texas 

RON PAUL, Texas 

MICHAEL BURGESS, M.D., Texas 

JOHN CAMPBELL, California 

SENATE 

CHARLES E. SCHUMER, New York, Vice 

Chairman 

EDWARD M. KENNEDY, Massachusetts 

JEFF BINGAMAN, New Mexico 

AMY KLOBUCHAR, Minnesota 

ROBERT P. CASEY, JR., Pennsylvania 

JIM WEBB, Virginia 

SAM BROWNBACK, Kansas, Ranking Minority 

JIM DEMINT, South Carolina 

JAMES E. RISCH, Idaho 

ROBERT F. BENNETT, Utah 

NAN GIBSON, Executive Director 

JEFF SCHLAGENHAUF, Minority Staff Director 

CHRISTOPHER FRENZE, House Republican Staff Director 

(III) 

C O N T E N T S 

OPENING STATEMENTS OF MEMBERS

Hon. Carolyn B. Maloney, Chair, a U.S. Representative from New York .......... 1 

Hon. Kevin Brady, a U.S. Representative from Texas ......................................... 2 

Hon. Michael Burgess, MD, a U.S. Representative from Texas .......................... 15 

WITNESSES

Statement of James D. Hamilton, PhD, Professor, Department of Economics, 

University of California, San Diego, California ................................................. 5 

Statement of Daniel Yergin, PhD, Co-Founder and Chairman of Cambridge 

Energy Research Associates, Washington, DC. ................................................. 6 

SUBMISSIONS FOR THE RECORD

Prepared statement of Representative Carolyn B. Maloney ................................ 26 

Prepared statement of Representative Kevin Brady ............................................ 26 

Prepared statement of James D. Hamilton ........................................................... 27 

Report titled ‘‘Causes and Consequences of the Oil Shock of 2007–08’’ ...... 30 

Prepared statement of Daniel Yergin .................................................................... 101 

Prepared statement of Representative Michael Burgess ...................................... 114 

(1) 

OIL AND THE ECONOMY: THE IMPACT 

OF RISING GLOBAL DEMAND ON THE 

U.S. RECOVERY 

WEDNESDAY, MAY 20, 2009 

CONGRESS OF THE UNITED STATES, 

JOINT ECONOMIC COMMITTEE, 

Washington, DC. 

The committee met at 10 a.m., in Room 210, Cannon House Office Building, Hon. Carolyn B. Maloney (Chair), presiding. 

Senators present: Brownback. 

Representatives present: Maloney, Hinchey, Snyder, Brady, 

and Burgess. 

Staff present: Gail Cohen, Nan Gibson, Colleen Healy, Marc 

Jarsulic, Andrew Wilson, Rachel Greszler, Lydia Mashburn, Jeff 

Schlagenhauf, Jeff Wrase, Ted Boll, and Chris Frenze. 

Chair Maloney. The committee will come to order, and the 

Chair recognizes herself for 5 minutes for an opening statement. 

OPENING STATEMENT OF HON. CAROLYN B. MALONEY, CHAIR, 

A REPRESENTATIVE FROM NEW YORK 

Good morning, I would like to thank our distinguished experts 

for agreeing to testify this morning on the impact of last year’s oil 

price shock on the U.S. economy and the potential effect of higher 

oil prices on our economic recovery. 

This hearing is timely because the traditional start of the summer driving season gets underway this weekend. The most recent 

estimate from the Energy Information Administration is that regular gasoline prices will average $2.21 a gallon over the summer’s 

driving season and that diesel fuel prices will be $2.23 a gallon, a 

far cry from the $4 or more a gallon for gasoline or diesel that drivers faced last summer. What a difference a year makes. 

Although drivers will face much lower pump prices than they did 

last summer, crude oil and gasoline prices have ticked up recently. 

Indications of ‘‘green shoots’’ in the U.S. economy and fiscal stimulus measures adopted in China have already begun to nudge oil 

prices higher as expectations for greater demand rise. 

Right now it looks like the surplus capacity of crude oil production is large enough to prevent an immediate repeat of last year’s 

price spike. But today we want to explore with our witnesses the 

short-term policies that will help to avoid derailing our recovery 

and long-term policies for sustainable, economic growth. 

While it would have been better for the last administration to 

have started on a sensible energy policy earlier in the decade, the 

2 

current decline in global demand for oil has given us some breathing room to change course. 

Yesterday’s announcement by President Obama ushering in 

tougher national fuel efficiency standards is truly an historic opportunity to reduce our dependence on oil. Higher standards mean we 

will get further on every tank of gas. 

The American Recovery and Reinvestment Act also included policy changes that will help in the long run, such as investment in 

intercity light rail and funding and loan guarantees for research 

into advanced technology for vehicles and other innovative technology. These investments will help the United States develop a 

modernized transportation system with efficient alternatives to 

automotive travel. 

Last year’s oil shock showed us that right now it takes a very 

large increase in gasoline prices to reduce our consumption of oil. 

Part of the reason is because many consumers have no alternatives 

to their gasoline-powered cars. 

In the long run, energy policies that increase alternatives to 

using a gas-fueled car, whether they are different modes of transportation or alternative fuels for cars, will help minimize the impact to the economy of a rise in the price of oil. 

Energy efficiency, which allows us to use less energy for the 

same activity, is an important part of the solution. Smart grid technology will also allow us to use our electric transmission grid more 

efficiently. 

In testimony before this committee last year, Dr. Yergin observed 

that the most recent oil shock underscores the need, and I quote, 

‘‘to encourage timely investment across the energy spectrum.’’ I am 

optimistic that we are moving in that direction and towards a longterm solution to reducing our dependence on oil. 

I look forward to the testimony today and am pleased to recognize my colleague, Congressman Brady, for 5 minutes or as much 

time as he may need. 

[The prepared statement of Representative Maloney appears in 

the Submissions for the Record on page 26.] 

OPENING STATEMENT OF HON. KEVIN BRADY, A U.S. 

REPRESENTATIVE FROM TEXAS 

Representative Brady. Thank you, Chairwoman, for hosting 

this hearing. I think it is an important topic, and I join with you 

in welcoming the witnesses testifying before us on oil prices and 

the economy, and the way forward. 

Oil prices have plunged, as we know, during the recession but 

have started to increase more recently due to greater optimism 

about the economic outlook. And while some of this recent optimism may be questionable, given the latest data on retail sales and 

business investment, it is reasonable to believe the economy will be 

in recovery by next year, especially given the huge injections of 

money and credit by the Federal Reserve. 

The key challenge to energy policy now, given the long lead time 

involved, is the need for investment in exploration and production 

to meet oil demand over the longer term as opposed to an oil price 

spike in the short term. Nonetheless, as the international economy 

recovers, it is likely that oil prices will increase. 

3 

In considering this issue, it is important to note that state-controlled oil companies in OPEC and Russia and others account for 

three-quarters of the world’s oil reserves. These state-controlled 

companies, not private firms, are behind periodic attempts to manipulate the global oil market and exert monopoly power to hold 

up prices. Whatever the lasting success of these efforts, there is little doubt that state-controlled oil companies are a major and growing force in the world oil market. 

There are also other state-to-state projects underway, such as the 

effort to arrange financing for the Brazilian national oil company 

with the Chinese government. 

These efforts, whether they are undertaken with Iran or Venezuela, are not only an attempt to guarantee energy supply but 

also to guarantee energy work by suppliers and others with these 

foreign governments, and those jobs replace U.S. jobs. 

OPEC’s cuts in oil production hold up prices, only one of the 

many reasons we should want to encourage oil production in North 

America. The U.S. and Canada together hold 15 percent of the 

world’s proven oil reserves, 200 billion barrels, and their resource 

potential is much greater. The U.S. can and must do much more 

to expand domestic production of oil as well as natural gas. 

Technologies, such as hydraulic fracturing, seismic imaging enhanced by geopositioning satellite systems and steerable drilling 

with gyroscopic guidance systems, together can significantly expand economically recoverable oil and gas reserves. Steerable drilling allows precision drilling along variable trajectories without 

repositioning the drilling rig, which is particularly beneficial offshore. And furthermore, when horizontal drilling was combined 

with fracturing in the early years of this decade, large volumes of 

natural gas became recoverable from rock formations that previously had been regarded as depleted or could not be tapped at all 

with conventional methods. 

Unfortunately, instead of encouraging U.S. oil and gas production, the Federal Government has placed excessive limits on exploration drilling, include effectively making offshore drilling impossible in many areas. 

The administration would further penalize oil and gas production 

in the United States and would offshore U.S. energy jobs by the imposition of a variety of new energy taxes. 

The Treasury Department justifies these tax increases by arguing that the lower taxation under current law ‘‘encourages overproduction of American oil and gas, and is detrimental to the longterm energy security,’’ at least partly because it boosts ‘‘more investment in the oil and gas industry than would occur under a neutral system.’’ 

With all due respect, it is a policy designed to suppress traditional U.S. oil and gas production, and it is absurd. The Treasury 

notes that the lower taxation under current law is also inconsistent 

with the administration’s policy of reducing carbon emissions, encouraging the use of renewable energy sources through a cap-andtrade program. 

In other words, at a time when we are nearly 60 percent dependent on foreign oil and we need dramatic new investments in energy 

throughout the world, our government is proposing policy doing 

4 

just the opposite. Thus it appears that the counterproductive nature of the administration proposal is not an unintended consequence, but the result of deliberate design. 

Congress should block these tax increases precisely because they 

would undermine oil and gas investment and production as the 

Treasury itself concedes. These traditional sources of energy are 

the bridge we need to the future of renewable energy. 

We are all in favor of seeking more renewable energy sources, so 

long as they are economically viable. However, we should not be 

seeking to suppress traditional energy production that we know is 

economically viable. 

