[Senate Hearing 112-35]
[From the U.S. Government Publishing Office]
S. Hrg. 112-35
ENERGY AND OIL MARKET OUTLOOK
=======================================================================
HEARING
before the
COMMITTEE ON
ENERGY AND NATURAL RESOURCES
UNITED STATES SENATE
ONE HUNDRED TWELFTH CONGRESS
FIRST SESSION
TO
RECEIVE TESTIMONY ON THE ENERGY AND OIL MARKET OUTLOOK FOR THE 112TH
CONGRESS
__________
FEBRUARY 3, 2011
Printed for the use of the
Committee on Energy and Natural Resources
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COMMITTEE ON ENERGY AND NATURAL RESOURCES
JEFF BINGAMAN, New Mexico, Chairman
BYRON L. DORGAN, North Dakota LISA MURKOWSKI, Alaska
RON WYDEN, Oregon RICHARD BURR, North Carolina
TIM JOHNSON, South Dakota JOHN BARRASSO, Wyoming
MARY L. LANDRIEU, Louisiana SAM BROWNBACK, Kansas
MARIA CANTWELL, Washington JAMES E. RISCH, Idaho
ROBERT MENENDEZ, New Jersey JOHN McCAIN, Arizona
BLANCHE L. LINCOLN, Arkansas ROBERT F. BENNETT, Utah
BERNARD SANDERS, Vermont JIM BUNNING, Kentucky
EVAN BAYH, Indiana JEFF SESSIONS, Alabama
DEBBIE STABENOW, Michigan BOB CORKER, Tennessee
MARK UDALL, Colorado
JEANNE SHAHEEN, New Hampshire
Robert M. Simon, Staff Director
Sam E. Fowler, Chief Counsel
McKie Campbell, Republican Staff Director
Karen K. Billups, Republican Chief Counsel
C O N T E N T S
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STATEMENTS
Page
Bingaman, Hon. Jeff, U.S. Senator From New Mexico................ 1
Burkhard, James, Managing Director, IHS Cambridge Energy Research
Associates, Cambridge, MA...................................... 28
Diwan, Roger, Partner and Head of Financial Advisory, PFC Energy. 20
Jones, Richard H., Deputy Executive Director, International
Energy Agency, Paris, France................................... 14
Murkowski, Hon. Lisa, U.S. Senator From Alaska................... 2
Newell, Richard, Administrator, Energy Information
Administration, Department of Energy........................... 4
APPENDIX
Responses to additional questions................................ 65
ENERGY AND OIL MARKET OUTLOOK
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THURSDAY, FEBRUARY 3, 2011
U.S. Senate,
Committee on Energy and Natural Resources,
Washington, DC.
The committee met, pursuant to notice, at 9:33 a.m., in
room SH-216, Hart Senate Office Building, Hon. Jeff Bingaman,
chairman, presiding.
OPENING STATEMENT OF HON. JEFF BINGAMAN, U.S. SENATOR FROM NEW
MEXICO
The Chairman. Why don't we go ahead and get started?
Senator Murkowski is on her way here but was stuck in
traffic and asked that we proceed without her.
Let me first just mention, welcome to the committee. We
have eight new members of this committee in this Congress, and
one or two of them have come to the earlier hearings we had,
but I hope several will come to this hearing. Let me just
mention who they are and welcome them all--Senator Franken, who
is here; Senator Coons; Senator Manchin; Senator Portman;
Senator Lee, welcome to the committee; Senator Coats; Senator
Paul; and Senator Hoeven. So we are glad to have them all on
the committee and look forward to working with them.
Let me go through a short statement here, and then we will
begin our testimony.
This is an oversight hearing on the energy and oil market
outlook for this 112th Congress. As many of you know, we
usually try to start each new Congress by having a sort of
scene-setting hearing of this kind, which will look at the
broad energy trends that we expect to influence our thoughts on
energy policy, also more specifically on agenda items that come
before the committee during this 2-year Congress.
Today, we will start that discussion by hearing from Dr.
Richard Newell, who is the Administrator of the Department of
Energy's Energy Information Administration. He is going to give
us highlights of EIA's latest short-and long-term energy market
forecasts. We appreciate him being here. He just returned from
a trip to the Middle East, I understand, and perhaps he can
give us some insights from that trip.
The committee is a heavy consumer of EIA information and
products. So we always appreciate having EIA share its data and
its analyses with us.
We also will hear from Ambassador Jones, who is the Deputy
Director of the International Energy Agency in Paris. We look
forward to discussing IEA's forecast of total world energy
supply and demand out through 2035. I would also note that IEA
was founded as a forum for responding to oil supply
disruptions, and it still has an important role to play in that
capacity.
Executive Director Tanaka, who was scheduled to be with us,
found that the current situation in the Middle East required
him to remain at their headquarters in Paris, but we are in
good hands with Ambassador Jones, whose impressive resume
includes service as the U.S. Ambassador in many of the
countries in the Middle East. Given the current situation that
we are seeing internationally, we are especially grateful to
him for being here to give us the International Energy Agency
perspective.
We are also pleased to have two other very impressive
witnesses with us, leading experts on energy, both of whom are
familiar to the committee. They testified in 2008, as we
attempted to understand that year's historic oil price spike.
Mr. Diwan is partner and head of financial advisory with PFC
Energy in Washington, and Mr. Jim Burkhard is the managing
director of Cambridge Energy Research Associates in Cambridge,
Massachusetts. So we very much appreciate them being here.
Since the hearing was announced early last week, I think it
is safe to say that members and witnesses alike have been
following the developments in the Middle East with much
interest. Fortunately, it appears unlikely that the political
turmoil will result in major disruptions in oil production or
transportation. At least at this time, that is my impression.
However, I note that whenever geopolitical events of this
type occur, it reminds us of our vulnerability to world oil
supply disruptions, and it is a spur for us to consider energy
policies that help to reduce that vulnerability.
That is why I am particularly glad to see that EIA is
forecasting a decline in U.S. consumption of imported oil
between now and 2035. Until very recently, reversing the
decade-old narrative of ever-increasing U.S. dependence on
foreign oil seemed all but impossible. We now see that 2005
might well have been the high-water mark in U.S. oil import
dependence.
Increased vehicle efficiency, a transition to increased
reliance on biofuels, together with gains in U.S. oil
production--all of those are creating real national and
economic security benefits. I am optimistic that further
technology advances, both in vehicles and in fuels, could make
us even less reliant on imported oil than the current forecast
predicts. I hope that we in the Congress will have the good
sense to remain on this path toward increased energy
independence.
Now, with that, let me stop and defer to Senator Murkowski
for any comments she would like to make before we hear from the
witnesses.
STATEMENT OF HON. LISA MURKOWSKI, U.S. SENATOR
FROM ALASKA
Senator Murkowski. Thank you and good morning, Mr.
Chairman.
I was eager to hold this hearing even before the unrest
that we are seeing in Tunisia and Egypt and how this has grown
into the international crisis that we are now witnessing. We
say this a lot in this committee, but I think today's hearing
is particularly timely.
While we have seen no interruption in the supply of oil,
the unrest in North Africa is affecting its price, and that
should help us understand the costs and the consequences that
are associated with our current energy policy.
I think there is strong bipartisan agreement that our
Nation is far too dependent on foreign oil, and I have always
found it unfortunate that agreement seems to end there for so
many members. I have never been one to deny the critical need
for greater energy efficiency, for greater investments in
alternatives, and for a responsible path forward for a cleaner
energy future. This is and will continue to be a major
undertaking, and the written testimony that we have today
reflects that efficiency, biofuels, and other technologies will
make an important contribution in the coming decades. I think
that is a good thing, and we will continue to build on it here
in this committee.
But I am also quite interested in what we can achieve
today, not just tomorrow. Despite the unfortunate state of our
economy, oil prices are near $100 per barrel, and hardly anyone
expects a correction back to $50 or even $80. Instead, oil is
more likely to stay in its current range or trend upwards.
With imports accounting for more than 50 percent of our
supply, we are on the verge, once again, of seeing the huge
costs that high prices hold for our economy. Worst of all, this
is a problem that is at least partially of our own making. Over
the years, our lands have been locked up and many of our most
promising opportunities have been put out of reach.
The U.S. sits on huge unexplored oil reserves in the
offshore, in my State of Alaska, in the Rocky Mountain West. We
have shale formations that aren't even accessible for research
and development right now. At times, our energy policy goes
beyond frustrating and becomes simply irresponsible. The
American people expect their Government to keep energy
affordable, but right now, it is failing on that front.
We as citizens own the oil and the natural gas on Federal
land. The Government is not a landlord, but a management outfit
that we allow, through representatives in Congress, to contract
for the development of these resources for our benefit. When
the value of these resources is sustained at such high levels
and we are overly dependent on foreign sources for our supply,
there is not much tolerance for keeping them locked up. We
essentially have money buried beneath our own soil, but instead
choose to hemorrhage nearly $1 billion a day out of our
economy.
Now it is not that I expect our Nation to supply 100
percent of its own oil. We won't. It is not that I expect
increased domestic production to singlehandedly bring down the
price of oil back down to our preferred price range. It won't
do that. But I do expect honesty in this discussion about what
increased domestic production can do to protect against supply
disruptions, increase our security, restore our trade balance,
generate Government revenues, and, most of all, create jobs.
The events in North Africa should be a wake-up call to
those of us who work on energy policy. Civil unrest is a fact
of life in many of the nations that provide our imports. Iran
now holds OPEC's presidency and is perfectly comfortable with
$100 oil. An actual supply disruption, as opposed to the mere
specter of one, would likely spike oil prices to levels that
will stifle our economic recovery and result in genuine
hardship for American working families.
As this committee's joint background memo quoted from the
Bipartisan Policy Center, they said, and I quote, ``A one-
dollar 1-day increase in a barrel of oil takes $12 million out
of the U.S. economy. If tensions in the Mideast cause oil
prices to rise by $5 for even just 3 months, over $5 billion
will leave the U.S. economy. Obviously, this is not a strategy
for creating jobs.'' That is the end of the quote.
That is a tremendous amount of money. Really, we are
talking about exponentially more when it comes to our deep
dependence on foreign oil. So, today, I am renewing my call for
a realistic and truly aggressive approach to the energy
challenges we face. For the sake of our national security, for
the sake of our economy, and for the sake of our world's
environment, America should produce as much of the oil that it
uses as possible.
It is this balance, in concert with the resulting revenues
and the ease of manufacturing, that will allow us to truly take
control of our energy future. I am anxious to work with
Senators on both sides of this dais to achieve a more
appropriate balance in our energy policy, a balance that
promotes all forms of energy.
I thank the witnesses for the testimony that you have
presented here this morning and look forward to the discussion
that we will have.
Thank you, Mr. Chairman.
The Chairman. Thank you very much.
Why don't we start with you, Dr. Newell? If you could take
8 minutes or so and give us sort of the main points we need to
understand? I would ask the same of each of the other
witnesses, and we will include in the record your complete
written statement in each case.
But Dr. Newell, go right ahead.
STATEMENT OF RICHARD NEWELL, ADMINISTRATOR, ENERGY INFORMATION
ADMINISTRATION, DEPARTMENT OF ENERGY
Mr. Newell. Thank you, Mr. Chairman and members of the
committee. I appreciate the opportunity to appear before you
today.
The Energy Information Administration is the statistical
and analytical agency within the U.S. Department of Energy. EIA
does not promote or take positions on policy issues, and we
have independence with respect to the information and the
analysis that we provide. Therefore, our views should not be
construed as representing those of the Department of Energy or
other Federal agencies.
Focusing first on the short-term outlook for oil, EIA
expects a continued tightening of world oil markets over the
next 2 years. World oil consumption grows by an average of 1.5
million barrels per day in 2011 and in 2012 in our outlook,
while supply growth from non-OPEC countries averages less than
0.1 million barrels per day. Consequently, we expect the market
to rely on increased OPEC members' production of crude oil and
other liquids and some drawdown in inventories to meet world
oil demand growth.
With tighter world oil markets, EIA expects the price of
West Texas Intermediate crude oil, a key U.S. pricing
benchmark, to average about $93 per barrel in 2011, $14 per
barrel higher than last year's average. We expect the price to
rise to an average of $99 per barrel by the fourth quarter of
2012. However, oil price forecasts are subject to a great deal
of uncertainty. For example, the market value of futures and
options contracts, which we track closely, is telling us that
there is about a 1-in-3 chance that the price of oil could be
above $110 per barrel at the end of this year.
EIA expects the retail price of regular gasoline to average
about $3.17 per gallon this year, about 40 cents per gallon
higher than last year, and $3.29 per gallon in 2012. Prices
will be higher than this during the peak summer driving season
and in certain regions of the country, particularly the west
coast. There is also a significant chance that gasoline prices
could diverge substantially from these values, particularly due
to uncertainty in oil prices.
I will now turn to the longer-term energy projections from
EIA's Annual Energy Outlook, which we update once each year.
The reference case, which we released in December, represents
an energy future through 2035--so, for the next 25 years--that
assumes continuance of current market and technological trends,
consumer behavior, and current laws and regulations. It does
not include the effect of potential future policies that have
not yet become law. The reference case represents a baseline
that is a useful jumping-off point for assessing alternatives,
and the full outlook, which we will release this spring, will
include a large number of sensitivity cases that examine the
impacts of different technological market assumptions and
policy assumptions.
Renewables are the fastest-growing energy source in our
outlook, albeit from a relatively small base. Total use of
renewable fuels grows 3 percent per year on average, compared
to overall energy consumption, which grows only less than 1
percent per year on an annual average basis. Growth in
renewables results mainly from the implementation of renewable
fuel standards, which is a Federal standard, and also State-
level mandates for renewable electricity generation.
Turning to natural gas, the prospects for domestic natural
gas production have dramatically improved over the last several
years with the emergence of shale gas production. U.S. shale
gas production has increased 15-fold over the last decade, and
proved reserves of shale gas have tripled over the last few
years. This has led EIA and other analysts to reassess the U.S.
shale gas resource base, and in our new reference case just
released, technically recoverable shale gas resources are more
than double what we assumed in last year's outlook.
As a result, U.S. natural gas production increases 25
percent over the next 25 years, and our projections for natural
gas imports and natural gas prices are, in turn, significantly
lower than what we had previously assumed. Lower projected
natural gas prices, in turn, underpin increased natural gas
consumption, which rises 17 percent over the next 25 years,
primarily for use in industry and electric power.
Coal is another key source for electricity generation, and
coal consumption grows gradually throughout the reference case
projection, as existing plants are used more intensively and
the few new coal plants already under construction are
completed and enter into service.
Nuclear generating capacity increases by about 10
gigawatts, from 101 gigawatts in 2009 to about 111 gigawatts by
2035. This includes about 6 gigawatts of new plant additions,
with the balance coming from upgrades at existing plants.
Turning back to oil, the reference case crude oil prices
continue to rise in our long-term outlook as a growing global
economy underpins oil demand growth that is more rapid than
supply growth from non-OPEC producers. By 2035, the reference
case crude oil price is $125 per barrel in real terms in our
outlook.
Recognizing the possibility of unpredictable changes in
energy markets and policies, the full Annual Energy Outlook to
be issued this spring will include a wide range of oil price
scenarios that diverge significantly from this reference case
assumption.
Total U.S. consumption of oil and other liquid fuels grows
from about 19 million barrels per day in 2009 to 22 million
barrels per day in 2035 in the reference case. This modest
growth in the reference case reflects increasing fuel prices
and the implementation of finalized standards and statutory
mandates that drive the fuel economy of light-duty vehicles to
35 miles per gallon by 2020. However, pending standards
proposed for heavy-duty vehicles and potential changes in
light-duty standards beyond 2017 are not reflected in the
reference case.
Virtually all of the increase in liquids comes from
biofuels use, driven by the Federal renewable fuel standard
along with increases in natural gas liquids from natural gas
production. We expect domestic oil production increases to come
from onshore enhanced oil recovery projects and shale oil
plays. Cumulative offshore oil production in this year's
reference case is lower than in last year's outlook due to
delays in near-term projects, changes in expected lease sales,
and lower natural gas prices, which tend to be coupled with oil
production.
As a result of this increased domestic production and
modest consumption growth, we expect U.S. dependence on
imported liquid fuels to continue to decline. After reaching a
high of 60 percent in 2005, the imported petroleum share of
total liquid fuel use fell to 52 percent in 2009 and continues
to decline in our projections to 42 percent by 2035.
EIA's data analysis and projections are meant to assist
policymakers in their deliberations and the private sector in
making informed decisions. In addition to preparing baseline
projections that I have reviewed this morning, EIA has also
responded to requests from this committee and others for
analysis of the energy and economic impacts of energy policy
proposals. We look forward to providing you with whatever
assistance you need in that regard.
Mr. Chairman, members of the committee, this concludes my
testimony, and I look forward to any questions you might have.
Thank you.
[The prepared statement of Mr. Newell follows:]
Prepared Statement of Richard Newell, Administrator, Energy Information
Administration, Department of Energy
Mr. Chairman and Members of the Committee:
I appreciate the opportunity to appear before you today to discuss
the energy and oil market outlook.
The U.S. Energy Information Administration (EIA) is the statistical
and analytical agency within the U.S. Department of Energy. EIA
collects, analyzes, and disseminates independent and impartial energy
information to promote sound policymaking, efficient markets, and
public understanding regarding energy and its interaction with the
economy and the environment. EIA is the Nation's premier source of
energy information and, by law, its data, analyses, and forecasts are
independent of approval by any other officer or employee of the United
States Government. The views expressed in our reports, therefore,
should not be construed as representing those of the Department of
Energy or other federal agencies.
The energy projections that I will discuss today are widely used by
government agencies, the private sector, and academia as a starting
point for their own energy analyses. EIA prepares both short-term
energy outlooks, examining monthly trends over the next one to two
years, and longterm outlooks, with annual projections over the next 20-
to-25 years. While I will be focusing primarily on the long-term
outlooks in my remarks today, I would like to first summarize some key
findings from our January Short Term Energy Outlook, which includes
monthly forecasts through the end of 2012.
THE SHORT-TERM ENERGY OUTLOOK
EIA's Short-Term Energy Outlook forecasts a continued tightening of
world oil markets over the next 2 years. World oil consumption grows by
an annual average of 1.5 million barrels per day through 2012 while the
growth in supply from countries that are not members of the
Organization of the Petroleum Exporting Countries (OPEC) averages less
than 0.1 million barrels per day each year. Consequently, EIA expects
the market will rely on both inventories and significant increases in
the production of crude oil and non-crude liquids in OPEC member
countries to meet world demand growth. While on-shore commercial oil
inventories in the Organization for Economic Cooperation and
Development (OECD) countries remained high last year, floating oil
storage fell sharply in 2010, and projected OECD oil inventories
decline over the forecast period. EIA expects that OPEC members' crude
oil production will continue to rise over the next 2 years to
accommodate increasing world oil consumption, especially with non-OPEC
supplies expected to show limited growth. Projected OPEC crude oil
production increases by 0.5 and 1.1 million barrels per day in 2011 and
2012, respectively.
Because of the projected tightening in world oil markets EIA
expects the price of West Texas Intermediate (WTI) crude oil to average
about $93 per barrel in 2011, $14 higher than the average price last
year (Figure 1).* For 2012, EIA expects WTI prices to continue to rise,
with a forecast average price of $99 per barrel in the fourth quarter
2012. Energy price forecasts are, however, uncertain. Based on futures
and options prices as of January 31, 2011, the probability that the
monthly average price of WTI crude oil will exceed $110 per barrel in
December 2011 is about 30 percent.
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* Figures 1-13 have been retained in committee files.
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EIA expects regular-grade motor gasoline retail prices to average
$3.17 per gallon this year, 39 cents per gallon higher than last year
and $3.29 per gallon in 2012, with prices forecast to average about 5
cents per gallon higher in each year during the April through September
peak driving season. There is regional variation in the forecast, with
average expected prices on the West Coast about 25 cents per gallon
above the national average during the April through September period.
There is also significant uncertainty surrounding the forecast, with
the current market prices of futures and options contracts for gasoline
suggesting a 35 percent probability that the national average retail
price for regular gasoline could exceed $3.50 per gallon during summer
2011 and about a 10 percent probability that it could exceed $4.00 per
gallon.
Domestic natural gas production increased by an average 3.5 percent
per year over the last 4 years, primarily because of the growth in
production from unconventional shale gas resources. The growth in
production has contributed to higher inventories, lower natural gas
prices, and an increase in natural gas use in the electric power
sector. The projected Henry Hub natural gas spot price averages $4.02
per million Btu for 2011, $0.37 per million Btu lower than the 2010
average (Figure 2). EIA expects the natural gas market to begin to
tighten in 2012, with the Henry Hub spot price increasing to an average
$4.50 per million Btu.
