Hearing of the Interior and Related Agencies Subcommittee of the House Committee for Appropriations for the Energy Department

Federal News Service

HEADLINE: HEARING OF THE INTERIOR AND RELATED AGENCIES SUBCOMMITTEE OF THE HOUSE COMMITTEE FOR APPROPRIATIONS APPROPRIATIONS FOR THE ENERGY DEPARTMENT

CHAIRED BY: REPRESENTATIVE CHARLES H. TAYLOR (R-NC )

LOCATION: B-308 RAYBURN HOUSE OFFICE BUILDING, WASHINGTON, D.C.

WITNESSES:

SPENCER ABRAHAM, SECRETARY, DEPARTMENT OF ENERGY

BODY:
REP. CHARLES H. TAYLOR (R-NC): The Committee will come to order. Today we welcome the secretary of Energy, Spencer Abraham, who is here to explain his 2005 budget request for Energy programs funded in the Interior Bill. Mr. Secretary, your prepared statement and biography will be inserted in the record at this point. You may summarize as you see fit. Overall the budget request for Energy research is characterized by winners and losers. Increases for major initiatives are funded at the expense of ongoing research.

We'd like to hear your estimation, Mr. Secretary, for these changes including your arguments for the large increases in certain areas and the large decreases in other areas. Total reduction proposal in the budget for fossil fuels research is $39 million but ongoing research is substantially reduced, even eliminated in many areas to fund a huge increase of the FutureGen initiative, the power plant of the future. Ongoing energy conservation research is cut to pay for large increases in weatherization grants and an increase in the hydrogen fuel cell program that is part of the Freedom CAR initiative.

Mr. Secretary, we will in all likelihood make some adjustments to your budget-that should be no surprise -- (laughter.) I'd like to have a continuing dialogue with you as we consider the budget proposal over the next several months. We have found in our relations with you in your outstanding record in the Senate as well as your time as secretary of Energy that you've understood and will try to understand the fact that we have a lot of competing programs and not necessarily starting with this administration and probably not any administration, it's a program that has to be put together in a way that continues for a long period of time and bringing forth an Energy policy to sustain and support America.

At this point I'd like to recognize Mr. Dicks, ranking member-minority member of the subcommittee for any opening remarks.

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REP. SHERWOOD: Well, I thing we have gotten into some unintended consequences here, I'm not sure we've helped ourselves. And when you approach the end of the heating oil season, with short supply and high demand, to decide we're going to store that oil until the next heating oil season is beyond comprehension. That doesn't make any economic sense whatsoever. And there is a limit as to how long we can store it and still have it work in home heating oil. We've got to figure somewhere at the end of the season, we've got to clean that damn thing out and then replace it with new oil the next year, or we'll go to use 20 years from now and find that it's unusable.

SEC. ABRAHAM: I don't actually know the technology answer to that in terms of the life cycle. What I would say is that I think the issue for Congress, for everybody who is interested in this to consider, is whether the real-the principal objective of the reserve is to be a backstop against serious international supply disruption or it's to be helpful in terms of addressing short-term dislocations. And if the latter is of equal or greater importance, then I think the question really has to be whether a 60 percent differential is the appropriate trigger.

For whatever reason-I can't recall the debate on this at this time-that 60 percent level was put into the legislation. It may have been because there had been in fact in that timeframe something close to that. But I think that, given the at least equal level, if not greater level, of emphasis on the sort of security side of the equation, then that's kind of dominant in the way this has been interpreted.

REP. SHERWOOD: How do you think the SPRO is working? How full are we? How much are we buying now, and is it counterproductive to be continuing to cram it full with higher prices?

SEC. ABRAHAM: Well, here is-first, let me take a second to talk about it works. After 9/11, the president made a decision that the SPRO should be brought up to full capacity. As I recall, in the Energy bill, at least the one that came out of conference, was even enlarged to a billion barrels of oil. When we took office, the amount-roughly at 9/11 -- the amount in was about 540 million of the 700 million. When the president issued that directive to us, we began to slowly fill the reserve. We concluded that a huge buying of oil was not appropriate.

So what we did was to use the "Royalty in Kind Program," as it's called, in which companies who use federal land for their oil production, and are required to provide us with a percentage of that oil, that we'd take that percentage in kind-is really the way it's laid out-we would take those barrels and we would use them to fill the reserve.

The pace that that works at is about 125,000 barrels a day. That's in, of course, a world marketplace that produces about 80 million barrels a day today -- 81 or something in that range. So we do about 120,000 barrels a day. That's about four million barrels a month and today the reserve is at its highest level of fill. But it's about 643 million barrels. At the current pace, therefore, it will be finished somewhere next summer, summer of '05.

