Senate Hearing, 110TH Congress - Oil Bubble or New Reality: How Will Skyrocketing Oil Prices Affect The U.S. Economy?

S. HRG.
110
OIL BUBBLE OR NEW REALITY: HOW WILL SKYROCKETING OIL PRICES AFFECT THE U.S.
ECONOMY?
HEARING
BEFORE THE
JOINT ECONOMIC COMMITTEE

CONGRESS OF THE UNITED STATES
ONE HUNDRED TENTH CONGRESS
SECOND SESSION
JUNE 25, 2008
Printed for the use of the Joint Economic Committee
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JOINT ECONOMIC COMMITTEE
[Created pursuant to Sec. 5(a) of Public Law 304, 79th Congress]

SENATE
HOUSE OF REPRESENTATIVES
CAROLYN B. MALONEY, New York, Vice Chair
CHARLES E. SCHUMER, New York, Chairman
EDWARD M. KENNEDY, Massachusetts
MAURICE D. HINCHEY, New York
JEFF BINGAMAN, New Mexico
BARON P. HILL, Indiana
AMY KLOBUCHAR, Minnesota
LORETTA SANCHEZ, California
ROBERT P. CASEY, JR., Pennsylvania
ELIJAH E. CUMMINGS, Texas
JIM WEBB, Virginia
LLOYD DOGGETT, Texas
SAM BROWNBACK, Kansas
JIM SAXTON, New Jersey, Ranking Minority
JOHN E. SUNUNU, New Hampshire
KEVIN BRADY, Texas
JIM DEMINT, South Carolina
PHIL ENGLISH, Pennsylvania
ROBERT F. BENNETT, Utah
RON PAUL, TEXAS, Texas
MICHAEL LASKAWY, Executive Director
CHRISTOPHER J. FRENZE, Republican Staff Director
(II)
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CONTENTS
Page
OPENING STATEMENT
MEMBERS
OF
Statement of Hon. Charles E. Schumer, Chairman, a U.S. Senator from

New York ..............................................................................................................
Statement of Hon. Kevin Brady, a U.S. Representative from Texas ..................
Statement of Hon. Carolyn B. Maloney, Vice Chair, a U.S. Representative
from New York .....................................................................................................
Statement of Hon. Sam Brownback, a U.S. Senator from Kansas ......................
Statement of Hon. Amy Klobuchar, a U.S. Senator from Minnesota ..................
Statement of Hon. Robert F. Bennett, a U.S. Senator from Utah .......................
1
4
6
7
9
10
WITNESSES
Statement of Dr. Daniel Yergin, Co-founder and Chairman of Cambridge
Energy Research Associates, Washington, DC ..................................................
Statement of Dr. Frederick Joutz, Professor of Economics, George Washington
University, Washington, DC ...............................................................................
Statement of Mr. John Skip Laitner, Director, Economic Analysis, American
Council for an Energy-Efficient Economy (ACEEE), Washington, DC ............
SUBMISSIONS
FOR THE
(III)
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RECORD
Chart entitled Americans Are Spending Double on Gasoline Now Than They
Spent in 2001 .......................................................................................................
Prepared statement of Senator Charles E. Schumer, Chairman .........................
Prepared statement of Representative Carolyn B. Maloney, Vice Chair ............
Prepared statement of Senator Sam Brownback ..................................................
Prepared statement of Dr. Daniel Yergin ..............................................................
Prepared statement of Dr. Frederick Joutz ...........................................................
Chart entitled Crude Oils Share of GDP Has Doubled ....................................
Prepared statement of Mr. John Skip Laitner ...................................................
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OIL BUBBLE OR NEW REALITY: HOW WILL

SKYROCKETING OIL PRICES AFFECT THE
U.S. ECONOMY?
WEDNESDAY, JUNE 25, 2008
CONGRESS OF THE UNITED STATES,

JOINT ECONOMIC COMMITTEE,
Washington, DC.
The committee met at 9:30 a.m. in room 106 of the Dirksen Senate Office Building, The Honorable Charles E. Schumer, Chairman,
presiding.
Senators present: Klobuchar, Brownback, and Bennett.
Representatives present: Maloney, Cummings and Brady.
Staff present: Christina Baumgardner, Heather Boushey, Tamara Fucile, Nan Gibson, Colleen Healy, Aaron Kabaker, Michael
Laskawy, Ted Boll, Chris Frenze, Jim Gilroy, Rachel Greszler, Jeff
Schlagenhauf and Jeff Wrase.
OPENING STATEMENT OF HON. CHARLES E. SCHUMER,

CHAIRMAN, A U.S. SENATOR FROM NEW YORK
Chairman Schumer. The hearing will come to order. I want to
thank everybody for being here. I apologize for being a bit late.
Today, were talking about the skyrocketing price of oil, and we
want to explore whether the high price of oil is a bubble or a permanent, painful reality, or some of both; how it will affect our economy and what we can do to reduce prices and break our dependence on foreign oil.
We know that gas prices and the high price of oil and oil products is the number one issue in America. Everywhere we goLegion halls, parades, weddingsthis is one of the very first things
that people bring up.
I wouldnt even say one of the very first things; this is the very
first thing almost everyone brings up. Its no wonder that Congress
has held about 40 hearings on oil and energy policy this year, 11
this month alone.
Now, were all looking to find answers to some pressing and important questions, so we can shape the right economic and energy
policies, going forward. Im hopeful well have some luck answering
those questions today from our very distinguished panel, including
Dr. Dan Yergin, a Pulitzer Prize-winning author of The Prize,
and one of the worlds foremost experts on oil and energy.
We eagerly look forward to hearing from him, and from Dr. Frederick Joutz and Skip Laitner, shortly, and I thank all three of you
for coming and for going out of your way to be here.
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I think that everyone would like to believe that high oil prices
are a bubble; that you burst the bubble and the price will come
down and stay down. We all hope thats the case, but it may not
be so.
Many would like to believe that theres a silver bullet that could
pop the bubble, but if theres an oil bubble or prices temporarily
decline and we put off doing the necessary things we have to do,
like conservation or investing more in alternative fuels incentives,
well be even further behind than we are now, from breaking our
foreign oil dependence.
One thing is clear: Demand is on the rise, especially in rapidlydeveloping large countries like China and India, and, in this global
economy, they can compete for oil thats produced here or overseas
as well as anybody else, and the high price wins.
I heard the other day, that there will be as many new cars in
the developing world as there are total cars in the U.S. over the
next ten to 15 years. In other words, if every Chinese, Indian, Brazilian who never had a car buys one, that will be equal to the number of cars we now drive here.
In fact, the Energy Information Administration is projecting that
oil prices will have increased by almost 70 percent from 2007 to
2008, gasoline will have increased by 35 percent, and diesel prices
will have increased by 50 percent.
The question everyone asks is, if demand has not gone up by 70
percent, why do prices go up by 70 percent, and thats the question
we want to answer here, because that leads to the belief that there
is a bubble.
I also think its interesting that the big oil companies and OPEC
are blaming speculators for out-of-control prices, when they may be
much more of the cause. Theyre sort of diverting attention.
It isnt as cut and dry, at least to me. Speculation may be exacerbating the demand problem, but if we guess wrong on the cause,
were going to put off the right solutions.
There are some things that can be done to curtail the impact of
speculation, like raising margin requirements and strengthening
regulations, and I believe some of these may do some good. Im for
them.
But they may not solve the problem in the long run, particularly
if we think these are the only things that should be done. The reality is that we need to look beyond quick fixes that will do little
for consumers as they pay record prices at the pump.
Now, we have some charts up here. Many consumers are experiencing stagnant wages, sending a much bigger slice of their paychecks into their gas tanks.
Americans are spending twice as much on gasoline today than
they spent in 2001. Across the nation, families are being shaken
down for about five percent of their take-home pay, just to pay the
gas man.
Here is the chart that shows the percentage of disposable income
that a family pays. Its doubled.
[The chart entitled Americans Are Spending Double on Gasoline
Now Than They Spent in 2001 appears in the Submissions for the
Record on page 40.]
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Low- and middle-income families are particularly hard hit. The
recent data from 2006, when gas prices were only $2.50 a gallon,
shows that the lowest 20 percent income level, spent ten percent
of their paychecks on gasoline, and thats a scary figure for people
who are trying to scrape by every day and have to take their cars
to work, oftentimes.
For all the talk about how American families have benefitted
from the Presidents tax cuts and for all the emphasis that Senator
McCain is placing on making those tax cuts permanent, the simple,
undeniableyou can look it upno-spin truth is that the average
American family is paying far more in higher gasoline prices this
year, than they received in the Bush tax cuts.
So a lot of Americans are wondering what Washington can do to
bring down oil prices and reduce our dependence on oil.
First, let me tell you what Washington didnt do: With seven
years under the belt of this Administration, the White House has
taken zero proactive steps to reduce our dependence on foreign
oilzero.
If it wasnt for the recent Democratic Congress passing long overdue modest increases in fuel efficiency standards for cars, President Bush would have left the White House with a spotless record,
committing no sins against big oil or OPEC.
Now, with almost 70 percent of the oil we consume, going into
our gas tanks, its a crime against our future, that since 1995, so
many here in the Congress, and, of course, in the White House, opposed increasing fuel economy standards for so long.
Even now, in the midst of $140 a barrel oil and $4 gasoline
prices, the only solution some of my friends on the other side of the
aisle are familiar with, is drilling in the Arctic Refuge. By 2018,
ten years from now, ANWR might produce enough oiland this is
not my estimate; this is the Department of Energyto decrease gas
prices by one to four cents a gallon in 2018.
The only short-term way to increase supplies right now, leads directly to the sands of Saudi Arabia. As we see here, OPEC is producing well under its capacity, despite record oil prices.
Saudi Arabia is about the only country that has extra capacity
right now. Its the 800-pound gorilla of oil production, and even
after modestly increasing production this weekend, they still have
excess capacity.
Most experts believe they could produce another million barrels
of oil, which would have an immediate impact on price. Today,
Saudi Arabia is still producing this year, below its 2005 production
level, and thats not because of lack of maintenance or wells running dry, as it is in, say, Russia or Venezuela or Mexico.
But, having said that, in the long term, we must address the demand side of the oil equation. That is the only answer, in my judgment.
One good thing that came out of the oil shock in the 70s, was
the push for dramatic energy conservation. Jimmy Carter is not regarded as a very successful President, but a lot of the things he did
had positive effects on oil prices for a decade or more later.
Why dont we do more of it now? It would reduce prices at the
pump and be the easiest thing to accomplish legislatively. And well
hear about this from Mr. Laitner, but Californiapeople forget
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thisCalifornia made herculean efforts under Governor Jerry
Brown, over 20 years ago, during his Administration, to reduce consumption.
They put into effect all kinds of conservation measuresfor
buildings, utilities, appliancesand now California, the car capital
of the country, is well below the national average in energy use and
consumption.
As one environmentalist said, alternative fuels are the sizzle, but
conservation is the steak. Even as someone who supported targeted
drilling in the East GulfI was one of the few Democrats who
voted for it. I said, lets drill in the East Gulf. I didnt see much
environmental damage, and we should do more drilling in the East
Gulf.
Thats closest to the refineries; it probably has the greatest
known capacity of untapped oil and gas.
You still cant drill your way out of the problem. If you dont do
conservation, if you dont do alternative energy, and you dont tell
the big oil companies they can no longer run energy policy in
America, we wont succeed, plain and simple.
So there are two main things, in my mind, that set our nation
way off track on energy prices: First, because there were low
pricesand that is goodwe were complacent. We didnt prepare
for the future as the handwriting was on the wall.
Second is the power of the oil, utility, and car companies, which
for years and years and years, prevented us from enacting real alternative energy programs.
So there are a lot of questions. Im sure that not all of my colleagues will agree with everything or even most of what Ive said,
but I think we ought to have a debate on this very important issue,
and look at the causes, before we look at how were going to solve
the problems.
So, with that, let me call on Congressman Brady for his opening
statement.
[The prepared statement of the Honorable Charles E. Schumer
follows appears in the Submissions for the Record on page 41.]
OPENING STATEMENT OF HON. KEVIN BRADY, A U.S.