EIA estimates fossil-fuel CO2 emissions increased by 3.8
percent in 2010, after falling by 7.0 percent in 2009. Coal-and natural
gas-related CO2 emissions rose as a result of increased
usage of both fuels for electricity generation and higher consumption
of natural gas in the industrial sector. Projected declines in coal and
natural gas consumption in the electric power sector in 2011 more than
offset increased consumption of petroleum in the transportation sector
(i.e., motor gasoline, diesel fuel, and jet fuel). Consequently,
forecast fossil-fuel CO2 emissions fall by 0.6 percent in
2011. The forecast resumption of growth in electricity generation and
improvement in economic growth in 2012 contribute to a 2.4-percent
increase in fossil-fuel CO2 emissions. Projected fossil-fuel
CO2 emissions in 2012 remain below the levels seen since
1999 and 4.4 percent below 2005 emissions.
LONG-TERM ENERGY OUTLOOKS
International Energy Outlook.--Before focusing on our U.S. Annual
Energy Outlook, I want to briefly discuss some highlights of our
International Energy Outlook 2010 (IEO2010), which was issued last May.
The IEO2011 will be issued this spring. Although the Annual Energy
Outlook focuses on our latest thoughts about domestic energy markets,
it is useful to place this within a global context given the
interconnectedness of U.S. energy markets and the broader global
economy.
The United States accounted for one-fifth of the world's energy
consumption in 2007, but this share is likely to decline over the next
two decades. Global energy consumption will grow about 50 percent over
the next 25 years, with most of the growth occurring outside of
developed countries, in places like China, India, and the Middle East.
Energy demand in non-OECD countries is expected to grow over 80 percent
from 2007 levels, and by 2035 China will account for almost 25 percent
of total world energy consumption. Renewables are the fastest-growing
source of world energy supply, but under current market and technology
trends fossil fuels are still expected to meet more than three-fourths
of total energy needs in 2035, assuming current policies are unchanged.
Total global liquid fuels consumption projected for 2035 is 110.8
million barrels per day, which is 29 percent or 24.7 million barrels
per day higher than the 2007 level of 86.1 million barrels per day.
Conventional oil supplies from OPEC member countries contribute 11.0
million barrels per day to the total increase in world liquid fuels
production from 2007 to 2035, and conventional supplies from non-OPEC
countries add another 4.8 million barrels per day. World production of
unconventional resources (including biofuels, oil sands, extra-heavy
oil, coal-to-liquids, and gasto-liquids), which totaled 3.4 million
barrels per day in 2007, increases fourfold to 13.5 million barrels per
day in 2035.
Natural gas consumption increases 44 percent globally over the
projection period. Tight gas, shale gas, and coalbed methane supplies
increase substantially in the IEO2010 Reference case--especially from
the United States, but also from Canada and China.
In the absence of additional national policies and/or binding
international agreements that would limit or reduce greenhouse gas
emissions, world coal consumption is projected to increase from 132
quadrillion Btu in 2007 to 206 quadrillion Btu in 2035, at an average
annual rate of 1.6 percent. China alone accounts for 78 percent of the
total net increase in world coal use from 2007 to 2035.
Annual Energy Outlook.--Turning to the Annual Energy Outlook 2011
(AEO2011), the Reference case discussed today was released in December
2010 and is intended to represent an energy future through 2035 based
on given market, technological and demographic trends; current laws and
regulations; and consumer behavior. EIA recognizes that projections of
energy markets are highly uncertain and subject to geopolitical
disruptions, technological breakthroughs, and other unforeseeable
events. In addition, long-term trends in technology development,
demographics, economic growth, and energy resources may evolve along a
different path than represented in the projections. The complete
AEO2011, which EIA will release this spring, will include a large
number of alternative cases intended to examine these uncertainties.
EIA has made numerous updates in developing its AEO2011 Reference
case. Several notable changes from the AEO2010 include (1) a
significant update of the technically recoverable U.S. shale gas
resources, more than doubling the volume of shale gas resources assumed
in AEO2010; (2) an increase of the limit for blending ethanol into
gasoline for approved vehicles from 10 percent to 15 percent; (3)
incorporation of California's Low Carbon Fuel Standard and other State
environmental rules; and (4) updates in several key technology
assumptions, including the cost of new power plants and the cost and
sizes of electric and plug-in hybrid electric batteries.
ECONOMIC GROWTH
Real gross domestic product (GDP) grows by an average of 2.7
percent per year from 2009 to 2035 in the AEO2011 Reference case, the
same as in the AEO2010 Reference case. The Nation's population, labor
force, and productivity grow at annual rates of 0.9 percent, 0.7
percent, and 2.0 percent, respectively, from 2009 to 2035.
Beyond 2011, the economic assumptions underlying the AEO2011
Reference case reflect trend projections that do not include short-term
fluctuations. The near-term scenario for economic growth is consistent
with that in EIA's October 2010 Short-Term Energy Outlook.
It is important to note that one must exercise care in evaluating
percentage growth relative to 2009 levels throughout the projection
results since 2009 was the low point of the economic downturn and
associated energy consumption.
ENERGY PRICES
World oil prices declined sharply in the second half of 2008 from
their peak in mid-July of that year. Real prices trended upward
throughout 2009, and through November 2010 they remained generally in a
range between $70 and $85 per barrel before climbing above $90 per
barrel. Prices continue to rise gradually in the Reference case (Figure
3), as the world economy recovers and global demand grows more rapidly
than liquids supplies from producers outside the Organization of the
Petroleum Exporting Countries (OPEC). In 2035, the average real price
of crude oil in the Reference case is $125 per barrel in 2009 dollars.
The AEO2011 Reference case assumes that limitations on access to
energy resources in resourcerich countries restrain the growth of non-
OPEC conventional liquids production between 2009 and 2035, and that
OPEC targets a relatively constant market share of total world liquids
production (Figure 4). The degree to which non-OPEC and non-OECD
countries restrict access to potentially productive resources
contributes to world oil price uncertainty. Other factors causing
uncertainty include OPEC investment decisions, which will affect future
world oil prices and the economic viability of unconventional liquids.
A wide range of price scenarios (from $50 per barrel to $200 dollars
per barrel in 2035, in 2009 dollars) and discussion of the significant
uncertainty surrounding future world oil prices will be included in the
complete AEO2011 publication.
Prices of motor gasoline and diesel in the AEO2011 Reference case
increase from $2.35 and $2.44 per gallon (all prices are in real 2009
dollars), respectively, in 2009 to $3.69 and $3.89 per gallon in 2035.
The price of natural gas at the wellhead is consistently lower in
the AEO2011 Reference case than it was in AEO2010 (Figure 5), because
of a revised representation of natural gas pricing and a significant
increase in estimated technically recoverable shale gas resources. The
annual average natural gas wellhead price remains under $5 per thousand
cubic feet through 2022, but rises thereafter to meet growth in natural
gas demand and to offset declines in natural gas production from other
sources. As the shale gas resource base is developed, production
gradually shifts to resources that are somewhat less productive and
more expensive to produce. Natural gas wellhead prices (in 2009
dollars) reach $6.53 per thousand cubic feet in 2035, compared with
$8.19 per thousand cubic feet in AEO2010.
The average U.S. minemouth coal price declines somewhat after 2010,
as the share of highercost coal from mines in Appalachia declines. The
Appalachian share of total coal production, on an energy content basis,
declines from 40 percent in 2009 to 33 percent in 2016 and 29 percent
in 2035. The average, real delivered electricity price in the AEO2011
Reference case falls from 9.8 cents per kilowatthour in 2009 to 8.9
cents per kilowatthour in 2016, reflecting continued low natural gas
prices. Electricity prices tend to reflect trends in natural gas
prices, because natural gas represents a large share of total fuel
costs, and in competitive areas natural gas-fired plants often are the
marginal generators. In the AEO2011 Reference case, lower natural gas
prices lead to lower electricity prices than in the AEO2010 Reference
case. Electricity prices in 2035 (in 2009 dollars) are 9.2 cents per
kilowatthour in the AEO2011 Reference case, compared with 10.3 cents
per kilowatthour in the AEO2010 Reference case.
ENERGY CONSUMPTION
Total primary energy consumption, which was 101.7 quadrillion Btu
in 2007, grows by 21 percent in the AEO2011 Reference case, from 94.8
quadrillion Btu in 2009 to 114.3 quadrillion Btu in 2035, to about the
same level as in the AEO2010 projection in 2035 (Figure 6).
The energy intensity of the U.S. economy, measured as primary
energy use (in Btu) per dollar of GDP (in 2005 dollars), declines by 40
percent from 2009 to 2035 in the AEO2011 Reference case as the result
of a continued shift from energy-intensive manufacturing to services,
rising energy prices, and the adoption of policies that promote energy
efficiency. Since 1992, the energy intensity of the U.S. economy has
declined on average by 2 percent per year, in large part because the
economic output of the service sectors, which use relatively less
energy per dollar of output, has grown at a pace almost 6 times that of
the industrial sector (in constant dollar terms). As a result, the
share of total shipments accounted for by the industrial sectors fell
from 31 percent in 1992 to 24 percent in 2009. In the AEO2011 Reference
case, the industrial share of total shipments continues to decline, but
at a slower rate, to 21 percent in 2035.
Population is a key determinant of energy consumption, influencing
demand for travel, housing, consumer goods, and services. The U.S.
population increases by 27 percent from 2009 to 2035 in the AEO2011
Reference case, and energy consumption grows by 21 percent over the
same period. Energy consumption per capita declines somewhat as a
result, declining by an average of 0.2 percent per year from 2009 to
2035 in the AEO2011 Reference case.
The fossil fuel share of energy consumption falls from 84 percent
of total U.S. energy demand in 2009 to 78 percent in 2035, reflecting
rising fuel prices and the impacts of fuel economy standards and
provisions in the American Recovery and Reinvestment Act of 2009
(ARRA), the Energy Improvement and Extension Act of 2008 (EIEA2008),
the Energy Independence and Security Act of 2007 (EISA2007), and State
legislation.
Total U.S. consumption of liquid fuels, including both fossil
liquids and biofuels, grows from 18.8 million barrels per day in 2009
to 22.0 million barrels per day in 2035 in the AEO2011 Reference case.
The transportation sector dominates the demand for liquid fuels and its
share (as measured by energy content) grows only slightly, from 72
percent of total liquids consumption in 2009 to 74 percent in 2035.
AEO2011 assumes the adoption of fuel economy standards for lightduty
vehicles for model year 2011, as well as joint fuel economy and
greenhouse gas emissions standards set forth by the EPA and NHTSA for
model years 2012 through 2016. The fuel economy standards increase
further through model year 2020 to meet the statutory requirements of
EISA2007. The Reference case does not assume any further changes in
fuel economy standards. Some ideas for further standards are discussed
in the September 2010 EPA/NHTSA Notice of Upcoming Joint Rulemaking to
Establish 2017 and Later Model Year Light-Duty Vehicle Greenhouse Gas
Emissions and Corporate Average Fuel Economy (CAFE) Standards. Nor does
it include the proposed fuel economy standards for heavy-duty vehicles
provided in The Proposed Rule for Greenhouse Gas Emissions Standards
and Fuel Efficiency Standards for Medium-and Heavy-Duty Engines and
Vehicles, published by the EPA and the National Highway Traffic Safety
Administration (NHTSA) in November 2010. Enactment of further binding
standards would lower the projection for liquid fuels use.
Biofuels account for most of the growth in liquid fuels
consumption, increasing by 1.8 million barrels per day from 2009 to
2035. The biofuel portion of 2035 liquid fuels consumption is 3.9
quadrillion Btu in AEO2011, about the same as in AEO2010. Although the
situation is uncertain, EIA's present view of the projected rates of
technology development and market penetration of cellulosic biofuel
technologies suggests that available quantities of cellulosic biofuels
will be insufficient to meet the renewable fuels standard (RFS) targets
for cellulosic biofuels legislated in EISA2007 before 2022, triggering
both waivers and a modification of applicable volumes, as provided in
Section 211(o) of the Clean Air Act as amended in EISA2007.
In the AEO2011 Reference case, natural gas consumption rises from
22.7 trillion cubic feet in 2009 to 26.5 trillion cubic feet in 2035.
The total in 2035 is about 1.6 trillion cubic feet higher than in the
AEO2010 Reference case due to lower natural gas prices.
Total coal consumption, which was 22.7 quadrillion Btu in 2007,
increases from 19.7 quadrillion Btu (1,000 million short tons) in 2009
to 25.2 quadrillion Btu (1,302 million short tons) in 2035 in the
AEO2011 Reference case. Coal consumption, mostly for electric power
generation, grows gradually throughout the projection period, as
existing plants are used more intensively, and a few new plants already
under construction are completed and enter service. Coal consumption in
the electric power sector in 2035 in the AEO2011 Reference case is
about 1.3 quadrillion Btu (53 million short tons) lower than in the
AEO2010 Reference case, however, as a result of higher levels of
natural gas use for electric power generation due to relatively lower
natural gas prices in the AEO2011 Reference case.
Total consumption of marketed renewable fuels grows by 2.9 percent
per year in the AEO2011 Reference case. Growth in the consumption of
renewable fuels results mainly from the implementation of the Federal
RFS for transportation fuels and State renewable portfolio standard
(RPS) programs for electricity generation. Marketed renewable fuels
include wood, municipal waste, biomass, and hydroelectricity in the
end-use sectors; hydroelectricity, geothermal, municipal waste,
biomass, solar, and wind for generation in the electric power sector;
and ethanol for gasoline blending and biomass-based diesel in the
transportation sector. Excluding hydroelectricity, renewable energy
consumption in the electric power sector grows from 113.6 billion
kilowatthours in 2009 to 261.6billion kilowatthours in 2035.
ENERGY PRODUCTION AND IMPORTS
Net imports of energy meet a major, but declining, share of total
U.S. energy demand in the AEO2011 Reference case. Energy imports
decline due to increased domestic natural gas production, increased use
of biofuels (much of which are produced domestically), and demand
reductions resulting from the adoption of new efficiency standards and
rising energy prices. The net import share of total U.S. energy
consumption in 2035 is 18 percent, compared with 24 percent in 2009.
The share was 29 percent in 2007, but it dropped considerably during
the recession.
OIL AND OTHER LIQUIDS
U.S. dependence on imported liquid fuels, measured as a share of
total U.S. liquid fuel use, reached 60 percent in 2005 and 2006 before
falling to 52 percent in 2009. The liquids import share continues to
decline over the projection period, to 42 percent in 2035 (Figure 7).
In the AEO2011 Reference case, U.S. domestic crude oil production
increases from 5.4 million barrels per day in 2009 to 5.7 million
barrels per day in 2035. Production increases are expected from onshore
enhanced oil recovery (EOR) projects, shale oil plays, and deepwater
drilling in the Gulf of Mexico. Cumulatively, oil production in the
lower 48 States in the AEO2011 Reference case is approximately the same
as in the AEO2010 Reference case, but the pattern differs in that more
onshore and less offshore oil is produced in AEO2011.
Onshore oil production is higher in AEO2011 as a result of an
increase in EOR, as well as increased shale oil production, for which
the resource estimate has been increased relative to AEO2010. In
AEO2011, EOR accounts for 33 percent of cumulative onshore oil
production. The bulk of the EOR production uses CO2. For
CO2 EOR oil production, naturally produced CO2 or
man-made CO2 captured from sources such as natural gas
plants and power plants is injected into a reservoir to allow the oil
to flow more easily to the well bore.
Offshore oil production in AEO2011 is lower than in AEO2010
throughout most of the projection period because of expected delays in
near-term projects, in part as a result of drilling moratoria and
associated regulatory changes, and in part due to the change in lease
sales expected in the Pacific and Atlantic outer continental shelf
(OCS), as well as increased uncertainty about future investment in
offshore production.
As with natural gas, the application of horizontal drilling
together with hydrofracturing techniques have allowed significant
increases in the development of shale oil resources (oil resident in
shale rock). With AEO2011 incorporating five key shale oil plays (as
opposed to two in AEO2010), oil production rises significantly in areas
of the country where shale oil is being produced, including the Rocky
Mountains (primarily from the Bakken shale), the Gulf Coast (primarily
from the Eagle Ford and Austin Chalk plays), the Southwest (primarily
from the Avalon play), and California (primarily from the Lower
Monterey and Santos plays).
NATURAL GAS
The emerging role of shale gas resources highlights the outlook for
natural gas supply. Cumulative natural gas production in the lower 48
States over the projection period in the AEO2011 Reference case is 25
percent higher than in the AEO2010 Reference case as a result of
greater supply availability from shale gas plays (Figure 8). The higher
shale gas production and a higher rate of development results from the
addition of shale gas resources in existing plays that can be produced
at prices under $7 per thousand cubic feet.
In the AEO2010 Reference case, technically recoverable unproved
shale gas resources were estimated at 347 trillion cubic feet; in the
AEO2011 Reference case they are estimated at 827 trillion cubic feet.
The revised estimate results from the availability of additional
information as more drilling activity takes place in both existing and
new shale plays. U.S. shale gas production has increased 14-fold over
the last decade, and reserves have tripled over the last few years
(Figure 9).
As a result of updated shale gas resources in existing plays (key
additions were in the Marcellus, Haynesville, and Eagle Ford plays) and
an assumption of increased well productivity for the newer plays, shale
gas production in 2035 in the AEO2011 Reference case is almost double
that in the AEO2010 Reference case.
There is considerable uncertainty about the amounts of recoverable
shale gas in both developed and undeveloped areas. Well characteristics
and productivity vary widely not only across different plays but within
individual plays. Initial production rates can vary by as much as a
factor of 10 across a formation, and the productivity of adjacent gas
wells can vary by as much as a factor of 2 or 3. Many shale formations,
such as the Marcellus Shale, are so large that only a small portion of
the entire formation has been intensively production-tested.
Environmental considerations, particularly with respect to water, lend
additional uncertainty. Although significant updates have been made to
the estimates of undiscovered shale gas resources in newer areas, most
of the resulting additions are not economically recoverable at AEO2011
prices and have little, if any, impact on the projection.
The Alaska natural gas pipeline, expected to be completed in 2023
in the AEO2010 Reference case, is not constructed in the AEO2011
Reference case. This change is a result of increased capital cost
assumptions and lower natural gas wellhead prices, which hurt the
economics of the project over the projection period. Total U.S. net
imports of natural gas in the AEO2011 Reference case are lower than in
the AEO2010 Reference case (Figure 10), due in part to stronger North
American production, less world liquefaction capacity than previously
assumed, and increased use of LNG in markets outside North America.
COAL
Although coal remains the leading fuel for U.S. electricity
generation, its share of total electricity generation is consistently
lower in the AEO2011 Reference case than in the AEO2010 Reference case
through about 2023 (but similar thereafter). As a consequence, total
coal production is slightly lower in the AEO2011 Reference case than in
the AEO2010 Reference case.
As U.S. coal use grows, domestic coal production increases at an
average rate of 0.7 percent per year, from 21.6 quadrillion Btu (1,075
million short tons) in 2009 to 25.8 quadrillion Btu (1,305 million
short tons) in 2035. Production from mines west of the Mississippi
River trends upward over the entire projection period. Following a
substantial decline in output between 2009 and 2015, coal production
east of the Mississippi River remains relatively constant from 2015
through 2035. On a Btu basis, 60 percent of domestic coal production
originates from States west of the Mississippi River in 2035, up from
50 percent in 2009.
Typically, trends in U.S. coal production are linked to its use for
electricity generation, which currently accounts for 93 percent of
total coal consumption. Coal consumption in the electric power sector
in the AEO2011 Reference case (21.8 quadrillion Btu in 2035) is about
1.3 quadrillion Btu less than in the AEO2010 Reference case (23.1
quadrillion Btu in 2035). For the most part, the reduced outlook for
coal consumption in the electricity sector is the result of lower
natural gas prices that support increased generation from natural gas
in the AEO2011 Reference case.
ELECTRICITY GENERATION
Total electricity consumption, including both purchases from
electric power producers and onsite generation, grows 30 percent, from
3,745 billion kilowatthours in 2009 to 4,880 billion kilowatthours in
2035 in the AEO2011 Reference case, increasing at an average annual
rate of 1.0 percent (Figure 11). The growth in electricity consumption
continues to slow due to structural change in the economy away from
manufacturing and more stringent appliance efficiency standards. The
growth rate in the AEO2011 Reference case is about the same as in the
AEO2010 Reference case.