According to the Energy Information Administration, the truth is 

that oil, gas and coal provide most of the energy in the U.S. economy and will continue to do so for many years. Tax increases targeting our U.S. energy production, including cap-and-trade tax, will 

weaken the economy, undermine U.S. competitiveness and lower 

American living standards for decades to come. 

I yield back. 

[The prepared statement of Representative Brady appears in the 

Submissions for the Record on page 26.] 

Chair Maloney. Thank you very much. 

Chair Maloney. Now I would like to introduce our distinguished 

witnesses. Dr. James Hamilton has been a professor at the University of California, San Diego, since 1992. He served as Chair of the 

Economics Department from 1999 to 2002. 

He is the author of ‘‘Time Series Analysis,’’ the leading text on 

forecasting and statistical analysis of dynamic economic relationships. He has done extensive research on business cycles, monetary 

policy and oil shocks and has been a research adviser and visiting 

scholar with the Federal Reserve system for 20 years. 

Dr. Hamilton received his PhD in economics from the University 

of California at Berkeley. 

Dr. Daniel Yergin is chairman of IHS Cambridge Energy Research Associates. 

Dr. Yergin received the Pulitzer Prize—congratulations—for his 

work, ‘‘The Prize: The Epic Quest for Oil, Money and Power,’’ which 

appears in a new updated edition in 2009. 

He is a trustee of the Brookings Institution; a director of the 

New American Foundation and of the U.S.–Russia Business Council and on the advisory board of the Peterson Institute for International Economics and of the MIT Energy Initiative. 

Dr. Yergin received his B.A. from Yale University and his PhD 

from Cambridge University, where he was a Marshall Scholar. 

Thank you very, very much, and we are going to begin with Dr. 

Hamilton and end with Dr. Yergin. Thank you for being here, for 

your research, for your time, and for your testimony today. Thank 

you. 

Dr. Hamilton. 

5 

STATEMENT OF JAMES D. HAMILTON, PhD, PROFESSOR, DEPARTMENT OF ECONOMICS, UNIVERSITY OF CALIFORNIA, 

SAN DIEGO, CALIFORNIA 

Dr. Hamilton. Thank you very much, Chairman Maloney and 

Vice Chair Senator Schumer, Ranking Member Representative 

Brady, for holding this hearing. 

In the OPEC oil embargo, the Iranian Revolution, the Iran-Iraq 

war and the first Persian Gulf War, we saw big increases in the 

price of oil, and each time it was followed by an economic recession. 

In 2007–2008, the price of oil increased by more than it did in 

any of those historical oil shocks. And, in my opinion, there is no 

question that the oil shock of 2007–2008 made a material contribution to the current economic recession. 

So why did it happen? Declines in production from mature oil 

fields in the North Sea and Mexico, disruptions in Nigeria, and production cuts from Saudi Arabia were all factors that prevented 

world oil production from increasing at all between 2005 and 2007. 

And although production stagnated, world demand for petroleum 

continued to boom. 

World GDP was up more than 10 percent in 2006 and 2007, and 

if there had not been a big increase in the price of oil, with that 

kind of income growth, we would have anticipated very big increases in petroleum consumption. 

Even with the price increases, oil consumption from China was 

up almost 1 million barrels a day, and yet no more oil was being 

produced. That meant something had to change to persuade the 

rest of us to reduce our consumption, despite the growing incomes. 

The historical experience has been that even very large oil price 

increases cause relatively little immediate response on the part of 

consumers. And, the experience between 2004 and 2006 was that, 

if anything, consumers were responding even less than those small 

historical estimates to the price increases that had come so far. I 

think the main reason a lot of us were ignoring those initial price 

increases is because we could afford to. 

The energy expenditures as a share of total consumption expenditures had been 8 percent in 1979 and had declined to 5 percent 

in 2004. But as the price of gasoline continued to go up and 

reached $4 a gallon, that expenditure share was boosted back up 

to 7 percent, a point at which nobody could have ignored the price 

of energy, then we started to see some dramatic changes. 

Unfortunately, those quick changes in consumption spending can 

be very disruptive for key sectors of the rest of the economy. A 

prime example would be the U.S. auto sector. While sales of fuelefficient imports were going up, the sales of the domestically manufactured models, particularly the SUVs, were plunging, and the lost 

production and sales in the U.S. auto sector made a significant negative contribution to GDP and employment. 

More generally, the decline in consumer sentiment and overall 

consumer spending that we saw in 2007–2008 were very similar to 

the pattern that we saw in those earlier historical oil shocks. 

Americans purchase about 140 billion gallons of gasoline each 

year, and that means that when the price went from $2 to $4 a gallon, that took away $280 billion at an annual rate from spending 

6 

power. The declines we saw in consumption are very much in line 

with that. 

Now, granted, there were other problems for the economy besides 

just the oil shock, housing being at the foremost, but housing was 

actually making a bigger reduction to GDP in the year before the 

recession than it did in the first year of the recession. 

Something else happened to turn that slowdown from housing 

into an outright decline in overall income and employment, and, in 

my opinion, these factors I have pointed to, in terms of effects of 

the oil shock, are a key aspect of that. 

Now, furthermore, there is an interaction between what was 

going on with oil markets and what was happening in housing. 

Lost jobs, lost income, increased commuting cost to the exurbs were 

all factors further depressing house prices, further aggravating 

foreclosures. And eventually in the fall of 2008, we reached a point 

where those financial events were sufficiently severe that we entered a very serious new phase in the recession that we are still 

struggling with. 

Now would we have had those problems eventually even without 

the recession, I don’t know. But one thing I know for sure is that 

those problems were made significantly worse by having gone 

through a year of recession, and the fact that we were in a recession, rather than slow growth, was very much influenced by oil 

prices. 

[The prepared statement of James D. Hamilton appears in the 

Submissions for the Record on page 27.] 

[The report titled ‘‘Causes and Consequences of the Oil Shock of 

2007–08’’ appears in the Submissions for the Record on page 30.] 

Chair Maloney. Thank you very much. 

Dr. Yergin. 

STATEMENT OF DANIEL YERGIN, PhD, CO-FOUNDER AND 

CHAIRMAN OF CAMBRIDGE ENERGY RESEARCH ASSOCIATES, WASHINGTON, DC. 

Dr. Yergin. Thank you. I want to thank you, Chair Maloney, 

Ranking Member Brady and the committee for the opportunity to 

join you this morning. 

Amidst your very complex agenda, the committee is to be commended for taking up this issue of energy during a period of lower 

prices, when attention tends to shift. For these issues of energy are 

integral to our Nation’s economy, to our well-being, our security 

and the safeguarding of our environment. 

Chair Maloney, you said, what a difference a year makes, and 

that is certainly the case here. 

And, Congressman Brady, you emphasized the importance of investment, and what I want to try and do in my testimony this 

morning is talk about the importance of not having an either/or approach to energy. 

When I had the opportunity to testify before this committee a 

year ago, oil was on that very sharp, upward trajectory. I checked, 

it was 16 days after the hearing that oil hit $147.27 a barrel. And 

if you remember, at that time people were saying oil was going to 

be $200 or $250 or $500 a barrel. Although it seemed to us, when 

7 

we looked at it, that we really were near a break point, that the 

prices were going to come down. 

It is noteworthy that it was on July 11th of 2008 that we hit that 

high point. That was 2 months, more than 2 months, before the collapse of Lehman Brothers when we went from moral hazard to that 

frightening world of systemic risk when many thought the financial 

system might actually collapse. 

I think Professor Hamilton has made clear that it was not only 

the failure of the credit system that led to the deepest recession 

since the Great Depression, but that what happened with commodity prices, particularly oil, was extremely important. After all, 

the automobile industry was knocked flat on its back, not by the 

collapse of Lehman Brothers but by what happened at the gasoline 

pump. 

So, in my testimony, I try and address three questions. One, how 

did we go from the demand shock of the stronger economy to the 

current recession shock? 

The answer is that oil prices are, among other things, a barometer of the world economy, so that the number one reason is we 

went from what was called the best global economic growth within 

a generation to the deepest recession since the Great Depression. 

And we see it in many different indicators. Oil demand today on 

a global basis is back to a pre-2005 level. In April, U.S. oil demand 

was lower than it had been in any April since 1996, 13 years ago. 

But the question on the mind of the committee is, what happens 

in the future? What are the prospects for another shock? 

And we are now in what we call the Long Aftershock; we are seeing the effects of the price collapse and what happened to demand. 

And when we look at that, we look at it in terms of what is called 

spare capacity, which is a security cushion that we rely upon. 

And today, in the global oil market, we have about 6.5 million 

barrels a day of spare capacity. This is a very large number. The 

last time we had this big a cushion was in 1988. 

Compare that to 2005, when prices were headed up, when that 

spare capacity was only 1 million barrels a day—very tight market 

ready for a price shock. This cushion we have now, and it is noteworthy, is equivalent to the total exports combined of Iran, Venezuela and Nigeria. In other words, that takes some of the geopolitical risk out of the oil market. 

But what’s going to happen in the future? 

By the way, we are looking at inventories, too. They are almost 

at their top levels. 

But when we look at the future, it goes back to Congressman 

Brady’s remarks, out of the 15 million barrels a day of new supply, 

roughly, that we would have expected to come on line on a global 

basis between now and 2014, about half of that, 7.6 million barrels 

a day, is at risk of delay, postponement, cancellation. 

So as the economy recovers, we will see that spare capacity 

shrink. And, therefore, we will start to become vulnerable to future 

shocks, and I can assure you that, 3 to 5 years from now, we will 

be looking at a very different oil market again, and this committee 

will be looking, as it does, with much concern about, what are the 

risks to our economy? 