REPRESENTATIVE FROM TEXAS
Mr. Brady. Thank you, Mr. Chairman. Its a pleasure to join in

welcoming the panel of distinguished witnesses before us today.
The topic, not just of current oil prices, but future oil prices and
gas prices, is a concern of all Americans, and they want Congress
to take action now to address this problem.
Earlier this year, Congress took great pride in announcing and
passing legislation providing economic stimulus checks to America,
but data released last week, shows that the historic rise in gas
prices, has wiped out the economic impact of those stimulus checks.
Average families in America are paying $535 more this year than
last, so those $600 rebate checks, economic stimulus checks, are
not going to buy a familys computer or new washer and dryer, but
is being poured down our gas tanks and having an effect, unfortunately, on our economy.
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As witnesses will testify about today, higher oil and gas prices
are largely due to the fact that global demand is rising faster than
global supply.
In recent years, rapid economic growth in China, India, and elsewhere, have raised living standards, but also resulted in rising demand for oil, gas, and other commodities. Gasoline price controls
and subsidies in many countries, have also contributed to demand
pressures.
Meanwhile, supply is growing at a much slower pace, and were
not producing as much as we need. Instead, were relying on unstable countries to fuel America.
For example, recent instability in Nigeria, has led to a drop in
production there, and other producers have tightened their supplies, as well. We can no longer afford to rely on unstable countries
for our energy needs.
And while Congress is eager to place the blame elsewhere,
whether its OPEC or big oil or big autos, the fact of the matter
is, we ought to take a square look in the mirror. We need more
American-made energy, and this Congress has resisted it. We need
more supply.
Three decades ago, during Jimmy Carters energy crisis, this
country imported just one-third of energy and produced the rest
ourselves. Today, it is almost exactly the opposite; we import twothirds of our energy and take responsibility for only one-third.
Our goal should be to take responsibility for two-thirds once
again. It seems to me, reading Dr. Yergins testimony, where he
talks about the either/or phenomenon, this Congress has been
eager to offer a false choice to the American public: Either renewable energy or traditional energy.
The truth of the matter is, for us to have both stable energy
prices and to transition to a more balanced portfolio, we need both.
This Congress is committed to conservation through fuel standard increases. Weve committed to renewable energies by extending
the Republican tax credits on wind, solar, hybrids, and a number
of other alternative sources.
What weve refused to do, is commit to creating more traditional
energy here in America. We must thoughtfully explore the potential of our own resources, open up closed areas to exploration and
development.
Beneath Americas land and seas, lie an estimated 100 billion
barrels of oil and 650 trillion cubic feet of natural gas. Unfortunately, this Congress has failed to act in an effective and meaningful manner to open up those thoughtful resources.
Democrat leaders have offered no solutions, only gimmicks, from
suing OPEC to windfall profits taxes, to the latest use-it-or-lose-it
approach, which has been universally derided by every geologic scientist in the country.
I hope that we can work together to craft responsible energy solutions that America needs and wants; more American-made energy supply, more renewables, more conservation, so we can again
take more control of our own daily energy needs.
With that, I would yield back.
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OPENING STATEMENT OF HON. CAROLYN B. MALONEY, VICE

CHAIR, A U.S. REPRESENTATIVE FROM NEW YORK
Vice Chair Maloney [presiding]. Im Congresswoman Maloney,

and I, first of all, would like to welcome all of the panelists. We
look forward to your testimony, and I would like to thank Chairman Schumer for his very timely and important hearing.
Just a few months ago, it was shocking to see oil rise above $100
a barrel. Now its trading at record highs above $138 per barrel,
double the price it was last year.
Consumers are feeling the pinch in their pocketbooks, and
whether its paying over $4 a gallon at the pump, or seeing higher
grocery bills as a result of rising fuel costs, the question on the
minds of all Americans, is, are high oil and gas prices here to stay?
Many energy analysts believe that a large part of the recent rise
in oil prices, has been caused by increased demand by developing
countries such as China and India.
Oil prices are expected to rise alongside the expansion of these
countries over the long term. In the short term, the economic downturn here in the United States and the weak dollar, have also contributed to rising oil prices.
The Federal Reserve has lowered its target rate to two percent,
which has led to a fall in the Dollar relative to other currencies.
Instead of seeking the safe haven of U.S. Treasury Bills, investors
have been looking to commodities, including oil, as a hedge against
inflation, thereby driving up the prices.
As our witness, Daniel Yergin, puts it, oil has become the new
gold. Financial markets and oil markets have become intertwined
as never before, as the amount of non-commercial trading of oil has
increased.
Congress must scrutinize how much of the run-up in oil prices
is due to speculative manipulation. One potential way to deter
speculators from driving up the prices, is in several bills before
Congress.
It would prohibit anyone without the ability to actually accept
delivery of crude oil, from buying it as a futures contract. There are
others for disclosure and increasing the margin requirements.
Americans are paying a hefty price for the Bush Administrations
failure to pursue a sensible energy strategy over the past seven
years. Meeting the energy needs of our nation, will soon require
achieving greater efficiency, conservation, and investing more in renewable fuels.
We cannot drill our way out of this problem, as the Administration would have us believe. The U.S. has less than two percent of
the worlds oil supply, but we currently use 24 percent.
Drilling in the Arctic National Wildlife Refuge would not yield oil
for ten years, and at its peak production in 22 years, it would only
save consumers about two cents a gallon on gas.
Oil companies already have 68 million acres of federal oil reserves leased for development, and the House will soon take up legislation, H.R. 6251, that will require oil companies to use those
leases or lose them.
We are building on steps that the Democratic-led Congress has
already taken to lower oil prices and reduce our dependency on oil,
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by expanding tax incentives for renewable energy and creating
green jobs to spur American innovation and business investment.
The energy bill signed into law in December, included provisions
to combat oil market manipulation and increase vehicle fuel efficiency to 35 miles per gallon in 2020, the first Congressional increase in more than three decades for fuel efficiency.
This Spring, we suspended the Strategic Petroleum Reserve,
which will put more oil on the market and help drive down gasoline prices. We have overridden the Presidents veto of the new
Farm Bill, which makes an historic commitment to more affordable, homegrown, American biofuels and increases Commodity Futures Trading Commission authority to detect and prevent manipulation of energy prices.
Congress continues the fight to bring down the price of gas and
make America more energy independent. Our nations continued
prosperity depends on meeting the challenge of our energy needs
and bringing relief to American families.
Again, Mr. Chairman, we thank you for holding this hearing and
we look forward to the testimony.
[The prepared statement of the Honorable Carolyn B. Maloney
appears in the Submission for the Record on page 44.]
Chairman Schumer [presiding]. Thank you, Vice Chair
Maloney. Senator Brownback.
OPENING STATEMENT OF HON. SAM BROWNBACK, A U.S.

SENATOR FROM KANSAS
Senator Brownback. Thank you very much, Mr. Chairman. Its

always a pleasure to join you, even if your statements sometimes
can be a bit one-sided. I guess thats why we have two sides up
here.
I am reminded that on the price-setting equation that I learned
in basic economics, that there are two factors that go into price. I
dont think they changed this formula much over all the research
over all the years. This one seems to be pretty well set.
You have a supply curve and you have a demand curve, and
where those intersect at a point called price, and that those are the
two pieces to setting the fundamental price. If the panel disagrees
with that, I hope, later on, that youll correct me and correct the
economics for the world.
But you have two pieces to this. I think, clearly, what you have
to do to work on both sides of the equation. Youve got to work on
the supply side of the equation and youve got to work on the demand side of the equation, if youre going to be able to try to bring
price down. You want less demand, you want more supply, if you
are to be able to bring that price point down.
We can work, I guess, against fundamental economics; we can
try to jimmy-rig something, but at the end of the day, this is whats
going to happen globally.
Weve been pretty good, the United States has, on demand side.
If you look at our gasoline growth curve, its been fairly flat, pretty
stable. Its gone up a little bit, not a lot.
You look at the world demand for gasoline, and its skyrocketed.
We all know that; we all know that we can control a certain piece
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of the demand side of the equation within our own country, or have
at least impact on that, but we cant on the world situation.
We also know we can have more impact on our supply here at
home and that those two pieces go together. Now, the Democrat response, and theyve had one, windfall profits tax, more regulation,
no nuclear energy, those go at driving price up. They dont get you
more supply in the system.
I guess they could reduce demand by increasing the price, artificially, with more taxes, and that could get at your demand in the
U.S. It doesnt get at your global demand point at all, on global
prices, because we cant put those taxes on globalpeople around
the world.
Thats not going to get the issue there. Nothing done on production. Weve certainly done a lot of expansion on ethanol production,
on biofuels. I dont know anybody thats opposed toI guess some
people are opposed to expansion of biofuels.
Were certainly looking at cellulosic ethanol. Were getting long,
strong support for that. Hopefully, on biodiesel, well be able to go
forward.
Wind, were going to be able to go forward. We all support that.
At the end of the day, you still have a gasoline-based system at
the present time and into the near future, and youre going to need
more oil production and more oil supply. And if youre saying were
going to hold out of production, major tracts that have the highest
potential for production, thats going to reduce your overall supply
equation in this country.
I want to read a quick quote here that was said by a gentleman
I think most people are familiar with. It says: America must get
to work producing more energy. The Republican program for solving economic problems, is based on growth and productivity. Large
amounts of oil and natural gas lay beneath our land and off our
shores, untouched, because the present Congressional majority
saying that in parenthesesseems to believe that the American
people would rather see more regulation, more taxes, and more
controls, than more energy. It must not be thwarted by a tiny minority opposed to economic growth, which often finds friendly ears
in regulatory agencies for its obstructionist campaigns. Make no
mistakes, we will not permit the safety of our people or environmental heritage, to be jeopardized, but we are going to reaffirm
that the economic prosperity of our people, is a fundamental part
of our environment.
Now, Id like to take credit for that original thought, but its
paraphrased slightly, spoken 28 years ago by Ronald Reagan when
he accepted the nomination to be the Republican nominee for President, when he was nominated that year.
We have got to work on the supply side of this. Weve got places
we can agree on, a number of these issues, but until you get at that
fundamental of supply as my colleague to the right, Senator Bennett noted, when his dad was a Senator, they started talking about
the oil shale region in Utah and its availability, and more oil there
than in Saudi Arabia, and yet it has been held out of production.
It has not been allowed to be explored. It is past time, and we
can do it in an environmentally sensitive fashion. We need to do
that; we need more flex-fuel vehicles. Were going to have a bipar-
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tisan bill to require that half of our fleet be in vehicles sold that
have flex-fuel chips.
But weve got to get at both sides of this equation. Well work
with you on the demand side. We agree on most of that. The supply
side is one we cannot ignore; we must address it. Thank you, Mr.
Chairman.
[The prepared statement of the Honorable Sam Brownback appears in the Submission for the Record on page 46.]
Chairman Schumer. Senator Klobuchar.
OPENING STATEMENT OF AMY KLOBUCHAR, A U.S. SENATOR

FROM MINNESOTA
Senator Klobuchar. Thank you very much, Mr. Chairman.