Although the mix of investments in new power plants includes fewer
coal-fired plants than other fuel technologies, a total of 21 gigawatts
of coal-fired generating capacity is added from 2009 to 2035 in the
AEO2011 Reference case. Coal remains the single largest energy source
for electricity generation (Figure 12) because of continued reliance on
existing coal-fired plants and the addition of some new plants in the
absence of an explicit Federal policy to reduce greenhouse gas
emissions. Concerns about greenhouse gas emissions continue to slow the
expansion of coalfired capacity in the AEO2011 Reference case, even
under current laws and policies. Lower projected fuel prices for new
natural gas-fired plants also affect the relative economics of
coalfired capacity, as does the continued rise in construction costs
for new coal-fired power plants. Total coal-fired generating capacity
grows to 330 gigawatts in 2035 in the AEO2011 Reference case.
Compared with the AEO2010 Reference case, electricity generation
from natural gas is higher in the AEO2011 Reference case, particularly
over the next 10 years, during which natural gas prices remain low. New
natural gas-fired plants are also much cheaper to build than new
renewable or nuclear plants.
Nuclear generating capacity in the AEO2011 Reference case increases
from 101 gigawatts in 2009 to 111 gigawatts in 2035, with 6.3 gigawatts
of new capacity (5 new plants) and the balance coming from rerated
capacity. Electricity generation from nuclear power plants grows 10
percent, from 799 billion kilowatthours in 2009 to 879 billion
kilowatthours in 2035, accounting for about 17 percent of total
generation in 2035 (compared with 20 percent in 2009). Higher
construction costs for new nuclear plants in AEO2011, along with lower
projected natural gas prices, make new nuclear capacity slightly less
attractive than was projected in the AEO2010 Reference case.
Increased renewable energy consumption in the electric power
sector, excluding hydropower, accounts for 23 percent of the growth in
electricity generation from 2009 to 2035. Generation from renewable
resources grows in response to key Federal tax credits, but it is lower
in the AEO2011 Reference case than in the AEO2010 Reference case
because of lower natural gas prices and somewhat higher costs for new
wind power plants. The drop in renewable generation relative to AEO2010
is seen primarily in lower projections for wind and biomass generation.
Growth in renewables is also supported by the many State requirements
for renewable generation. The share of generation coming from renewable
fuels (including conventional hydro) grows from 11 percent in 2009 to
14 percent in 2035. In the AEO2011 Reference case, federal tax credits
for renewable generation are assumed to expire as enacted. Extension of
these tax credits could have a large impact on renewable generation.
ENERGY-RELATED CARBON DIOXIDE EMISSIONS
After falling by 3 percent in 2008 and nearly 7 percent in 2009,
largely driven by the economic downturn, projected U.S. energy-related
CO2 emissions in the AEO2011 Reference case do not return to
2005 levels (5,980 million metric tons) until 2027, and then rise by an
additional 5 percent from 2027 to 2035, reaching 6,315 million metric
tons in 2035 (Figure 13). Energyrelated CO2 emissions grow
by 0.2 percent per year from 2005 to 2035. Emissions per capita fall by
an average of 0.8 percent per year from 2005 to 2035, as growth in
demand for electricity and transportation fuels is moderated by higher
energy prices, efficiency standards, State RPS requirements, and
Federal CAFE standards.
Energy-related CO2 emissions reflect the share of fossil
fuels in energy as well as the mix of fossil fuels consumed, because of
their different carbon contents. Given the relatively high carbon
content of coal and its current use to generate more than one-half of
the U.S. electricity supply, prospects for CO2 emissions
depend in part on growth in electricity demand. After a decline from
2007 to 2009, electricity sales resume growth in 2012 in the AEO2011
Reference case, but the growth is tempered by a variety of regulatory
and socioeconomic factors, including appliance and building efficiency
standards, higher energy prices, shifts in housing growth, and the
continued transition to a more service-oriented economy. With modest
electricity demand growth and increased use of renewables for
electricity generation influenced by RPS laws in many States,
electricity-related CO2 emissions grow by 18 percent from
2009 to 2035. Growth in CO2 emissions from transportation
activity also slows in comparison with the recent prerecession
experience, as Federal CAFE standards increase the efficiency of the
vehicle fleet, employment recovers slowly, and higher fuel prices
moderate growth in travel.
Taken together, these factors tend to slow the growth in primary
energy consumption and CO2 emissions. As a result, energy-
related CO2 emissions grow by 16 percent from 2009 to 2035--
lower than the 21-percent increase in total energy use. Over the same
period, the economy becomes less carbon-intensive, as energy-related
CO2 emissions per dollar of GDP decline by 42 percent.
CONCLUSION
As I noted at the outset, while EIA does not take policy positions,
its data, analyses, and projections are meant to assist policymakers in
their energy deliberations. In addition to the work on baseline
projections that I have reviewed this morning, EIA has often responded
to requests from this Committee and others for analyses of the energy
and economic impacts of energy policy proposals. We look forward to
providing whatever further analytical support that you may require on
energy-related topics.
This concludes my testimony, Mr. Chairman and members of the
Committee. I would be happy to answer any questions you may have.
The Chairman. Thank you very much.
Ambassador Jones, why don't you go right ahead?
STATEMENT OF RICHARD H. JONES, DEPUTY EXECUTIVE DIRECTOR,
INTERNATIONAL ENERGY AGENCY, PARIS, FRANCE
Mr. Jones. Thank you, Mr. Chairman.
Just for those who came in late, my name is Dick Jones. I
have been the Deputy Executive Director of the International
Energy Agency since September 2008. Prior to joining the IEA, I
served for 32 years as a U.S. diplomat, mostly in Middle East
oil producers. I was also Ambassador to Kazakhstan.
I am going to speak to you this morning about international
energy trends today and over the next 25 years, focusing on 4
key topics: first, recent international oil price increases and
their impact; second, the IEA role in emergency response to oil
supply disruptions; third, recent developments in gas and coal
markets; and finally, long-term trends in world energy.
The price of oil has risen more than 25 percent since last
September. This week, ICE Brent has been priced above $100 per
barrel for the first time since 2008. Some blame this rapid
increase on speculation. But recent data for the final quarter
of 2010 suggest that it was good old supply and demand, with
fear over political unrest in the Middle East thrown in during
the past few weeks.
Will these high prices last? The IEA is skeptical. The
situation today differs from 2008 in several key respects. OPEC
has 3 times as much spare capacity now, has already shown a
willingness to use it. OPEC production is up by 250,000
barrels, or maybe more, since November. OECD's stocks are also
higher. Government stocks alone equal 60 days. Refining
capacity has improved worldwide.
However, the Egyptian crisis remains the wild card. If
international oil prices do stay at today's levels for the rest
of 2011, it would bring us very close to an oil burden equal to
5 percent of world GDP, a level that is associated with 3
global recessions in the past 40 years. Today's tensions in the
Middle East make it appropriate to review IEA's role in
preparing for and coordinating international responses to oil
supply disruptions.
To belong to the IEA, each member country must maintain
strategic oil stocks of at least 90 days of net imports. These
can be government stocks or commercial stocks, but the
government must have the legal authority to order their release
in an emergency. Most countries have a mix of public and
private stocks, including the United States.
Stocks can either be in the form of crude oil or refined
products. Again, many countries have both. However, the U.S.
Strategic Petroleum Reserve only holds crude oil. Mr. Chairman,
I recall that the IEA welcomed your bill in the previous
Congress that would have changed that.
In a crisis, the IEA quickly consults with affected member
countries, analyzes the likely impact, and then recommends a
course of action to the group, such as the release of specific
amounts of oil into the international markets. If an action is
approved, we then work with the members to ensure that they all
do their part. This includes regular reporting and consultation
until there is an assessment that the disruption is over.
Outreach to important energy consumers outside of the IEA
is also vital to managing a supply disruption, given the
increasing weight that they play in world oil markets. In a
crisis, we would also consult with important producers,
including members of OPEC. Ten nonmembers took part in our
latest emergency response training exercise, including China,
India, and Russia.
Although serious oil crises have been fortunately rare over
the past 35 years, in my short tenure at the IEA, I have
already seen occasions when a public reminder that IEA
countries hold emergency stocks helped calm jittery markets.
Besides oil, natural gas is also now garnering intense
interest. American companies' success in producing gas from
shale deposits is encouraging other countries to look for
unconventional gas. Activity is growing in Australia, India,
and China, but also in Poland and elsewhere.
Now it is going to probably take several years to know
individual results. However, it is already clear that by
causing a glut in supply, shale gas is shifting patterns of
trade, having a major impact on gas prices around the world.
LNG slated to come to the United States is now going to
Europe and Asia instead. In some markets, spot gas prices have
been as low as a quarter to a third of oil on an energy basis.
This is raising competition for pipeline gas, giving consumers
in Europe a break. Gazprom is not very happy about that.
More gas also means more natural gas liquids, which are
becoming an important factor in oil production at the margin.
This is one reason why we see the oil market as being
relatively well supplied for 2011. Abundant gas should help
keep oil prices down. Eventually, more gas could even help with
coal prices. But right now, coal prices are climbing due to
strong demand in China and India for power generation.
For all these reasons, the IEA is very excited about gas,
and we will release a special report on the golden age of gas
here in Washington in June.
2011 is also a time of uncertainty for long-term energy
analysts. What course will the incipient economic revival take?
How will Government responses shape markets? In the most recent
edition of our annual World Energy Outlook, WEO for short, we
looked at what would likely happen to world energy if current
policies continue for the next 25 years. The results were
disquieting.
World energy demand would increase by about 50 percent.
Fossil fuels would continue to dominate. Although oil use would
only increase by a quarter, gas use would increase more than
half and coal use by closer to 60 percent.
Growth in all forms of energy is expected to be driven by
economic expansion in emerging economies, notably China and
India. But also the Middle East becomes an important
consumption center. In fact, China, which only recently passed
America as the world's largest energy consumer, is expected to
double its consumption by 2035.
Another feature of this WEO scenario is growing market
power for OPEC countries. Their oil production is set to
increase from 40 percent of world output today to one half over
the next 25 years. Moreover, more of the world's oil production
will come from difficult and remote places, which means it will
cost more in real terms.
In short, this scenario points to a less secure, more
costly, and more environmentally harmful mix of energy than we
have today. To avoid such an untenable energy future, WEO 2010
also contained proposals for an alternative path based on three
main elements: first, a strong push to improve energy
efficiency; second, rapid steps to decarbonize electricity
production using renewables, nuclear power, and carbon capture
and storage; and finally, accelerating the development of
advanced vehicle technologies.
In our view, these steps would help improve lives all over
the world by enhancing all countries' energy security,
insulating economies from the price volatility inherent in
fossil fuel energy markets, and reducing the pollution of our
land, water, and air from the increased production, transport,
and use of fossil fuels that would otherwise occur.
I want to stress, however, that our scenario does not
foresee a rapid decline in use of fossil fuels, let alone an
end to it. Rather, we advocate shifting our energy supply to a
more varied and, thus, a more secure, affordable, and cleaner
mix of sources.
Mr. Chairman, I would like to close with a brief personal
comment. Having worked in the Middle East and the former Soviet
Union and seeing the security, economic, and environmental
impacts of the current world energy system firsthand, I am
convinced that we can do better.
Thank you very much for your attention.
[The prepared statement of Mr. Jones follows:]
Prepared Statement of Richard H. Jones, Deputy Executive Director,
International Energy Agency, Paris, France
Mr. Chairman, Senator Murkowski, and Members of the Committee, I am
grateful for the opportunity to come before you today to discuss the
views of the International Energy Agency (IEA) on the outlook for, and
major trends shaping, global energy and oil markets today and over the
next 25 years. I hope that my testimony will help to inform the
important work of this committee as it begins crafting policies in the
new Congress.
A retired American diplomat with experience on Middle Eastern and
energy issues, I have served as Deputy Executive Director of the
International Energy Agency since September, 2008. The IEA is an
intergovernmental organization that acts as an advisor to 28 member
countries, including the United States, in their effort to ensure
reliable, affordable and clean energy for their citizens. Founded
during the 1973-74 oil crisis, the central role of the IEA was and
remains to co-ordinate response measures in times of oil supply
emergencies. As energy markets have evolved, however, so has the IEA.
Its mandate today also incorporates work on market reform, energy-
technology collaboration, climate-change policies and outreach to the
rest of the world, especially major consumers and producers of energy
including China, India, Russia and OPEC countries.
I will use my time this morning to focus on several key areas. The
first is an assessment of recent oil price movements, and their
potential impact on the global economy in the near term. I will follow
this with a brief description of the IEA's role in responding to
disruptions in the supply of oil. I then wish to touch on market
movements for other sources of energy, before speaking about the long
term outlook for global energy.
RECENT OIL PRICE MOVEMENTS AND THEIR POTENTIAL IMPACT
Since last September, international oil prices have increased by
more than 25%, and reached $100 a barrel for the first time in more
than two years on Monday.
It has been claimed by some that speculation on the price of oil
was behind this rapid rise. However, data on supply and demand
fundamentals for the fourth quarter of 2010 that has recently become
available points more towards a market tightening due to stronger-than-
expected demand in key consumers and a concurrent drawdown of
commercial oil stocks in OECD countries. Reasons for this growth in
demand include unseasonal weather patterns and better than expected
global economic growth. More recently, it appears that prices were
boosted by concern in the market that the ongoing demonstrations in
Egypt may eventually lead to a disruption of oil shipments through that
country or spread to important producer countries in the region.
Although some market observers have previously predicted that a
combination of more and more demand, an impending scarcity of supply,
and high revenue goals from producers will keep oil prices at around
$100 for a sustained period of time in 2011, we do not see the current
situation as a vindication of that point of view.
Were prices to remain at this level for a sustained period of time,
however, oil expenditures would soon rise as a proportion of GDP,
creating an `oil burden' that could put a drag on the world economy.
(This burden is calculated by analysing nominal--as opposed to
inflation adjusted--oil expenditures, as a percentage of nominal GDP.)
In fact, in the past, whenever the oil burden has been calculated at 5%
or more, it is usually associated with an impending economic slowdown
(see figure).*
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* Graphic has been retained in committee files.
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The rise in prices over the last few months brings the oil burden
too close to this 5% mark for comfort. Fortunately, there are elements
of stability in the current market, which simply weren't there in 2008.
For example, OPEC has much more spare capacity than it did in 2008 and
OECD member countries have ample stocks of oil. There are already signs
that some OPEC producers may be feeding extra supply to the market.
Refining capacity is also in better shape than it was in 2008. While
it's too soon to be confident, such factors could help cap prices in
2011, by ensuring there is a sufficient supply of oil.
IEA'S ROLE IN RESPONDING TO DISRUPTIONS IN THE SUPPLY OF OIL
Here I would like to note that IEA member countries are well
equipped to respond to a disruption in their oil supply. As a condition
of membership in the Agency, each of the IEA's 28 member countries is
required to hold strategic oil stocks equivalent to 90 days of its net
imports. Since being established in the aftermath of the first oil
crisis, a fundamental part of our work has focused and continues to
focus on planning for and helping co-ordinate a collective IEA response
to major disruptions in oil supply.
Our work in this area now also includes many countries outside the
IEA membership, such as China and India and other countries in Asia,
which are also boosting their oil stocks or taking other measures to
enhance their energy security, and have sought our advice. Last
November we held our fifth major Emergency Response Exercise in Paris
with the active participation of 10 non-Member countries.
Emergency stocks, now growing in more and more countries, are a
vital aspect of global energy security, as countries are able to add
measured amounts of oil to the market in the event of large-scale
disruptions to supply over an extended period. You will recall that
this was last done back in 2005, when oil stocks were released after
Hurricanes Katrina and Rita ripped through the Gulf of Mexico, damaging
offshore oil rigs, pipelines and oil refineries.
MARKET MOVEMENTS FOR OTHER SOURCES OF ENERGY
Moving on from oil, the IEA also follows the international markets
for other major fossil sources of energy, where recent developments are
also worth noting.
Recent success with US production of significant amounts of
`unconventional' sources of gas, mainly from shale deposits, has
sparked a flurry of interest throughout the world. Australia is leading
the charge, but China, India and Indonesia are also seriously
investigating their own `unconventional' gas sources. In Europe, work
is proceeding in Poland and elsewhere.
Based on current rates of consumption, it is estimated that
recoverable conventional gas resources will last around 130 years, but
this could be doubled with `unconventional' gas. These resources may
also exist in countries which lack significant reserves of conventional
gas; it is little wonder that the current scramble is now firmly
underway.
Soaring production of `unconventional' gas in the US has already
led to a sharp drop in its need to import gas. This slump in US import
demand is having a significant impact on global gas markets which have
also been hit by the international economic crisis. Meanwhile, ample
supplies, mostly from Qatar, of Liquefied Natural Gas have been
arriving in the market. This has led to a `gas glut'--and a diversion
of LNG cargoes to Europe. Spot prices of gas in Europe consequently
have fallen, putting downward pressure on the price of gas supplied
under long-term contracts from Russia.
This is an example of why the IEA strongly urges countries to make
their gas markets work as efficiently as possible, efficient markets
help promote competition among suppliers. This is an important step for
maintaining affordable prices.
In contrast to natural gas, coal prices have been rising, largely
because of growing demand from China and India. Even though both
countries are massive coal producers themselves, and are almost self
sufficient in coal, their economic growth is so rapid that they must
increasingly look elsewhere for additional supplies.
While their imports are small relative to their total coal use, the
amount of coal they are looking to import is at such a level that it
impacts heavily on the global coal trade, affecting traded coal prices
sharply. Of course, in many parts of the world, because of transport
costs and quality differences coal is not subject to global price
pressures, and as such coal remains a competitively priced fuel, able
to supply power at affordable prices.
THE LONG-TERM OUTLOOK FOR GLOBAL ENERGY
Last November, the IEA released the 2010 edition of its World
Energy Outlook (WEO-2010). There are no 'facts' about the future, but
the report does provide helpful insights into the evolution of our
global energy system. Perhaps most importantly it highlights that the
energy outlook over the next quarter century hinges critically on
government policy action, and how that action affects technology, the
price of energy services and end-user behavior.
Today we will share some of the key results of our Current Polices
Scenario, which is comparable to the EIA's Reference Scenario, in which
we assume that government policies continue unchanged. World primary
energy demand rises by 47% between today and 2035 in the Current
Policies Scenario. Fossil fuels (oil, coal and natural gas) remain the
dominant source of energy during that time, even as cleaner energy
sources make gradual inroads. Oil demand increases by 24%, natural gas
by 56% and, owing to relative abundance and low cost, coal demand
increases by 59%. Electricity demand nearly doubles by 2035.
Emerging economies are responsible for over 90% of the projected
growth in primary energy demand. As a result, the OECD share of global
energy demand, which declined from 61% when the IEA was set-up in 1973
to around 42% today, falls to just 35% in 2035. The surge in non-OECD
energy consumption is led by brisk growth in China, where demand
doubles by 2035, dwarfing increases in any other country or region.
Over the past year we have witnessed an historic re-ordering of energy
heavyweights, with China surpassing the United States to become the
world's top energy consumer. Remarkably, energy use in China was only
half that of the United States just ten years ago. This underscores
that developments on the global energy landscape remain highly
sensitive to the various factors that drive energy demand in China,
including prospects for economic growth, changes in economic structure
and developments in energy and environmental policies.
World oil demand experiences strong growth over the medium-and
long-term. Based on preliminary data, we estimate that global oil
demand in 2010 reached almost 88 million barrels per day (mb/d), the
highest level on record. We project a rise to 107 mb/d in 2035, with
all of the increase coming from non-OECD countries, led by China, India
and the Middle East. In OECD countries, oil demand is expected to fall
with improvements in vehicle efficiency; US demand, for example, is
projected to drop by 1.7 mb/d, or 10%, between today and 2035.
Oil supplies will come from an increasingly concentrated group of
producers that hold the majority of remaining low-cost resources.
OPEC's share of global oil supply is set to expand from 40% today to
50% in 2035, as oil production in most non-OPEC countries has peaked
(e.g. the United States, the North Sea), or will soon peak. These
trends occur against the backdrop of an industry in flux. Opportunities
for international oil companies, which have historically dominated oil
sector development, are diminishing with the growing role of national
oil companies and fewer reserves in accessible basins outside OPEC
countries. Oil market challenges are further exacerbated by the
prospect of accelerating decline rates for individual oilfields,
particularly in non-OPEC countries; this includes Mexico--a major
exporter of crude oil to the United States. To meet new demand growth
and offset decline in currently producing fields, gross capacity more
than six times the current capacity of Saudi Arabia will have to be
installed by 2035. The world's total endowment of oil is large enough
to support the projected growth in output, but it will require
substantial levels of investment and development of more technically
challenging and unconventional resources.
