Hearing of House Subcommittee on Energy and Resources: America's Energy Needs as Our National Security Policy
HEARING OF HOUSE SUBCOMMITTEE ON ENERGY AND RESOURCES: AMERICA'S ENERGY NEEDS AS OUR NATIONAL SECURITY POLICY
APRIL 6, 2005
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Mr. Issa. Good afternoon. A quorum being present, this hearing of the Government Reform Subcommittee on Energy and
Resources will come to order. I want to thank all of our witnesses for being here promptly.
A matter of housekeeping. It is likely that we will go an hour without a vote. If that occurs, we actually will get to hear all of your testimonies uninterrupted.
I will begin with my own opening statement.
Energy drives the U.S. and world economies. Our prosperity and way of life are sustained by energy. Affordable, reliable and sustainable energy supplies are essential to our national security and maintaining our global commitments. In the last decade higher global demand for energy, particularly oil and natural gas, has led to disturbing developments. As more nations increasingly depend on imports to meet their needs, and as the world approaches full oil production capacity, and some might say exceed, countries such as China are becoming more aggressive in pursuing energy agreements often with governments unfriendly to the United States. State-owned energy companies are becoming more assertive on the international market, creating an additional concern because of a lack of transparency in the contracting operations. New alliances and developments indicate a shift in energy geopolitics.
And I might say that there is no question that what was once known has changed--and I particularly want to hear from Jim Woolsey, because of his tenure and position at the CIA.
Domestically continuing high oil and gas prices are impacting families and businesses and could seriously affect our economic growth. Unlike other periods of price volatility over the last 30-plus years, today's period of price volatility is demand-driven. Because it is demand-driven, there is no person or group to blame for today's high prices. To a certain extent we are victims of our own success in that worldwide economic growth and development are raising the standard of living, but also dramatically raising the consumption of energy.
In the second week of this administration, in 2001, with leadership and foresight, President Bush established the National Energy Policy Development Group and charged the group to develop recommendations for a national energy policy. Based on these recommendations, in the last Congress the House and Senate passed an omnibus energy bill, but reconciliation did not occur, and the bill was not enacted.
It is now clear more than ever that we must adopt a comprehensive national energy policy and establish a long-term strategy to ensure the security of our economy and our national interest. At a minimum, such a policy must expand domestic opportunities for production of traditional and nontraditional sources of energy while expanding conservation and efficiency
efforts.
Today we will conduct a frank assessment of energy roles in our national security. We look forward to hearing from our distinguished panel, and today we are pleased to have the Honorable Clay Sell, Deputy Secretary of the Department of Energy. Secretary Sell previously served as special assistant to the President for legislative affairs, with an emphasis on energy; special assistant to the President for economic affairs, and staff director at the Senate Energy and Water Development Appropriations Subcommittee.
We are also pleased to have the Honorable James Woolsey, former Director of the Central Intelligence Agency, and a Commissioner to the bipartisan, nongovernmental National Commission on Energy Policy. He is currently a vice president at Booz Allen Hamilton. His extensive administrative experience also includes time as Under Secretary of the Navy, general counsel of the Senate Committee on Armed Services, and delegate and advisor for diplomatic talks to reduce conventional and strategic arms in Europe.
We are also pleased to be joined by Ambassador Robert Hormats, vice chairman of Goldman Sachs International. The Ambassador served in a number of administrations, holding positions as Deputy U.S. Trade Representative, Assistant Secretary of State for Economic and Business Affairs, and senior economic advisor to the National Security Council.
Last and certainly not least, we are joined by Robert Ebel, chairman of the energy program, the Center For Strategic and International Studies. In addition to extensive private sector experience in the energy sector, he has been advisor to the U.S. Department of State on energy and diplomatic issues. He also served with the CIA for 11 years and spent 71/2 years with the staff of the Office of Oil and Gas in the Department of Interior.
We are delighted to have such a distinguished panel, and as is the custom of this committee, I would yield to the ranking member, Mr. Higgins, for such time as he may consume.
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Mr. Issa. We have done a wonderful job of getting a lot of testimony in a short period of time. I will lead off by setting a good example for my colleagues. I am going to limit myself to just one question that I think I heard again and again in one way or the other from each of you, and I just want a confirmation and as short as possible of what I think I heard, which was that there is no one solution, it has to be multiple energy sources, and it has to be multiple efforts at conservation. Included in that, I believe there was a pretty universal statement that attacking the oil problem is going to require perhaps not the old CAFE approach, but a new CAFE approach, one that has incentives and perhaps even funding to help us use less oil in our primary area of using it, which, of course, is internal combustion engines that move things down the road. Can I get a confirmation that there is no
disagreement with this panel on that?
Thank you. Mr. Secretary.