Thank you for holding this hearing, thank you to our witnesses.
I was home this weekend in Minnesota, and probably half the
people, when they brought up an issue, it was about gas prices. I
think that out on the prairie lands and in the Midwest, where people have longer ways to drive, theres not as much public transportation, it hits people harder.
There are a lot of people not going up to their cabins, not going
up to the lakes and other places, just because they simply cant afford to fill their car up with gas.
I would agree with whats been said, that in the long term, that
the long-term solution is a combination of things. We are right next
door to North Dakota, we know theres some more domestic drilling
we can do, but the bottom line, is, we just have three percent of
the worlds oil reserves and that were going to have to look for
other alternatives.
Were very excited about biofuels in the Midwest. We know we
need to go beyond corn ethanol to cellulosic prairie grass, to
switchgrass, to LG to whatever else, and we actually believe that
this can be done, because weve seen how its revitalized the rural
areas of our state.
But what Im most curious about today, is this topic of speculation. I think theres a lot of reasons you might have seen this immediate jacking up of prices and this short-term issue.
Some of it, of course, is the demand that weve talked about with
China, but the demand in the United States has gone down. Some
of it is the weak Dollar, and this idea that I think people have
talked about, with people pushing their money into commodities,
not just oil, but also food and taking it out of things like hedge
funds.
But even all of that, I believe, doesnt really account for this price
differential. We had the CEOs of some of the major oil companies
testify before Congress a few months ago, and say that oil shouldnt
be trading at over $100 a barrel; that it should be trading somewhere around $55 to $60 a barrel.
So the question that I want you to think about, as our witnesses,
is, if thats true, do all of these things with just the people pushing
their money in and the weak Dollar, account for that vast price differential?
We had a top-ranked energy analyst who called the oil markets,
the worlds largest gambling hall. Its said its open 24/7, its totally
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unregulated, and this is like a highway with no cops and no speed
limit, and everybodys going 120 miles per hour.
So Im not one to think this is all about speculation, but when
youve seen this frenzy of unregulated market speculation, and you
think and you think about these people who are spending their
hard-earned money on gas, if you think you can do something
about it, that doesnt hurt in the long term, thats going to make
some difference in the short term, you want to take action.
And, obviously, the things that weve been looking at, is building
on the work that was done in the Farm Bill, which partially closed
the Enron loophole, to see if theres more needed to be done with
the so-called London loophole, with trying to do something about
regulating some of the overseas offshore trading thats being done,
to look at what we can do about the margin requirements, which
we know are very low for oil, when you compare them to other
stocks and things like that; to look at the regulatory powers that
we can give to these agencies.
We had a joint Agriculture Appropriations hearing on this with
the acting Chairman, and we kept asking, what other tools do you
need? Clearly, they need more cops on the beat. Theres been a
huge reduction in their budget, and in the number of people looking at these markets, but the issue other than that, is, I believe,
just looking at this as a former prosecutor, that you want to have
the tools.
Maybe you wont use them, but if youve got a situation where
you used to have the burden on those that you regulate, and now
you have the burden, as the agency, to try to prove things, thats
harder to prove them.
So, I think that, looking at what tools we can give to these agencies, to better look at price gauging and better look at market manipulation, is a good thing to do, because any prosecutor will tell
you that laws are good, but if you dont have the cops on the beat
that are looking for the violations and you dont have the prosecutors to get the work done, its not really going to make a difference.
So, the way I look at this, its not all about speculation, but I believe that this has been a major factor in some of the short-term
jacking up of prices, and Id like to hear what the three of you have
to say about that, and also about some of the ideas that weve been
talking about, to resolve it. Thank you very much.
Chairman Schumer. Thank you, Senator Klobuchar. Our last
opening statement, even if new people come in, is going to be Senator Bennett.
OPENING STATEMENT OF ROBERT F. BENNETT, A U.S.

SENATOR FROM UTAH
Senator Bennett. Thank you very much, Mr. Chairman. The

advantage of going last, is that you get to make notes and respond
to some of the things that have been said.
I agree absolutely with your statement when you said that some
of us would not agree with you.
[Laughter.]
Senator Bennett. You made reference to ANWR and said it will
take ten years, and to quote that great economist, Jay Leno, thats
what the Democrats were saying ten years ago when they refused
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to agree to open ANWR. The Congress passed authorization for
ANWR, President Clinton vetoed it, and if, indeed, we had proceeded at the time Congress passed it, we would now be receiving
from ANWR, a million barrels a day.
Theres a disconnect between the statement that a million barrels a day, if it were brought onboard by the Saudis right now,
would solve a lot of our problems and the statement that if we had
drilled in ANWR, we would only have a few cents.
If a million barrels a day from Saudi Arabia would solve our
problems, or at least alleviate them, a million barrels a day from
ANWR would do it.
And I just want to make this one quick comment: Ive been to
Alaska, Ive seen ANWR. Ive also seen the Naval Petroleum Reserve, which is at the top of Alaska.
Theres more wildlife in the Petroleum Reserve, than there is in
the Wildlife Refuge, and theres more oil in the Wildlife Refuge,
than there is in the Petroleum Reserve. It shows that labels
maybe the thing we ought to do, is just switch the labels, so we
call the Wildlife Refuge, the Petroleum Reserve and the Petroleum
Reserve, the Wildlife Refuge, and then wed feel better about drilling up there.
There are comments about big oil runs the policy in America.
The fact is, we do not have an American oil market, we have a
world oil market, and investor-owned companies like ExxonMobil
and Chevron, constitute six percent of the worlds oil companies.
The other 94 percent are controlled by governments.
The largest oil company, of course, is Saudi Arabia; the second
one is Iran, then you have Russia, you have Venezuela, and investor-owned oil companies are the only ones who use their profits to
prospect for new oil.
The others use their profits, in the case of Hugo Chavez, in order
to make trouble in South America. Use it or lose it, with respect
to drilling on public lands and leases, I would point out to everyone, coming from a public lands state where the Federal Government owns two-thirds of the state, a lease on public land now expires in ten years and reverts back to the Government, if oil is not
found and is not being produced there. Use it or lose it, is the
present law.
The reason there are so many leases that are not producing oil,
is because the oil isnt there. You get the lease, not by making any
seismic tests; you get the lease by looking at it, physically.
Yeah, youre allowed to fly over it with a helicopter, and then you
make a bet and say, I think there may be some oil there. You get
the lease. That only gives you the privilege of paying rent to the
Federal Government on those lands while you explore them.
So, you think theres some oil there, you lease it, you pay rent
on it, you do the seismic testing, and if you discover from the seismic testing, that your original guess was wrong, you still pay the
rent, and, naturally, you dont produce any oil.
And if you do not produce oil within ten years, you turn the lease
back to the Federal Government. Use it or lose it is a strawman,
because its already the law.
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Oil shale, it is true that they started talking about oil shale as
long ago as when my father was in the Senate. There are several
problems with it, some of them technical, most of them financial.
But this Congress has established a moratorium on even filling
out the forms that would let you start on oil shale. There is more
oil in eastern Utah, western Colorado, and southern Wyoming,
than there is in Saudi Arabia, by a very large margin, and 100 percent of that oil shale, is off limits for anyone, under the moratorium currently in place.
There is oil shale activity going on in the State of Utah, and
there are test wellstest procedures that look as if they will start
producing in fairly significant test amounts this year.
Why is that going forward? Because those test activities are on
state lands, rather than federal lands, and the State of Utah is allowing them to go forward. Its time the Federal Government allowed them to go forward, because, repeating again, more oil in
Utah, Colorado, and Wyoming, than there is in Saudi Arabia.
Those who say, oh, its environmentally difficult, because it takes
a lot of water, it takes a tiny fraction of the amount of water to
produce a barrel of oil from oil shale, as it does to produce a barrel
of oil from ethanol.
Chairman Schumer. Thank you, Senator Bennett. I think Ill
take the prerogative of the Chair and just mention two quick
points, before we get to our witnesses:
One, the difference between Saudi Arabia and Alaska, is that the
Saudi Arabian oil is available now and the Alaskan oil wont be
available until ten years from now.
We can all go back and say, you didnt do drilling, you didnt do
automobile raising of mileage standards. Nobodys blameless here,
no matter what your perspective is, and a lot of mistakes were
made in the past. What do you do now?
One other point: I despise Chavez and the head of Iran.
ExxonMobil, last year, spent 60 percent of its profits buying back
its stock. That will not produce one type of new energy, whether
its alternative energy, when the head of ExxonMobil told us he
didnt believe in alternative energy, or oil and gas.
With that, Im using the prerogative of the Chair to get in the
last word. I dont do that much, but I couldnt resist it. [Laughter.]
Do you want to say something? You can get the last word, Senator Bennett.
Senator Bennett. Not at all, Mr. Chairman. We can go discuss
this privately.
Chairman Schumer. Okay, good.
[Laughter.]
Senator Bennett. We wont take the time of the witnesses.
Chairman Schumer. Thank you. Okay, let me introduce our
witnesses. I think this dialogue is a good dialogue, and all I would
say, is, I do hopeI dont think the answer is either exclusive demand-side or exclusive supply-side, and I would hope we could
come together with some compromise.
Ten years ago, I went to Senator Murkowski and suggested that
if he could get ten Republicans to raise the car standards, I could
get ten Democrats to vote for Alaskan oil, and it couldnt get done.
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Anyway, let me introduce Daniel Yergin. Daniel Yergin is Chairman of Cambridge Energy Research Associates, one of the worlds
leading energy consulting and research firms.
Hes the author of numerous books on energy and economics, including The Prize, for which he was awarded the Pulitzer Prize.
He chaired the U.S. Department of Energys Task Force on Strategic Energy Research and Development and was the recipient of
the United States Energy Award for Lifelong Achievements.
Hes a member of the Board of the United States Energy Association; a member of the U.S. National Petroleum Council, and regarded as one of the foremost voices on energy issues.
Frederick Joutz is Professor in the Department of Economics at
George Washington University, and Director of Research Programs
on Forecasting. Dr. Joutz has served as a consultant and technical
expert to several Federal Government agencies and private corporations, including doing extensive work consulting for the Office
of Energy Markets and End Use at the U.S. Energy Information
Administration.
And Skip Laitner is Director of Economic Analysis for the American Council for an Energy-Efficient Economy. Prior to joining
ACEEE, he spent almost ten years as a Senior Economist for Technology Policy for the U.S. Environmental Protection Agency. Hes
been working in the energy policy arena for more than 35 years.
Gentlemen, your entire statements will be read into the record.
Proceed as you wish, and thank all for coming.
STATEMENT OF DR. DANIEL YERGIN, CO-FOUNDER AND