8 

The third part of my testimony is looking at one important element of energy security. We just this week have done a new study 

called ‘‘Canadian Oil Sands: Finding the Right Balance.’’ 

We don’t think about it this way very often in this country, but 

Canada has the second largest oil reserves in the world. Canada 

is the largest source of oil imports in the United States, almost 20 

percent. And the oil sands have seen very substantial growth because of technological innovation. 

There are two types of questions that hang over it, though. One 

is the investment risk, a large risk. Many new projects are being 

postponed because of cost. And secondly, there is a lot of debate 

about the CO2 impacts and oil sands coming into the United 

States. We looked at that very carefully. And if you look at it from 

the production of oil sands right through our automobile tail pipes, 

it is about 5 to 15 percent more CO2, a manageable number, a 

number that needs to be brought down, but it is within the range. 

And so I think, when we think about our future energy security, 

energy independence, all of those kinds of questions, we really have 

to pay very close attention to Canada. 

The point I would like to leave the committee with is the reality 

of cycles. This recession will end. Maybe it is already ending. 

We have to think about the energy future. Major initiatives have 

now been launched by the U.S. Government to help further diversify and strengthen our energy system. We see it in smart grids in 

transmission, electric batteries, renewables and alternatives. There 

is also the opportunity to make real advances in energy efficiency. 

That is wholly welcome. 

And I am so struck that there is an embrace of energy efficiency 

all across the energy spectrum in a way that we have never seen 

before. We are going to see, I think, major impacts that will come 

from sustained spending on energy research and development. 

We talk so often in energy about diversification, I think we can 

say that the concept of diversification is, itself, being diversified, 

and that is a major contribution to our security. 

But—and here is the, ‘‘but’’ lead time and scale are very important. We use in this country the equivalent total energy of 46 million barrels a day of oil. 

So even if we start to electrify our automobile fleet, that will take 

time. Even as we have more efficient automobiles, and we have 

heard the announcement yesterday from the President that will accelerate that, it will take time. 

Meanwhile, we will see the growth in oil demand, particularly 

coming from emerging markets. We are already there. It is very 

striking that over the last 3 months, each of the last 3 months, 

more new cars have been sold in China—in China—than the 

United States, something that we would not have really imagined 

5 years ago. 

So when economic growth resumes, so will growth in energy demand. And that will put energy security back on the agenda, and 

given the lead times, our policy decisions need to look longer term 

to protect the American economy and the American consumer. 

And that gets me to my very final point. As part of that longerterm view, we need to get beyond the either/or energy debate. It 

is not one or the other. 

9 

We need to take a more ecumenical approach, ensuring that 

there is a combination of conventional energy, renewable and energy efficiency, alternatives—all developed with appropriate environmental and climate change consideration. 

Consider that today conventional energy, oil, natural gas and 

coal supply over 80 percent of our total energy. There is no single 

answer to the energy needs of our $14 trillion economy. Oil itself 

is about 40 percent of our total energy. That makes clear the importance of oil and the evolution of oil to our economy and security 

in the years ahead and to the global economy of which we are so 

much part. 

That is precisely why the focus of this committee today is so significant. Thank you. 

[The prepared statement of Daniel Yergin appears in the Submissions for the Record on page 101.] 

Chair Maloney. Thank you so much. 

Dr. Hamilton, in your opinion, can an increase in domestic production have a significant long-term effect on the price that the 

U.S. pays for oil? Can we drill our way out of this problem? 

Dr. Hamilton. Well, there is no question, if we had had additional oil brought to the market last summer, it would have been 

helpful. Those were unusual market conditions, as Dr. Yergin was 

pointing out in terms of the very, very, low excess capacity. 

But I would further emphasize that it is a global market for oil. 

And had there been no increase in the price of oil from 2005 to 

2008, I could easily see a need for another 5 million barrels a day 

on the world market. 

And even the most optimistic assessments of what we might be 

able to do with domestic production wouldn’t make a dent in that. 

And even if they did, in a few more years down the road, with 

these levels of sales of cars from China, we would be back in the 

same boat. 

So I would very much endorse what Dan was saying about the 

need for a combination of approaches. Yes, domestic production 

would be helpful, but it is by no means a silver bullet that solves 

the problems by itself. 

Chair Maloney. Well, what should we do, or what steps should 

we take? Both of you have touched on it in your testimony. But if 

you could elaborate more on how to reduce the impact of oil price 

increases in the long run, and during this time when we seem to 

have a little bit of a breathing space, what is the most efficient way 

that we can use our resources to move us in the right direction for 

energy independence? 

Dr. Yergin and Dr. Hamilton, if both of you would comment. 

Dr. Yergin. When you look at it, we import about 56, 57 percent 

of our oil today. If you take that in terms of our total energy, of 

course, it is a smaller share of that. 

I so often think when people use the phrase energy independence, they really mean energy security, so that our economy and 

consumers are not vulnerable to future shocks. And I think it is a 

diversified approach. 

Obviously, we are seeing a step up in a focus on the longer term, 

which particularly means energy research and development, so 

10 

that young scientists can really make long-term careers there. And 

so that, I think, is part of the picture. 

Certainly, what we are seeing on the renewables and alternatives is very significant. But, if you say what has been the biggest innovation in energy in the United States in the last 2 years, 

you pause and you say, well, it is actually what is happening in 

natural gas. 

The revolution in unconventional gas is really a big deal. It has 

been kind of piecemeal so it hasn’t gotten a lot attention. It is a 

domestic resource. That means that actually we have the capacity 

to meet more of our needs for natural gas, domestic natural gas. 

I think that is part of the picture. 

And, clearly, if we import 56 percent of our oil, we produce 44 

percent, and so continuing to maintain domestic production, there 

is no single number there, but it all adds up. 

Chair Maloney. A number of people suggested that speculation 

contributed to the size of the oil price spike that we suffered. 

Can you estimate how much of the oil price increase was the result of speculation, if any, and would you advocate policy action to 

curb speculation, such as increased margins for purchase of oil future contracts? 

Dr. Hamilton and Dr. Yergin, could you comment on speculation 

and its contribution? 

Dr. Hamilton. I know a number of people have proposed numbers for what was the contribution speculation; though in my opinion, there isn’t a sound bases for making that kind of calculation. 

I would emphasize that whatever you want to think about in 

terms of financial markets, there is ultimately a physical commodity that is involved here. There is a physical commodity produced and consumed. 

And if the quantity that is produced is bigger than the quantity 

that is consumed, that ought to go into inventories. What we saw 

happening to inventories in the early part of 2008 was that they 

were well below normal rather than above normal. So I think it is 

hard to argue that the price at the beginning of 2008 was one at 

which there was an excess supply. 

Now, I think that it did come to be the case, that, obviously, the 

movement of the price in the summer of 2008 was overshooting. 

People were underestimating the degree of these adjustments that 

people did start to make when that expenditure share got higher. 

I think there are some changes we could make to financial markets to make sure we limit the exposure to risk of institutions that 

shouldn’t be taking risk, and making sure that there are adequate 

margin requirements for trading on organized exchanges. I am in 

favor of all of those measures. 

But I think we shouldn’t be blaming financial speculators for giving us a message we didn’t like. And the basic message is, the 

world wanted more oil, and there wasn’t more oil available for it. 

Chair Maloney. Thank you. 

Mr. Brady. 

Representative Brady. Thank you, Madam Chairman. 

I think Dr. Yergin’s point is a great one, which is it is not an 

either/or proposition. I think we find ourselves in the sound byte 

11 

role too often, whether it is ‘‘we can’t drill our way out of it’’ or 

‘‘drill, baby, drill,’’ probably two extremes in this. 

It really is an all-of-the-above solution, energy efficiency, investments in renewable energy and then traditional energy that can be 

that bridge until we get to that renewable point. 

A couple of thoughts, one, the ecumenical approach you suggest, 

Dr. Yergin and Dr. Hamilton, I think, are excellent. One of the 

myths is that demand for oil and gas is slowing, but in fact it is 

growing. The International Energy Agency World Energy Outlook 

estimates that the demand for traditional oil will grow from 85 million barrels a day, as it is currently, to 106 million barrels a day 

by 2030. And much of this, of course, will be in the developing 

countries. 

So the thirst for oil, even with all of our progress from renewables will continue to grow. There is also a myth that we are running out of energy. The truth of the matter is that our reserves are 

not shrinking; they are growing. We are seeing this in areas like 

Brazil. But we also often hear people say America consumes 25 

percent of the world’s energy; only has 3 percent of the proven reserves. This is misleading for a couple of reasons. Your testimony 

shows that Canada and the U.S. together have 15 percent of the 

reserves. And, secondly, reserves are growing by the day. Technology has done that. In the U.S. alone, our reserves have doubled 

since the 1970s. 

The problem is we have blocked away so much of our opportunities to explore. You don’t know till you get in there what is there. 

That is also, I think, causing real supply problems globally that 

could have provided, perhaps, that leeway to keep prices from spiking, which is why the administration’s proposal that we are overproducing here in the United States is just crazy. It is, to be kind, 

I think, naive and maybe bordering on the ignorance of our world’s 

global supply. 

So my question has to deal with what types of investments 

should we be making now to ensure that there is adequate supply? 

It seems to me this administration is making a keen investment 

in renewable energies. 

Private companies, though, are outpacing the U.S. Government’s 

investment by about 5–1. Private business is making key investments in energy efficiency. Our commercial buildings are 30 percent more efficient than they were just a few years ago. 

So my question is, what types of investments, in addition to renewable energy, what types of investments in traditional energy 

should U.S. be making, and what types of policy changes should we 

be making to be able to access the oil sands of Canada, for example, which have been sort of given a cold shoulder recently by this 

government. 