The outlook for natural gas demand is particularly uncertain. The
gas glut I mentioned earlier could have far-reaching consequences for
the entire energy sector. It is expected to keep pressure on gas
exporters to move away from oil-price indexation, particularity in
Europe. Lower prices could lead to stronger demand for gas, backing out
renewables and/or coal in power generation. To inform the policy debate
on these issues, the IEA is currently preparing a new report on the
``Golden Age of Gas'' which we plan to release here in Washington in
early June. The projections in our Current Policies Scenario have
profound implications for three elements vital to sound energy policy:
First, energy security. Without policy changes, fossil-fuels
continue to dominate the energy mix at the expense of the
enhanced security that a more diverse set of energy sources
would provide. Furthermore, international shipments of energy
commodities will have to expand substantially to accommodate
the growing geographic mismatch between demand and production.
While energy supplies will become more flexible in some
respects (e.g. growing trade of liquefied natural gas vs
pipelines), expanding international trade unavoidably increases
dependence on physically vulnerable transit routes and
infrastructure, which poses greater risks in tight markets.
Second, economic development. In the absence of policy
changes, few meaningful alternatives to oil are expected to be
available before 2035. As prices steadily rise, importing
countries without prospects for new development will continue
to face higher import bills that pose a mounting and
potentially unsustainable economic burden.
Third, environmental protection. Without new initiatives to
slow the growth in fossil-fuel use, energy-related air
pollution will increase. Emissions of carbon-dioxide alone will
jump from 29 Gt in 2008 to 43 Gt in 2035, an increase of 45%.
According to analysis undertaken for the Intergovernmental
Panel on Climate Change, this emissions trajectory could lead
to a global average temperature increase exceeding six degrees
Celsius.
These all add up to the conclusion that the global energy system,
in which all countries are interdependent, faces a future that is
increasingly untenable. To continue business-as-usual risks heightened
insecurity, increasing economic volatility, and irreparable harm to the
environment. We truly need a transformation in the world's energy
system to a more secure, sustainable model, but of course this is much
easier to say than it is to accomplish.
The first step is to understand the extent of the necessary
transformation. To help with this, the World Energy Outlook also
presents a ``450 Scenario'' which is essentially a roadmap of what
needs to be done to move to a truly sustainable energy future. To be
frank, the scale of the challenge is immense. Carbon intensity would
have to fall at 2.8% per year through 2020, and then by 5.3% per year
until 2035. Keep in mind the 1973 oil price shock resulted in a 2.5%
improvement in carbon intensity--in one year only--illustrating the
daunting challenge of achieving those levels of improvement each and
every year.
The 450 Scenario confirms that promoting energy efficiency remains
the quickest, most cost-effective approach to achieving our security,
economic and environmental goals. This is the lowest hanging fruit we
must pick first. A fundamental change will also be needed in the power
and transport sectors. The global share of renewable-based electricity
generation, for example, needs to rise to more than 45% by 2035--two-
and-a-half times higher than today. The share of nuclear power in total
generation needs to increase by about 50% over current levels. By 2035,
electricity generation from coal plants fitted with carbon capture and
storage (CCS) equipment exceeds that from coal plants without the
technology. In transport, biofuels and advanced vehicles will need to
play a much larger role. By 2035, about 70% of global passenger-car
sales will need to be advanced vehicles (hybrids, plug-in hybrids and
electric cars). The benefits of this scenario are not only
environmental; it would also significantly enhance our energy security
by spurring greater diversity in the global energy mix, and reducing
fuel import dependence. These results will in turn have important
economic benefits for the vast majority of countries.
Mr. Chairman, Senator Murkowski, and Members of the Committee this
completes my testimony. I would be happy to answer any questions you
may have.
The Chairman. Thank you very much for your testimony.
Mr. Diwan, go right ahead.
STATEMENT OF ROGER DIWAN, PARTNER AND HEAD OF FINANCIAL
ADVISORY, PFC ENERGY
Mr. Diwan. Mr. Chairman, Senator Murkowski, and members of
the committee, I am grateful to have the opportunity to come
before you today to discuss PFC Energy, my company's view on
the oil markets.
I hope that my comments today will help you to understand
better the present situation in oil markets, and I am going to
focus my remarks really on 4 points, in particular on the short
to medium term, the next 2 years in terms of oil markets.
First, when we look at the fundamentals, so the supply
demand situation, and we look at the oil market right now, the
way I would describe them is they are well supplied. Demand is
rising almost exclusively in non-OECD markets in the next 2
years, with the depths of the demand not very strong because we
are really counting on two areas to grow very strongly, which
is China and the Middle East and a little bit of the rest of
Asia.
OECD countries are not showing strong demand growth. So,
and this unbalanced demand, if you want, makes global demand
not particularly strong. I agree with Dr. Newell, it is around
1.5 million barrels per day in the next 2 years.
On the supply side, global liquid production--and I would
like to include crude, gas liquids, and biofuels, all the
liquids--have shown very strong growth in 2010. It is a record
year. The question, is it a 1-year wonder, or is it telling us
something more? I don't think that we will have such a strong
growth in 2011 and 2012, but I think 2011 actually will show
good numbers, probably close to 1 million barrels per day for a
demand of 1.5 million barrels per day.
The question is why do we believe that? The beginning of an
answer seems to be showing that, actually, high oil prices are
having an impact on supply for the first time in very long
time. We have had high oil prices now for almost 8 years, and
we start to see supply reacting both in crude, but also,
obviously, in natural gas and creating a lot of liquids and
biofuels to compete with crude oil. I will speak a little bit
more about that.
Finally, stocks, worldwide stocks actually are at
respectable levels, above historical norms, and in certain
areas clearly oversupplied. So if you look at oil markets
today, you don't see visible tension in oil markets like we saw
2 or 3 years ago.
The second point is that not only oil markets are well
supplied, but we have a very large cushion in terms of spare
capacity, probably above 5 million barrels per day. In
historical terms, this is a very high number and in percentage
of demand, it is also a high number. We don't believe that that
number will shrink dramatically in the next 2 years. Maybe a
million barrels per day, maybe a little less, maybe a little
more. So what we are describing as a well-supplied oil market
is not changing dramatically in the next 2 years unless you
have an exogenous factor, a crisis removing supply.
Moreover, when we look at these numbers, we are not
factoring Iraq and the potential increase in production and
capacity in Iraq in these numbers. So outside an exogenous
crisis, markets are well supplied.
Obviously, we have a crisis right now, but we don't have
any supply disruption. In a way, what we see in Egypt shows the
good and the bad in the oil market. It reacts very quickly even
if there is no supply. But at the end of the day, the reaction,
I think, is short-lived and not very dramatic. Basically,
prices moved by $5, and already we are starting to lose that as
no disruption has occurred. At PFC, we do not believe that
actually there is a strong chance of any disruptions.
Finally, and probably the most difficult part is to
understand prices and price formation. I have been looking at
oil prices now for almost 20 years, and they remain a mystery
for me. Because when you look at the present situation in the
oil market in terms of supply, demand, stocks, spare capacity,
et cetera, oil price is at $90. But you know, 10 years ago,
with exactly the same numbers, oil prices would have been at
$15. Five years ago, they would have been at $40. Two years
ago, they would have been at $100.
So the exact numbers do not predict an oil price level.
They more predict a price path, if you want. So how do we
account for having oil prices at let us say between $70 and $90
this year with this type of fundamentals? I think we really
need to look at broader issues to understand that, and the one
I would like really to talk to you today, the one which I think
is very important is really the margin--the price of marginal
supplies.
Basically, at what price or what price you need to bring
new barrels of oil into production. So how high the price has
to go to push for new investment in more marginal areas.
Obviously, you are going to invest first in your most
profitable potential fields, and the more marginal ones come as
prices rise.
The marginal fields in the world right now, being in Canada
or Brazil or some fields in the United States, requires
probably north of $70 to be break-even prices. So oil prices
only have risen to bring more supply to market. OK? Is it $70,
is it $80 and $90, I don't know, and I am not sure there is a
clear number there. But that marginal price is important to
bring new supply, and we are in the zone which is attracting
new supply.
The second important determinant of oil prices for me is
really the internal needs of producing countries. It is what
the Gulf countries in particular and the OPEC producer require
internally to balance their budget at the end of the day. It is
pretty much their only resources.
When you look at the countries in general and you look at
their balance of payment, they all have budgeted around $70,
$80 oil. So, in a way, they believe that is the way the market
is going to be there, and they are constraining supply to stay
close to these prices.
In my view, they are fairly reactive to the marginal price,
rather than setting it. So, in a way, the OPEC tolerance for
high prices increase as prices increase rather than as they
push prices higher--as the market pushes prices higher, their
tolerance increases.
The third element, which is very important and I came here
a couple of years ago to discuss, really is the
financialization of oil. Oil has become an investable asset,
like equity, fixed income, gold, dollar, or other commodities.
The flow of money actually is quite important in determining
how in the short term price move and determining that price
path, and that is quite important.
We have seen some important changes in the last few months,
I think, and we can talk more about that in the Q&A. I feel
there is less ability to increase prices very quickly through
just money flows.
I will stop here my comments and probably will come back to
more during the Q&A, and thank you for giving me the
opportunity to come and talk about that in front of you.
[The prepared statement of Mr. Diwan follows:]
Prepared Statement of Roger Diwan, Partner and Head, Financial
Advisory, PFC Energy
OIL MARKET OUTLOOK FOR 2011-2012
More than ever, the world is seeing a two-speed economy. Nearly all
of the world economy is expanding again, but the divergence between
recovery in the developed world and strong growth in the emerging
markets is becoming more pronounced. In both Europe and the United
States the medium-term outlook remains unexciting--the financial crisis
that caused the recession is over, but its consequences will persist
for years to come. In contrast, emerging markets are contending with
the problems of excessively rapid growth--especially as it stokes
inflation exacerbated by loose monetary policy. Despite concerns over
inflation and the potential for monetary tightening in key emerging
markets like China, the period through 2012 will likely see continued
oil demand support that will far surpass any potential OECD demand
increase.
Although slowing from the 2.3 mmb/d global oil demand growth
realized in 2010, PFC Energy forecasts demand to increase around 1.4
mmb/d in both 2011 and 2012. Global consumption over this period will
be driven entirely by the emerging market economies, as economic
stabilization also leads to marginal net changes in advanced economies'
oil demand. Gains in non-OPEC supplies (including OPEC NGLs) and
further ramping up of new Iraqi production will be sufficient to meet
the bulk of this incremental demand. Although there is some projected
shortfall in new supplies' ability to completely satisfy demand
requirements, the first half of the year will still be characterized by
a relative over-supply in physical markets. But the tightening of the
market by the second half of the year will prove supportive of higher
prices, reflected in our upward revision in our price forecast for WTI
to a 2011 average of $90.75/b and $96.25/b in 2012, with average
quarterly prices reaching the $100/b mark toward the end of this two-
year period.
The growing turmoil in the Middle East is providing a bullish
factor for oil markets right now. The instability in Egypt has pushed
prices up, but PFC Energy views the potential impact on oil supplies as
virtually nil, and that includes the Suez Canal. Protests have spread
across much of North Africa, as well as Yemen, but the major oil
producing countries of the Gulf states have seen little in the way of
unrest.. Since Tunisia's Bin Ali was pushed from office, several
governments have taken measures to promptly address the food price
issue and have re-instated food subsidies. Bolstered by strong balance
sheets routinely leveraged to lower political unrest, and still
enjoying the support of many of its citizens, the Gulf countries will
likely have no difficulty keeping regimes, oil supply, and still ample
spare capacity intact. And even if in more oil producing North African
states the protesters achieved a Tunisian style victory, a lack of
cohesiveness regarding the next step would be unlikely to dislodge the
state apparatus, particularly that associated with oil production and
marketing, or in the case of Egypt, disruption in Suez shipments.
US ECONOMY SLOWLY GETTING BACK ON ITS FEET
The United States has shrugged off fears of a double-dip
recession--GDP growth has more or less returned to its pre-recession
trend rate of 2.5%--but without recovering to its full potential
output. Failure to do that means the economy is producing less than it
could, and employing less labor as a result. Reengaging these idled
resources is the most important policy challenge for the US government,
but there may be little more that can be done while household and bank
finances remain encumbered with debt. This suggests that high levels of
unemployment are likely to persist for years.
Even so, there now appears to be a reliable base of private sector
support for sustainable growth at these modest employment and capacity
utilization levels. For nearly two years government transfers staved
off a decline in real disposable income, but over the past two quarters
underlying real income growth has risen back to a 2-2.5% range. At the
same time, the personal savings rate has stabilized in a range of 5-6%
of disposable income, substantially higher than the preceding decade
but still below the longer-term historical average of 8-10%. Taken
together, these data point to a sustainable 2-2.5% growth rate in
personal consumption--and given the 70% GDP share of personal
consumption that underpins PFC Energy's expectation that overall growth
will be in the same range.
Other sources of growth are unlikely to add or subtract much to
this underlying rate. Business investment has made a strong recovery
from the depths of the recession, but appears to have stabilized at a
modest 2-3% growth rate. Although capacity utilization rates had risen
sharply from record lows, they have lately shown signs of stalling out
at a level that still leaves significant slack in the economy and
little incentive for large-scale new investment. Spending by the public
sector will almost certainly decline this year, especially at the state
and local level. As for trade, despite an encouraging rise in exports
late last year it is still more likely that the deficit will widen than
expand, making a net negative contribution to growth.
Given these considerations, PFC Energy has revised upward its North
American oil demand growth forecast for 2011 and 2012. After having
grown by over 550 mb/d last year (essentially replacing 25% of the
cumulative demand lost in 2008-09), we are confident that a sustained
US recovery would add at least another 175 mb/d to North American
demand levels this year (24.1 mmb/d versus 23.9 mmb/d in 2010). It is
our perspective that structural changes to underlying US fuel
consumption patterns have not been dramatically affected by higher oil
prices in the lead-up to the Great Recession, and that unrealized
demand for motor fuels remains. Income, more than price, seems to be
the driving factor not only for US motorists, but for US consumers writ
large.
Indeed, middle distillate demand (i.e., the primary fuels used in
commerce and air travel) was far more heavily impacted than gasoline,
falling at an average rate of 7% per year in 2008-09 versus gasoline's
-1.6%. It is notable that gasoline's postrecession recovery has also
been less pronounced than that of middle distillates, underscoring the
relative paucity of non-oil personal transportation alternatives in the
United States as well as motorists' preference for gasoline. The
contraction in 2008-09 highlighted the sensitivity of discretionary
automotive use, not automotive use in general (or even a sweeping
change in preference in favor of smaller cars). But whereas gasoline
demand increased by 1% last year, diesel and jet fuel consumption
surged by 3.5%--reflecting improved industrial activity and retail
sales. Similar to the situation facing the general economy, middle
distillates still have a long way to go in order to make up for the
volumes of demand lost during the recession, and it is unlikely in our
view that they will be able to do so by the end of 2012.
In addition to the demand recovery gap from middle distillates,
other parts of the barrel are also unlikely to return to pre-recession
levels over the next two years. The product categories most likely to
be affected are at the heavier end of the spectrum, fuel oil and
``other oils'' (mainly asphalt). While the structural decline in the
former has been common knowledge for years, weakness in asphalt is
becoming more pronounced due to public sector budgetary constraints for
transportation investment. This will likely become more pronounced this
year as many US states struggle to fill widening budget deficits.
For North America as a whole, stabilized economic conditions mean
an improvement in cross-border trade and economic growth. Other
localized factors do impact our forecast (for instance, the much more
fundamentally sound nature of the Canadian economy compared to
Mexico's), but for the region as a whole we see demand rising by 225
mb/d in 2011 and 200 mb/d in 2012 (up 70 mb/d and 40 mb/d respectively
since our December Global Oil Markets Report).
EUROPE: PERIPHERY WEIGHS DOWN THE CORE
In contrast to the United States, Europe faces a serious threat to
growth from the spreading Eurozone debt crisis--which has forced
governments to accelerate fiscal adjustment even at the risk of
undermining a still-fragile recovery. Portugal seems almost certain to
join Greece and Ireland under an IMF emergency program with Spain
likely to follow. Promises of austerity and a more buoyant European
economy have done little to ease the pressure on the weakest
governments. Until markets believe that their finances are on a
sustainable path, they will be unable to raise funding without public
assistance.
The result is a clouded European outlook. Most European economies
returned to growth in 2010, but the peripheral countries have either
remained in recession or look poised to fall back into it. Adjustment
policies in these countries aim to slash public spending and promote
price deflation, but in weak economic conditions this is a guarantee of
recession--and a further deterioration in public finances. The
combination of state spending cuts and falling wages is already
sparking political opposition, and this is certain to grow stronger.
Problems in the periphery will hamper growth elsewhere, both through
reduced trade and renewed financial sector difficulties. This suggests
a weak growth forecast even if the Eurozone manages to muddle through
2011, but a slide back into recession if the debt crisis spreads beyond
Spain.
A Europe splintered along structural economic fault lines is
reflected in oil demand. Whereas the industrial powerhouse of Europe--
Germany--continues to truck along (pulling Poland and other smaller
Central European countries along with it), other EU member states have
simply stagnated and the socalled ``peripheral countries'' continue to
contract.
Accordingly, PFC Energy expects the contraction in total OECD
European oil product demand to bottom out in the second quarter of 2011
before rising to post yearly gains in 2012 (posting growth of -20 mb/d
and +105 mb/d in 2011 and 2012, respectively). In contrast to North
America, risks to this forecast are more to the downside, especially if
the Euro zone financial crisis spreads to Italy and Spain.
ASIAN DEMAND LEADS THE WAY
A long restocking cycle and easy, if not stimulative, monetary and
fiscal policies underpinned a generally strong Asian economic
performance and increased oil demand throughout 2010. But while China
has embarked upon an ambitious attempt to re-orient its economy toward
consumption-led growth, the majority of Southeast Asian economies have
simply increased their economic export sector dependence. In 2011 this
business-as-usual approach will result in lower growth for these
countries. Aside from OECD goods import demand showing little upside
for additional expansion and commodities inflation on the rise again,
China's own economic transition (which encompasses reduction of both
exports and imports) bodes ill for other Asian intermediate and capital
goods.
While Japan and South Korea will need to continue emphasizing high-
end niche markets, Southeast Asia must find avenues for effectively
competing or partnering with China as well as stimulating domestic
demand. But these are long-term processes and even if undertaken in
2011 all signs point to moderating economic growth. Even China will see
somewhat slower growth, despite its large domestic consumption
potential and strong industrial support from import substitution. After
the country's GDP expanded by just over 10% last year, slowing growth
in industrial production, lending, government spending and net exports
is likely to reduce growth this year to about 9%. One of the key
factors for these decelerations is increasingly difficult year-on-year
comparisons: a weaker first half 2011 for example will find it hard to
show gains against a strong 2010 base.
Aside from such accounting, inflationary pressures, particularly in
rising food and housing prices, may also limit growth. Much of the
year-to-year inflation, which has now reached 5%, has been a function
of declining prices in the prior year period. But even as this base
effect recedes, inflation is expected to exceed Beijing's new 2011
inflation target of 4% and likely stabilize at slightly under 5%.
The soon-to-be ratified Five-Year Plan (covering the period 2011-
2015) goes beyond the emphasis on domestic consumption to an emphasis
on several strategic industries, with energy efficiency and alternative
energy sources an overriding concern--including an aim to limit the
increase of oil consumption. While much of the groundwork for
implementing these measures will be done during 2011-2012, no
significant impacts are expected to appear before later in the five
year period. Growth in China's oil consumption is expected to slow in
2011 to 490 mb/d (compared to 600 mb/d in 2010) and register 540 mb/d
in 2012, but these trends reflect primarily the general economic
conditions (and accounting effects), rather than any significant impact
from initial stages of re-structuring along the guidelines laid out in
the Five-Year Plan.
As with the global economy more generally, the most pronounced
economic and oil demand weakness in Asia lies within the advanced
economies. But the largest factors affecting the outlook for demand in
the OECD Pacific region are more strongly influenced by developments in
China than domestic economic conditions. These countries managed to
keep demand flat in 2010 due to strong Chinese demand for Japanese and
Korean goods in wake of the global restocking cycle as well as due to
capricious weather. With this support fading in 2011 and a large cut in
naphtha demand looming (as their petrochemical exports to China are
crowded out by Chinese domestic production), OECD Pacific oil demand
will continue to structurally decline through 2012, registering total
losses of 190 mb/d during the forecast period.