CHAIRMAN OF CAMBRIDGE ENERGY RESEARCH ASSOCIATES, WASHINGTON, D.C.
Mr. Yergin. Chairman Schumer, Vice Chair Maloney, Congressman Brady, Ranking Members, distinguished members of the Joint
Economic Committee, its an honor to appear before this Committee, and I certainly want to congratulate the Committee on its
wisdom in undertaking and encouraging this searching examination while policies are being considered and before they are being
framed.
We are at a break point in world oil. The pressure on markets,
the impact on consumers and on the economy, the shifts at hand,
tell us that a break point is at hand.
Markets do not go up forever. Were already seeing a response.
Gasoline demand in 2007, probably reached its peak in the United
States, and is now begun to decline.
Secondly, I think, as Chairman Schumer said, the steak, a big
piece of steak, is energy efficiency. Its the subject that drew me
into energy research in the first place.
Weve doubled our energy efficiency over the last 30 years. I
think its a reasonable goal to double it again. I think its possible,
and I think Skip may address this, that we could reduce our gasoline demand by 700,000 to 900,000 barrels a day, with really no
discomfort to consumers at all, by a small package of almost behavioral changes.
The third thing I want to address, is the oil shock, and we really
are in an oil shock, and youve already addressed how painful it is
for consumers and businesses. The specter of stagflation is once
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again in front of us with low growth, high inflation. Weve discussed how oil prices have gone up.
In such circumstances, the tendency is to try and find a single
explanation, but for something this big, there is not a single explanation. I think we can divide it into the traditional fundamentals
and the new fundamentals.
The traditional fundamentals have been addressed, particularly
the growth in demand. Between 1998 and 2002, world demand
grew by four million barrels a day. Over the next five years, it grew
by eight million barrels a day. Thats the kind of pressure that we
have on the demand side.
Theres been a slow response in terms of supply. Why?
One is the issue of access around the world; secondly, is uncertainty about investment, fiscal, and regulatory regimes; thirdly
and Im going to address thisthe shortage of people and equipment, is a very big part of the picture.
A second of the traditional fundamentals, is geopolitics. Its already been addressed by Congressman Brady, about Nigeria, as
one example. Forty percent of Nigerian production is currently out.
Last week, more oil was lost in Nigeria, than the entire increase
from Saudi Arabia, and I could go down a long list of that.
So its a tight market and its a crisis-prone market. Its more
vulnerable to the impact of disruptions.
I want to add that the dangers and uncertainties related to
Irans nuclear program are also a distinctive feature of todays oil
market, and, clearly, there is an Iranian risk factor in the price of
oil today.
What about the new fundamentals? The first one is a doubling
of costs in the last four years. It costs twice as much to develop a
new oil field or gas field, as it did four years ago. Theres a shortage of people, equipment, skills, theres the rising cost of commodities like steel, and all of this leads to delay, postponement, cancellation, and so were seeing a slower response in terms of supply,
than would otherwise have been expected.
Then we come to the controversial question of oil as the new
gold, and oil as the storehouse of value these days, reflects broad
global economic trends and imbalances. Also, its increasingly seen
as an asset class by investors.
This is a development that has only really emerged in the last
few years. We know the role of the financial markets is controversial, and no word these days is more controversial than speculator.
Speculator has a technical meaning; it means the people on the
other side of the trades of independent gas producers, airlines, or
farmers, in hedging their risks.
Then theres the colloquial meaning, which ranges from manipulator to risk-taker, to those who collectively get caught up in irrational exuberance and help generate bubbles.
I think its too limited to focus on that in terms of the financial
markets. They are playing an increasingly important role in price
formation, responding to, accentuating, and exaggerating supply
and demand, geopolitics, and other trends, and theres clearly the
need for greater transparency in these markets, and I think thats
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the first step, before new controls, is actually to understandmake
sure we understand how these markets work.
What we observe, is that the people who are called financial investors or speculators are in fact in it for many different reasons:
Some to trade, some to hedge against inflation, conflict in the Middle East, a permanent shortage, and I think there is a shortage
psychology today in the financial markets thats widespread and
has grown as the prices have gone up, partly based on current market conditions, and partly based on expectations of whats ahead.
And as we see in other markets, this becomes self-reinforcing, at
least until the markets turn.
The U.S. credit crisis, the weakening of the dollar, has been addressed as an important point. As the dollar has weakened, as interest rates have gone down, oil prices and other commodities have
gone up.
Theres a painful irony here: The crisis that started in the
subprime market in the United States has traveled around the
world and through the medium of a weaker dollar has come back
home to Americans in terms of higher prices at the pump.
Just in terms of policy, one, I think we needwe have to get beyond the either/or. We need a broad approach, an ecumenical approach, a portfolio strategy that recognizes both the importance of
demand side, of alternatives, renewables, and also the reality that
over 60 percent of our energy today comes from oil and gas, and
that we have to pay attention to the environmentally sound provision of that.
I would say focusing on that question of investment, timely investment, there is a shortfall in investment, and that has to be
stepped up in order to play a vigorous game of catch-up with the
growing world economy.
The role of markets: I think if we compare the self-inflicted gas
lines of the 1970s, with the relatively smooth reaction to the hurricanes in 2005, a very important lesson about how markets can respond, that we should keep in mind.
The members of the Committee have talked about the U.S. and
global markets. So often, as I listen to the discussion, it seems to
me that were really rather inward in how we look at it.
Our oil imports are twice what they were in the 70s; our share
of the world market is less; the balance is changing the market; national oil companies control over 80 percent of world oil reserves.
The five super-majors account for less than 15 percent of total
world oil production. China and India are now significant players.
The list goes on.
The realities of the global markets and Americas integration into
them emphasize the need for a cooperative, multifaceted approach
to relations, both with producers and other consumers, and that
puts a premium on how we manage, how we think through, and
how we structure our relations with other countries.
My last point is about expectations. A lot of what I think is going
on in the financial markets, is not only looking at the short term
Nigeria, Iranbut particularly an expectation of short supplies,
three, five years down the road.
Those expectations feed back into price, and these general expectations of very tight supplies, are based upon the assumption that
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the global market cannot generate the responses that are warranted in terms of demand and efficiency and conservation, in
terms of new supplies and timely investment, in terms of renewables, new technologies, and alternatives.
Meanwhile, developments of great importance, like these immense discoveries in the offshore of Brazil or downward shifts in
demand that are occurring, these are currently discounted. A major
contribution to alleviating todays oil shock would be to create an
environment based upon realistic assessments that change expectations.
One way to do that is to ensure that timely investment is really
and convincingly underway.
In conclusion, the answer here, as you all have already said, is
not either/or. We need that broad portfolio approach of new supplies, renewables, efficiency, all developed with appropriate environmental and climate change considerations in mind.
Such an approach would be a great contribution, not only to relieving the pain and pressure that the American people are feeling
at the pump, and the difficulties that are faced by American businesses, small and large alike, as you all have addressed this morning, it would also be a fundamental contribution to the future prosperity of our nation and to the global economy, of which we are so
centrally part. Thank you.
[The prepared statement of Dr. Daniel Yergin appears in the
Submissions for the Record on page 49.]
Chairman Schumer. Thank you, Dr. Yergin. Dr. Joutz.
STATEMENT OF DR. FREDERICK JOUTZ, PROFESSOR OF ECONOMICS, GEORGE WASHINGTON UNIVERSITY, WASHINGTON,
D.C.
Mr. Joutz. Mr. Chairman, Ranking Member and distinguished

members of the Joint Economic Committee, I would like to thank
you for holding this hearing and for inviting me to testify on the
impact of oil prices on the U.S. Economy.
The impact of rising oil prices on the economy, is an important
issue, but one that has only recently gathered the same attention
that was paid to it during the oil price shocks of the 1970s.
Although large increases in oil prices, by themselves, do not lead
to recessions, large increases in oil prices have been associated
with and contributed to episodes of falling incomes, higher unemployment rates, and rising inflation.
Whats the likely impact of the recent increase in oil prices? I put
together a very simple model, and I estimate that the recent runup in prices, could lead to a cumulative decline in U.S. GDP growth
of six to seven percent over the next two and a half years.
These results are due to the increasing share of incomes spent
on oil, and this is consistent with one of the charts you have, showing crude oils share of GDP has doubled. In fact, its approaching
the levels that it reached in early 1980.
The increase in the share of income spent on oil and the future
course of oil prices, affects both consumers and businesses in the
United States. It creates uncertainty about income and employment prospects for consumers, and about long-term profits for businesses.
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When consumers confidence is low, as it is today, and theyre
worried about how much money they are really making or will
make in the next few years, they postpone purchases of big-ticket
items like durable goods, automobiles, and light trucks.
Businesses make similar plans to postpone or cut their investment, spending decisions, and upgrade their existing machines and
structures.
In addition, they are less inclined to hire new workers and maintain the hours of their existing workforce. These changes in spending on the part of consumers and businesses, are the reasons driving the expected decline in GDP.
Further, increases in oil prices, are putting upward pressure on
inflation. From 2006 to the present, inflation has risen by about 1.2
percent.
A substantial number of jobs have been lost, as well. Since December of 2007, when employment was slightly over 138 million
people, theres been a decline of over 200,000 jobs in the United
States, and weve seen that in just the last two months, a big uptick in the unemployment rate.
I would like to contrast the most recent episodes of oil price
changes to earlier oil price shocks that the U.S. economy had endured. During the two oil price shocks in the 1970s and early
1980s, GDP fell by 13.3 percent and 11.8 percent, respectively.
At the same time, inflation rose by 4.9 percent and 4 percent,
thus the term, stagflation. In contrast, during the two oil price
shocks in the late 90s and early 2000s, there was a much smaller
decline in GDP growth, and, in fact, GDP actually increased during
the second of those two oil price shocks between 2002 and 2005.
At the same time, inflation increased marginally, while in 2002
through 2005, inflation fell in the United States.
The behavior of the economy during these two recent oil shocks,
led many economists to believe that the United States had become
immune to changes in oil prices.
However, the evidence and my results, seem to indicate that is
not the case. This change in response back to one like we had in
the 1970s, of higher oil prices, should not come as a surprise.
First of all, theres been an enormous real price increase, a tripling of oil prices, in a very short period of time.
As I discussed above, the share of income spent on oil and also
other energy sources, has risen to much higher levels than what
has been seen during the earlier episodes in the 1990s and the beginning of the 2000s.
Second, this oil price increase has followed on and coincided with
a severe financial crisis. The Federal Reserve has used expansionary monetary policy to prevent the financial crisis from crippling the economy.
One aspect of that policy, has been a rise in the inflationary expectations.
Finally, I would like to conclude by stating that the effect of oil
price changes on the economy, is not symmetric. Even if oil prices
fall, while the downward pressure on GDP will ease off, historical
evidence suggests that we will not see a corresponding economic
boom.
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Thank you very much for the opportunity to testify, and Id be
happy to answer questions.
[The prepared statement of Dr. Frederick Joutz appears in the
Submission for the Record on page 64.]
[Chart entitled, Crude Oils Share of GDP Has Doubled, appears in the Submissions for the Record on page 86.]
Chairman Schumer. Thank you, Dr. Joutz. Mr. Laitner.
STATEMENT OF JOHN SKIP LAITNER, DIRECTOR, ECONOMIC

ANALYSIS, AMERICAN COUNCIL FOR AN ENERGY-EFFICIENT
ECONOMY (ACEEE), WASHINGTON, D.C.
Mr. Laitner. Thank you and good morning, Chairman Schumer,