What types of investments in policy should we be taking and furthering today to ensure we don’t have that price spike in the future? 

Dr. Yergin. 

Dr. Yergin. There are a range of answers to that. I think that 

one thing, if we go back to diversification as the starting point, it 

is in our interest to see a lot of different forms of energy being developed around the world and to be encouraged. 

12 

When Winston Churchill made the historic decision to convert 

the British Navy from coal to oil just before World War I, his critics 

said, well, you are going to be dependent upon oil from Iran, Persia. And his answer was, safety in oil lies in variety, and variety 

alone. 

So I think some of it is to encourage; some of it is to not put obstacles in the way of things. We should give clear signals to Canadian oil sands or to Brazil in terms of developing its offshore, that 

we would like to see that happen. I think those are kinds of the 

signals. 

There is a big research agenda. We know that the questions of 

clean coal have to be addressed on a global basis, particularly when 

you look at China and India. It is also a reasonable development 

of resources in the United States. 

As I mentioned before, the development of unconventional natural gas is really a big deal for our country, but you need to develop those resources, and I think that includes the question of offshore exploration in a reasoned, environmentally careful manner as 

part of the agenda. 

Representative Brady. Thank you very much. 

Dr. Hamilton, do you want to weigh in? 

Dr. Hamilton. To that, I would just add I think nuclear technology is a known technology with some known problems, but it 

has to be part of the solution. Investments are needed there. 

And I would also emphasize that to make use of some of these 

alternative sources, such as wind, some significant investment is 

required in the electrical transmission infrastructure to get the 

power from where the wind is to where the people are. 

Representative Brady. I agree, Texas leads the Nation in wind 

power. The trick is making it reliable, creating a transmission grid, 

and having natural gas, for example, to be that safety net. 

I would note, too, we have a member of the Energy and Commerce Committee here today, but I think the new cap-and-trade 

bill devotes 58 pages to light bulbs and 2 sentences to nuclear energy. It probably ought to be the other way around. 

I yield back. 

Chair Maloney. Thank you. 

Mr. Hinchey. 

Representative Hinchey. Thank you very much, Madam 

Chairman. 

Thank you both. I very much appreciate everything that you 

have said and what you have written in your statements and your 

involvement in those issues. 

Dr. Yergin, I very much appreciate that wonderful book that you 

wrote quite a while ago and is now out in a new version. I am very 

interested in looking at the new version and seeing what additional 

information you may be providing there. I am sure there may be 

some that is very interesting. 

The issue that we, are dealing with here is very complex, very 

difficult and I think, in some ways, very dangerous. The amount 

of oil on this planet is limited. 

We may not know precisely how much it is, but we do have a 

very good idea about how much it is. 

13 

There is very little of it that we are not aware of and that we 

may be able to obtain. And some of that, that we may be able to 

obtain, is very complicated. 

For example, the oil in Canada. Canada has a huge amount of 

oil, but obtaining that oil, getting it, is not as easy as it is in drilling in the Middle East, where it is much more accessible and much 

more easy to get out. It is much more expensive to pull it out in 

Canada, and the consequences of pulling it out can be complicated, 

can be dangerous, can have some issues dealing with the environment that may be consequential in some ways. 

Same thing with natural gas here in the United States, a lot of 

activities going on to produce natural gas here in the United 

States, but in some ways in which it is being done as a result of 

the change in those regulations, as a result of the 2005 energy policy bill that passed this Congress, which stopped the examination 

of this kind of activity in order to prevent the natural resources, 

particularly water. All of that is very complicated, could be very, 

very dangerous. 

So this situation that we are dealing with is something that we 

need to spend an awful lot of time on and come up with some very 

good responses. 

The amount of oil that is being consumed on this planet keeps 

growing, even though the amount of oil that we have on this planet 

remains what it is, remains the same. 

As you were pointing out, the increase in automobiles in China, 

which has a population of about 1 billion people, is growing up 

very, very dramatically. That is likely to also grow in other places 

like India, where there is another 1 billion population. 

So the impact on the availability of oil is going to continue to increase dramatically. And so, therefore, the price will continue to go 

up. We are seeing that price go up now in spite of the fact that the 

economy globally is still in a very difficult set of circumstances; the 

price of a barrel of oil has gone up. The price of a gallon of gasoline 

has gone up here in the United States and elsewhere. So this is 

something that is very, very complicated. 

We are importing now, something in the neighborhood of like 70 

percent of the oil that we use, that we use in this country, about 

70 percent is coming out from someplace else. 

We produce about 6 percent of total oil, but in terms of what is 

known, we hold about 2 percent of the known oil reserves around 

the world. So we are impacting on our known oil reserves in a very 

dramatic way, which is going to run it out rather quickly, unless 

we are wise enough to get ahold of this energy situation in a more 

intelligent and reasonable way. 

Now, some of the things that you talked about were alternative 

energy. You just mentioned wind energy, and I just drove through 

Pennsylvania early this week, saw a lot of those windmills up 

there, 12 of them in one particular place. 

It reminds me of what I saw in places like Amsterdam, a lot of 

windmills over there, and, as you said, Texas, and other places. 

But we need to focus on alternative energy, don’t we? What do 

you think? Do you think that we should be focusing our attention 

on alternative energy? Should we be developing solar energy? Solar 

energy is probably the most solid availability of energy anywhere 

14 

on this planet; that is the strongest source of energy. And as a 

number of people have talked about it for a long time, it gives us 

the opportunity to produce the energy we need if we could just do 

it in an effective way. 

So what can you tell us about the circumstances that we are 

dealing with and what we should be doing to reduce our dependence on fossil fuels and particularly our dependence on oil and 

changing that to a dependence on something else, maybe solar energy? 

Dr. Yergin. That is a big question. You have put a lot of different pieces together. 

As we think about it, we need to divide the picture in two parts; 

one is electricity, and then there is transportation. And at this 

point, the transportation depends upon the internal combustion engine, and I think that part of that picture is indeed a more efficient 

automobile—the direction that we are going in. That is welcome, 

and it is sort of the obvious thing to do, and it is something that 

just kind of fell off the agenda for many years. 

Wind is already becoming a substantial business. Solar is still 

quite small. They will grow as substantial businesses, but they are 

still parts of our overall mix. And, again, I go back to, we have a 

$14 trillion economy. So I say, yes, those should be encouraged, 

stimulated. 

They will become bigger, but we have to still look at where does 

most of our energy come from, and how do we deal with where we 

are going to be in the next 5 or 10 years? 

Imports, you mentioned the 70 percent number, those are the 

gross import numbers. It depends whether you look on imports in 

terms of the gross number of barrels we import, because we actually export some as we refine it and so forth, so it varies that sometimes the numbers used are 70 percent. But if you look at a net 

basis, it is 56 percent. That is still a very, very, very large number. 

We import more oil than any other country consumes. So we are 

very much integrated into that energy market. 

So the answer is that it is really all of the above when you have 

a $14 trillion economy, and we can’t afford to make mistakes. 

What we have seen, as Professor Hamilton said, is that we are 

paying a heavy price now for what happened over the last few 

years. And it was not only the credit system; it was also inadequate 

supply. 

Dr. Hamilton. I would like to underscore what Representative 

Hinchey said about the oil sands. They are a very energy-intensive 

resource. It takes a lot of energy to get oil out. It is a very capitalintensive resource. It is a very water-intensive resource, and it is 

very hard to scale up. 

So we can look at the total reserves, but to get anything other 

than a tiny fraction of that on an annual basis near term is very 

challenging, even if we ignored the environmental issues. 

So those challenges are significant, and I am very much in agreement with Dr. Yergin that we need all of the above. And it is specifically a transportation question, and we should be looking at the 

transportation infrastructure in addition as we evaluate these 

questions. 

15 

Dr. Yergin. I have great respect for Professor Hamilton, but let 

me slightly clarify it. At one point, 3 million barrels a day, it starts 

to become a significant number. When we do the numbers for 

where is the major growth in oil supply going to be in the top 15 

over the next 10 days years—what we call the ‘‘O–15,’’ Canada is 

like number 3 because of the oil sands, so it is not inconsiderable. 

There are a series of environmental, important environmental 

questions that need to be addressed, but the water issue, for instance, is mostly a winter question, not a summer question, and I 

think there is a high priority on addressing them. 

The development of the oil sands, it is a very highly regulated 

business in Canada. And, clearly, there is going to be more and 

more focus on what do you do to continue to bring down the CO2 

compared to other sources? 

So it is not to say that it is more important than some others; 

just to say that it is actually pretty important, and it happens to 

be next door to us, and it is one of the things we have to look at 

when we think of, what is the equation for our energy security, and 

where do our supplies come from. 

Chair Maloney. Thank you very much. 

Congressman Burgess for 5 minutes. 

OPENING STATEMENT OF HON. MICHAEL BURGESS, A U.S. 

REPRESENTATIVE FROM TEXAS 

Representative Burgess. Thank you. 

We are doing this hearing, the Joint Economic Committee, and 

I am also in a hearing two buildings over on the cap-and-trade bill 

that is working its way through our Energy and Commerce Committee, so it is very instructive to have this hearing this morning. 

I think, Dr. Yergin, we spent some time a year ago in our Oversight Investigations Subcommittee in Energy and Commerce about 

the speculation of the futures market and the very high prices that 

we were facing. 

Oddly enough, now we are putting ourselves in a position, the recession fixed the problem of the high prices in the oil market, and 

we may be reinstituting those high prices with our cap-and-trade 

legislation that we are working on in Energy and Commerce. 

The issue of diversification, and Representative Brady mentioned 

that there was really only scant mention of nuclear in the cap-andtrade bill that we are doing right now, the energy tax bill that we 

are doing right now. 