Mr. Sell. Mr. Chairman, I think you have summarized well the testimony that we gave; and I concur in your conclusions, specifically on CAFE.
One of the recommendations of the President's national energy policy was we requested of the Congress in fact more flexibility in order to set policies and increase fleet efficiency. We did increase the standard as it related to light trucks about a year ago or perhaps 2 years ago. But, as you are well aware, the politics in the Congress have severely restricted the ability to do anything on passenger vehicles or to move to a more flexible approach on CAFE standards. We would like to have that flexibility, and I think a new approach would be helpful in that regard.
Mr. Issa. Thank you.
Mr. Director.
Mr. Woolsey. Mr. Chairman, yes. The Commission supports flexible CAFE standards in the sense of being--manufacturers being able to trade credits among different types of vehicles and among one another, much more flexible than the current standards. And, as I mentioned, this feature of a safety valve would mean that if one, say, set at slightly more than $55, which is the penalty that is required today for a vehicle, when a manufacturer has a fleet that exceeds the CAFE standards or doesn't meet the CAFE standards, it is--1 mile per gallon per vehicle is $55. If you take that or something slightly more as a transferrable fee, then we in the Commission would set a ceiling, let us say $60 per mile per gallon per vehicle. So, in the first instance, if Maserati wanted to exceed in the aggregate the CAFE standards, they could go to Toyota, which is not exceeding the CAFE standards, and buy credit. But to get new credits Maserati would never have to pay more than $60 from the government.
That feature of a safety valve, which we also have with respect to carbon emissions in the electricity part of our report, we believe offers an opportunity for consumers, for corporations, for labor to all come together and say we don't have to guess exactly what the cost is going to be to get mileage improvements. We may be right. We may be wrong. If we are on the low side, then there is one consequence. If we are on the high side, there is another. But, in any case, it is never going to cost the manufacturer more than X dollars to get new credits from the government. And with all of that flexibility we were able to come together--corporation representatives, labor representatives, environmentalists representatives, odd ducks like me--on a single report.
Mr. Issa. Thank you.
Mr. Hormats. Yes. I am not an expert in this area, but I did read Jim's Commission's report, and it did strike me as a reasonable consensus. And I think that is the interesting point about it. As Jim pointed out, it is very hard--it has been traditionally very hard to get agreement up here on this; and I think if you have all these various elements who have an interest in reaching agreement, that is really an important step forward. And I find myself as, again, not an expert on it but someone who is impressed with the fact that they were able to get this broad-based consensus, which is what is desperately needed to get anything moving in this area.
Mr. Ebel. Mr. Chairman, this country consumes about 9 million barrels of gasoline every day out of a world total of oil consumption of 80 million barrels of oil a day. If we are going to do something about the oil problem in the United States, it has to begin with the internal combustion engine. We have had some ideas placed on the table this afternoon which work in that direction, but I think they need a little push, a little shove down the road.
I had the opportunity Friday to drive a fuel cell car manufactured by a Japanese company. I won't say which one it was. It was not Toyota. It was Honda.
Mr. Issa. I am glad you didn't say who it was.
Mr. Ebel. It slipped. It is a 2005 model. I checked the tailpipe. Water was coming out of the tailpipe. You couldn't hear the motor. Acceleration was great. And I asked the engineer, what is the cost of this car? It was a million and a half dollars. When do you expect mass production; 15 to 20 years. So we have to find something between now and then if the then is the hydrogen fuel cell.
Thank you.
Mr. Issa. Thank you.
With that, I would yield to the ranking member, Mr. Higgins, for his questions.
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Mr. Issa. Well, you guys may get off really, really easily here. But I do have a second round, a couple of questions.
One of them that I kind of warned about ahead of time with the Secretary--and Ambassador I don't think I gave you a full heads up, but it was covered in your testimony--the windfall profits history, the 1979 to 1988 period. Oddly enough, your graph on page 9 shows that the peak of R&D was almost exactly when we put in the windfall profits tax, and from there it dropped precipitously.
Mr. Sell. Correct.
Mr. Issa. I am concerned, and Mr. Kucinich unfortunately was not able to stay, but he alluded to his legislation from the previous Congress that he plans on reintroducing, which would enact a windfall profits tax. So I think it is fair on his behalf and on mine to bring up the subject and say, what is the history of the windfall profits tax of 1979? And if not a windfall profit like that one, then since you have all alluded to incentives and each of you has come up with ideas and some positive ones, what do we do to ensure at this high level, one in which $8 a barrel oil is being taken out of the ground and being sold at $56 a barrel, what do we do to ensure that production rises so that, if that is not the correct supply, demand, that we reach that correct supply, demand equilibrium at some time in the future? In any order.
Mr. Sell. Mr. Chairman, I do appreciate the early warning on the question.