Vice Chair Maloney, distinguished members of the Committee, and
Committee staff.
Im now celebrating almost four decades of work in this thing we
call the energy policy arena, and there have certainly been some
disappointments along the way.
At the same time, however, Ive never been more confident in
telling you and this Committee, that the United States has never
been better positioned to move on to a path of what we might call
sustainable energy production and consumption, one that promotes
both productivity and economic prosperity.
The underpinning of this opportunity, is the huge potential for
cost-effective investments in energy efficiency through all sectors of
the economy.
When we put kilowatt hours of electricity, tons of coal, therms
of natural gas, on a comparable footing of oil equivalents, the efficiency potential through the year 2030, is on the order of 45 to 50
billion barrels of oil equivalent, should we choose to develop it and
pursue it.
This is about two and a half times bigger than what some have
suggested might be available from offshore drilling, and it is about
five and a half times bigger than what we will get from the improved CAFE standards enacted by Congress last December.
The good news is that if we were to invoke the spirit of Leonardo
da Vincis motto, saepe videiri, to know how to see, interpreted,
if we know how to see and pursue the development of that 45 to
50 billion barrels of efficiency, that would generate a significant
downward pressure on oil prices and increase both the resilience
and the robustness of the American economy, again, if we choose
to develop it.
As my colleague, Dan Yergin, would perhaps suggest, we might
think of energy efficiency as the next great prize.
In all of this, the market responds to direction and information.
Policy solutions will play a pivotal role in strengthening the continued development, dissemination, widespread adoption of energy-efficient technologies.
In that regard, ACEEE recommends a set of ten policy actions
that might be undertaken by this Congress to immediately provide
that market signal, and, more critically, to change the direction of
energy usage through increased energy efficiency.
Our proposals include the immediate passage of a joint resolution
to reaffirm the energy efficiency resource and directing federal
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agencies to develop that resource at all levels within their current
budget and mandates.
They also include an emergency supplemental transit appropriation, the creation of what we call a crusher credit to retire older
and inefficient cars and trucks, and the launch of a national telecommuting videoconferencing initiative to reduce unnecessary travel.
Although Senator McCain appears to have anticipated some of
the testimony here today, we should also provide an array of incentives that parallel the automotive X Prize and the Freedom Prize,
all designed to stimulate new innovations of energy productivity.
Now, the full set of ten proposals offered here, is intended to accomplish two specific objectives. The first is provide an immediate
catalyst, by launching an effort over the next few months, that we
think can save oil in a hurry, a small amount, but sufficient to provide some certainty into the marketplace. If undertaken with sufficient robustness, these initial proposals might generate, as already
suggested, an immediate downward pressure on oil prices, to the
benefits of consumers and businesses.
The second is to begin the process of fundamentally restructuring
our transportation infrastructure, a step that will be necessary, if
we are to change the energy use path that our transportation system is currently on.
Many of these suggestions lay the groundwork for a shift in the
larger transportation policy, an opportunity afforded the next Congress by next years reauthorization of the Transportation Bill.
And by way of concluding and underscoring the critical importance of the energy efficiency resource, let me share the results of
a quick experiment and an analogy. First, the experiment:
I confess Ive not done all my homework. I have read Dans book,
The Prize. I have not yet read the Commanding Heights. However, I just ordered it, and its now here in this room, and I did
it on my Amazon Kindle. Its an e-book.
I was able to order it and have it accessed here in this room
within one minute, and I saved $5 in doing it, so Ive now contributed to the royalties of at least one of the panel here.
[Laughter.]
The point is that there are many ways to think about moving
and transporting goods. It is, in fact, easier to move and transport
electrons than to move and transport people and goods.
We have, through the information communication technologies
industry, an amazing capacity to deliver greater efficiency gains,
again, should we choose to develop it. That is one example of many
that we can rely on and begin to tap, should we choose to see it
and choose to develop it.
By way of my analogy, let me draw from the world of baseball.
Pitcher Nolan Ryan was something of a hero of mine. He won, I
think, something like 324 games over his career, which included a
stint with the Presidents own former team, the Texas Rangers.
But let me ask how many games would the so-called Ryan Express have won, had he taken the field without his catcher or
without his infield?
In a very similar way, if we are to design and implement an energy policy that sustains our economy in a highly prosperous man-
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ner, we should be funding and fielding a complete team effort, and
that includes the full development of the energy efficiency resource.
I thank you for the opportunity to speak, and I also will be happy
to answer questions.
[The prepared statement of Mr. John Skip Laitner appears in
the Submissions for the Record on page 87.]
Chairman Schumer. Thank you. I want to thank all three of
our witnesses for really excellent testimony that tries to deal with
this issue.
Were going to limit questions to five minutes and try to do two
rounds, so people can have a second chance.
First, to Dr. Yergin, I was surprised that in your testimony you
really emphasized the psychological effect and sort of bad things
seem to be prominent and good things seem to be downplayed.
Now, that would sort of not necessarily indicate, but augment the
view that non-market forces, non-immediate economic market
forces, are having some effect on this price.
You know that the U.S. Energy Information Administration is
predicting that while oil prices may remain high in the short term,
prices should drop off to the $75 range in the future. Do you agree
with that prediction?
A friend of mine says that one thing that will bite in here, is the
fact that were using less gasoline, and, sooner or later, people are
going to realize that, and in a huge country like ours, where so
much of our oil is gasoline, that that will have an effect.
So, do you agree with the United States Energy Administrations
prediction?
Mr. Yergin. We found that the best way to think aboutwe
once did a study called The Perils of Prophecy, about oil price
forecasting, and that so much of what happens to oil prices are affected by other things, such as what happens to GDP, what happens to global politics, and so forth.
I think, though, in our base case, we would think that, as we see
the kind of things that have been described here, like greater efficiency, market response, supplies with delay in coming on, that
would set the stage for prices to come down from where they are.
I think that right now, Im really struck by this kind of pessimism about future supply and focus on whats going wrong. I just
find that a very important part of the psychology of the markets
right now.
I saw your response when I mentioned that other things like the
demand response are not getting the attention. When that happens, then I think the markets can change.
Chairman Schumer. And let me then ask you this: Because
there is so much talk, the issue du jour here in Congress, is speculation, and if you just sort of stop the speculation, that the price
would come down.
Thats a little different than what youre saying. Youre talking
more about markets and the way they function, and, I guess, speculators are a result of that, as opposed to a cause of that, is how
some people put it.
So, do you think that if we did some things in speculation, limiting speculation, either raising margin requirementssome talk
about that, or at least giving the CFTC power to do thator saying
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that the speculator or the buyer must want the product for some
eventual use, as opposed to just holding it as an investmentthats
pretty severe, but Senator Lieberman is talking about thatdo you
think either of those would havewhat kind of effect would those
have on price, if any?
Mr. Yergin. I think that, obviously, the tool of shifting margin
requirements seems to be a reasonable tool that regulators should
have, as they do in other markets. Knowledge of whats happening
in over-the-counter markets, all of those things, are the starting
point.
I think that the notion that you should legislate asset allocation
on the part of investors, our 401(k) plans or whoever, you know,
whoever it may be, I think thats a pretty slippery slope to get into
that. If you limit liquidity, how then does the airline whose back
is against the wallour airlines are spending, I think, $60 billion
this year on jet fuelwe know the bad shape theyre in.
But if they cant hedge, they would be in even worse shape. So
I think that removing the liquidity from the market would not be
a wise thing to do.
There are some things that make great sense to do. Senator
Klobuchar raised the question that there needs to be trust about
the markets, and the first way youd get that is by transparency
and better information.
I think you do that before you rush in and start making a lot of
changes.
Chairman Schumer. The proposal that some of us are part of
here, that our side of the aisle has put forward, is more information, giving the CFTC the ability to investigate, and then letting
them change the margin requirements, without setting a number.
That seems to be something that you think might be a positive
move.
Mr. Yergin. Thats a reasonable thing, and I believe the CFTC
is going to report in September on the state of the markets. These
markets have changed rapidly, developed rapidly, and the first step
is to really more fully understand them.
Chairman Schumer. Thank you. Congressman Brady. Were
going to have a second round.
Mr. Brady. Thank you, Mr. Chairman. I appreciate all the testimony today.
I want to focus on Dr. Yergins comment that global supplies will
be in short supply over the next three to five years, that we need
to change the expectations, that timely investments need to be confident in the marketplace.
Given that while the Chairman likes to beat ExxonMobil like it
were the Brittany Spears of the media, the industry data shows
that, as you said, costs are doubling. Most energy companies are
reinvesting more than they profit.
The cost of an offshore lease, average cost, is between $20 million
and $60 million, the cost of a deepwater lease in the Gulf of Mexico, is between a quarter of a billion dollars and three-quarters of
a billion dollars to explore these. The costs are remarkable.
This Congress has said investments in renewable energy are important, even though they may not produce cellulosic ethanol for a
decade. Well we may not reach the hydrogen goal for two decades.
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Arent timely investments in the oil and gas on United States
lands and offshore, arent those equally important, timely investments for this country to make?
Mr. Yergin. Thank you. First let me clarify. I was not saying
that we necessarily believe that five years from now that markets
are going to be very tight, but that is kind of, as you can see, that
is what the prices are telling us.
I mean, if we have the kind of slowing of the world economy that
has been described, the delay in new supplies coming on, we do not
have a crisis involving Iran, then we could see a market five years
from now that could look quite different than it looks today. But
that is certainly the expectation right now. And there is such a
focus in the market on one particular country, China, and the
growth of Chinese demand, that that tends I find to often be the
end of all arguments and discussions.
Yes, I think thatthat is why I said it is not an either/or thing,
and that as a country over 60 percent of our energy comes from oil
and gas, and there are environmentally sound ways of addressing
the investment question there, too. That is part of the picture.
For instance, we made a huge bet as a country on natural gas
for electric power. We are going to be using a lot more natural gas
and electric power. Are we going to import that natural gas from
other countries?
We are spending almost $600 billion now to import oil from
around the world. Or are we going to produce some part of that
extra gas that we are going to use? I think that is a very immediate question we face as a country.
Mr. Brady. Thank you. I think it is important to understand
that when looking at both renewables, which we need to do more
of, but are very long term and traditional energy which is a proven
source, and we know we can produce again, though it will take
some time, I think is equally important.
Let me ask the panel
Mr. Yergin. Could I just add one thing?
Mr. Brady. Yes.
Mr. Yergin. That is, we focus on oil. But as the carbon regime
comes into place into this country there is going to be an extra premium on natural gas.
Mr. Brady. Sure.
Mr. Yergin. So we really have to think about our natural gas
supplies, as well as our oil supplies.
Mr. Brady. Absolutely. Thank you.
For the panel, there is a new proposal called Use It Or Lose It
where the premise is theres 68 million acres in America that is
currently for lease, and there is a vast resource of oil and gas underneath it, but energy companies just refuse to drill it.
Not withstanding the fact that the independent American Association of Petroleum Geologists basically just dismiss the whole
premise here in a letter this week in the fact that independents
drill, explore the balance of I think 70 percent of the natural gas,
more than two-thirds of the oil here in America.
With your expertise as a panel, of those 68 million acres can you
identify any of those acres that have vast resources, and that an
oil company refuses to explore?
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Mr. Yergin. You know theres a famous U.S. wildcatter at the
end of the 19th Century who discovered the biggest oil field in
Texas, and somebody once said to him: Is there oil at such-andsuch a place where he was drilling?
And his answer was: Well, actually only Dr. Drill knows for sure.
We have had an immense advance in technology over the last 10
or 20 years in terms of identifying resources, but still the reason
it is called exploration is because you do not know.
And of course companies go out with different viewpoints. They
read the geology differently. And then they have to prioritize in
terms of where do you put your money. And as I think you suggested, you can drill an exploration well in the Gulf of Mexico that
could be $120 million and it could turn out you are wrong.
So I think it is a question of people taking that acreageSenator
Bennett described how the process worksand then you prioritize,
and of course you go after your best prospects first.
You also have to deal with the fact that your costs are four
timesor twice what they were four years ago as you try and figure out what to do.
Mr. Brady. Right. Thank you. Any other comments?
Mr. Laitner. Yes, if I might offer one comment, I think it is an
interesting question but we need to take one step back and look at
the entire energy market, the production system, at all points in
the production process.
We are flat-out 24/7 in something akin to an energy straitjacket.
We cant get the right number of trained workers on the rigs. We
cant find the right kind of quality piping any longer. We cant find
the right number of railroad locomotives to haul coal in a timely
way. We cant get tires out to excavation equipment to mine the
coal. Even renewables and combined heat and power technologies
are 18 months on back order. At every point in the production process the system is constrained.
Even if we drill more oil, theres no guarantee were going to be
able to deliver it, and refine it, and make it available in a timely
way.
I talked to some of my colleagues in the oil industry and they
told me, flat out, they are a little bit worried about their ability to
even deliver oil should they be able to produce it. You can only
push it through the pipeline 6 miles an hour, and not much faster.
So if the demand goes up, we are in trouble.
The point I am saying is there is a great need for an investment
in this Nations energy infrastructure. If we are going to have to
spend a good bit of money anyway, we should step back and think
what we can do to provide that slack in the market, and that slack
I think includes the need to stimulate oil saving in a hurry and
greater efficiency to provide the slack that the market can then readjust and the prices can similarly readjust.
Mr. Brady. At some point I hope we will move away from the
gimmicks and move toward what I think is the balanced portfolio
approach all of you are proposing today. Thank you, Mr. Chairman.
Chairman Schumer. Senator Klobuchar.
Senator Klobuchar. Thank you very much, Mr. Chairman.
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Mr. Laitner, I was captivated by your testimony about the positive position we could be in if we made some good policy decisions
in terms of energy efficiency.
I will say I think the country, the people itself, have moved on
beyond Jimmy Carter getting on with the sweater and looking
glum on TV. I just see a real interest in this issue in our State,
because I see it beyond an environmental issue; that it is a way
for them to save money if we give them the tools so that they can
make those decisions, whether it is the types of cars or trucks that
they purchase, if they have more of a choice so they can make that
decision, or a little technology that they can put on their washer
and dryer to figure out when to run it.
I always think back to when Kennedy said he wanted to put a
man on the Moon. It was a question of resources, but it was also
leadership. And out of that leadership came everything from the
CAT scan, to infrared technology, to those little chocolate space
sticks that my family would take on camping trips in the 1970s.
I was reading your testimony where you talked about even these
GPS monitors, how you could use the technology so people would
know how to avoid congested routes, which I thought was fun as
I love going with those GPS monitors and having my husband be
told take a U-turn, take a U-turn, youve gone the wrong way.
[Laughter.]
Senator Klobuchar. But anyway, I think that there are all
kinds of possibilities here. My question is: Do you agree that if we
could take some of theseyou know, we have limited budgets here,
and a lot of us wanted to take some of these oil giveaways, the $17
billion to Exxon and these other companiesby the way, Congressman, I dont think that Britney Spears got $17 billionbut to take
these investments in these resources and put them into what
youre talking about, into the hybrids, and the electric cars, and the
investment, that we could move this change quicker?
Mr. Laitner. Yes, Senator Klobuchar, a good question. I absolutely agree.
Let me give you one of many examplesI could go on. Not too
long ago I took a trip to Stockholm, Sweden, but I did that by walking two blocks down from my office here in Washington, D.C.
I had an absolutely fabulous meeting. It was a form of video conferencing. And in your profession you may recall that now increasingly they are taking affidavits and witness testimony long distance by video conferencing.
This happened to be a legal firm earning secondary income by allowing video conferencing. We had absolutely quality image, quality sound, and I saved I estimated something like 3700 pounds of
carbon dioxide emissions that I did not use because I was doing air
travel to Stockholm, Sweden.
One of the initiatives we are calling for is a greater understanding of both telecommunication, or teleworking, telecommuting, video conferencing, which can lay the foundation for I
think some substantial energy savings in the short term, to be
sure.
But more generally, if we take a step back and understand the
levels of efficiency, we are still no more efficient in terms of our
electricity production than we were in 1960.
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Now imagine, had Intel introduced its micro chip in 1971 and
stayed at that same level of transistors per chip where we would
be as an economy. We have some huge opportunities at all points