Nuclear does have a place, in my opinion, in whatever we do, as 

far as the Nation’s future energy armamentarium. It also seems 

like, during the run-up to this hearing that we are having in Energy and Commerce, we heard testimony from the standpoint of oil 

sands in Canada, the colocation of nuclear facilities close to the oil 

sands could, the excess energy produced with production of nuclear 

energy could in fact be used to satisfy some of these higher energy 

demands that are required for getting the tar sands. 

Is that a correct observation? 

Dr. Yergin. Representative Hinchey mentioned my book The 

Prize, and one of the lessons that I take away from it is about constant innovation in energy. The reason the oil sands are more significant now than they were 10 years ago is because of major innoVerDate Nov 24 2008 14:56 Dec 01, 2009 Jkt 052393 PO 00000 Frm 00019 Fmt 6633 Sfmt 6633 C:\DOCS\52393.TXT SHAUN PsN: DPROCT
16 

vation, and I think we see that in renewables, alternatives, all 

across the way. 

And one of the issues on the agenda is, could there be small nuclear power plants used to provide the heat for the in situ recovery 

of oil sands, and I think that is a very reasonable research question. 

I think generally what you say about nuclear power, and Professor Hamilton has mentioned it already, it is 20 percent of our 

electricity today. It is not like should we have nuclear? It is a significant part of our electricity supply. The question there, too, is, 

what kind of technological advances will make it a third or fourth 

or fifth generation part of the mix? We certainly see it happening 

in other parts of the world, and it is a carbon-free form of electricity. 

Representative Burgess. Correct, and if I have time, we will 

come back to that. 

Let me just ask a question about the, Dr. Yergin, you mentioned 

the issue of electricity, the issue of transportation. 

Now, in my part of north Texas, we actually happen to be blessed 

with one of those alternative shale formations 8,000 feet under the 

ground, the Barnett shale. And out of that type of shale, we are 

now producing a significant amount of natural gas. Our good friend 

back in Texas, T. Boone Pickens, always talks about putting our 

heavy transportation fleet on natural gas fuel as opposed to the 

diesel fuel. 

Is that a realistic outlook to be able to replace our transportation 

fuel with a compressed natural gas that we have here that is made 

entirely in America? 

Dr. Yergin. Between 1895 and 1905, we had a horse race in this 

country between the horseless carriage, what was going to power 

it? Was it going to be alcohol fuels? Was it going to be gasoline? 

Was it going to be electricity? And the internal combustion engine 

and gasoline and diesel won. Today that race is wide open again, 

and we are looking at all these difference choices. 

I think the reality is that we will probably need the natural gas 

for electric generation. I think that is—and particularly as we develop more wind, as has been pointed out, we need natural gas 

generation to back up that wind production. 

We know that our automobile industry is in a deeply wounded 

state. And, yesterday the President announced the acceleration of 

the fuel efficiency standards. I think there are only so many things 

that the automobile industry can be asked to do at the same time. 

And it seems to me, what we are saying is, become more efficient; that over here are hybrids; here, let’s see what can be done 

with electric batteries. And that is a pretty big agenda for an industry that is very short on resources. 

Representative Burgess. And, yet, if 20 percent nuclear is significant, no question about it, there is a big nuclear facility not far 

from my district down in Comanche Peak, Texas, but I rather suspect the size of that could be significantly increased, and the barriers to doing that have always been the regulatory aspects and the 

environmental impacts, so that it seems as if we could streamline 

some of that process and allow colocation of next-generation nuVerDate Nov 24 2008 14:56 Dec 01, 2009 Jkt 052393 PO 00000 Frm 00020 Fmt 6633 Sfmt 6633 C:\DOCS\52393.TXT SHAUN PsN: DPROCT
17 

clear facilities on the sites where we are already generating nuclear power, so there is not the siting issue. 

More of our base load for electricity could be generated by nuclear, thus freeing it up for transportation. I agree that wind is not 

a stable enough source. Certainly in Texas where there are high 

energy demands on a hot day, the wind isn’t blowing, and you need 

natural gas right now for those plants to supply the energy required for air conditioning. 

But if you were able to take care of more of the base load with 

nuclear; 20 percent is significant, but what if we could bring it to 

30, 35 or 40 percent? That would certainly free up more of the natural gas to be used for our transportation sector. 

Dr. Yergin. Right. I think the challenge for nuclear right now 

is our, as our electricity demand grows, will nuclear stay at 20 percent? Will it drift down? We have seen these nuclear power plants 

that used to operate at 55 or 60 percent capacity now at 85, 90 percent. 

There are a number of, as you know, applications for new nuclear power plants, and it does seem that the process has been 

streamlined. There is still risk, but a number of people want to do 

it. 

But I think what you say is most likely that those plants will be 

colocated next to existing nuclear power plants. And, again, it is 

part of the mix. 

Of course, what has also happened over the years is we have lost 

a lot of our capacity to have a nuclear industry, and that business 

now has become globalized, too. 

Representative Burgess. Thank you. 

[The prepared statement of Representative Burgess appears in 

the Submissions for the Record on page 114.] 

Chair Maloney. Mr. Snyder. 

Representative Snyder. Thank you, Madam Chairman, for 

having another good hearing. 

Dr. Yergin, I appreciate what you said a while ago. I think too 

many of us—probably more on this side of the table—in our zeal 

back home, our populace sphere, talk about energy independence 

and produce all our energy right here. The reality is our country 

has always been a trading Nation; it will always be a trading Nation. 

What we should be looking for is predictability of supply and 

price. And we are always going to be selling energy, we are always 

going to be buying energy, and we shouldn’t be alarmed by that, 

but we should be alarmed by threats to predictability of supply and 

price. And I hope that we will be, as the years go by, a major seller 

of technology for developing. I mean, it will be a huge plus for us 

in our job situation. 

The interrelationship between all these things going on in the 

American economy right now, I think it is a fair statement, isn’t 

it, that because of what is going on in the credit markets right now, 

some of our investments in venture capital and things like wind 

production has been held back. Is that a fair statement? 

Dr. Yergin. Yes. There was a lot of buoyancy in the renewables 

and alternatives a year ago. The collapse in the credit markets has 

really hit these projects very hard, and you see it both in the develVerDate Nov 24 2008 14:56 Dec 01, 2009 Jkt 052393 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 C:\DOCS\52393.TXT SHAUN PsN: DPROCT
18 

opment projects; you also see it in terms of the venture capital. The 

discovery is that everything is harder, and it takes longer. 

Representative Snyder. There are still very good projects sitting out there. Arkansas has a lot of dynamic things going on in 

energy. One of them is we have developing blade manufacturers 

that have moved in, and some other things. And there are some 

projects on the table that are good business opportunities, but 

whether it is a gas station or a restaurant, you can’t get the money 

to get it going. 

Dr. Yergin. Yes. Part of the green stimulus program has been 

aimed at trying to put a floor under the renewables and alternatives so that while policy wants to move in that direction, the 

economic realities doesn’t move in the other direction. But I think 

for a lot of entrepreneurs, the last 8 months in this sector, as in 

many others, has been very, very difficult. 

Representative Snyder. Right. Mr. Brady mentioned Texas 

and natural gas. Arkansas has been a major new producer of natural gas for this country, and I think, as you mentioned, not a lot 

of people know about it. I think my district has probably been the 

center of new production of natural gas for the country for the last 

several years. And it is still going on, despite the downturn in 

price; we still have companies that are drilling today and producing 

new wells. 

You all talked about—one of you phrased it ‘‘the flight to commodities’’ in terms of price, and whether it is speculation or not 

speculation. Would you talk about the issue of how this might impact on our producers? If we have folks who are producing new natural gas wells out there, they need to have a predictable price to 

make it worthwhile for them. And so they get contracts, they get 

some hedge contracts so they have some predictability of price. 

There is some apprehension that in our zeal and necessity of regulating the speculative market that we will do it in such a way 

that may hurt what we all see as the traditional healthy use of 

commodity hedge contracts to have that predictability of price. 

Would you all comment on that issue with regard to natural gas? 

Dr. Hamilton. Well, I would like to point out that the futures 

markets play a role not just for hedging, but also for information 

provision. And I think it is vital for the economic future that we 

get an accurate reading on what are these challenges in terms of 

global demand, and what are the available supplies. And that is a 

very important function that futures markets have to provide. 

If you define hedging as taking a position on a futures contract 

to reduce your risk, you could argue that a pension fund that is in 

commodities is hedging because the commodities may go up at the 

time your other assets go down, and they diversify your portfolio. 

Representative Snyder. It just seems like there is a dramatic 

difference between a producer that cuts a contract with somebody 

down the line that this is what our price will be 2 years from now. 

That is so dramatically different from somebody speculating in the 

commodities market. 

Dr. Hamilton. Well, on the other hand, if you define speculation 

as taking a position because of what you think is going to happen 

to the price, it is hard to think that even somebody who has physVerDate Nov 24 2008 14:56 Dec 01, 2009 Jkt 052393 PO 00000 Frm 00022 Fmt 6633 Sfmt 6633 C:\DOCS\52393.TXT SHAUN PsN: DPROCT
19 

ical delivery involved is not also taking into consideration what 

they think is going to happen to the price. 

So I am a little uncomfortable with this very sharp distinction 

between hedging on the one hand and speculation on the other. I 

think it is vital that these markets function correctly and send an 

accurate signal. And I am all in favor of any institutional changes 

that help to promote that. But again, we do need to face the future, 

and if the future means tighter energy, we need to know about that 

now, and we need to respond to it now, rather than blame the futures markets for pricing that, I think. 