We deferred our fills, briefly, last year when the combination of events I talked about earlier, Venezuela, Iraq and Nigeria, occurred. When we do that, the company that owes us oil is required to, at a later date, send us that oil and a premium-that is even a sort of interest payment, if you would, of additional oil.

So that's where we're at. That's where we're headed. We ask the Energy Information Administration to do an analysis, to see what kind of impact does this have on the oil marketplace. Everybody knows the price of oil is high today.

How much of a factor is it? Our analysts believe it is a very minimal negligible factor for a variety of reasons, the most important of which is that it is such a transparent and predictive process that the marketplace fully adjusts to it. They know exactly how much. They know what the timeframe is and the amount is such a small fraction of the world production that the conclusion that our own analysts have reached is that it is a very, very insignificant part of the price of oil.

There's also people in the department - not in that analytic arm only-who believe that those who set production levels, OPEC, for example, understand and know exactly how much we're putting in there or how much we're filling, and that it is entirely possible that, if we were to defer, that they would adjust their production levels accordingly. Obviously, I can't with confidence comment whether or not that would happen. But it may well be that, if we deferred, we would find that there was just an offsetting production cut as well.

REP. SHERWOOD: How about worldwide storage? What percentage is ours of other strategic reserves around the world?

SEC. ABRAHAM: We have 640 million in our reserve. Private sector inventories are another 250 million to 300 million, that range, I guess. So there's about not quite a billion barrels in the U.S. inventories, if you include the reserves. Worldwide, the public-and I don't mean worldwide because in some parts of the world I don't know how much there might be in reserves in places like China-but of the countries who work together on this, the International Energy Agency countries-we're one of them, it's mostly the large industrial countries-the cumulative public-private reserves is about 3.7 billion. And the government-run reserves, I think, are maybe a little under two billion worldwide.

REP. SHERWOOD: Do you think that we've lost a major strategic battle in the last few years with OPEC's thinking? It used to be that they had a target price of oil that, you know, Saudis would jump in and if it got much over $20 a barrel, the Saudis would jump in and throw up some more production. And now, I see, just recently, even though we've got $30 a barrel oil, they're deciding for the spring to cut back a little bit. And have we lost a major diplomatic battle there?

SEC. ABRAHAM: I don't think we've lost a diplomatic battle. I think we've made it clear we're not going to beg for oil from these countries and that takes a little bit of one's leverage away, perhaps, in these kinds of discussions. As the president said in October and as we have repeated since then, we have been very clear, in sending a message publicly and privately to those countries, that they should be taking action that could hurt the world economy because we believe that, whether you are a consumer or a producer country, you do better when the world economy is growing than when it is not.

REP. SHERWOOD: My point was they must have had a change in thinking because they used to think that it was stable at about $20. Now they seem to think it's stable at about $30.

SEC. ABRAHAM: A few years ago, as you know, they publicly indicated that they would try to keep their price in a band of $22 to $28 a barrel-using U.S. dollars. That band has been largely exceeded every single day since at least November-I mean I don't know the exact number-for quite a long time. Obviously, you know, that price concerns all of us and I don't know the rationale and detail of some of their assessment, they would make their own case. But I would just reiterate with the president that we-there's no question that energy prices have an impact on the economy.

REP. SHERWOOD: It concerns all of us, but it concerns those of us in the Northeast a lot more because energy prices in the Northeast are just like a tax and I think they have undone a lot of the beneficial effects on the economy that our tax cuts brought in.

We talk about automobiles. Are we paying enough attention to heavy trucks? A huge amount of petroleum is used in our transportation system and I don't have a solution for this-but we've had some new emission standards on our heavy trucks that came out two years ago and I wondered if your office had been taking into account how much oil that we were using a day because of those and we had any cost benefit analysis on that?

SEC. ABRAHAM: I don't know if we do. I would be happy to submit it for the record.

REP. SHERWOOD: I'd be glad to hear your thoughts.

SEC. ABRAHAM: Can I just-one other point. I was just handed a note by one of our folks here to come in on the Northeast home heating oil reserves, that the oil is actually turned over each year. I did not know that.

REP. SHERWOOD: It is turned over each year. So we pay somebody to pump it out and pump it in? We don't use it, but we pay somebody to handle it?

SEC. ABRAHAM: Some of it is sold and then in a retreat --

REP. SHERWOOD : I understand. I understand.

SEC. ABRAHAM: I think that's what you were hoping they would do.

REP. SHERWOOD: I was hoping they would release it, and then you buy it back in August. You don't-you know, when it's cheap.

REP. TAYLOR: Thank you, Mr. Sherwood.