in the production process, the refinement process, and the use process to encourage efficiency, if we will take a step back.
But I think your point is critical in that leadership is absolutely
required, which is why we tried to frame our ten proposals addressing the transportation perspective initially in a step-by-step sequence so that we can inspire confidence in the market.
If we first announce what we are going to do, and then we reinforce that by taking actions, I think that will do a lot to stimulate
and inspire the confidence that will reduce the tendency to the
price levels were seeing today.
Senator Klobuchar. Thank you. Dr. Yergin, now you talked
about the demand going down. Did you mean worldwide, or just in
our country, for oil?
Mr. Yergin. I was just talking about U.S. gasoline demand. Also
youre seeing it in Europe. Obviously if you look at China, if you
look at India, they are on a very different curve in terms of their
demand.
Senator Klobuchar. How about worldwide demand, then? Is
that going up?
Mr. Yergin. Worldwide demand was growing at about a millionand-a-half barrels a day. We think this year it will grow by about
900,000 barrels a day. So the rate of growth is slowing, and that
is significant, and that is of course a response to price.
Senator Klobuchar. And so, still going backso the rate of
growth is slowing, but this year is the year we see the gas prices
going up 30-some percent, and the diesel prices up 66 percent,
crude oil up 98 percent.
How much do you think that this migration of investmentI
wont use the word speculationthe migration of investment
from subprimes and other things into this market has affected
things?
Mr. Yergin. Well I think it is very hard to quantify. I think it
is part of it, and we particularly saw it if you start looking back
at July when the subprime crisis began. You certainly start to see
in oil and other commodities those prices going up substantially
telling you theres a shift in investment.
So is it $20? Is it $30 of the price that reflects the impact of the
investment market and the kind of growing pessimism?
You see the Iranians make a statement, a bellicose statement,
and you see the price of oil go up $5 or $7, and they made an extra
$85 million that week, too.
Senator Klobuchar. Do you think those statements, when they
make the statements, but do you think that investors sort of use
that as an excuse to then jack up the prices?
Mr. Yergin. Its people get nervous, and its not only investors
but it may also be people, airlines or others, who have to worry
about supplies hedging it.
So I think it is kind of a reinforcing process. I think if we saw
demandbut the other side of it is, supply is also growing rather
slowly this year. So the two things are coming together in this pessimism.
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At some point these other factors of demand, the kind of things
that Skip is talking about and that have been described by Dr.
Joutz in terms of the economy, those are the factors that have not
yet been factored into the market, but that is when the market will
have its top in turn.
Senator Klobuchar. So part of this would be justI do not
want to paraphrase what youre sayingbut you believe in using
a cautious approach with speculation in terms of getting transparency and giving the agencies the tools, and acknowledging that
this might be part of the short-term problem?
Mr. Yergin. Yes.
Senator Klobuchar. But the longer term of doing some of the
things he is talking about could actually affect the price, because
people will see that we are going another route?
Mr. Yergin. Yes. Ill tell you, I think somethingit is not in the
power of this Congressbut if there was a way to do something
about the Nigerian Delta region, that would be a real contribution
to helping reduce the prices that Americans are paying at the
pump.
In the new book that I am writingSkip called it the Next
Great Prizethe new book, I was going to write one chapter on
energy efficiency. I ended up writing three chapters because there
is so much going on, and as he suggests in his testimony we have
so many tools today that we just did not have even 5, or 10, or 15
years ago.
What I see in this country, I can remember when energy efficiency was in that either/or category. Now what I can see is it
is something that everybody across the spectrum says this can
make a major contribution, and this is a major element in the solution.
Senator Klobuchar. Thank you very much.
Chairman Schumer. Thank you, Senator Klobuchar. Just to
underscore, the proposal that we have, our Caucus, on speculation,
which is CFTC looking at the facts and maybe changing the margin
requirement without setting one, is right consonant with what Dr.
Yergin has said.
There are other proposals that go beyond that.
Senator Bennett.
Senator Bennett. Thank you very much, Mr. Chairman, and
thank you all on the panel. This has been very illuminating and
very helpful.
Dr. Yergin, you have been helpful to this Committee over the
years and it is good to see you again. Let me focus, because I think
you have put your finger on it, on the issue of expectations.
I have learned the one thing the market hates more than anything else is uncertainty. Whenever there is a sense of uncertainty,
the price of whatever it is the market is trading in will go up, or
down.
If there is uncertainty about a company, the stock will fall even
below legitimate projections of what the company will really do, but
if there is uncertainty that they will be able to meet those goals
the price will fall.
And here there is uncertainty that the efficiency will kick in,
that the supply will be therewhether it is oil shale, or whatever
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it is that we have been talking aboutthe Nigerians? Oh, theres
uncertainty. The Iranians? Theres uncertainty. And we flee from
uncertainty, and in this case the price goes up.
So as I look at it, I say what can we do to increase the sense
of certainty that in the three- to five-year period that Dr. Joutz is
talking about, or two- to three-year period even, that we are on the
way toward solution.
You talk about Brazil being discounted, and Iran being exaggerated, if I can put words in your mouth, you put those two together,
heres a major new find and people are discounting it, and here is
an existing producer that has a crazy president and everybody is
going nuts over the consequences of that.
If we could reverse that and say: Well, Iran is going to have another election. Iran is going to do something a little bit more stable.
And Brazil is going to really come on. That could have a significant
impact simply because it changes the expectations. But in the
framework I have created here, creates a sense of certainty.
So that is a different kind of approach than, gee, lets change the
CAFE standards, or lets build more natural gas ports so we can
bring in more liquida comprehensive approach to this whole
thing.
Now, Mr. Laitner, I resonate completely with what you are saying about the lack of people and facilities. We have oil piling up
in Utah because we do not have the refinery capacity to bring it
on line. And most of the refinery in Utah is dedicated to refine Canadian oil thats coming out of tar sands, and the tar sands are
closely related to the shale oil thing that Im talking about because
the technology is somewhat similar.
React to that. And give me your thoughts about what immediate
things we could do to create a greater sense of certainty with respect to the future that might help calm down the markets.
Mr. Yergin. In my testimony I mentioned one thing that the
U.S. Government did during the 1990s which did not get a lot of
attention but was very important. That was the support it gave to
the Baku-Tbilisi-Ceyhan Pipeline from Azerbaijan to Turkey.
Without U.S. Government support and involvement, that would
not have happened. That is now putting 700,000 barrels a day into
the Mediterranean, a major contribution to energy security, and in
a sense the U.S. Government gave support, a sense of certainty to
it, and this very uncertain thing happened.
Now that does not happen overnight, but that is an example of
where on an international stage we played a very important role.
Indeed is there a role that the U.S. can play with other countries
to help stabilize the Delta in Nigeria? That could be very important. So I think our diplomacy is actually part of our energy policy
in a way that they do not normally get connected.
To go back to the relationship with Brazil, it takes on an increasing importance from an energy dimension. What we heard in the
last week or ten days about Iran, the reason that has such an impact is it is not only of course about Iran but there is that chronic
question that 40 percent of the worlds traded oil flows through the
Strait of Hormuz, and whenever tension gets high there is a focus
on that.
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As I was writing this testimony and thinking about the issues
about speculation and the financial markets, this issue of expectations, as you suggest, really came to loom very high.
Stability in the investment environment, whether you are talking
about oil and gas, whether you are talking about wind, whether
you are talking aboutacross the range, if you have uncertainty it
not only affects prices, it affects investment and the path of investment.
I think a couple of other things to focus in on:
One is focusing on this kind of question that Skip described and
I talked about, the shortages of people and equipment, we have to
grapple with that. There is an educational issue about assuring the
next generations of expertise.
So I wanted to highlight what will change the expectations, including if people start to become more confident about what is happening in education. I have to say, though, Dr. Juntzs comments
about the economyI do not think we have heard it expressed as
clearly as he has what the risks are to our economy. That highlights the need to address the issues you are talking about in terms
of creating a stable environment expectations, not changing the
rules, because that is what is going to make things happen sooner
rather than later.
Senator Bennett. Thank you, very much.
Chairman Schumer. Okay, we will go to a second round here.
This is for all three panelists, but particularly Mr. Laitner first.
There is no silver bullet, but if there is one cost-efficient way to
deal with this that we have not dealt with since the 1970s it is efficiency, in my judgment. I think it is the easiest, and it has the
greatest bang for the buck.
I mentioned in my testimony the success California has. People
do not realize that if you took away cars, Californias efficient percapita use of energy would be similar to many countries in Europe.
And even with cars they are more efficient than most states.
Why is it that efficiency, which should not create the kind of political hackles that some of the other things do, why has it gotten
so little attention, play, in the United States thus far? And I would
ask Mr. Laitner, and then the two other panelists to comment
briefly.
Mr. Laitner. Chairman Schumer, that is an excellent question.
We just put out a report last month on what we term The invisible
efficiency investment boom.
Since 1970 we have in effect doubled our efficiency over time in
ways that have been responding to smart investment, but it is the
efficiency we do not see as we use our goods and services.
In other words, efficiency is the energy we do not use in providing travel, or providing entertainment, or food on the table. And
because of that hidden nature, that secondary attribute, it is not
something that jumps out that you can count and you can reliably
turn to for immediate impact on the market.
So the critical need is to make that efficiency much more visible.
Chairman Schumer. Has efficiency slowed? I mean, we know
that there was a dramatic increase in efficiency after the oil shocks
of the late 1970s. Has our, if you will, rate of efficiency slowed
down?
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Mr. Laitner. Yes. Let me just give you a quick sense of the history.
Up till 1973 we were very anemic in our ability to improve efficiency. But as you suggest, 1973 to 1986 we improved our efficiency
better than about 2.6 percent a year as an economy.
Then it flattened out, less than 1 percent a year over the next
decade. Then something interesting happened. One of the new fundamentals that Dan is talking about I think has to do with
broadband information communication technologies.
In 1995 Moores Law began to have an economic consequence.
We began to see that in the rapid drop in prices for semiconductors, in computers, even in software. That led to what we are now
seeing as the Internet economy in various ways. It led to my ability
to download Dans book through Amazon-Kindle. I did not have to
travel anywhere. It is not in paper at all. It is a dematerialized
thing, easily available. I saved money doing it.
That is among the things that are contributing to the new tools
that Dan was talking about. So that we did see a process of capital
deepening in the United States up to about the year 20002002
that led to an uptake in efficiency again. But now more recently,
beginning with the uncertainties in the market and what we are
here today feeling very seriously, that process has slowed.
So we are no longer investing quite like we are even in the computer industry. There is hesitation to make those investments in
that smart technology. The capacity is there if the will is there.
And if we had that leadership, I think it can again return.
Chairman Schumer. Right. And that is market forces working
in technology, which generally are efficiency-producing things, but
here in the government if we were to adopt the standards that
California did on a national basisbuildings, appliances, utilities
that would have a dramatic effect, I would assume?
Mr. Laitner. That would have a dramatic effect, and that is one
of the reasons we laid out the 10 policies we have recommended to
be taken a look at. And that would include exactly that point.
Chairman Schumer. Yes. I have tried in the energy bills to get
us to do that, and just nobody even cares about it very much.
And, Dr. Yergin, I would make a point here and hear what you
have to say, it may have something to do with just the psychological effects you are talking about. People are not paying attention to efficiency, even though it is happening, and even though it
could happen relatively easily, and they pay attention to ANWR
where there is huge contention and that it is unlikely to happen.
Do you think a greater focus on what efficiency can do, just that
in itself might help a little bit?
Mr. Yergin. Yes. It is something I have thought about for a long
time. As Skip was talking, as you were asking the question, I was
thinking: If we wanted to put out a book about energy, we could
have a dramatic photograph of windmills, and offshore platforms
Chairman Schumer. Right.
Mr. Yergin [continuing]. A power plant, but how do you put a
photograph of energy efficiency on the cover?
Chairman Schumer. Yes.
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Mr. Yergin. It is, as you said it is the invisible one, and yet
when you look at how much we have saved as a country compared
to where we were in the 1970s, you see this is an immense resource.
So you say: How do you get there?
Well it is the advance of technology itself. You get it through regulation, information, exhortation, price, tax; all of those things do
it.
You know in 1998 was the lowest gasoline price we had ever had
in the history of our country, and that of course is a time when you
had the great SUV boom because it didnt make sense to worry
about gasoline prices.
Chairman Schumer. Right.
Mr. Yergin. Now you see how quickly everybody is playing kind
of catch-up with this new regime of prices. So I think it really
needs kind of a multi-faceted approach to keep it front and center.
It seems to me that it hasI dont know if you find it in your
discussions on the Hill; do you find greater resonance now than say
two years ago on this subject?
Chairman Schumer. Some, but not enough to get us moving
here. I mean, one of the things I was thinking of talking about was,
well, I am not wild about this offshore drilling, but at least if you
are going to try to do that you ought to do it combined with some
demand reduction and serious efficiency.
As I said, ten years ago I proposedmy friend Senator Bennett
is gone, but I mean some of us are trying to be two-sided on this,
demand and supply. Now how much of demand should be fossil
fuels, and how much demand should be alternatives we can debate,
but even putting that aside as I said I proposed to Senator Murkowski, get me 10 votes for automobile efficiency and I think I
could get you 10 votes for Alaska. In those days Alaska was less
contentious.
And I talked to some of the environmental groups and not all but
some of them said, you know, I would hold my nose but if you could
do that, or not do that, I would rather do it.
So I think, you know, we do have to come up with sort of the
grand compromise here where Democrats sort of hold their nose a
little bit and figure out ways to increase supply. As I mentioned,
I supportedthere was a handful of Democrats supporting drilling
in the East Gulf, and Republicans do far more, even though they
may think its not just the market, to encourage efficiency, and we
might have the work of a grand compromise.
Frankly, I do not think this Administration can pull it off. It is
too late, and they have not shown it, but either President Obama
or President McCain might be able to do that.
Mr. Yergin. Well I think that grand compromise is what our $14
trillion economy requires to assure that it has the proper energy
foundation for the future.
Chairman Schumer. Right. Let me, since we are in the second
round, I will go a littlemy time is up, but I will go a little longer
with Congressman Bradys permissionDr. Joutz, tell us about the
dollar and the fall of the dollar and how much effect that has had
on our increased oil prices?
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And again I would be happy to have either Dr. Yerginwell, Dr.
Yergin in particular; it is not Mr. Laitners area of expertisecomment on that.
Mr. Joutz. First, I think one thing that is important to mention
is that the world oil market uses the U.S. dollar as its benchmark
price. And as the dollar moves, that affects their revenues, and it
affects their revenues for also importing goods from the United
States and other countries.
When the value of the dollar is appreciating, their real revenues
increase and their real imports increase. However, when the dollar
depreciates, as it has been doing since about 2002, we have had on
a trade-weighted basis about a 20 to 25 percent decline in the
value of the dollar.
That means two things. First, the revenues that oil exporting
countries have received purchased less than they did before.
On the other side of the coin, the one that is more important to
us from the American consumers and firms standpoint, as the dollar has depreciated and the price of a barrel of oil has increased,
weve been paying the full price effect of these much higher oil
prices.
So when it has risen from $25 to $30 a barrel in the mid-1990s
to $40, and today $138, or $135, we are paying the full freight on
that. And part of that is due to the value of the dollar declining
against other currencies.
Now
Chairman Schumer. If you had to put a percentageI know
that is hard to do
Mr. Joutz. I think it is about, I want to say about 25 percent.
Chairman Schumer. Of the increase?
Mr. Joutz. Overall, I think I could say
Chairman Schumer. Pretty significant.
Mr. Joutz. It is pretty significant. But there is another sort of
double-edged sword here.
As the value of the dollar has decreased, yes, we have been paying more for oil. As Dan mentioned, I think this year it is going
to be about $600 billion of importing oil. As the value of the dollar
has decreased, U.S. manufacturing firms, U.S. service companies,
have become much more competitive around the globe.
And what we have seen over the last two to three years is we
have seen the export sector in the United States has been rising.
And American firms that previously were competing against foreign firms are now more competitive domestically.
So the movements in the dollar make some of us better off, and
in other ways worse off.
Chairman Schumer. Do you have anything to say on that,
Dr.Yergin?
Mr. Yergin. Yes. In the testimony I cite the Dallas Federal Reserve which attributes between 2003 and 2007 about a third of the
price, increase in the rise in the price of oil, to the dollars decline.
And we think that if you start looking from July 2007 you certainly
see with the dollar and other commodities they start to go up as
the dollar goes down. In other words, this is part of the global impact of the credit crisis.
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At the same time, you know just this week we saw in terms of
stagflation the doubling that the Chinese are going to pay for iron