Large domestic consumption capacity has also been a driving force
for Indian oil demand, which is expected to expand by a moderate 95 mb/
d and 113 mb/d in 2011-2012. Substitution of liquid fuels in power
generation and fertilizer feedstocks by natural gas, as well as likely
monetary tightening will prevent greater demand growth. Total Asian oil
demand growth to slow to slightly around 500 mb/d and 550 mb/d in 2011
and 2012, markedly down from the 820 mb/d growth seen in 2010.
CHALLENGES FOR MIDDLE EAST ENERGY
The Middle East is largely on a strong growth path that should
weather even stronger than expected economic headwinds. The most
salient risks to growth primarily reflect the problems of success. The
primary challenges include managing increased power demand, containing
inflationary pressures and ensuring sufficient job growth for locals,
and are largely manageable in the short term. Power demand issues were
marginally better this past summer, and a strong focus on investment in
power generation should continue to improve this issue. Chronic
unemployment in the region is an issue that has been present for years,
but a prior baby boom will cause these issues to increase in the coming
years as the number of new entrants to the labor force peak.
Within the context of those challenges, 2011 demand growth in the
Middle East is forecast to be 320 mb/d. This is slightly lower than
last year's 382 mb/d pace, but is not reflective of a slowdown in the
region. Instead it reflects primarily a deceleration of the increase in
demand by Saudi Arabia after changing its policies in 2008 to emphasize
fuel oil (and subsequently, crude) burning for power generation. While
the effects of the policy change are largely complete, continued
increased demand to meet electricity demands will be the primary driver
in Saudi Arabia's 190 mb/d growth this year. It is anticipated that
this summer crude demand for power generation will average 886 mb/d and
could reach peaks as high as 1,150 mb/d in the high heat of the summer.
This power demand will continue to grow strongly as construction
projects are still in development throughout the region, with much of
the construction activity centered in Saudi Arabia and Abu Dhabi--the
new home for many of the construction cranes that were previously in
Dubai. While most of Dubai's construction was underwritten by foreign
debt, the construction boom now underway is largely financed or
underwritten by foreign investors, and will allow continued growth in
gasoil and other construction related fuels. The large financial
reserves coupled with scant foreign debt for the major oil producers
provides the region significant buffers from any further shocks to the
global system. Consumer demand is also increasing as the recovery in
car sales for the region is expected to continue, and with it gasoline
demand, expected to rise 45 mb/d this year. Transportation demand is
also expanding from the increased use of aircraft, a trend occurring
globally during this recovery, but is even more of a factor for the
Middle East as its flight capacity expands and it becomes an
increasingly important hub for travel to Asia. This will help boost
kerojet demand by an estimated 30 mb/d in 2011.
IRAN'S SUBSIDY REFORM
Iran is a lone growth exception for the region, and it is expected
to show another year of net demand decline in 2011. These declines are
attributed to the strictures of an increasingly difficult multi-lateral
sanctions program as well as the four-fold price increases introduced
last December as part of a comprehensive subsidy restructuring. Demand
in 2011 is forecast to decline 31 mb/d, with gasoline declining an
estimated 30 mb/d as Iranians seek out alternative transportation. The
alternatives include buses, which have already experienced increases in
demand in the days after the price increases were announced. This
factor that provides one of the few bright spots for Iranian demand,
with diesel fuel expected to rise 15 mb/d on this increased public
transportation use.
Given the relatively staid reception these price increases have had
on the population (albeit under heavy police and Basij presence to shut
down protests before they started) it could be that they will be
absorbed with relatively little change in the actual appetite for the
fuels. However, the lack of any consumer outrage can also be attributed
to the initial offsetting subsidy payment of $120 (representing three
months of accrued subsidy payments--in the future these payments will
continue to be $40 per month).
The real effect of this change could be felt in the broader economy
as the increased fuel prices translate into decreased consumer
discretionary spending, as well as increased other costs across the
board. President Mahmoud Ahmadinejad's plan seeks to avoid this
particular problem with limited allowable price increases for
businesses most affected by the fuel price increases, which in turn
could shrink profit margins in other sectors and lead to lower business
confidence. In the future, if the increased prices are believed to
cause long-term economic problems, Tehran's response is likely to raise
direct subsidy payments rather than roll back pump prices. This is in
keeping with Ahmadinejad's plan to use the subsidy reform as a platform
to strengthen his position within his political base, the rural poor,
and a section of the population that saw limited benefits from the old
subsidy program due to their low fuel consumption levels.
LATIN AMERICA: AN ECONOMIC RENAISSANCE?
Latin American oil demand in 2010 recovered with a near 300 mb/d
increase, a pace expected to slow to 230 mb/d in 2011. The deceleration
is affected by base effects and changes in the macroeconomic climate,
but 2010 was also punctuated by a number of significant weather events
that increased demand. While the impact of such weather events is
expected to be diminished this year, current drought conditions in
Argentina are likely to negatively affect agriculture output, and by
extension diesel demand growth.
Brazil continues to be the demand linchpin for the region,
accounting for 163 mb/d of oil demand growth in 2010, a number that
will slow to 120 mb/d in 2011. This oil demand growth was supported not
just by an expanding economy and increased spending, but also a poor
sugarcane harvest that pushed motorists to fuel up with gasoline C (a
gasoline mix with a low, fixed level of ethanol) over hydrous ethanol
(a straight ethanol product suitable for use in most Brazilians flex-
fuel vehicles). A near record planting season in the fourth quarter
should increase supplies of the fuel by the second half of the year,
reducing the demand growth from gasoline, barring poor weather.
As the region has been exposed and profited from the recovery of
commodity prices, demand support across the barrel has remained strong.
Car sales have recovered from the low levels during the recession,
fueled in part by tax incentives. But, at least in Brazil's case, the
elimination of such incentives caused a downturn in sales for only a
short period of time before recovering again. It is expected that even
without such incentives Brazil car sales (now fourth largest in the
world) will likely reach a new record in 2011.
SUPPLY GROWTH LARGELY SATISFIES DEMAND
Although oil prices are moving to higher trading ranges on demand
and general economic optimism, current liquids supply trends suggest
that expected demand growth in 2011 and 2012 can easily be met from
gains in non-OPEC production and OPEC gas liquids with only marginal
demands on the still substantial OPEC spare capacity. Gains in non-OPEC
liquids in 2010 are set to come in around 1.0 mmb/d although these
increases will likely slow in 2011 and 2012. OPEC gas liquids will
continue growing in both forecast years as domestic and export oriented
gas projects reach full operation. And OPEC effective spare crude
capacity is currently estimated at 5.7 mmb/d, providing the ability to
cover any disappointments in non-OPEC performance--or unforeseen supply
disruptions--throughout the forecast period.
PFC Energy forecasts 2011 non-OPEC supplies (including not only
crude, but also gas liquids and biofuels) will increase by around 540
mb/d--a bit more bullish than prior estimates. The crude portion of
this gain is 210 mb/d, somewhat lower than 2010's 640 mb/d increase.
Most of this stems from the expectation that US crude output will
decline rather than increase in 2011 as output drops in the Gulf of
Mexico owing both to a lack of additional planned new projects as well
as the drilling moratorium. Further adding to the slowdown will be
smaller gains in Russia and China as new project start-ups are fewer in
number exerting less of an upward pull.
The year 2012 is forecasted to show only a 60 mb/d gain in total
non-OPEC production. The key reason for the drop is a 230 mb/d decrease
in crude supplies as ongoing depletion in most countries will offset
gains in those few that are adding to production. Key oil plays showing
increases over the next two years include Canada's oil sands, Brazil's
deepwater, Colombia's Llanos basin, Ghana (the Jubilee field that
started mid December) and Oman (Oxy's Mukhaizna project). But these
gains combined cannot offset declines in the United States, North Sea
and Mexico as well as numerous smaller producers in Latin America, MENA
and the Far East.
The other two elements of non-OPEC supply, gas liquids and
biofuels, continue to show gains in both forecast years. Gas liquids
(condensates and NGLs) should move up by around 175 mb/d in 2011 and
125 mb/d in 2012. They are increasing simply from the many countries
pursuing gas projects to meet domestic energy demand. But the largest
increase in 2010 and expected for 2011 is the United States. Both from
increases in natural gas output as shale gas development continues
(seemingly regardless of the weak price environment) and the incentive
to look for areas with liquids rich gas (given strong oil prices that
push up liquids values well above natural gas values) the country
should see about a 100 mb/d increase in 2010 followed by 40-50 mb/d in
2011 and stabilizing in later years.
Biofuels will add another 150-160 mb/d per year in the forecast
years. As in the past, the two main sources of biofuels output growth
will be the United States and Brazil. After seeing an increase in
ethanol production estimated at 160 mb/d in 2010 (a good 70% of 2010's
global increase in biofuels output), gains in the United States will
moderate to the 40 mb/d range unless a blend rate above the current 10%
is approved. Current restrictions approving a higher ethanol content
for late model cars only makes it infeasible to implement at the retail
level. Brazil should see steady annual growth of 40-50 mb/d as well.
Other areas of the world are expected to add 40-50 mb/d per year,
mainly biodiesel in Europe and Southeast Asia. However, with recent
concerns over renewed food price inflation and intermittent support
from governments, these assumed gains are far from locked in and could
ultimately come in under our current estimate.
OPEC non-quota-constrained gas liquids are making an impact on
global balances, although somewhat haltingly due to construction delays
and lengthy commissioning times. After adding an estimated 415 mb/d to
supplies in 2010, OPEC gas liquids should see additional growth
averaging about 420 mb/d in both 2011 and 2012. Qatar is the key
contributor, stemming from expansion of its LNG industry that is
nearing completion. As the trains reach full operational output in 2011
gas liquids will continue to grow. Another important contributor will
be start-up in 2011 of Shell's Pearl GTL project whose first phase will
throw off another 70 mb/d of gas liquids. Saudi Arabia and the UAE are
the other main contributors as both countries pursue oil and gas
projects that will lead to increases in condensates and NGLs.
At one time, Iran was expected to see equal if not larger gains in
gas liquids output, but delays to the country's South Pars project
schedule stemming from ongoing sanctions suggest minor gains over the
next couple of years. This compares to the steady increases seen over
the past decade, when the first of the now completed first eight phases
of South Pars went into service. Kuwait is also being held back from
further development of its sour and high pressure gas reserves until
agreements are reached with foreign companies that can assist with the
technical challenges of such development.
OPEC: BOTH THE CALL AND ACTUAL OUTPUT TO REMAIN STEADY
This expansion of global liquids outside of quota constrained OPEC
crude reached 1.4 mmb/d in 2010 covering almost 60% of the robust
demand growth (+2.3 mmb/d). Similarly, non-OPEC liquids plus OPEC NGLs
should cover about 1.0 mmb/d of 2011's 1.4 mmb/d demand increment, or
about 70% of expected demand growth. The call on OPEC should begin to
rise more significantly in 2012, when projected gains in total non-OPEC
liquids should net only 0.5 mmb/d, or roughly 35% of incremental
demand. Based on this supply and demand path, 2012 could see the first
major increase in the call on OPEC crude totaling almost 1.0 mmb/d.
after a relatively minor 0.5 mmb/d increase in 2011.
This does not however suggest a material tightening of supply
conditions is in the offing. Capacity expansions in Saudi Arabia as
well as maintained production restraint throughout the Gulf Arab and
North African member states leave effective spare capacity at 5.7 mmb/
d. Both absolute and relative spare capacity are at levels not seen
since the 1990s--an era of very weak prices. But a combination of
operational flexibility and strategic considerations--both at the
commercial strategic level of the operating national oil companies as
well as in the political perspectives of the member states--means that
such high levels of spare capacity will not play the same bearish role
it has in the past.
However it is not only quota members who are increasing capacity,
but Iraq as well. PFC Energy's forecast sees Iraqi production rising
380 mb/d by year end 2011 and a similar amount by year end 2012. And
progress is being made. ENI announced in early December that it was now
in the cost recovery and fee payment phase with the Zubair field,
triggered when production hit 10% above the initial output rate of 183
mb/d. And BP announced this week that the 10% threshold on the 1.077
mmb/d Rumaila field has been met as well. Assuming that existing export
infrastructure is improved, these projected additional incremental
volumes coming in 2011 should be able to reach market. In addition to
increases in Iraq southern volumes, we are still holding to our
assumption that Kurdistan exports will re-start and average about 70
mb/d for the year. For 2011, Iraq's annual average output should move
up by about 400 mb/d, with a similar increment expected in 2012.
STOCKS AND BALANCES SHOW TIGHTENING
Between non-OPEC and OPEC the world is well supplied with liquids.
Even if 2011 or 2012 demand proves more robust than thought, supplies
should readily be available to cover increased crude needs at OPEC's
discretion depending on price and actual global stock changes. The
unexpectedly sharp increase in 2010 oil demand--and third quarter draws
from total commercial stocks--has lessened PFC Energy's concerns over
impending stock builds in the first half of 2011. This is reflected in
a substantial upward revision to our 1Q11 price outlook ($92/b for
WTI). However, the early part of this year nevertheless still features
not insignificant builds of nearly 1.0 mmb/d. A near-term continuation
of oversupply conditions (albeit greatly reduced from our previous
estimates) suggest prices may still weaken on a fundamentals basis over
the second quarter ($86/b). From then onward our global supply/demand
balance points to continual price increases through the end of the
forecast period, eventually averaging $100/b in 4Q12.
Despite the projected rise in prices, PFC Energy does not see OPEC
substantially raising production in the next several months. Even with
concerns of long term demand destruction and worries of another price
spike potentially derailing the global economic recovery, the results
of rising prices so far have not shown strong oil prices to be
particularly pernicious. Furthermore, the global overhang of oil
products has only just begun to recede, making risks to the downside
from adverse change in the fundamentals less of a threat. Saudi Oil
Minister Ali Naimi's characterization of $90/b as the new fair oil
price was less a statement on the Kingdom's targeting of such a price
level, but rather that current prices were achieved primarily as a
result of a healthy return of demand. The pull of consumption on prices
therefore also guards against threats that rising oil prices could de-
rail the economy. OPEC is likely comforted in this assessment by the
judgment that rising nonenergy commodity prices produced little
noticeable drag on economic performance in 2010. While general
inflationary troubles could translate into economic and political
problems over time, for the moment OPEC's concerns may turn to favoring
further nominal price increases, even if only an attempt to preserve
the purchasing power of the dollardenominated barrel. And perhaps most
fundamentally of all, the cartel may be willing to resume its prior
stance of taking pro-active steps to guard against downside price risks
and address upside demand surprises reactively--a position that helped
generate the historic boom in oil prices from 2004.
[All tables and graphs have been retained in committee files.]
The Chairman. Thank you very much for your testimony.
Mr. Burkhard, go right ahead.
STATEMENT OF JAMES BURKHARD, MANAGING DIRECTOR, IHS CAMBRIDGE
ENERGY RESEARCH ASSOCIATES, CAMBRIDGE, MA
Mr. Burkhard. Thank you, Mr. Chairman, other members of the
committee. We really appreciate the opportunity to share some
thoughts with you about energy and oil in particular.
Oil prices and gasoline prices are, as we all know, very
visible. Millions of people see them every day when they fill
up at the pump. It was just 2 \1/2\ years ago when we saw oil
above $140, and then it was just 2 years ago when oil prices
sunk close to $30 a barrel. These swings have had a great
impact on Americans and the economy.
Oil prices are on the rise again, and it is raising
questions yet again about the impact on the economy and why are
we seeing these kind of prices? The turmoil in Egypt raises the
question about geopolitical stability of world oil supplies.
Now what is happening in Egypt is part of a broader story,
something we would refer to as a global redesign. A global
redesign is what we describe as a period of change, deep change
of the formal and informal mechanisms that shape and manage
international relations.
There is no blueprint for this global redesign, but it is
clear that the pace, the distribution of economic growth is
affecting the global balance of economic, political, and
military power all at a time when the world faces extraordinary
questions about macroeconomic management, security, and energy.
Oil demand, supply, and price are key variables that will shape
this redesign, and energy overall will play a significant
element.
The political upheaval in Egypt has provoked anxiety in oil
markets. The oil market is always fearful when there is a
threat to big oil exporters in North Africa and even bigger
ones clustered in the Persian Gulf. Egypt is not a major
exporter. It is, in fact, a slight importer. But about 2 to 4
percent of global supplies does transit Egypt, and what happens
in Egypt obviously has an impact beyond its borders in the
Middle East.
So oil prices are considerably higher. But looking back at
what has happened over the last decade, it goes beyond just
concerns about stability in the Middle East. There are many
reasons that explain what has happened. But perhaps the most
important, the core of what has happened is the stunning
increase in income and GDP in China, India, and other emerging
markets.
We all know this, but looking at some of these statistics
really just shows how stunning this is. In the last decade, GDP
per capita in China is up 235 percent, 235 percent. In India,
it is up 176 percent. That is from 2000 to 2010. Stunning.
Rarely, if ever, have we seen living standards for so many
rise so quickly. This is due, to some extent, to the breath-
taking spread and success of market-based decisionmaking in
nearly every corner of the world.
Now, some of the growth of the past decade was based on
misplaced exuberance, and we still are grappling with that
painful aftermath. But the broad trends of rising global
prosperity are intact. Just look at how successful the
economies of India and China have been since 2008.
Over the last decade, demand in emerging markets has
increased about 12.2 million barrels per day. That is roughly
equivalent to the entire production capacity of Saudi Arabia.
That is what has happened in emerging markets. Again, at the
core of this, the higher incomes, aspirations for higher living
standards. There are other factors as well that have played
into this. Roger went into a few, and I will amplify some of
those.
One on the supply side, the law of long lead times. It can
take anywhere from a couple of years to more than a decade to
bring on a new oil field. You don't develop and bring on a new
field overnight just because the price went up.
Also, high industry costs. This was perhaps arguably the
second most important trend in the oil markets over the past
decade. From 2005 to 2008, according to the IHS CERA Upstream
Capital Cost Index, which is sort of a consumer price index for
the oil industry, in that short time period, 2005 to 2008, the
cost of developing a field doubled on average around the world.
So, in other words, a company had to pay double in 2008 in
order to develop the same barrel of oil that compared to 2005
prices.
Other factors as well, oil has become the new gold. It is a
financial asset in which investors take positions based on
their expectations of the value of the dollar, inflation, and
global oil demand and supply. The role of financial players has
gotten a lot of interest over the years, especially in 2008,
and they can accentuate a given price trend. But the primary
reasons of price trends are rooted in the fundamentals of
supply, demand, industry costs, and geopolitics.
So what does this all mean for today and the future? One,
it is a reminder that the oil market is a reflection of the
world. That means prices go up and down in response to what is
happening around the world. But perhaps more importantly, what
does this mean for the future?
In 2010, there is about 1 billion members of what you could
call the global middle class. That is people who live in
countries with per capita GDP of $10,000 or more. About a
billion. By 2030, so in 20 years, that will have grown to about
2.5 to 3.5 billion people in the global middle class. So a
billion today, over the next 20 years, 2.5 to 3.5 billion
people in countries with per capita income of $10,000 or more.
That means more oil, more oil demand.
There is a strong case for prices, for oil prices to be
above levels we have seen for most of the past 20 to 30 years.
This will reflect continued prosperity around the world. It
will foster innovation and efficiency. Does it mean prices are
inevitably going to continue to rise and rise? No. There are
some factors that will offset that.
One is the view that has been voiced already is peak demand
in the OECD--Europe, North America, South Korea, Japan,
Australia. We do believe that oil demand in the OECD peaked in
2005, petroleum-based oil demand, and it will not exceed that
level again. Fuel economy, biofuel mandates, demographics, the
global health boom has turned into a global aging boom. That
tends to lower oil consumption.
All of this figures into the changing balance of power,
this global redesign. There is no blueprint for how this is
going to unfold, and there will be, of course, times of
turmoil, which we are seeing today unfold in Egypt. To
conclude, the energy prices, and especially oil, will continue
to reflect the shifting fortunes of the global economy and
geopolitics.
Thank you.