I think in the way you asked the question lies the answer: We should ask about the windfall profits tax, would it help, would it help the situation, the problems that have been described here today. And the view of the administration is it would not help. We believe in the power of competitive markets. It is incumbent upon the government to ensure the marketplace works. We think market forces, when working properly, determine an appropriate profit; and so a profit tax we think is anti-competitive and therefore bad for the consumer. I do believe that $58 oil is a sufficient incentive for dramatic increases in production, and I think we will see that materialize over time.
One situation that we have gotten into over the last decade is it now takes much longer for new reserves to be developed than it did in the past. In the past, you could typically count on a 2 or 3-year cycle, and now it is as long as 5 or 10 years to bring a new production on line. But today's prices do incentivize that.
On the domestic side, there are additional things we can do. We can open up new areas to access, and we can also streamline the permitting process. And, in some cases, we have increased royalty benefits due to producers in portions of the
Gulf of Mexico. So there are some things that we can do on the domestic side, but the administration does not believe a windfall profits tax is an appropriate policy.
Mr. Hormats. I find myself very much in agreement with Secretary Sell on this. I do not think a windfall profits tax is appropriate. It is--the point that you raised in this chart demonstrates is that it really--I am not sure what the goal of it would be. The goal of American policy should be to increase production and not to impose incentives that takes money away from producers, it seems to me.
I actually have just been finishing up a book on how we financed America's wars in the past, from revolution on, and during World War I and World War II we did have excess profits taxes. We were in war situations then where people were making
money from munitions, so there was a feeling of public--that fairness would require you to take some of that money away because there was sort of a windfall as a result of that. It wasn't a very effective way of doing it, but it looked like it would satisfy public opinion.
In this case, it seems to me it is a bad kind of signal to send. The objective--and Secretary Sell put it very well. The goal is to have them utilize their profits to produce more energy, not just gasoline, not just hydrocarbon fuels, but a whole range of other fuels. And I would make a couple points.
One, I mentioned in Canada you have the oil sands. In Alaska you have a whole slew of potential production areas in the north slope. You have Wyoming, the Green River Valley. Plus, and I think it is another element to touch on here, and that is abroad there are a lot of opportunities.
One of the goals should be to increase production here across the board in various kinds of new and old sources but also to help diversify global production of energy. That means, I think, working with groups like the World Bank and other institutions to improve the investment environment in a wide range of countries that have the capability of supplying more oil but don't because either their investment environment is so adverse to people who want to put money in they don't have proper regulations, they don't have proper transparency, the state controls too large a portion of their oil infrastructure. So it should be a global and a domestic process as well. The more diversification in oil supplies the better, because it is a global market. And none of these things would be advantaged by an excess profits tax.
Mr. Ebel. The Ambassador raised a very important point. A major problem facing the international oil companies today is access. Where do you go to find the new oil you need to offset the oil you produced last year? Where do you go? West Africa? Venezuela? Iran? Iraq? Libya? Russia? Azerbaijan? Karzakstan?
You can't really go into the Persian Gulf because those resources are held by the national oil companies. In fact, over 70 percent of all the oil reserves are in the hands of national oil companies, and they are going to develop them themselves at the pace that they decide upon. They are going to be responding to market developments. They are not going to be ahead of the market.
And what does that tell us? That we are going to have some difficult times ahead, unless you would have a collapse in the Chinese economy or the Indian economy or even here at home. That is the only way you are going to get a short-term decline in prices, is on the demand side.
Mr. Issa. Oddly enough, we were having that discussion before the committee hearing. There is an obvious way that we will get that: If the U.S. economy collapses, then China's economy will collapse. So we have that to look forward to. It is not what I am hoping for.
I am not here to give testimony, but uniquely--although, by the way, I also am a Clevelander by birth, so I have managed to be at two electrical power dropouts, the Cleveland side of me, where my family called and said, you know, is this a California curse you have bestowed on us, when it happened. And, of course, being from California, I have seen what happens when
you don't have excess capacity. One of my questions, I am very interested in what I like to call mineral energy, which people always ask what it is and I say, well, it is nuclear. But it is a mineral, after all. It usually gets a laugh, not in such a serious situation.
But we don't have the diversity of one of the No. 1 ways of forming electricity. It is not 2 cent electricity, but it is not too far from it if we do it right. There are no new license requests. There is no next generation of nuclear power. I have been to companies, I have seen their proposals for the next generation, but nobody is funding it. We are not putting a new nuclear power plant on line. We are not even putting a decent-size research operation on line just to test the true proof of concept of, can they produce clean electrical energy with very reduced byproducts. And I am particularly sensitive to that since I sit on the other subcommittee that yesterday dealt with the Yucca Mountain and that stalled process.