ore prices which tells you that the demand for all commodities
prices are high. And although we focus on the downturn here, everywhere else you go in the world there is this preoccupation with
inflation.
Chairman Schumer. Right. One otherthis is a question for
Dr. Yergin. So you look foreveryone demands a short-term solution. You know, lets snap our fingers and get something done. Very
hard. Very hard to do. Maybe the best one is the one you mentioned, sort of a psychological talking up the good side, and talking
down the bad side a little bit.
But it seems to me something I have thought, the one place
where there is a more ready supply is the Saudis. They have increased supply a couple of hundred thousand barrels, I think
300,000 and then 200,000, but they still have by most estimates I
would guess a million more barrels a day that they could produce.
Is there anything that would induce them to do so? Is there anything we can do to get them to do so? Or do you feel that it will
not make a difference, or they just will not do it?
Mr. Yergin. Part of the issue is the quality of the oil that they
have available is not the one that there is a demand for. There isnt
a physical shortage.
That would also leave the world with zerolets say they produced it all. It would leave us with zero spare capacity, which
would be a very precarious position in terms of any kind of a crisis.
The other thing that I focus onand this is in Skips areaI
really do think that we could very quickly, without influencing any
of our standards of living, bring down our gasoline consumption by
6-, 7-, 800,000 barrels a day, with some very minor changes in our
behavior.
This is always put over there under that category called tips,
but if you say it is not tips it is a strategy. So I actually see conservation as part of our strategic resources
Chairman Schumer. The kinds of things Mr. Laitner laid out
in his ten points.
Mr. Yergin. Yes. And it is just, you know, it bugs me that they
are always regarded as just tips when you can put them together,
and that can have an impact. Because changes in demand can help
change the outlook.
Chairman Schumer. Congressman Brady is being very kind. I
had a few other questions I wanted to touch on.
The oil workers that you mentioned, that we have a shortage of
just people and equipment, classic market economics would say
that is going to solve itself rather soon because there is a greater
demand for oil, and it has not happened yet.
Could you please tell us a little about what you think of why it
has happened? And will it solve itself? And is there anything we
can do about it?
Mr. Yergin. Yes. What happened is that you had a 20-year contraction in the oil and gas industry. You had two price collapses,
two episodes of $10 a barrel.
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So just as the industry finishes its contraction and downsizing,
that is when demand explodes with China and India and so forth,
and that is why we are playing a game of catch up.
Petroleum engineering departments closed down. People stopped
enrolling. So I do think that will fix. But it will not fix overnight
because it takes 5, 10 years to get an engineer up to appropriate
standards and experience.
You need abut, you know, four years ago you could have rented
a deep-water drill skip for $125,000 a day. Today it would cost you
$650,000 a day. Those ships are going to get built, but there again
it does not happen overnight. But I think it willthose incentives
three, four years from now will see an industry that will be more
equipped to meet the needs.
It will be a much more internationalized industry. We will see
more Chinese and Indian engineers.
Chairman Schumer. Anything we can do to hasten that?
Mr. Yergin. I would like to give that a little thought. I think on
the educational side that might specifically look at the education
of energy technologists and would be something that would be well
worththat would be one thing well worth examining.
Chairman Schumer. Well thank you.
Congressman Brady has been very patient as I have gone over
my time by a significant amount.
Mr. Brady. No, this is an important topic. And besides, you have
the gavel so I think that works well that way.
[Laughter.]
Mr. Brady. I agree, coming from an energy producing state, we
do have a shortage of energy workers today, and an aging energy
working population. It is a real concern today. In Southeast Texas
we have three major expansions of refineries desperately seeking
about 15,000 workers both to construct and ultimately to maintain
those refineries, and it is an issue.
Energy efficiency. I am pleased that we are talking about this.
America is making progress on energy efficiency. The Ways and
Means Committee held a hearing, oh, 24 months ago where we basically sat through three days and listened to testimony that shows
that we could make virtually everything we touch each day at
home or at work more energy efficient. There are remarkable potentials there. And to accelerate that really is the key.
I think part of the challenge is to recognize in rural communities
like 10 of my counties where people are forced to drive a long way
to work. They are forced to drive a long way to the hospital. They
are forced to drive a long way to school. They are making cutbacks
and changes in their behavior today, but it is simply not enough
to offset the dramatic increase in energy.
I think that may be why the recent Bloomberg poll from yesterday showed that while the American public supports more energy
efficiency and supports investments in renewables, that 68 percent
of Americans believe we ought to be exploring more here in America.
In fact, 60 percent of Democrats in the country believe we should
be exploring more here in the United States. And it has been frustrating I think that we have not had, or been allowed to vote even
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once on any bill that would create more production and supply here
in America.
So, Senator, I and others would welcome any potential grand
compromise on efficiency and production, because I think it is long
overdue.
Let me ask you this: One of the frustrationsone of the reasons
I think we have trouble with drilling in our deep ocean exploration
is that Congress has allowed former Presidents and current Presidents with ratification in Congress has allowed states to basically
lock off federal waters off their shores.
I understand that states ought to have control over the three
miles of state waters, but beyond that those are federal waters, resources that are owned by the American public, and I think should
be reclaimed for the American public as we have this debate about
a national energy policy.
We cant have a national energy policy if states control the resources that in fact the U.S. owns.
My question to the panel is: As we go about looking at making
timely investments, not just in renewables but in traditional energy as well, is there a reason why the nationalwhy Congress
should not reclaim authority over federal waters throughout this
country?
[Pause.]
Mr. Brady. Dont all talk at once on this one.
Mr. Laitner. I might open a few comments with the note that
the states indeed are in many ways responding much more agilely
than the Federal Government at this point with regard to a number of different energy initiatives.
Certainly California is leading the way. New York is doing some
really
Mr. Brady. On the production side?
Mr. Laitner. Well even on the production side. For example I
am thinking of more efficient supply like combined heat and power
technologies, or waste energy type generation technologies.
Mr. Brady. But as it relates to oil and gas?
Mr. Laitner. That I agree, there is a stasis there.
So the point being that the states are eager to do something
Mr. Brady. Sure.
Mr. Laitner [continuing]. And they need to be let loose. At the
same time, the issues are so paramount that we as a Nation are
risking more by not acting at all; that it may be time to rethink
what it might require to both develop new sources and to promote
efficiencies.
So I would be put in the category of what Chairman Schumer
had called the nose-holder. I can imagine that not acting is going
to cost us more environmentally and cost us more financially than
coming together with some form of compromise that might allow
some offshore drilling to occur.
Mr. Brady. Well we have, for example, off Florida, 100 miles off
Florida, on the tiny sliver of Section 181 that we are allowed to explore, and we have a small 2-acre platform there, the independents
have, a $2 billion investment, that produces 10 percent of all the
natural gas in the Gulf, 2 percent of all the natural gas in America.
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You can barely find it. If you and I flew over it for a week, it
is so small and environmentally well planned out, it just seems to
me some proposals say lets extend state waters even farther out
and give states more control perhaps to 12 miles or beyond, but
then you cant even see an oil rig 6 miles from a coast. The curvature of the earth doesnt allow it.
But the point being, perhaps the compromise is to extend those
waters under state control farther out so there is that reassurance
for states, but then to reclaim beyond that and find some thoughtful ways that we can lease what are tremendous resources for us,
and which can be done a very environmentally friendly way.
Mr. Laitner. I think we are in such a straitjacket that we need
to put all resources on the table, but make sure that they are all
evaluated at the same level of analysis in terms of full costs and
full benefits, and then make some decisions about what is the mix
of resource that should be developed, given our investment capability. Given our need to maintain a robust economy, how should
we move forward?
So that might mean, for example, that if there were some mechanism as you described, it might be one part oil drilling and two
parts further efficiency gain. We would be better off economically
and environmentally than allowing nothing to happen at this point.
Mr. Brady. Right.
Mr. Laitner. I would need to think about that more, but in
order to break open the discussion that needs to be put on the
table.
Mr. Brady. That is the kind of thinking we need.
Mr. Yergin. Right. I think thatI dont know and am very interested to understand more clearly the jurisdictional issues between the states and the Federal Government, between 3 and
12
Mr. Brady. Sure.
Mr. Yergin [continuing]. And farther out. I would rather not call
it the nose-holder. I would rather call it the Grand Bargain. I
think that as part of addressing conservation and new technologies,
that offshore is clearly part of that.
I think we should recognize that the same advance in tools that
make possible the kind of advances in efficiency that today drilling
offshore is a very different industry than it was 20 or 30 years ago.
It is space age, its extraordinary in terms of its capabilities and
its abilities to do thing right.
We see countries like Norway, which is the greenest country on
earth in terms of policies, have found a way to address the offshore.
And about a third of the worlds oil today comes from the offshore.
So it is an important resource.
What you describe in terms of our natural gas needs next winter,
that is going to be something. We are now focused on gasoline.
Next winter we will be focused on natural gas, and that is part of
the picture.
I just wanted to add one other thing to Chairman Schumers
question about how quickly. There is still this people deficit issue
that is a big issue. I was just thinking as part of the National Petroleum Council study last year that found that 55 percent of the
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petrol professionals, as youll call them, engineers and scientists,
are within 10 years of retirement.
So there really is a missing generation in terms of energy technology in our country.
Mr. Brady. And I think, tooand I will close with this, Mr.
ChairmanI think one of the reasons we are seeing perhaps a discouragement of new energy workers is that some of our policies
here in Washington I think tend to discourage that investment of
human capital.
For example, two years ago Congress, worried about the outsourcing of manufacturing jobs, passed legislation that creates a
lower manufacturing tax if you produce, invest, create jobs here in
America; a higher one if you do that overseas.
Unfortunately, this Congress has continued to pursue tax
changes that would single out one industry, energy, to basically
say, no, you do not qualify for that tax credit any more. In fact, we
are going towhen you invest in American workers, in American
production, in American exploration, we will actually raise your
taxes to do that.
I cannot imagine that we are going to lower gas prices or make
more timely investments by actually discouraging companies from
exploring, and producing, and creating jobs here in America. That
may be part of the problem we are having attracting and recruiting
not just engineers, researchers, Hispanic workers, union workers,
skilled welders, its a broad range, 2 million energy workers today.
I think we need to do more of that, not less.
I yield back, Mr. Chairman.
Chairman Schumer. Thank you.
Congressman Cummings had four hearings today, so he is a little
bit late. We said we would close at 11:30, but we are going to make
a little exception with the okay of the witnesses so that Congressman Cummings can ask his full round of questions.
Mr. Cummings. Thank you very much, Mr. Chairman.
Mr. Laitner, you state in your written testimony that increased
energy efficiency has played a significant supporting role in the
growth of our economy.
Essentially you argue that increases in energy efficiency have resulted in a lower per capita energy use in 2008 compared to the
trends that could have been expected in 1970 had the energy efficiency increases not occurred.
Can you comment on how much of the increase in energy efficiency resulted from specific government policies, and how much
resulted from technology improvements that industry chose to
bring about without prompting from the government?
Mr. Laitner. A very interesting question and, not to be a middle-of-the-roader on it, I think it has been both. There has been
some amazing innovations on the industrial side. We tend to think
of industry as a user of energy, when in fact in many ways they
are the source of the innovations that we are all putting to work.
Work I have been doing recently with the likes of Dell Computer,
Intel, and others, Verizon, a number of firms like that, I am quite
stunned at the level of innovation that they are putting into this
effort.
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Part of it is market driven; they are trying to be competitive, but
clearly a source of innovation. And I would have to say it is probably on the order of maybe half of the efficiency gains, if you want
me to put it in that rough measure, has been because of industrial
innovation.
But the other half has come from a combination of price to an
extent, but more critically government policies. And Chairman
Schumer has raised the issue of California, what they have done.
They have enacted a variety of standards. They have funded a
number of programs. They have provided a great deal of information, technical assistance, and incentives to move more aggressively
with respect to increased efficiency.
And at the federal level we have seen everything from a very
successful, voluntary Energy Star Program that I think is a resource that needs to be deployed more fully, and recognized more
credibly than has been, but also other things like standards for appliances and consumer products.
So that there has been a mix. There has not been a single silver
bullet to be sure, but it has been a very dynamic mix. The issue
then becomes how to enrich and build on that resource to really extend the full potential that can be there should we make that decision.
Mr. Cummings. It is interesting. As you were talking I was just
thinking that yesterday I met with some bond counsel and they
were saying that there is a lot of new bond work coming up, municipal bond type work, whereby the companies are going in and
showing municipalities how they can save, and they make arrangementsthe savings are so great with regard to energy, the savings
are so great that in many instances they have been able to cut energy consumption in half.
Baltimore and a number of other places are looking into doing
more of that. That is just a very interesting thing, to think that
you can cut that much use of energy. And when you multiply that
throughout the country, you are talking about quite a bit.
As a member of the Transportation and Infrastructure Committee, I read with great interest your comments on our Nations
transportation infrastructure.
Unfortunately, many of these measures such as co-funding local
land-use planning and developing policies to expand alternative
modes of freight transportation are geared more towards the longterm.
Are there measures that you would recommend that could be implemented more immediately?
Mr. Laitner. Yes. One of the measures I have already referenced
earlier is the movement towards a telecommuting and video conferencing capability at the Federal Government and at the municipal
level, but within industry.
One of the reasons in fact I am no longer at the Environmental
Protection Agency is because my management did not like me telecommuting. I could be with my daughters riding lessons and talking to people in Russia, and she insisted I had to be in the office
because thats where you forced me to be. It was Congress that set
up that, and I had to adhere to that.
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So extending the ability of telecommuting and video conferencing
at all levels I think can go a significant way to reduce transportation requirements. I mentioned earlier I took a trip to Stockholm
just a couple of months ago by walking down the street in a very
high-quality participation in a video conference with 20 of my colleagues in Stockholm and me here in D.C. I saved almost 4000
pounds of carbon dioxide by not traveling that distance. It saved
me two days of time and cost me $200 to get the job done.
I think we would be surprised at the extent of what we could do
with information communication technologies to leverage greater
efficiencies in freight, in logistics, personal travel, entertainment,
and just general worker productivity.
Mr. Cummings. I recently talked to some newcomers to Baltimore. Baltimore is changing drastically, and a number of them said
that they came to the City from the country because of gas prices.
And it was just more convenient.
I look at what is happening in Washington and other places and
I guess it is much easier to live where you work and so that if you
are not commuting an hour, an hour and ten minutes one way,
that is quite a bit of savings. I had not thought about it from that
perspective.
I think that what will happen is a lot of your urban areas will
probably continue to grow much faster than they normally would
have, and I think this gas situation has caused a number of people
to do that, to move into the more urban areas. Would you agree?
Mr. Laitner. I would absolutely agree. And if I might comment
on your suggestion about communities more generally, as a source
of effective action, to the extent that we think about greater energy
productivity as a form of economic development, communities can
become a critical deployment resource to get the job done.
I with a number of other architects have put in a bid for the City
of Elgin, outside of Chicago, to help them redesign much of their
economic activity with that precise goal in mind, to deliver quality
investment in ways that build on the information broadband infrastructure, but in ways that also allow greater productivity from
transportation and from entertainment and their own personal
working capabilities. I think it is a critical opportunity.
Mr. Cummings. Thank you, Mr. Chairman.
Chairman Schumer. Well I want to thank all our panelists,
and particularly our witnesses. I think it was very instructive.
Two points. First, it was good to hear that Dr. Yergin, who is one
of our great experts here, believes that prices may well come down
over a period of time. That is good news, and maybe that will help
the psychological problems that we are talking about.
And second, I was heartened to see on both sides of the aisle
here, as well as on the panel, at least the little seedling of perhaps
a grand compromise. Because I do think we need it, and I would
certainly be one who would be very much eager to pursue that in
terms of energy.
So with that, let me again thank everybody. This was a very productive hearing, and we are adjourned.
[Whereupon, at 11:34 a.m., Wednesday, June 25, 2008, the hearing was adjourned.]
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Senate Hearing, 110TH Congress - Oil Bubble or New Reality: How Will Skyrocketing Oil Prices Affect The U.S. Economy?