[The prepared statement of Mr. Burkhard follows:]
Prepared Statement of James Burkhard, Managing Director, IHS Cambridge
Energy Research Associates
It is an honor to speak on the energy and oil market outlook before
the US Senate Committee on Energy and Natural Resources of the 112th
Congress. It is very timely for the Committee to assess the current
situation. I hope to provide a framework that will help to understand
what we are seeing in world oil markets--and why. It was just two and a
half years ago that oil surged to over $140 a barrel and just two years
ago that it sank close to $30 a barrel. These swings had great impact
on the economy and on the American people. Prices that were in the high
$80s and low $90s have surged once again on the upheaval in Egypt. Once
more there are questions about the impact of oil on the overall
economy--and why we are seeing these kind of prices. The turmoil in
Egypt has raised anew the concerns about the geopolitical stability of
world oil supplies. Egypt is an important transit point for delivering
Middle East oil to the global market via the Suez Canal and the Sumed
pipeline. In recent years, combined oil flows from the canal and the
pipeline have ranged from 1.7 million barrels per day (mbd) to 3.3 mbd.
The high end of this range is equivalent to about 3.8 percent of world
oil production.
The pace and distribution of economic growth is affecting the
global balance of economic, political, and military power--all at a
time when the world faces extraordinary questions about macroeconomic
management, security, energy, and the environment. The world is in the
midst of what we refer to as a ``Global Redesign''--a period of change
for the formal and informal mechanisms that shape and manage
international relations.\1\ Oil demand, supply, and price are key
variables that will shape this redesign--as will energy overall.
---------------------------------------------------------------------------
\1\ See the Multiclient Study IHS CERA Energy Scenarios.
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Oil prices are in a range considerably higher than in the past.
There are many reasons, but the most important reason of all is the
change in the world economy and rise of major new, dynamic growth
centers. Oil is our largest source of energy--about 37 percent of total
US energy--and is essential to personal mobility, commerce, and trade.
Its price reflects the global economy--the ups and downs, the
surprises, and shifting expectations about geopolitics, technology, and
economic growth.
US ROLE IN THE OIL AND GAS INDUSTRY
The United States plays a major role in the oil and gas industry.
We are the largest consumer of oil and gas in the world, but what is
perhaps less recognized is the key role on the supply side. The United
States is the world's largest producer of natural gas, the third
largest for oil, and number two for coal. The United States is also a
big producer of renewable energy. It is the largest biofuel producer in
the world and has a growing portfolio of wind and solar power
generation capacity. Oil and gas production plays an important role in
the economy of producing areas of the United States. For example, in
four states along the US Gulf of Mexico--Louisiana, Texas, Alabama, and
Mississippi--the offshore oil and gas industry accounts for nearly
400,000 jobs that generate $70 billion in economic value. This does not
include the jobs created in Pennsylvania, Connecticut, Ohio, and a
number of other states that provide equipment and services to the
offshore industry.
Domestic energy production is dynamic--its size is not simply a
legacy of past investments. A recent ``game-changing'' development is
the revolution in unconventional gas production in the United States.
The unlocking of ``shale gas'' was led by the innovation and risk-
taking of American companies. Innovation in gas extraction has also
resulted in higher oil production. In 2009 the US recorded the largest
increase of oil and gas production in the world--a growth trend that
continued in 2010.
Another striking development of the past few years is the
increasing integration of the US and Canadian energy markets. Canada
leads development of the oil sands--an important component of global
oil supply growth. The oil sands have made Canada the largest
supplier--by far--of foreign oil to the United States, and this source
has become part of the fabric of our continental energy security. Since
2000 Canadian oil sands output has more than doubled--from 600,000
barrels per day (bd) to 1.4 million barrels per day (mbd) in 2010.
Total Canadian oil exports (crude oil and refined products) to the
United States are 2.5 mbd, about double the number two supplier,
Mexico. Canadian oil accounts for 21 percent of our total oil imports.
WHAT SHAPES OIL PRICES?
The US energy industry is a substantial investor, supplier, and
employer, but it is also part of a larger and increasingly global
market. Oil is the most global of energy markets and exemplifies a
dynamic, flexible, and competitive trading system. The price of oil--
and particularly of gasoline--is highly visible. We see it every time
we fill up at the pump. But the factors that shape the price are often
not as readily visible as the brightly lit signs listing the price of a
gallon of gasoline.
Electric power bottlenecks in China have, at times, contributed to
greater use of oil in that country for backup power generation,
boosting oil demand. This was one of the reasons that pushed oil demand
up 9.7 percent in China last year. This created a volume gain of
810,000 bd, which was one of the largest recorded gains in a single
country in the past several decades. Rising global steel costs for the
petroleum industry--up 122 percent since 2003--are an example of what
may appear to be an obscure industrial trend, but one that has
contributed to much higher costs to develop new oil fields. China's
demand dynamics and the trend in steel costs are just two of many
examples of how developments around the world influence what Americans
pay at the pump, but which don't come to the attention of most
consumers.
Crude oil is fungible. This means, for example, that a barrel of
oil produced in Africa can be refined anywhere in the world into
gasoline, diesel, and jet fuel. Price signals help determine where to
ship more or less oil. Nearly all the world's oil sales are directly
linked or influenced by one of two ``benchmark'' crude oils: West Texas
Intermediate (WTI) in Cushing, Oklahoma, or Brent in the United
Kingdom. The price of a specific crude oil will vary from these
benchmarks by as little as a few pennies or by as much as a number of
dollars, depending on its quality and the cost of transporting it to a
refinery. The futures markets for both WTI and Brent are well developed
with large daily trading volumes.
Flexibility and capability to allocate supply in response to price
signals are the foundation of the oil market--and explain how it has
withstood economic shocks, demand spikes, and supply outages. But with
flexibility and responsiveness comes exposure to a broad array of
forces of change around the world. These forces can both lower and
increase the price of oil. A very recent example is the unrest in
Egypt. While not a major producer itself, Egypt is a key oil transit
point and an influential country in the world's most important oil
producing region.
Dawn of a New Age
The past decade was an exceptional time in the oil market. For a
generation--up until 2003--oil prices generally hovered from $10 to $30
per barrel. A $5 to $10 shift in the price of oil was an extraordinary
development. But this all changed over the next several years as oil
prices rose from an annual average of $26 in 2002 to an all-time annual
average high of nearly $100 in 2008. The period of 2003 to 2008 was the
``dawn of a new age'' in oil and energy markets. The driver was the
unprecedented increase in income and gross domestic product in Asia,
Latin America, the Middle East, and other emerging markets. Rarely, if
ever, have living standards risen for so many across the globe in such
a short time. Per capita economic output in China soared 235 percent
between 2000 and 2010. India's per capita output rose 176 percent.
Poverty reduction, rising income, and aspirations for higher living
standards mean more oil demand--and this is what we have seen over the
past decade. Oil demand increased 42 percent in emerging markets from
2000 to 2010--a volume increase of 12.2 million barrels per day.\2\
This is roughly equivalent to the entire production capacity of Saudi
Arabia. But in contrast to emerging markets, demand in developed
markets--Europe, North America, and OECD members in Asia--was lower in
2010 than in 2000.\3\ The contrasting demand patterns reduced the
developed markets' share of world oil demand from 63 percent in 2000 to
53 percent by 2010. But the volume growth in emerging markets more than
offset the decline in developed markets. World oil demand in 2010 stood
at 87.3 mbd--an all-time high. After two years of falling world oil
demand, 2010 registered the second largest gain in more than three
decades. Emerging markets were, again, the main driver of this growth.
---------------------------------------------------------------------------
\2\ Emerging markets are generally defined as countries outside of
North America, Europe and OECD members in Asia (Japan, South Korea,
Australia and New Zealand.)
\3\ The OECD is the Organization for Economic Cooperation and
Development.
---------------------------------------------------------------------------
Oil Supply: Law of Long Lead Times
Demand trends are a critical piece of the oil price story, but
there are others as well. On the supply side the oil industry is ruled
by the law of long lead times. The time it takes to explore for and
discover oil, develop a field, and deliver the oil to market can range
from several years to more than a decade, depending on the size and
location of the resource base, the reservoir characteristics, and the
business environment. Rising oil prices encourage more investment in
oil production, but long lead times mean there is often a mismatch
between a surge in demand and when investment in a new oil development
leads to additional supply. New fields cannot be developed overnight.
Higher Industry Costs
As oil prices rose and investment in new supplies increased for
much of the past decade, so did demand for the people and equipment
needed to find, develop, and produce oil. But the previous legacy of
more than two decades of low oil prices and industry consolidation
meant a ``missing generation'' in the energy chain--a generation of
engineers, scientists, and others who skipped entering the petroleum
industry. As a result, shortages of equipment and personnel
dramatically raised the cost of developing an oil field. The IHS CERA
Upstream Capital Costs Index--sort of a ``consumer price index'' for
the global oil industry--illustrates the cost pressure. From 2005 to
2008 our cost index doubled. In other words companies had to budget
twice as much in 2008 as they did in 2005 to develop a barrel of oil.
Adding to the cost pressure were increasingly heavy fiscal terms on oil
investments in the form of higher taxes and greater state participation
globally in oil projects. Costs did decline slightly in the aftermath
of the Great Recession and subsequent fall in oil prices; but since the
middle of 2010 costs have been on the rise again and currently stand
close to the cost peak of 2008 (see Figure 1).*
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* Graphic has been retained in committee files.
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The Role of Global Financial Dynamics
Oil has long figured into the workings of financial markets. Since
the 1978 launch of the first heating oil contract on the New York
Mercantile Exchange, it has been possible for investors to buy and sell
oil contracts without being an active participant in the physical oil
business. Such ``noncommercial'' market participants are essential to
any futures market. In exchange for providing price certainty to a
producer or consumer of oil, a trader has the opportunity to turn a
profit--or a loss--from future price changes.
Financial market investors--including those in oil futures--
represent a broad spectrum of investors with different time frames and
motivations. They allocate capital based on current and expected global
demand for oil and other commodities. Also, since oil is priced in US
dollars, changes in the value of the dollar can and do influence the
price of oil. Oil has become ``the new gold''--a financial asset in
which investors stake positions based on their expectations of the
value of the dollar, inflation, and global demand and supply of oil.
The role of noncommercial investors can accentuate a given price trend.
However, the primary reasons for price movements in recent years are
rooted in the fundamentals of demand and supply, geopolitical risks,
and industry costs.
THE PRICE OF OIL: A REFLECTION OF THE WORLD
The story of the price of oil over the past decade is a reflection
of the changes in the world. At the core is the breathtaking spread and
success of market-based decision making in nearly every corner of the
world that has allowed hundreds of millions of people to benefit from
expansion of trade and investment. In the future historians may look
back at the early part of the 21st century as an extraordinary period
of wealth creation in today's emerging markets. To be sure, the Great
Recession revealed that some of the growth of the past decade was based
on misplaced exuberance--and we are still grappling with the painful
aftermath. But the broad trend of rising prosperity around the world is
still intact--a trend borne out by the impressive performance of the
Chinese and Indian economies since 2008.
The Outlook: A Boom in the Global Middle Class
Financial market dynamics, industry cost trends, innovation, and
the pace of investment will continue to influence the price of oil. But
ultimately the level of oil demand is likely to exert the greatest
impact.
In the past two decades the population of countries with per capita
income of less than $10,000 was booming. Now many of those countries
are well on the way to entering the ranks of the global middle class.
In IHS CERA's latest energy outlook, we project over that the next 20
years an unprecedented number of people will enter the global middle
class--countries with per capita incomes above $10,000. The global
middle class will rise from less than a billion people in 2010 to
between 2.7 and 3.5 billion in 2030. More people will be able to
purchase a car, travel by plane, and consume electricity generated by
coal, gas, nuclear, and renewable sources. When it comes to rising
economic power, China and India garner much of the attention--and
rightfully so given their massive populations. But this story will also
unfold elsewhere in the world in parts of Africa, Latin America, and
the Middle East.
Does this mean that rapidly rising oil prices are inevitable for
years to come? There is a strong case for historically high oil prices
continuing for a number of years to come. But higher fuel economy
standards, demographics, and oil substitutes will soften and perhaps
even offset some of the upward pressure on oil prices. For example, IHS
CERA believes that aggregate oil demand in developed markets peaked in
2005 and will not exceed that level again. Higher fuel economy
standards adopted in American, European, and Japanese markets will
steadily soften demand as more efficient vehicles enter the fleet. Also
biofuel mandates will continue to displace oil products--principally
gasoline. Lastly, aging populations in many countries--including
China--is another factor that will tend to slow the pace oil demand
growth. Looking further ahead, electric vehicles hold promise and may
become increasingly competitive with conventional cars powered by
internal combustion engines.
On balance world oil demand will continue to increase, but not
necessarily at breakneck speed. Oil prices are likely to remain well
above the levels seen during most of the past 30 years, but it will
reflect a continued rise in global prosperity and also foster
efficiency and innovation. There is no blueprint for the Global
Redesign. There will, of course, be times of tumult. Energy prices, and
especially for oil, will continue to reflect the shifting fortunes of
the global economy and geopolitics.
The Chairman. Thank you very much. Thank all of you for
your excellent testimony.
Let me start with a couple of questions, and Dr. Newell,
can you just elaborate a little bit on your testimony about
what is going to happen with the percentage of oil that we have
to import over the next 25 years as you see it? I do think your
testimony, it seems to be very different from what we have
historically heard here in this committee, which is that
imports have gone up and will continue going up.
This is consistent with what Mr. Burkhard just said, that
the level of imports peaked in 2005? Is that your position?
Maybe you could elaborate on that?
Mr. Newell. Yes. 2005 and 2006 were about the same, at 60
percent of overall liquid fuels consumption. It has come down
since then, and a good part of that has to do with the economic
downturn. When you have a decline in domestic oil consumption
needs, that tends to come first out of imports. So, that is one
of the things that has led to that significant downward shift
over the last several years.
But we see that declining to 42 percent by the end of our
projections. If you actually look at overall petroleum supply,
which includes both imports as well as domestic production,
that is about flat over our projection. But there is an
increase in overall consumption of liquid fuels. That is being
met by natural gas plant liquids, which are domestically
produced. When you produce natural gas, you can get liquids out
of that as well, which can displace conventional oil. Also
biofuels, which increases in our projection.
There have been a number of different factors that have led
to this change. One is more moderate consumption growth, which
I could attribute to two factors. One is the increase in fuel
economy standards that we have seen over the last several
years, both for light trucks first and then for light-duty
vehicles. We also have higher fuel prices, which leads to a
market incentive for folks to choose a more fuel efficient car
next time they go out to buy one. Same thing for trucks.
As I mentioned previously, on the supply side, we have an
increase in natural gas liquids associated with our increased
expectations for natural gas production, and we have the
increase in biofuels due to the renewable fuel standards. So
all of those factors together have led to a declining need for
imports of oil.
The Chairman. Ambassador Jones, let me ask you, I think you
made the statement that the growth in gas production or gas
supply is having a downward or exerts a downward pressure on
the price of oil? I thought I heard you say that. Could you
explain that a little more? Are you talking about the fact that
production of gas does result in some gas liquids being
produced and that is a factor, or are there other things going
on there that we need to understand?
Mr. Jones. That was the thrust of my remarks. A lot of the
shale gas plays in the United States produce the unconventional
gas, are fairly wet and are producing more natural gas liquids.
So natural gas liquid production in the U.S. has increased,
which is one of the reasons why U.S. oil production hasn't gone
down as rapidly as maybe some people thought it would.
That is true worldwide as well. Particularly in OPEC
countries that are producing large amounts of natural gas, a
lot of that gas is fairly wet, which means it has large amounts
of NGLs mixed with it. The NGLs are separated out, and they are
included in crude oil production or they are sold like crude
oil.
In fact, the increase in OPEC NGL production is interesting
because NGLs are not subject to the OPEC production restraints.
So a country like Qatar that produces a lot of gas, producing a
lot of natural gas liquids, can sell those, and it doesn't
appear as part of its quota. But yet it has a real impact on
the oil market. That was what I was referring to when I said it
can help keep prices down.
The Chairman. OK. Let me just ask in general, you know, I
think we are aware that this discovery of all this new natural
gas in this country and now, more and more, in other places
around the world has pretty dramatically changed the
expectation for what the long-term price of gas might be. That,
of course, impacts on decisionmaking with regard to new nuclear
plants, with regard to renewable generation, with regard to a
lot of things.
Dr. Newell, could you give us some insights as to what you
see happening there?
Mr. Newell. Yes, that is correct. One of the implications
of our reassessment of the shale gas resource base has been the
significantly lower prices that we are projecting. So the
average wellhead price of natural gas in our projection doesn't
get above $5 per million Btu until after 2020, which is
significantly lower than what we had in previous years.
It gradually increases over that. But still, even toward
the end of the period, it gets up to about $7. You may recall a
short time ago it was at least a couple of dollars per million
Btu higher than that.
So the implications are that in the electric power sector,
relative to other technologies, I mean, natural gas has had
over the last decade or more several other advantages in terms
of low capital costs, quick construction, and lower
conventional pollutant emissions as well as lower
CO2 emissions, which aren't currently subject to
regulation, but do enter into decisionmaking.
So, those other advantages that natural gas has, coupled
with these now lower prices, do tend to tilt the balance even
more toward natural gas. In terms of the capacity additions
that we see in our projections, the majority of those new
capacity additions are also for natural gas. The second-biggest
source of new capacity additions would be renewables.
Another factor that is useful to keep in mind is we
reassessed our power plant costs this year, and several of
those went up. Some came down. Natural gas was roughly the same
as what we had been previously assuming. The overnight capital
costs for nuclear and coal plants, which are much more capital-
intensive--large, more complex projects--went up significantly,
20 to 30 percent. Renewables and wind went up a little bit, but
not quite as much as coal and nuclear.
So, there have been a number of things that have changed
over the last several years that tend to point to natural gas
in the electric power sector. So we are projecting more natural
gas consumption in electric power, particularly over the next
decade, than we were last year.
The Chairman. Thank you very much.
Senator Murkowski.
Senator Murkowski. Thank you, Mr. Chairman.
Mr. Newell, yesterday the Department of Energy released a
finding stating that the construction of an oil pipeline out of
Canada into the United States would reduce our dependence on
Middle Eastern oil. Would you agree with the Department of
Energy's findings there?
Mr. Newell. I have briefly reviewed the study that you are
referring to, which was conducted in the context of the
Keystone XL pipeline. Whether or not that pipeline exists, one
question is whether or not the oil would be produced. That is
one question. That study seemed to suggest that it would be
produced regardless of whether there was a pipeline, and it
would likely be exported to the west, to Asia, as opposed to
south to the United States.
In terms of U.S. imports, that study concluded the oil
would most likely come from Canada, rather than come from the
Middle East, because we have had declines and are expecting
further declines in heavy crudes from Mexico and from
Venezuela, which have been historically sources of that crude
oil. Because we have complex refineries that can use that heavy
oil in the United States, we can refine this Canadian oil, and
the most likely substitute would be Middle Eastern oil.
Senator Murkowski. Then let me ask you in the reverse, our
concern up north in Alaska is the continued viability of the
Trans-Alaska pipeline, the TAPS. As you know, the throughput is
declining to what we believe is dangerously low levels, and if
we don't take some very serious steps in the very short term to
add more oil into that line within the next few years, there is
a real chance that it could be inoperable shortly after that.
So the question to you, and anybody else that might choose
to jump in, is, the economic impact, the national security, the
trade-related consequences that would result if we take TAPS
Offline, and our Nation is in a situation where we are no
longer receiving that 10 percent of domestic crude supply that
we have been receiving for approximately the past 30 years.
If we lose a large-diameter pipeline like we have up north
that brings crude into the lower 48, what is the economic
impact of this?
Mr. Newell. I will just make a brief comment, which is that
in our projections, the oil flowing through TAPS does continue
to decline, as it has over the last several years. Toward the
end of our projection, it starts to get to a level where my
understanding is the pipeline would stop operating. Two hundred
thousand barrels per day is roughly my understanding, and it
does get to that level toward the end of the projection.
So at least through the year 2035, we don't anticipate that
it would close. But after that, clearly, that looks like it is
on the longer-term horizon.
Senator Murkowski. Let me ask about capacity because
several of you have discussed this, and Mr. Diwan, I think you
stated that it is your understanding that there is a relatively
large cushion, was the term that you used, of about 5 million
barrels per day. I am told that it may be 5. It may be 6.
The question is, and as we look to what is going on in
Egypt and the uncertainty and the instability there, we look at
what is available in terms of spare capacity and suggest, that
can help insulate us from supply shocks, from the price shocks
because we have got that spare capacity. How accurate do we
really believe our numbers are when we are talking about this
spare capacity? Do we really know? How verifiable is it?
Mr. Diwan. We have a good idea. We don't have an exact
number, and this is why I think we all hedged a little bit. It
is probably closer to 6, but I like to say it is north of 5.