Dr. Yergin. Can I add reinforcement to what Professor Hamilton 

is saying? I certainly remember last year testifying before this committee, and, of course, last summer speculation was a very hot subject. But if you take two real-world examples, one is you are an airline, and you see key people keep saying the world is running out 

of oil, oil is going to be 200 or 250, and you go out and you hedge 

your position. Are you hedging or are you speculating? Another example, a specific pension fund, an $80 billion pension 

fund, concerned about instability in the Middle East, wanting to 

protect its retirees, takes a position in oil as a way to protect itself 

against conflict in the Middle East. Is that a hedger or a speculator? 

On the other hand, you have people who are just kind of playing 

the game and looking at technical analysis back and forth. When 

you look at the market today and you say the oil market is really 

not reflecting the fundamentals of supply and demand, there are 

a lot of green shoots in the oil price right now. There is a pent-up 

demand for demand, and people are saying China looks pretty good 

now, and it is all going to come back again. And by the way, the 

other thing that happens here is that—and we saw that in the runup last time the weakness of the dollar tends to lead to that flight 

to commodities as an offset, And we see that, too. 

We all struggle to identify that sharp dividing line between hedging and speculating, and it is awfully hard to find it. But certainly, 

what you are talking about, a producer who is making a commitment to invest for the next several years with the risk and trying 

to take some of that market risk out of it, that is a very important 

tool to be able to do that in a sound and legitimate way, to be able 

to go ahead and finance the development that they want to do. And 

you are seeing it exactly in your district. 

Representative Snyder. The tool is so important; it is the difference between whether they produce or not. And I think we have 

to be careful we don’t stifle that somewhere. And it will be this side 

of the table; if a mistake is made, it will be this side of the table. 

Dr. Yergin. Yes. Because you are going into that business, you 

have the risk of do you have the resource? Do you have the market? Then you have the price. What you are really trying to do 

when you are in that business is manage the whole series of different risks at the same time. 

Chair Maloney. Professors Yergin and Hamilton, oil prices 

started rising over 5 years ago, and real crude oil prices doubled 

from 2003 to 2006, and then doubled again in mid-2007 and 2008, 

and oil companies experienced record profits. Did these profits 

translate into increased domestic exploration and development? 

20 

Dr. Yergin. We certainly saw budgets with E&P, which is the 

upstream which you are talking about, went up very dramatically. 

At the same time, what was also going up—less attention was 

being paid to it, and I have a chart about it in my testimony—is 

that the cost went up. There was a shortage of engineers, drilling 

rigs, drill ships, everything else. So when you were investing in 

2008, if you were starting a new project, you would literally have 

to budget twice what you had budgeted in 2004 to be able to do 

that same project. So all of those factors were working together. 

Chair Maloney. Dr. Hamilton. 

Dr. Hamilton. There were big increases in investment. I was 

surprised we didn’t see a little bit more. But I would also emphasize the difference between the private oil companies and the national oil companies. The private oil companies were reinvesting 25 

percent of their gross revenues, and the oil-producing countries 

were reinvesting 6 percent of their net export revenues. So there 

is a real difference there. That is part of why we are not developing 

resources in the places in the world that would be helpful. 

Chair Maloney. What does this suggest about domestic oil supply in the future? 

Dr. Hamilton. Well, American production has been in a longterm decline since 1970. And we can talk, as we were earlier, about 

getting to some of these other sources. But to think we are going 

to significantly increase production for a significant period of time 

just within this country, I think, is very ambitious. Yes, we need 

that investment where there are promising alternatives, but I want 

to come back to this theme that we need all of these solutions. It 

is a huge problem, and it is too big a challenge for any one of these 

ideas, however good that one idea might be, to get anywhere near 

solving the problem by itself. 

Dr. Yergin. I guess I would add to it is that investment will be 

made somewhere. If it is made in the United States, it creates jobs 

in the United States and activity here rather than revenues going 

into the treasury of other countries. 

Professor Hamilton is quite right, we are not going to, from everything we know, increase our oil production. The question is do 

we stabilize it and keep it at a reasonable level? 

What we also see is the impact of technology. In the late 1970s, 

the so-called ‘‘deep water frontier,’’ if you were going out and drilling, was 600 feet of water. Today people are drilling in 6,000, 

7,000, 8,000 feet of water. All across the energy spectrum—renewables, alternative, conventional—you see this march of technology. 

That is really a source of actually confidence when you look at the 

totality of our $14 trillion economy. 

Chair Maloney. Thank you. 

Mr. Brady. 

Representative Brady. Thank you, Madam Chairman. This 

hearing is very instructive. 

We always have conspiracy theories in Congress abound whenever oil prices go up that they are being manipulated by fuel oil 

companies; and, of course, every investigation shows that that is 

not the case. Once people realize that national oil companies owned 

by other governments hold 80 percent of the reserves—nearly 80 

percent of the reserves in the world and produce equivalently to 

21 

that, they understand that there is a new geopolitics of oil, where 

national oil companies owned by their governments are now cutting 

political deals with other governments that guarantee access, guarantee jobs, and shrink the role of private international energy companies in trying to develop oil reserves. In fact, I think there are 

60 national oil companies, half of which have reserves outside their 

own countries, so they are moving very aggressively. 

Here in the U.S., we seem to be doing just the opposite, discouraging investment in the U.S. and discouraging production in those 

key investments. An example, in 2004, Congress passed a change 

in the Tax Code. Worried about jobs being offshored, they changed 

the Tax Code so that companies that manufactured here in the 

U.S., produced in the U.S., invested in the U.S. had a lower tax 

rate than companies that do the same activities offshore, in an incentive to produce here. 

But this Congress, in the last 2 years, has repeatedly chosen one 

sector, American energy, to single out and say, we are not going 

to treat you like that, we are going to—raise your taxes and treat 

you, when you manufacture, invest and produce jobs in the United 

States, as if you are doing it overseas; in other words, creating incentives to produce less here in America, and offshore those jobs 

and investments overseas. This at a time, again, where technology 

is allowing us to access more and more of our own resources in an 

environmentally friendly way, and also identify more reserves so 

that we can, again, continue to hit that balance of more renewables, more efficiency, more traditional oil. 

So I guess my question to both you of is as we look forward on 

pricing, the new geopolitics of oil where countries cut deals with 

other countries, and the role of private companies become smaller, 

what is that impact potentially on future prices here in the United 

States? 

Dr. Hamilton. Well, I think it is unfavorable, as I was saying, 

insofar as many of these governments are not running the industry 

as efficiently as they could. And when you go through the list of 

these countries—Venezuela, Nigeria, Iran, Russia—there are plenty of worries about the political stability in any of these. And, for 

me, it is one question of is the oil there? It is a second question 

of are we going to get it and get it in time? 

Representative Brady. In the past, private companies have 

had the competitive advantage on financing and technology and expertise, but that seems to be disappearing as well; there is a gap. 

Dr. Yergin. 

Dr. Yergin. Yes. I think up through last summer, many of the 

private companies were saying, well, what is going to be their role 

in the international scene in the future because of the role of the 

national oil companies. With prices down, you see that the balance 

changing. Indeed, I should say that one of the major themes in the 

new part of The Prize is this change in balance between national 

oil companies and private oil companies. It had looked like we were 

moving into this era of just national oil companies really dominating things. Price is down, suddenly the picture looks different; 

their countries need investment again, they don’t have the revenues, and there is more openness. 

22 

Private companies bring project management. These projects now are $5- or $10 billion projects. They can execute them. Capital becomes important again. So I think we can say that there is kind 

of a new balance emerging again in this part of the cycle. 

But I think the point—and the point for this hearing is that we 

really do move in cycles. In 3 to 5 years from now, the kind of concerns that we had last year will be back on the agenda again. And 

the question is having as solid a foundation that reflects the entire 

energy spectrum to deal with it. 

Representative Brady. I actually think there is more common 

ground on this issue than some of the sound bites allow us to pursue. But thank you both for being here. You are very informative. 

Representative Hinchey. I want to express my appreciation for 

you, too. Thank you both very much for being here, and thank you 

for what you have said in response to the questions. 

This is a very complicated and very critically important issue 

that has to be dealt with very effectively. And I can see how people 

here in the United States as well as a lot of other people around 

the world are trying to control this issue. 

I think that, as you were saying, as our production began to decline back around 1970, that was one of the initiators of the Middle 

East to organize themselves together and to begin to control oil 

prices and drive up the price for their benefit. And God knows, 

they have been enormously successful. The huge amount of money 

that flows into those countries—Saudi Arabia, particularly, but 

others as well—has been incredible since then, and it is just continuing. 

In some ways, that reminds me of a little story that dates back 

to the early part of the 20th century, which you included in the 

prize, the Teapot Dome scandal, where you had an interest in one 

particular company at that time controlling as much as they could 

of the known oil reserves on publicly owned land around the country. We have seen something similar to that over the course of the 

last year here, where we had people on one side of the aisle in this 

Congress saying that the best way to control oil prices would be to 

open up oil drilling offshore and extend the leases to companies. 

That would drive down the price. Well, we argued about that, and 

we saw that that was not really the case at all. 

We are dealing with a very fascinating issue here, very fascinating and very critical. It has got to be dealt with effectively, not 

just for now, which is very complicated, but even more so as time 

goes on. This is going to get more and more complex, more and 

more difficult to deal with. And this is something that this Congress has got to take into consideration, because one of the responsibilities we have is not just for today, but for future generations. 

So I am just wondering what you think we should be doing most 

effectively—not just now, but maybe now—but also, what we 

should be doing, thinking about what would be most effective three 

or four decades from now. 

Dr. Hamilton. Well, three or four decades is farther than I can 

think. I think it is a big enough challenge to get through the next 

10 years. 