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Senate Hearing, 110TH Congress - Oil Bubble or New Reality: How Will Skyrocketing Oil Prices Affect The U.S. Economy?

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S. HRG.

JOINT ECONOMIC COMMITTEE

JUNE 25, 2008

Printed for the use of the Joint Economic Committee

U.S. GOVERNMENT PRINTING OFFICE

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For sale by the Superintendent of Documents, U.S. Government Printing Office

VerDate Mar 15 2010

11:25 Apr 28, 2010

JOINT ECONOMIC COMMITTEE

cprice-sewell on DSK89S0YB1PROD with HEARING

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

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11:25 Apr 28, 2010

Statement of Hon. Charles E. Schumer, Chairman, a U.S. Senator from

cprice-sewell on DSK89S0YB1PROD with HEARING

11:25 Apr 28, 2010

VerDate Mar 15 2010

cprice-sewell on DSK89S0YB1PROD with HEARING

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11:25 Apr 28, 2010

OIL BUBBLE OR NEW REALITY: HOW WILL

CONGRESS OF THE UNITED STATES,

cprice-sewell on DSK89S0YB1PROD with HEARING

OPENING STATEMENT OF HON. CHARLES E. SCHUMER,

VerDate Mar 15 2010

11:25 Apr 28, 2010

cprice-sewell on DSK89S0YB1PROD with HEARING

VerDate Mar 15 2010

11:25 Apr 28, 2010

cprice-sewell on DSK89S0YB1PROD with HEARING

VerDate Mar 15 2010

11:25 Apr 28, 2010

cprice-sewell on DSK89S0YB1PROD with HEARING

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

Mr. Brady. Thank you, Mr. Chairman. Its a pleasure to join in

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11:25 Apr 28, 2010

cprice-sewell on DSK89S0YB1PROD with HEARING

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OPENING STATEMENT OF HON. CAROLYN B. MALONEY, VICE

Vice Chair Maloney [presiding]. Im Congresswoman Maloney,

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11:25 Apr 28, 2010

cprice-sewell on DSK89S0YB1PROD with HEARING

OPENING STATEMENT OF HON. SAM BROWNBACK, A U.S.

Senator Brownback. Thank you very much, Mr. Chairman. Its

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cprice-sewell on DSK89S0YB1PROD with HEARING

OPENING STATEMENT OF AMY KLOBUCHAR, A U.S. SENATOR

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

VerDate Mar 15 2010