A large part of it is in Saudi Arabia. This capacity is
new. It has been added in the last 3 years. So for once I would
say that we know actually that there is a large amount of spare
capacity available in Saudi Arabia. They have a production
capacity probably close to 12.5 million, and they are producing
8.5 million.
So most of the spare capacity in the world is in one
country, but that is the nature of what spare capacity is. It
is a Middle Eastern concept.
Senator Murkowski. Doesn't that give us less assurance.
When we are talking about the concerns that we are seeing in
the Middle East right now, to know that you have most of your
spare capacity located in one country, what kind of assurance
does that give us?
Mr. Diwan. The problem with the concept of spare capacity
almost is an oxymoron. Only certain countries are willing to
invest to create capacity and not produce it. These countries
are probably 5, OK, and they are all in the Persian Gulf.
This is their raison d'etre almost geopolitically is to be
able to provide that spare capacity if something happens. I
don't know a single oil company in the world--Exxon, Chevron,
any international oil company--which is willing to have
capacity which is not producing. So the concept of spare
capacity is focused on the Middle East at the end of the day.
So I have more assurance than I have 3 years ago that we
know that Saudi Arabia did invest tremendously to increase
capacity, and they have shown that they can produce more than
what they are producing now. So, in a way, spare capacity as a
number, I am more confident about it than I was 3 years ago
because we have seen higher production numbers. We have seen a
large amount of investment.
So is it 5? Is it 4? Is it 6? I don't know. But it is a
large number.
Senator Murkowski. Thank you, Mr. Chairman.
The Chairman. Senator Wyden.
Senator Wyden. Thank you, Mr. Chairman. Thank you to the
panel.
I want to look at the issue of the role that the financial
markets are playing with respect to oil prices. I was really
struck--on Tuesday, the Wall Street Journal ran a column in
what is called ``Heard on the Street'' that was entitled
``Unrest Pits Oil Bulls Versus the Gold Bugs.'' In effect, they
were talking about which area made more sense to put your bets
on. Should you put your bets on oil or gold?
Mr. Burkhard, you said something that I have not really
heard witnesses talk about here in the Senate Energy in the
past, and that is acknowledging the role that the financial
markets are playing in oil prices with your statement where you
say oil has become the new gold.
So my question, beginning with you, Mr. Diwan, you say that
the big oil producers are not going to be affected by what
happened in Egypt and Tunisia. I assume we are talking about
the Saudis. My question to you would be do you believe that the
recent price increases, like the $5 a barrel increase in oil in
a matter of days, do you think that is due to supply and
demand?
Mr. Diwan. No. Because we haven't seen a supply disruption.
But markets do anticipate. Correct? I mean, this is what they
do. They want to price risk.
So the way I look a little bit at oil market, and I came
here and in the House to talk about this financialization of
oil in the last 3 years, money flows is like the steroids in
the system. It comes, it rushes in. It has a very big impact.
Sometimes it is lasting. Sometimes it is not.
Clearly, when you have a situation like you had in Egypt,
people do try to cover or speculate or invest. But the broader
question that you ask is how important are these financial
players in the oil market? They are very important. Oil has
become more than a commodity. It has become an asset class, and
the last 3 years have shown that.
We have seen the money flow being the key determinant of
short-term oil price changes. Does it determine the price is at
$90 or $70? In the long term, it doesn't. The fundamentals
will. But these price movements, which are very jerky, have--I
mean, I look very closely at oil prices, and most of the time,
the only correlation we can have has to do with dollar value,
with gold, with exchange rates, with equity rather than short-
term moving the fundamentals. So the short-term moves are very
much financialized.
Senator Wyden. Over the years serving on this committee, I
have walked away with the judgment that you usually don't see a
single factor dictating oil prices.
Mr. Diwan. Yes.
Senator Wyden. I don't think you see just one. But clearly
in past debates, I think short shrift has been given to this
question of financial markets, and you just said this recent
short-term increase was not due to supply and demand. That
suggests to me that looking at the markets and the role of
speculation is going to be increasingly important.
I think you touch on that, and you touch on that as well
with respect to your views, Mr. Burkhard. So that takes us back
to you, Mr. Jones, because you don't think that the markets are
really what this is about. You make it clear that you think
this is about supply and demand, that the price increases in
oil recently have been driven by the situation in Egypt. Let me
get you, so you can put it in your words what you think of what
Mr. Diwan and, to some extent, what Mr. Burkhard have said.
Mr. Jones. The short answer is that I think I agree with a
lot of what they said. I think that what my testimony was
focused on was the actual run-up in prices since last
September, and we saw a lot of tightness in the market. There
was more demand.
The big news of 2010 was a more rapid resurgence in OECD
country demand than was expected, and particularly in the last
quarter. So, that is what got the prices moving up.
Now in the current situation where there is a crisis in the
Middle East, as Mr. Diwan said, markets don't only look at what
is happening today. They look at what they think might happen
tomorrow, and that is where you get expectations in. So, I
don't think there is necessarily a disagreement between us.
Senator Wyden. If you look at your prepared testimony and
you looked at Mr. Diwan's prepared testimony, there is a sharp
difference. You play down the question of anything other than
supply and demand. You are saying that markets are driving
this, and the price of oil is driven essentially by the supply
and demand question. Mr. Diwan is saying, look, we are not
seeing any changes in supply and demand.
That is why I got into the question of financial markets.
This is complicated stuff. We understand it. I am just
concerned your approach gives short shrift to the possibility
of speculation and the financial markets. Mr. Diwan, I think,
puts it in the appropriate context that there are a variety of
factors, but we shouldn't dismiss the question of markets.
When the Wall Street Journal is running articles talking
about what you ought to put your bet on in the future, that
ought to be a wake-up call that the Congress ought to start
putting some attention on those issues.
My time is up, Mr. Chairman, and I thank you.
The Chairman. Senator Coats.
Senator Coats. Thank you, Mr. Chairman.
The Chairman. Welcome to the committee.
Senator Coats. I appreciate that. Because this is my very
first committee meeting, I don't begin to have the experience
or the background of my predecessors who have already spoken.
So I am not exactly sure who to address my questions to, but I
will let you decide who wants to respond.
Just two areas I would like to pursue. One is the energy
security area. The gist of what was said here is that there
seems to be a fairly high level of confidence relative to the
flexibility of the supply lines and the capacity production and
so forth. So an unrest or an interruption of supply,
transmission of supply in one part of the world or from one
source could easily be compensated for by increasing production
or supplying through another area.
My question is, not going to the specific, but to the
general, do you, like the military--does anybody ``red team''
these things? Do you have books on the shelf that say, you
know, if this pipeline is shut down in the Caspians, this is
what we ought to do, or this is where we should go? Is there a
body of study and analysis that we turn to when things like
threats to the Suez Canal, threats to certain pipelines,
political unrest somewhere in the world?
What is the level of analysis that has been undertaken, and
what is the level of confidence that we can adjust to these
kind of things? There is always this uncertainty out there
about it is not factored in with conventional wisdom as to
supply and demand and availability and price and so forth. I am
not sure who needs to answer that, but Ambassador?
Mr. Newell. I will start, and then I will turn it over to
Dick Jones. So, within the U.S. Government, the answer is yes.
There is very good coordination within the Department of
Energy, among different elements. The Energy Information
Administration, which I head, works with the Office of Policy
and International Affairs, which interfaces with the
International Energy Agency.
We also work with the Office of Electricity Delivery and
Energy Reliability, which, in the event of things like
hurricanes or pipelines going down, tracks those events very
closely. In fact, right now, they are focused on the winter
storm issue in the Midwest because that has electricity
ramifications.
In the current context of something like the situation in
the Middle East, we are also in close contact with the National
Security Council and other Government agencies, providing
whatever analysis or background information that is necessary
to help people understand the level of spare capacity on the
supply side, which we have also talked about. Another issue
that comes up when you are talking about, for example, Egypt,
is different transit points. There is a pipeline called the
Sumed pipeline which crosses there, as well as the Suez Canal.
One thing to keep things in context, is that about 3 million
barrels per day transits the canal and pipeline, but about 45
million barrels per day of oil moves around the world through
marine transit. So, as a fraction of that, it is quite small.
There is about 10 percent spare capacity currently available in
marine shipping for oil. So, these are the kind of issues that
we track very closely. In the event of some kind of a
disruption, then the U.S. has a Strategic Petroleum Reserve
which could be called upon, as well as other reserves. That is
the context in which we then start to coordinate with the
International Energy Agency.
So I will turn that over to Dick Jones.
Mr. Jones. Thank you very much, Richard.
Yes, just the IEA looks at the world, and we work with the
world. We have 28 member countries. Obviously, the United
States is one of the most important member countries that we
have, but it is not the only one.
So when we are looking at the world situation, particularly
if we see a potential crisis brewing or potential disruption,
we begin consulting with the countries that would be the most
likely to be affected. That would include the United States,
but it wouldn't be limited to the United States. We do much of
the same work that Richard was describing, we do
internationally. We then provide information to our member
countries to keep them abreast of developments in the
situation.
Also I mentioned we have emergency response training
exercises. Those training exercises are based on case studies,
scenarios, and we don't make them up. We look at the real world
and we say, for example, if there is a disruption here. Then we
let teams come from our member countries and from the nonmember
countries, and we have several teams working on the same
problem.
Then we see what they come up with, and we then debate
whether or not this person's response or that team's response
was the best one, or if there was one that was better and so
on. That way, we all learn at the same time. We learn about the
specifics of the issues, but we also learn about different
points of view and how to work with one another, and that comes
into quite a bit good use when we have a real crisis.
Mr. Burkhard. One good example in the past that is
instructive. In 2005, when we had Hurricanes Katrina and Rita,
they took out a large amount of U.S. refining capacity.
Gasoline prices went up in the United States, and that sent a
market signal to the rest of the world to send gasoline to the
United States.
So the flexibility of the oil market was important there,
but also IEA members at that time, particularly in Europe, were
offering their strategic gasoline reserves to the market, which
also helped to calm it. So I think that very real, fairly
recent example of market signals combined with the insurance,
so to speak, of what the IEA members provide was a good example
of crisis management.
Mr. Jones. If I could just add one thing? Our focus has
been on oil because we were founded in the wake of the 1973-
1974 oil crisis. But in recent years, we are focusing more and
more on other forms of energy as well. So, for example, we now
also are doing work on natural gas security, particularly
pipeline security, which is very important to our European
members, and we are also looking at electricity grids and how
they can be made more secure.
So we are branching out beyond oil to natural gas and
electricity. The response that Jim just mentioned was
coordinated by the IEA.
Senator Coats. Mr. Diwan, did you have any comment?
Mr. Diwan. No. I want to build on what Jim said. The market
responds quickly. I mean, price signals change. When you have
disruption some places, prices go and you arbitrage. The only
problem, it takes time to transport oil.
So the system takes time to get back in shape, but we have
seen it, crisis after crisis anywhere in the world, that you
have enough spare refining, shipping crude. Right now, we have
spare of everything that you can adapt. Just takes time because
it is slow to adapt. You know, oil is bulky to transport and
store and refine.
Senator Coats. Thank you.
Mr. Chairman, I want to get off to a good start with the
Chairman. So I notice my time has expired and gone over time.
So I won't ask my second question.
The Chairman. You set a very good example for this
committee. We appreciate it.
[Laughter.]
Senator Coats. Thank you.
The Chairman. Senator Franken.
Senator Franken. Thank you, Mr. Chairman.
I would like to welcome my new members--not my new members,
the new members to the committee, of which I am one. While
Senator Hoeven was Governor of North Dakota, they discovered
and developed tremendous oil resources there. In fact, some in
North Dakota say he created them. I would like you to come over
in Minnesota and do the same, if you could.
But I want to turn to renewables because that is something
we do really well in Minnesota. Dr. Newell, we need to be open
to a diverse array of options as we think about energy policy.
But as you say in your testimony, renewables seem to be where
the largest growth is in the next 25 years. Is that right?
Mr. Newell. Yes, that is correct. They have by far the
fastest rate of growth.
Senator Franken. As I said, in Minnesota, we are a national
leader in renewables, especially wind and biofuels. We are
transitioning to renewables fast, largely due to policies like
the renewable energy standard, 25 percent renewables by 2025. I
am proud to say that Minnesota utilities met their 2010 targets
under the RES.
In the EIA reference case scenario, we see a pretty bleak
picture for renewables in 2035, only about 10 percent of our
energy mix by 2035. Now I recognize that this scenario assumes
no change in our national energy policies moving forward. Dr.
Newell, what factors, in your view, both policy and other
factors, could most help grow the U.S. renewables sector to a
much higher percentage than those projections for 2035?
Mr. Newell. The key issues that have affected the growth in
renewables over the last several years and that I would
anticipate would affect it over the next several years are
several fold. One is on the purely economic side, the cost of
renewable technologies. Were those to come down from where we
are currently forecasting, either due to faster innovation than
we are expecting or additional research and development effort,
that could bring those costs down, in which case they would be
more competitive with other technologies for power, such as
natural gas, coal, nuclear, and so on.
The other key policies that tend to support renewables are
policies such as the production tax credit for wind, which does
expire in our reference case, because that is what it does in
current law. But you actually see a kink in the curve when it
does expire. So that is clearly sending a signal that were it
not to expire, that would have a significant impact, and we
have run alternative policy cases that demonstrate that.
The renewable fuel standard for transportation fuels also
has a big impact. But that is in our reference case and grows
very considerably because that are under current statute and
ongoing regulations that is already in law. So those are some
of them. There are a number of other tax credits on solar and
so on, which also expire at some point in time. Were those to--
--
Senator Franken. I am sorry to interrupt.
Mr. Newell. Yes.
Senator Franken. We have countries like China that are
aggressively pursuing these, right, like solar and wind?
Mr. Newell. Yes. That is definitely correct. There are a
number of European countries doing that and also particularly
China has been investing heavily really in all sources of
electricity production. They have phenomenal growth, and so
they are investing in solar, in wind. They are also investing a
lot in coal and nuclear. So they are really kind of all-out on
all fronts.
Senator Franken. Let me go to Ambassador Jones. I notice
that you talked about three areas you would like to go--a
strong push in efficiency, to decarbonize electricity, and
create advanced vehicles.
So, let us talk about those. How do you decarbonize
electricity?
Mr. Jones. I mean, promotion of renewables is one way to do
that because they obviously don't burn fuel. But you can also--
--
Senator Franken. They don't burn carbon? They don't add
carbon?
Mr. Jones. They don't add carbon. But there are many other
ways, and for example, you can have a coal-fired power plant
running on biomass instead of on coal. You can have a coal-
fired power plant with biomass and carbon capture and storage,
and then you are actually taking CO2 out of the air.
Senator Franken. Right.
Mr. Jones. So there are a lot of different technologies
that are available. The question is what is economic and what
is appropriate to the political and the physical
characteristics of the country? For example, a lot of countries
are pushing ahead with nuclear power, and other countries have
decided not to do any nuclear power for political reasons
because of concerns, obviously, on nuclear proliferation, spent
fuel, and things like that.
But there is a whole mix of approaches you can take, and we
advocate a broad spectrum of technologies, depending on the
endowment of the country. For example, some countries would be
wasting their money if they invested in wind power because they
just don't have the wind resources. Similar with solar power.
So we think that where it makes sense, a country should
invest in renewables. Where renewables are not an option, they
should invest in carbon capture and storage if they want to get
the full lifetime out of existing power plants or use biomass
to fuel those power plants, or they should invest in nuclear.
It depends on the country.
Even in the same country, different regions will be
different.
Senator Franken. I know I am over my time. But I just want
to say in summary that these projections to 2035, that is a
fairly long way out.
Mr. Jones. Twenty-five years.
Senator Franken. We can definitely--you say it, and you
added a personal note, which is that we can do better. I would
like to add the same personal note and just say that those
three efforts--a strong push for efficiency, decarbonizing
electricity, and advanced vehicles, which I assume mean
electric cars, maybe LNG cars, anything else I am----
Mr. Jones. Hybrids--plug-in hybrids, all electrics. CNG is
a possibility, especially for large transport, buses, and so
on.
Senator Franken. I thank you all for your testimony. Mr.
Diwan, I just wanted to ask one last little thing? Did you, at
one point, say ``oil prices are a mystery to me?'' Did I miss
that in your testimony?
Mr. Diwan. No. The more you know, the less you know after a
while.
Senator Franken. OK. That really made me feel good.
[Laughter.]
Senator Franken. Thank you, Mr. Chairman.
The Chairman. Thank you.
Senator Hoeven, welcome to the committee.
Senator Hoeven. Thank you, Mr. Chairman.
Good to be with you. I would like to thank both you and
Ranking Member Murkowski for holding this hearing today and say
that I very much look forward to working with you on the Energy
Committee and, of course, with our fellow members. Not only the
Senator from our neighbor State, Senator Franken, but Senator
Manchin and I go back, I don't know, 6 years or more working as
fellow Governors, and worked on energy issues and worked
through the National Governors Association.
So I very much look forward to working with you on these
important issues, the energy challenges that face our country,
and I see it as an incredible opportunity. Senator Franken was
kind enough to refer to some of the progress we have made in
energy in North Dakota, and we do produce a lot more oil and
gas. We are over 100 million barrels a year now.
Ten years ago, though, we were not producing much oil, and
we were, in fact, declining in our oil production. Frankly, oil
companies, if they hadn't left the Williston Basin, they were
leaving.
We worked very hard. Of course, a lot of the talk at that
time was that companies weren't going to do exploration in the
continental United States. They were still doing some great
work up in Alaska, but really were going to other places around
the globe for not only their exploration activities, but also
production and refining as well.
So we worked very hard to create the right kind of business
climate that would stimulate not only oil development, but
other types of energy development as well. The clean coal
technologies, renewables, wind, biofuels, we are making a lot
of progress. It is not just about producing more energy that we
ship to great States like Minnesota and other places--
electrons, as well as oil and gas and biofuels--but it is very
important for our economic growth and for job creation.
So I see that same opportunity for our country. My question
to you is what should we do? What should this Congress do to
stimulate energy development in all sectors? What is the most
effective things we can do to stimulate energy development in
this country across sectors, without picking winners and
losers? I mean oil and gas. I mean electricity from coal,
hydro, other sources. Biofuels, wind, nuclear, you name it.
But across all sectors, what are the things that we can do
that will be most effective as a Congress to stimulate energy
production in this country? I would particularly like you to
focus on nonrevenue measures because we find ourselves with a
bit of a budget challenge these days. So particularly the
measures that don't cost money.
So I am not talking about direct subsidy and so forth, but
the kind of legal, tax, and regulatory measures we can put in
place to stimulate energy development most effectively. I would
like each of you to respond to that, if you would?
Mr. Burkhard. I will start off. I will steal a phrase from
a book of our chairman Dan Yergin. When Churchill 100 years ago
switched the Royal Navy from coal to oil, he said security is
in diversity and diversity alone. So in terms of pursuing
different strategies, a singular approach probably isn't the
most appropriate fit, but multidimensional policies that focus
on supply and demand.
Some of the trends and places you alluded to, Senator, if
they continue, they will help both on the demand and the supply
side. North Dakota is one of the key reasons why in 2009 the
United States had the greatest increase in oil and gas
production anywhere in the world. The United States did in
2009. In 2010, that growth trend continued, and that is due to
what is happening in North Dakota, but also Pennsylvania, other
relatively new players on the oil and gas side.
In terms of continental energy security, let us not forget
about Canada. When we think of foreign oil, we think of
something distant, far away, unknown. I don't think of Canada
that way. Twenty-one percent of our oil now comes from Canada.
It is by far the biggest oil supplier.
So thinking about continental energy security, if the same
trends in oil and gas continue, that will play an important
role. On efficiency, the fuel economy standards that were
renewed, strengthened in 2007 and then again in 2009, I
believe, they are going to play a very large role in keeping
U.S. oil demand below the 2005 peak.
So I think consistency in the long-term approach and a
multidimensional approach on demand and supply is something to
consider.
Senator Hoeven. What percent of our petroleum consumption
is provided by the U.S. and Canada together? Do you know?
Mr. Burkhard. Canada is about 2.5 million barrels per day.
U.S. oil, it is roughly probably half. Maybe a little bit more,
the U.S. and Canada combined total.
Senator Hoeven. But of our total consumption, of our total
consumption, what percentage do we cover between the U.S. and
Canada? It is higher than people realize, right?
Mr. Burkhard. It is probably half.
Senator Hoeven. Fifty percent?
Mr. Burkhard. Maybe a little bit more, 50 to 60 percent. If
you include Mexico, it is even higher. If you look at North
American energy security meaning Mexico, Canada, the U.S., you
are looking at 70, 75 percent, something around there.