So even though this hearing has concentrated a great deal on petroleum, I think it is pretty obvious that not addressing nuclear guarantees that we will be addressing some hydrocarbon. And, you know, in California we have switched to almost all natural gas. As a result, natural gas will be the subject of another hearing that we will talk about how are we going to get natural gas. And places like Qatar and so on today would love to supply it to us, but what if that supply gets cutoff?
If any of you want to deal with--I see you do.
Mr. Woolsey. I will try to say a quick word about nuclear power.
Our Commission report advocated resuming substantial research and development and work on nuclear power for electricity precisely because of its cleanliness and the fact that it doesn't put global warming gasses into the atmosphere. One does have a fuel disposal issue, which is a substantial problem that has to be dealt with.
But I wanted to also note that we also focused on some of the new clean gasification technologies for coal, integrated gasification combined cycle. I think there are about eight plants in the world now that use that, and one or two others. The advantages there are with some new types of coal gasification, the CO2 comes off at a different temperature than the combustion; and that means the carbon is easy--relatively easy to capture. Once the cost of sequestration in geological formations is affordable and one can be assured that it works, then those several types--not all, but those several types of
new coal gasification technologies are also not only clean but also can be made into something that sequesters carbon. So, in
a sense, they become as desirable in most ways as nuclear, solar, wind, etc. So both nuclear and the new coal gasification
technologies were very favorably regarded by the Commission.
Mr. Ebel. Let me make two points on nuclear. One is that the United States gets about 20 percent of its electric power from nuclear power stations. Fifty percent of the fuel burned in those nuclear power stations comes from Russia. Now why in the world would we put ourselves in a position of depending upon Russia for such a vulnerable situation?
That brings to my point that I raise in my testimony on tradeoffs. There is a tradeoff here, and the tradeoff is that we decommission nuclear warheads in Russia and use the fuel for our nuclear power plants; and, to date, I think well over 8,000 nuclear warheads have been decommissioned. So when you tell this to the American audience and you say is that kind of tradeoff in our national interest, the answer is yes.
The second point----
Mr. Issa. So you are advocating that we develop the next generation and take those warheads and turn them into energy?
Mr. Ebel. Absolutely. Well, the goal is to take out 12,000, I believe. We are moving toward that goal.
The second point is, Mr. Chairman, if you were addressing an American audience anywhere in the United States, I think you could get agreement that nuclear power is the only nonpolluting form of primary energy that we have. I think all the hands would go up and say, yes, we support it. And then you would say, that is good, because the reason I am here is to find a site for a new nuclear power plant, and I found one about 15 miles down the road. Now, can I have your permission to build it? Of course not. So it is a siting, permitting problem that we face, not only just the disposal of the spent fuel.
Mr. Hormats. That is exactly the problem. Unfortunately, no one wants it near them. I do think nuclear--the technology has come a long way.
The issue you get in addition to the disposal issue and the citing issue is the terrorism issue. As Congressman Higgins will know, we near New York City have had a constant running battle about a particular nuclear power plant in which the people around want to get closed and occasionally picket. It hasn't been closed, and basically it has passed the safety tests, but it is a controversial issue because of the concern that after September 11 someone is going to run a big airplane into it and blow it up.
In addition to dealing with all the other issues, you have to make sure that these are hard and to the point where there is no question about vulnerability, that they are invulnerable to attack; and this adds yet another threshold that makes it more difficult and adds to the not-in-my-backyard question.
I would just like to segue from that to another issue, just to touch on for a moment, because we have alluded to it very briefly, but it is a similar issue, and that is LNG imports, which are an opportunity for the United States. And there is a more diversified--there are a lot of additional suppliers of LNG around the world. It is one more part of a sound diversification strategy.
We have four import terminals now. There is an opportunity--you will see from this map there are four little red dots, and all these yellow dots essentially are potential places where you can put it up. But the same problem occurs: one, people don't want it near where they live; and, two, there is a risk that some people perceive that someone could blow it up. And the siting issue in many of these things, where it is good for the country, the region that is given the opportunity, shall we say, to have it doesn't really want to take advantage of that opportunity and fears putting it near where they live.
Mr. Issa. We have done a good job here. I am going to make my closing statement, which is I have the San Onofrie nuclear power plant in my district. I had approximately 80 percent in my district in a poll respond that they would support additional reactors at that existing site. So perhaps the NIMBYism comes when you are asking for a new site more than when you have an existing site with a good record.
You are going to waive? OK. Having no other questions except all of those we will followup with you endlessly, I want to thank the panel for being here. I want to thank the majority and minority staff for not only arranging such a great panel to be here but, in all candor, suggesting a lot of good questions, and we got through some of them.
I hope that you will accept our next invitation. This is not a subject on which we are going to have one hearing and move on. This is one that we want to stick with until it is resolved to a bipartisan conclusion.
With that, this meeting is adjourned.
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