But one point that I wanted to make that I think our discussions 

brought out is how interrelated all these questions are. We were 

23 

talking about natural gas; well, do we use it for electricity? Do we 

use it as an energy source for the oil sands? Do we use it as a supplement for wind power? Or we can drive our vehicles with it directly. Even though we are looking at the moment at a crunch in 

terms of transportation, we need a transportation technology, that 

analysis brings up how interrelated these are. And if you make 

progress on one front—for example, I have been mentioning nuclear power as a known option that we can pursue further, it gives 

you a little more breathing room on some of the other. But again, 

we need to be moving with all of these options at the same time. 

Dr. Yergin. As you say, this is very complicated. There is no single mastermind grand plan, I think, that will answer it because 

there are a lot of things we don’t know. No one thought 2 years 

ago or 3 years ago we would have this revolution of natural gas. 

No one thought a few years ago that we would see wind grow as 

much as it has grown recently. So I think that in the nearer term, 

it is a focus on security, so that 3 to 5 years from now this committee is not meeting asking, how did we get into this situation 

again, how did the great economic recovery that started in 2009 or 

2010 end up flat on its back. 

Longer term, three or four decades from now, I really do think 

if we have a sustained level of investment in research and technology, not with that uncertainty that you don’t know whether the 

dollars are there or not, that we may see some very happy surprises, very beneficent. 

You talked about solar. You know, the logic of solar and 

photovoltaics is so compelling, it is so powerful. The question is to 

get scale, to get the cost down. I am on the advisory board at the 

MIT Energy Initiative, and when you are on that campus, and you 

see all of these people working these questions, you say, that is 

where the future is three or four decades from now, and that is 

where we really need to make our investment. And you look at the 

last three or four decades, and that investment has gone up and 

down. So I think that kind of consistency will help us answer the 

question with greater clarity. 

Chair Maloney. Thank you so much. This has been a very informative hearing on a crucial subject. You are both leading experts. We will circulate your testimony to other Members of Congress. 

The meeting stands adjourned. 

[Whereupon, at 11:19 a.m., the joint committee was adjourned.] 

(25) 

SUBMISSIONS FOR THE RECORD 

26 

PREPARED STATEMENT OF REPRESENTATIVE CAROLYN B. MALONEY, CHAIR

Good morning. I would like to thank our distinguished experts for agreeing to testify this morning on the impact of last year’s oil price shock on the U.S. economy 

and the potential effect of higher oil prices on our nascent economic recovery. 

This hearing is timely because the traditional start of the summer driving season 

gets underway this weekend. The most recent estimate from the Energy Information 

Administration is that regular gasoline prices will average $2.21 a gallon over this 

summer’s driving season and that diesel fuel prices will be $2.23 a gallon—a far cry 

from the $4 or more a gallon for gasoline or diesel that drivers faced last summer. 

What a difference a year makes. 

Although drivers will face much lower pump prices than they did last summer, 

crude oil and gasoline prices have ticked up recently. Indications of ‘‘green shoots’’ 

in the U.S. economy and fiscal stimulus measures adopted in China have already 

begun to nudge oil prices higher as expectations for greater demand rise. 

Right now, it looks like the surplus capacity of crude oil production is large 

enough to prevent an immediate repeat of last year’s price spike. 

But today we want to explore with our witnesses the short-term policies that will 

help to avoid derailing our recovery and long-term policies for sustainable economic 

growth. 

While it would have been better for the last administration to have started on a 

sensible energy policy earlier in the decade, the current decline in global demand 

for oil has given us some breathing room to change course. 

Yesterday’s announcement by President Obama ushering in tougher national fuel 

efficiency standards is truly an historic opportunity to reduce our dependence on oil. 

Higher standards mean we’ll all get further on every tank of gasoline. 

The American Recovery and Reinvestment Act also included policy changes that 

will help in the long run, such as investment in intercity light rail and funding and 

loan guarantees for research into advanced technology for vehicles and other innovative technology. 

These investments will help the United States develop a modernized transportation system with efficient alternatives to automotive travel. 

Last year’s oil shock showed us that right now it takes a very large increase in 

gasoline prices to reduce our consumption of oil. Part of the reason is because many 

consumers have no alternatives to their gasoline powered cars. In the long run, energy policies that increase alternatives to using a gas-fueled car—whether they are 

different modes of transportation or alternative fuels for cars—will help minimize 

the impact to the economy of a rise in the price of oil. 

Energy efficiency, which allows us to use less energy for the same activity, is an 

important part of the solution. Smart grid technology will also allow us to use our 

electric transmission grid more efficiently. 

In testimony before this committee last year, Dr. Yergin observed that the most 

recent oil shock underscores the need ‘‘to encourage timely investment across the 

energy spectrum.’’ I am optimistic that we are moving in that direction and towards 

a long term solution to reducing our dependence on oil. 

I look forward to the testimony of our witnesses. 

PREPARED STATEMENT OF KEVIN BRADY, SENIOR HOUSE REPUBLICAN

I am pleased to join in welcoming the witnesses testifying before us today on oil 

prices and the economy. 

Oil prices have plunged during the recession but have started to increase more 

recently due to greater optimism about the economic outlook. While some of this recent optimism may be questionable given the latest data on retail sales and business investment, it is reasonable to think that the economy will be in recovery by 

next year, especially given the huge injections of money and credit by the Federal 

Reserve. 

The key challenge to energy policy now, given the long lead time involved, is the 

need for investment in exploration and production to meet oil demand over the 

longer term, as opposed to an oil price spike in the short term. Nonetheless, as the 

international economy recovers, it is likely that oil prices will increase. 

In considering this issue, it is important to note that state-controlled oil companies in OPEC and Russia account for three quarters of world oil reserves. These 

state-controlled companies, not private firms, are behind periodic attempts to manipulate the global oil market and exert monopoly power to hold up prices. Whatever the lasting success of these efforts, there is little doubt that state-controlled 

oil companies are a major force in the world oil market. There are also other stateVerDate Nov 24 2008 14:56 Dec 01, 2009 Jkt 052393 PO 00000 Frm 00030 Fmt 6601 Sfmt 6621 C:\DOCS\52393.TXT SHAUN PsN: DPROCT
27 

to-state projects underway such as the attempts to arrange financing for the Brazilian national oil company by the Chinese government. 

OPEC’s cuts in oil production to hold up prices are only one of many reasons we 

should want to encourage oil production in North America. The U.S. and Canada 

together hold 15 percent of the world’s proven oil reserves, 200 billion barrels, and 

their resource potential is much greater. The U.S. can and must do much more to 

expand domestic production of oil as well as natural gas. 

Technologies such as hydraulic fracturing, seismic imaging enhanced by 

geopositioning satellite systems, and steerable drilling with gyroscopic guidance systems together can significantly expand economically recoverable oil and gas reserves. Steerable drilling allows precision drilling along variable trajectories without 

repositioning the drilling rig, which is particularly beneficial offshore. Furthermore, 

when horizontal drilling was combined with fracturing in the early years of this decade, large volumes of natural gas became recoverable from rock formations that previously had been regarded as depleted or could not be tapped with conventional 

methods. 

Instead of encouraging U.S. oil and gas production, the federal government has 

placed excessive limits on exploration and drilling, including effectively making offshore drilling impossible in many areas. The Administration would further penalize 

oil and gas production by the imposition of a variety of new energy taxes. 

The Treasury justifies these tax increases by arguing that the lower taxation 

under current law, ‘‘encourages overproduction of oil and gas, and is detrimental to 

long term energy security,’’ at least partly because it boosts ‘‘more investment in the 

oil and gas industry than would occur under a neutral system.’’ With all due respect, a policy designed to suppress U.S. oil and gas production is absurd. The 

Treasury notes that the lower taxation under current law is, ‘‘also inconsistent with 

the Administration’s policy of reducing carbon emissions and encouraging the use 

of renewable energy sources through a cap and trade program.’’ 

Thus it appears that the counterproductive nature of the Administration proposal 

is not an unintended consequence, but a result of deliberate design. Congress should 

block these tax increases precisely because they would undermine oil and gas investment and production, as the Treasury itself concedes. These traditional sources 

of energy are the bridge we need to the future of renewable energy. 

We are all in favor of seeking renewable energy sources, so long as they are economically viable. However, we should not be seeking to suppress traditional energy 

production that we know is economically viable. According to the Energy Information Administration (EIA), the truth is that oil, gas, and coal provide most of the 

energy in the U.S. economy, and will continue to do so for many years. Tax increases targeting U.S. energy production, including the cap and trade tax, would 

weaken our economy, undermine U.S. competitiveness, and lower American living 

standards for decades to come. 

PREPARED STATEMENT OF JAMES D. HAMILTON

Big increases in the price of oil that were associated with events such as the 

1973–74 embargo by the Organization of Arab Petroleum Exporting Countries, the 

Iranian Revolution in 1978, the Iran-Iraq War in 1980, and the First Persian Gulf 

War in 1990 were each followed by global economic recessions. 

The price of oil doubled between June 2007 and June 2008, a bigger price increase 

than in any of those four earlier episodes. In my mind, there is no question that 

this latest surge in oil prices was an important factor that contributed to the economic recession that began in the U.S. in 2007:Q4. 

Unlike those earlier episodes, in which there had been a single dramatic development behind the oil price spike, the price rise over 2007–08 resulted from a number 

of separate factors. World oil production decreased slightly between 2005 and 2007. 

Declining production from mature oil fields in the North Sea and Mexico played a 

role, as did political instability in Nigeria. Saudi Arabian production, which many 

analysts had expected would have increased to meet rising demand, fell by 850,000 

barrels/day between 2005 and 2007. These declines were enough to offset production 

gains in places such as Angola and central Asia, with the result that total global 

oil production dropped slightly over this two-year period. 

Although production stagnated, the demand for petroleum continued to boom. 

World petroleum consumption had increased by 5 million barrels per day during 

2004 and 2005, driven largely by a 9.4% increase in global GDP over the two years. 

Over the next two years—2006 and 2007—world GDP grew an additional 10.1%, 

which in the absence of an increase in the price of oil would have produced further 

big increases in the quantity of oil consumed. Even with the price increases, Chinese 

28 

oil consumption increased by 870,000 barrels per day between 2005 and 2007. With 

no more oil being produced, that meant that residents of the U.S., Europe, and 

Japan had to reduce our consumption a comparable amount. The price of oil needed 

to rise by whatever it took to persuade us to do so. 

How much the price needed to rise in order to balance global demand with supply 

depends on how quickly consumers change their habits in response to a change in 

the price of oil. The historical experience has been that even very large oil price increases cause relatively little immediate change in the quantity of oil consumed. The 

response of consumers to energy price increases over 2004–2006 was if anything 

even smaller than those historical estimates. One reason for that smaller response 

may be that energy expenditures as a fraction of total spending by U.S. consumers 

had fallen from 8% in 1979 to 5% in 2004. The reason that we were purchasing 

about the same quantity of gasoline despite the increase in the price was that many 

of us could afford to do just that. By June of 2008, the price of gasoline had reached $4/gallon, driving the energy budget share back up to 7%. While some people had been ignoring $3 gasoline, $4 

definitely got their attention. The resulting abrupt changes in spending patterns can 

be quite disruptive for certain key economic sectors and seem to be part of the 

mechanism by which the earlier oil price shocks had contributed to previous economic recessions. The kinds of economic responses we saw between 2007:Q4 and 

2008:Q3 were in fact quite similar to those observed to have followed previous dramatic oil price increases. 

One notable example was the plunge in auto sales. The number of light trucks 

sold (which includes the once-dominant SUV category) fell by 23% between 2007:Q2 

and 2008:Q2. One indication that this sales decline was caused by oil prices and not 

other economic developments is the observation that sales of imported cars were up 

by 9% over this same period. Since the domestic manufacturers were more heavily 

reliant on sales of the less fuel-efficient vehicles, these changes represented a significant hit to the domestic auto sector. Declining production of motor vehicles and 

parts alone subtracted half a percent from total U.S. real GDP between 2007:Q3 and 

2008:Q3. In the absence of those declines, real GDP would have clearly grown over 

this period and it is unlikely that we would have characterized 2007:Q4–2008:Q3 

as a true economic recession. One hundred and twenty-five thousand jobs were lost 

in U.S. auto manufacturing between July 2007 and August 2008. If not for those 

losses, year-over-year total job gains for the U.S. economy would have been positive 

through the first year of what we now characterize as an economic recession. 

More broadly, another pattern we observed in earlier oil price shocks was a deterioration in consumer sentiment and slowdown in overall consumer spending. Americans buy about 140 billion gallons of gasoline each year, meaning that a dollar per 

gallon increase in the price takes away $140 billion from their annual purchasing 

power. The declines in consumer sentiment and slowdown in consumer spending 

that we observed between 2007:Q4 and 2008:Q3 are very much in line with what 

we saw happen in response to historical energy price shocks of similar magnitude. 

In 2003, I published a description of the response of U.S. real GDP to a change 

in oil prices that implies that the biggest economic effects of an oil price increase 

are not seen until 3 or 4 quarters after the oil prices go up, as the downturn multiplies and propagates across sectors. When you feed in the values of GDP through 

2007:Q3 and oil prices through 2008:Q2, that model would have predicted the value 

of 2008:Q3 real GDP—one year in advance—with an error of less than 0.2%. 

I was quite surprised by that last result, because of course there were other serious problems for the U.S. economy over this period besides the price of oil. Foremost 

among these would be the depression in new home construction. But residential 

fixed investment had subtracted 0.94% from GDP between 2006:Q4 and 2007:Q3, 

despite which the economy overall continued to grow and we were not at that point 

in an economic recession. On the other hand, residential fixed investment subtracted only 0.89% from GDP over 2007:Q4 to 2008:Q3, during which period the 

U.S. economy did enter recession. Something else, in addition to the pre-existing 

problems in the housing sector, contributed to tipping the scales from an economic 

slowdown into a self-feeding dynamic of falling output and employment. I see little 

basis for doubting that a key aspect of that new drag on the economy resulted from 

the effects of the oil price shock. 

There is also an interactive effect between the oil price shock and the problems 

in housing. Lost jobs and income were an important factor contributing to declines 

in home sales and prices, and we saw the biggest initial declines in house prices 

and increase in delinquencies in areas farthest from the urban core, suggesting an 

interaction between housing demand and commuting costs. Once house price declines and concomitant delinquencies reached a sufficient level, the solvency of key 

financial institutions came to be doubted. The resulting financial problems turned 

29 

the mild recession we had been experiencing up until 2007:Q3 into a much more 

severe downturn in 2008:Q4 and 2009:Q1. Whether those financial problems were 

sufficiently insurmountable that we would have eventually arrived at the same crisis point even without the extra burden of the recession of 2007:Q4–2008:Q3 is a 

matter of conjecture. But that oil prices made an important contribution both to the 

initial downturn as well to the magnitude of the problems we’re currently facing 

seems to me to be indisputable. 

Could anything have been done to prevent this? The decision by the Federal Reserve to drop interest rates so quickly in the first few months of 2008 likely contributed to some of the commodity price speculation. In the spring of 2008 I had further 

recommended some temporary sales of oil out of the Strategic Petroleum Reserve 

as another measure that might have proven beneficial. There is also a tradeoff between our goals of environmental protection and reducing U.S. energy use, and certainly there are policy options we could have explored for reducing our demand for 

low-sulfur oil in particular. I would recommend that the U.S. have an emergency 

plan in place for various regulatory adjustments that could be made on very short 

notice to help reduce petroleum demand in response to any future crisis in global 

oil supplies. For example, in my opinion the decision to accelerate the shift to winter 

fuel requirements was helpful in containing the economic damage from Hurricane 

Katrina in the fall of 2005. 

But although there are some concrete steps that might have helped, it would be 

a mistake to focus exclusively on short-term gimmicks. The fundamental problem 

that I have highlighted above—booming world petroleum demand in the face of 

stagnant world oil production—is very much a long-run challenge. The reality is 

that no policy could have prevented a substantial increase in the price of oil between 

2005 and the first part of 2008. The main lesson that I hope we draw from this experience is that this long-run challenge is something with very real and present 

short-run consequences. 

Will the recent uptick in oil prices undermine prospects for recovery from the recession? Retail gasoline prices have risen about 50 cents a gallon from their low in 

December. That takes away about $70 billion from consumers’ annual spending 

power, which is hardly helpful for the broader challenge of restoring household balance sheets to a level where spending could be expected to pick back up. But let 

me emphasize that although I believe that the initial spike in oil prices was an important element of the process that produced our current difficulties, we are currently at a point at which the multipliers and spillovers associated with the recession dynamic itself have become far more important factors than the price of oil. 

The problems faced by U.S. automakers at the moment—and those problems are 

very, very daunting—are not caused by the price of gasoline. What is needed to restore U.S. vehicle sales now is not lower gas prices but instead more income, jobs, 

and confidence on the part of consumers. 

Notwithstanding, the recent rise in oil prices again underscores the present reality of the long-run challenges. Even if we see significant short-run gains in global 

oil production capabilities, if demand from China and elsewhere returns to its previous rate of growth, it will not be too long before the same calculus that produced 

the oil price spike of 2007–08 will be back to haunt us again. 

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PREPARED STATEMENT OF REPRESENTATIVE MICHAEL BURGESS

Thank you Madam Chair for holding this hearing. I commend the JEC for taking 

this opportunity to engage in such a timely subject. 

Three weeks ago we heard from Chairman Bernanke who stated that the U.S. 

economy has contracted sharply since last autumn. Real gross domestic product has 

dropped at more than six percent in the fourth quarter of 2008—as well as the first 

quarter of this year—resulting in the loss of some 5 million jobs over the 15 months. 

Furthermore, the available indicators show overall business investment remains 

weak. The Federal Reserve found restrained capital spending plans, net declines in 

new orders and further weakening in the demand for commercial and industrial 

loans. 

A number of factors have contributed to this situation; however, rising commodities prices are clearly capable of prolonging this current recession, foremost on that 

list being oil. 

Clearly the United States needs oil to sustain our economic growth, but our supply here in the U.S. is limited and so we have turned our attention to developing 

countries such as Venezuela, Nigeria and Russia. But so have the hungry oil consumers around the globe, each eager to amass the formidable scope of even our currently troubled economy. For instance, China and India together account for 100 

million new consumers of oil EACH year. 

And while no one can tell us with perfect clarity the correlation between low 

prices of oil and the ability for our businesses to earn increased profits, any nominal 

economists can explain colloquially the basic laws of supply and demand. The U.S.’ 

desire for oil has not been whetted by high oil prices. We still drive our cars to work, 

to home and to play. Match this with the competing consumption demands for those 

seeking to mimic the America lifestyle and what we end up with is a scarce commodity . . . thus driving up costs. 

Furthermore, we know that we are heading towards a time in the year when oil 

prices, and subsequently transportation fuel prices, are seasonally higher, which can 

only add to our economic troubles. 

Madam Chair, make no mistake, I am interested in hearing from the experts in 

our panel today regarding specific metrics of analysis to determine whether our 

economy’s recovery is dependent upon the rest of the globes consumption of oil, but 

what we need are solutions for THIS country’s oil needs rather than a mere minimization of costs. 

Æ