Senator Hoeven. Seventy-five percent.
The Chairman. Anybody else have a quick answer, and then--
--
Mr. Diwan. No, I just wanted to point to a slight
contradiction.
Senator Hoeven. If you want, you can say the top 3 things
so I don't violate my timeline. But----
The Chairman. Yes, we have gone over the time.
Senator Hoeven [continuing]. Name 1, 2, or 3 things that
would really make a difference, in your opinion.
Mr. Diwan. The cheapest barrel of oil is an efficient car,
all right? I mean, this is how you reduce your demand, and it
is probably cheaper than producing a new barrel of oil.
But I just wanted to point a slight contradiction. I mean,
if North Dakota has seen its production increase, and it is a
great thing, it is because we have very high oil prices. So it
is the economics which are answering. We always knew about the
reserve in the Bakken, but they were never economical. When
prices reach a certain trigger, technology was able to come and
change that supply function. So having $3 gas and having high
production in Dakota goes together.
Senator Hoeven. No question, but the new technologies were
vital and will continue to be vital in order to produce it
economically----
Mr. Diwan. Absolutely.
Senator Hoeven [continuing]. Even down to a barrel price of
maybe $50 a barrel.
Mr. Diwan. Absolutely. So, efficiency, technology, and I
would say a regulatory framework, which is look at the long
term and allow the diversification across energy sources.
The Chairman. We have two Senators here who haven't yet
asked their first round, and then we will come back around, and
we can get more response to that in the second round perhaps.
Senator Udall.
Senator Udall. Thank you, Mr. Chairman.
Good morning, gentlemen. Thanks for being here today.
Let me start by speaking to the profits of the oil
companies. It has come to my attention that Exxon just
announced that its profits for the last part of 2010 were over
$9 billion. It is a 50 percent increase from earlier in the
year. Exxon is not alone. Most, if not all the major oil and
gas companies are going to report huge profits for 2010.
Mr. Diwan and Mr. Burkhard, what will the major U.S. oil
companies like Exxon do with these record-setting profits? For
example, how much of those net profits would you estimate that
the major U.S. oil companies are investing, or will invest, in
domestically produced clean and renewable fuels, the price of
which are not set by OPEC?
Mr. Burkhard. I think some context for that, one, oil
companies are price takers, not price makers. The revenues
reflect the global oil markets. In terms of their spending, oil
companies, the very large oil companies, their capital
expenditures in a given year can range from roughly $15 billion
to $25 billion.
So it is a treadmill that they are on to constantly
reinvest because they have fields that are at plateau
production or declining. So it is a massive capital-intensive
business where you have $15 billion, $20 billion, $25 billion
of CAPEX are what we are seeing right now. A lot of these
companies are part of this what we call ``the shale gale,'' the
unconventional gas revolution in the United States, and gas is
a lower carbon content fossil fuel. So that is playing a big
role.
Senator Udall. So you see them moving some of those profits
into development of gas reserves?
Mr. Burkhard. Yes.
Senator Udall. Mr. Diwan.
Mr. Diwan. I mean, they are oil and gas companies, first
and foremost. So they invest in oil and gas.
If you look at the broad trend in terms of capital flow,
the United States has seen a lot of investment. The global
industry is coming back to the United States, and that is a big
development over the last 2, 3 years. Obviously, it has to do
everything with the shale gas, but also the onshore oil
potential in places like the Bakken.
So the United States, because of technological change and
the high oil prices, have been able to attract a lot of
capital. A lot of these oil companies who have been looking
abroad for years to be able to add to their reserves are coming
back to the United States.
They are not the most nimble companies. They are very
large. So they tend to be second and third movers, rather than
first movers. The small companies, the muscle, the economic
muscle here have already created the resources. Now the oil
companies are going to develop them.
In terms of their investment in other technologies, it is
really research and development. They are not biofuel
companies. They are not solar companies. They will not become
solar companies. So they are what they are.
Most of their investment go back into massive projects
where the treadmill that Jim is talking about is very
important. The decline rates are very steep in the oil fields
that they bring. They are probably 10, 15 percent, sometimes
north of that. So, in a way, these companies are constantly
seeing their base resources disappearing. So they need
absolutely to invest, and that treadmill is only getting
faster.
Senator Udall. So you see them playing an important role in
continuing to produce secondary, tertiary oil from such fields.
But the advances in biofuels and clean energy will come from
other sectors as well and from other entrepreneurs, other
businesses, other business models?
Mr. Diwan. I think so. I mean, that is the model. These
companies are not the most nimble for these things.
Senator Udall. The demand for oil is driven mostly by our
transportation sector. I think, what, 70 percent of domestic
oil demand.
I am directing this at the panel. Do you have a sense of
what percentage of our transportation sector would have to be
fueled by electricity, natural gas, or some other alternative
fuel in order for us to achieve energy independence in the
transportation sector? In other words, at what point could our
domestic supply of oil fulfill our domestic demand?
Ambassador Jones, if you want to take that question for the
record, too, I would be more than happy to work with you.
Mr. Jones. I don't think it is something that we have
actually sat down and tried to calculate. You could probably do
a back-of-the-envelope calculation in terms of imports and how
much share they are and figure it out. But Richard, you might
have done something? I don't know.
Mr. Newell. Yes. We have not analyzed that particular
question. But under existing laws and market trends, while
there is a decline in net petroleum imports, it is still quite
sizable even 25 years from now. If one imagined what would be
the kinds of actions that could change that, one would be
declining consumption because declining consumption tends to
come first out of imports.
Then, substitution of the remaining consumption toward
something that is not imported, which if it is electricity,
electricity tends not to be imported. So any domestic source of
electricity would do that. If it was domestically produced
biofuels, that would do that.
But one would have to analyze a particular proposal in
order to--most anything you look at is potentially achievable.
It depends on what kind of actions one is willing to take to
achieve it.
Senator Udall. Thanks to the panel.
The Chairman. Senator Manchin.
Senator Manchin. Mr. Chairman, thank you. Thank all of you
for being here.
I am sorry. Some of us had to go back and forth to
committee meetings. So if I repeat something or might have
missed something, I am very sorry for that.
The State of West Virginia, as you know, is an energy
producer, always has been for many, many years. We just have a
hard time understanding without an energy policy in this
country and what you just told us about, the dependency we are
going to have on foreign oil, the security of the Nation being
at risk because of our dependency on foreign oil, the
uncertainty in the Middle East right now, and the growing
uncertainties that could even make us more vulnerable, and our
economy, how it is tied so tight, and you are telling me our
dependency will grow and not become more independent.
In our little State, we have an energy portfolio. We try to
use everything we have. We have developed our shale gas,
natural gas, as you know, in the Marcellus shale. We have a
tremendous abundance of coal. We have biomass. We have a
tremendous wind operation in West Virginia, which very few
people know, and we have done everything we could with hydro.
What I don't understand is that of all the energies you are
talking about, there are subsidies, and I think that is what
the Senator from Colorado was talking about. The subsidies of
energy, whether it would be to oil, gas, wind, solar, biofuels,
ethanol. The only energy source which is the greatest source
that we have as far as we are dependent on right now is coal.
It doesn't get a penny of subsidies.
But it has been villainized by this administration and so
many people, and it is the one we depend on the most that gives
back more than what it takes. I can't figure it out.
I mean, we are trying to use it in so many different forms,
in supercritical heating and things of this sort. We are
running into roadblocks with the EPA from every turn that we
go. We are trying to use it in conjunction with our natural gas
productions and trying to look at the changing and the fleet,
especially our commercial fleet to compressed natural gas I
think is a very doable.
Do you all have a comment on why that one source of energy,
which is the most depended upon in this Nation, has no types of
subsidies, but the others demand so much subsidies? Does
anybody want to answer that?
Mr. Newell. I guess I would just say that Congress makes
these policies, and so I don't have any particular----
Senator Manchin. Do you all have a comment? Basically, do
you think it is kind of off balance that 50 percent of our
energy comes from the coal, which we have depended on for
hundreds of years. No subsidies, not one penny of subsidies.
But then oil--and I heard the profits of, what, $9 billion
of profits--and the subsidies from that, subsidies from the
tight sands of natural gas, subsidies on a gallon of ethanol,
and everything else. Does it not make a little bit of----
Mr. Newell. The one remark I will make is that we have been
requested to do an analysis of energy subsidies by the House,
and that is underway. We will be issuing that report sometime
in the next few months.
Senator Manchin. You compare that toward the coal that gets
no subsidies. Will you compare it against what type of energy
this country receives and depends upon without any investment
except the market forces?
Mr. Newell. Yes. It is a broad study that covers all manner
of energy subsidies.
Senator Manchin. The dependency that we have had on foreign
oil and the uncertainly in the Middle East, I know you all have
talked on that a little bit. I have noticed, Mr. Newell, you
have talked about the price of a barrel of oil and the
uncertainty, not really knowing where it is going. What do you
anticipate as far as we, as a Nation, are able to take care of
the dependency, independency as far as from our own domestic
production? Is there any of you believe that we can become
independent with the current policies?
Mr. Burkhard. Senator, just on the coal question, I am not
an expert in subsidies. But what is perhaps little noticed in
some areas, the last decade, the strongest energy source in
terms of demand growth has been coal around the world. That is
due to what has been happening in China and India.
China, India, and the U.S. are among the top resources----
Senator Manchin. The rest of the world is using it more,
and we are villainizing it more.
Mr. Burkhard. It is a cornerstone of global energy supply
in this country and certainly in China and other major players.
Senator Manchin. Do any of you all believe that we can
become energy independent?
Mr. Diwan. Why do we need to become energy independent? We
are not independent of pretty much anything. We believe all in
free trade. We all have Italian ties, Chinese shirts, Chinese
computer chips in our computers. We import everything, and we
export everything. Oil shouldn't be that different, and energy
in particular. So----
Senator Manchin. You don't believe that we should try to
become----
Mr. Diwan. I don't think it is a key issue. It is a global
commodity. It is globally priced. If we can import it, we can
import it.
Senator Manchin. Do you all believe that it ties to the
security of the Nation?
Mr. Diwan. It has a security aspect, but it is not the only
one. There is an economic aspect.
Senator Manchin. Sure.
Mr. Diwan. What it costs to fuel this economy is a key
issue.
Mr. Burkhard. I would just add energy security and energy
independence aren't--you know, there are differences between
the two. If energy security is the objective, that may lead to
different outcomes, different decisions than energy
independence.
Senator Manchin. Basically, those of us who lived through
the 1974 oil embargo and saw what it had done and how it
crippled the Nation, and at that time, I think we tried to take
the position we would be energy independent by a very short
period of time, by 2000. Of course, that came and gone.
So you all are not tying the security of this Nation toward
the independency that we could do with more domestic production
of all of our resources?
Mr. Burkhard. The increase in continental production, in
Canada and the United States, it has been a source of economic
growth in the places where it has taken place. So it is
important in job creation, and it does play an important role
at enhancing global energy security and, consequently, U.S.
energy security. The growth in U.S. gas production and oil
production is an important component of that overall security
story.
Senator Manchin. I will save that for a second round. Thank
you, sir.
The Chairman. Senator Coons, welcome to the committee.
You are the only one here now who hasn't asked a first
round of questions. Did you have questions you want to ask in
this first round, and then we will do another 5-minute round?
Senator Coons. Thank you, Chairman Bingaman and Senator
Murkowski.
I am grateful for the opportunity to join you. I apologize
for my lateness. As is so often the case, there were other
committees. Judiciary Committee just reported out an important
patent bill that I think will help contribute to the role that
I also view this committee as having a central place to play
in, which is sustaining America's leading role in innovation
and then making sure that we work together to develop the
energy technologies of the future.
I was interested in the testimony of several of the members
of the panel. Dr. Newell, what changes do you expect to see
going forward that are based on energy efficiency?
I may have missed that since I was not here. But in what I
read I didn't see a clear trajectory on what we could achieve
in terms of savings due to energy efficiency standards. As that
is something we expect to take up shortly, I would be
interested in your views on how important that might be to
America's energy future.
Mr. Newell. Sure. Thanks for that question.
When we look out over the next 25 years, there is a
substantial decline in the growth of energy consumption we
expect to have from the historic situation for a number of
different reasons. If one looks at structural change in the
economy, there is a significant change toward a more service-
oriented economy, which tends to moderate the rate of energy
growth.
We have done some analysis that suggested our consumption
is going to be a third lower simply because of structural
changes in the economy, which lowers the overall energy
intensity of the economy. We have also done analysis that looks
at changes in the energy efficiency of particular technologies,
and that further lowers energy consumption about 13 percent
from where it otherwise would be. That is already built into
the reference case projection that I mentioned.
Now those changes in efficiency come from a number of
different places. One is efficiency standards that have already
been promulgated or that manufacturers and the Department of
Energy have agreed to. There have been some recent standards
there which are built into our forecast.
Market prices also play a role in reorienting consumers
toward more energy-efficient appliances. You also have
voluntary programs like the Energy Star labeling program, which
provide information to people to help them understand what the
energy consumption is from their appliances. These also tend to
affect consumer behavior.
In terms of disentangling the effect of these difference
pieces, it becomes quite complex. I mentioned some of the
things we have done. The other thing that enters in is fuel
economy standards for automobiles, which I mentioned.
We do include in the reference case the standards through
the year 2016, which get the fuel economy of the light-duty
vehicle fleet up to 35 miles per gallon. But in our reference
case, fuel economy actually continues to grow beyond that up to
38 miles per gallon by 2035, purely due to market incentives.
So once these technologies are built into automobiles, the
next time a manufacturer introduces a new model, those new
technologies would tend to be included in those new models.
Given higher projected oil prices, that would tend to provide
an incentive for consumers.
So there are a number of different policy and market
incentives that are directing the economy to more energy
efficiency. Although energy consumption still grows, it grows
by a significantly lower rate than what we have seen
historically.
Senator Coons. Thank you. If I could, one other question to
Ambassador Jones?
You expect electric and plug-in hybrids to make up to 70
percent of new car sales in 2035, if I am not mistaken, under
one of the scenarios. Tell me what technology developments you
think are critical to achieving that, what policies we should
be pursuing to help ensure an American leadership role in that,
and what are the different policy scenarios that you think
would deliver the biggest advantages for us in terms of
deploying that fairly significant percentage participation?
Mr. Jones. I think the technology that needs the most work
on is battery technology, storage. Increasing the energy
density of batteries to allow the vehicles to have greater
range. One of the key points that people always raise with
electric vehicles is their lack of range, the fact that the
speed with which they can be recharged, how often they need to
be recharged.
Now, in point of fact, studies have shown that, for
example, BMW is developing electric vehicles, and they brought
a fleet of electric BMWs and they let people drive them for a
year, and they followed their use. They actually found that
most people didn't really need to recharge their car more than
2 or 3 times a week, and it was very easy. After a few weeks,
they realized this, and they liked the vehicles.
But there is a lot of acceptance, that public acceptance is
the real problem. But that can be overcome with better battery
technology, cheaper battery technology. But that is the key
thing. Most of the rest of it has already been developed.
Senator Coons. Thank you very much.
Thank you, Mr. Chairman.
The Chairman. Thank you very much.
Why don't we do our second round here? Senator Murkowski,
did you have questions?
Senator Murkowski. Yes, thank you.
Mr. Newell, I want to confirm that within your projections,
you do not include any assessments as to Alaska natural gas
being part of the mix within the projections through 2035. Is
that correct?
Mr. Newell. Yes. That is correct. That tends to depend
heavily on the Alaska natural gas pipeline.
Senator Murkowski. Yes.
Mr. Newell [continuing]. Our assessment is that the capital
costs have increased, and domestic lower-48 gas prices have
come down. So, that pipeline through--at least through 2035--is
not currently in the projection. That is correct.
Senator Murkowski. I just wanted to confirm. Let me ask
more generally then, in terms of your assessments as they might
relate to the Arctic as a whole, not necessarily just to the
U.S. Arctic and what may or may not develop offshore there, but
as you know, we have the BP-Rosneft deal that is at play in the
Arctic.
Do you include these prospects in your assessment, either
the BP-Rosneft deal or just anything in the Arctic? I think we
recognize the potential for the reserves up there, but do you
anticipate in your forecasts seeing anything coming out of the
Arctic?
Mr. Newell. I would have to go back and look at the
specific results that we currently have. But areas that are
open for lease sale would enter into our projections at some
point. There have been changes over time in terms of what
areas, at least around Alaska, have been open. I think that has
even recently changed. So I would have to go back and see
exactly. But, yes, we do assess those areas for sure.
[The information referred to follows:]
The Energy Information Administration's global liquids production
projections, as published in the Annual Energy Outlook 2011, reflect
oil production in offshore Alaska but not in Arctic regions other than
Alaska, and therefore do not include any production potential as a
result of the BP-Rosneft deal. Although oil is already being produced
offshore in the Alaska Arctic, additional oil production from
undiscovered offshore fields is not projected to commence until after
2030. In the Annual Energy Outlook 2011 reference case, oil production
from new Alaska offshore fields in the Arctic reaches 200,000 barrels
per day in 2035.
Regardless of the EIA projections, Shell Oil is making a concerted
effort to drill exploration wells in both the Beaufort and Chukchi
Seas. If Shell found sufficiently large oil reservoirs at either
location that would justify their commercial development, then new
offshore oil fields in the Alaska Arctic could be in production by
2020.
Senator Murkowski. Let me ask, a question for the whole
panel. We talk a lot about the reserves worldwide and what the
U.S. consumes. The commentary is that the U.S. consumes a
quarter of the world's oil, but we only have 3 percent of the
world's reserves. I have some issues with how this is stated.
First of all, the 3 percent figure, as I understand it,
only speaks to proven reserves, which is to say that they have
already been drilled there. It doesn't reflect any of the
unexplored areas, whether we are talking Arctic offshore or
whether we are talking Atlantic, Pacific coast, Eastern Gulf,
much of the deep water.
So I guess the question to you all would be, first, how
important is it to actually know what our oil reserves amount
to? Secondly, if we here in the United States were to prove up
our reserves, not use them for production, but just provide for
that assessment, and we were to do so within the next 5- to 10-
year horizon here, what does this do to the percentage of
global reserves that we know in terms of our percentage of
consumption here in the United States? How does that even out?
Again, I am curious to know how important is it to know exactly
what we have in terms of reserves?
Mr. Burkhard, why don't we begin on your end?
Mr. Burkhard. Reserves are an important figure, but there
is no global, uniform standard that countries around the world
adhere to. So it is a figure that is used a lot, but it has an
uncertain definition globally.
One quick example, the Canadian oil sands. If you include
the Canadian oil sands, Canada has the second-largest oil
reserves in the world after Saudi Arabia. If you don't include
the oil sands, which some don't, it falls down quite a bit.
Perhaps a more relevant example of the resource bases is
production as opposed to reserves because the reserves depend
on future investment and activity and fiscal terms, a whole
host of factors. The U.S. is the third-largest oil producer in
the world, and it is the largest gas producer.
Senator Murkowski. But what you are saying is we don't have
a uniform definition as to how we are defining reserves, and
that doesn't allow us to do an apples-to-apples comparison. Is
that correct?
Mr. Burkhard. U.S. companies do adhere to a common
standard, but----
Senator Murkowski. Right. But outside of the United States?
Mr. Burkhard. Right.
Senator Murkowski. Mr. Diwan.
Mr. Diwan. Yes. I mean, in some places, it is a political
number.
Senator Murkowski. Yes.
Mr. Diwan. In other places, it is an economic number. At
different prices, you have more or less reserves. At $100 oil,
you have more reserve than at $10 oil because you can exploit
these resources and move them to reserves.
So I think, overall, it is not a key criteria. When you
look at oil companies, their reserves always seems very
limited. I mean, the United States has basically 10 years of
reserve ahead of us for the last 50 years. So it is not a
completely meaningful number. There is definitional issues, and
it is also how we prove and how you book reserve, which is
another factor which is complicating.
Senator Murkowski. Is there an effort within the EIA that
takes what you have globally and tries to come up with a
commonality and looking to not necessarily redefine, but to
just make sure that you are doing a same comparison when it
comes to understanding what the global reserves are?
Mr. Newell. For the United States, it is, I think,
relatively well defined in the global sense. But we have been
asked on other occasions by other Members of Congress to try
and dissect and put on an apples-to-apples basis, as much as is
possible, and we can share that with you.
It is a challenge. We rely on sources, as others do. The
U.S. Geological Survey is very important in this area, the Oil
and Gas Journal also. But as was stated, you have to treat
different estimates from different places with different
degrees of surety.
To get to your question, I think in terms of how it would
impact, for example, the work that EIA does, the thing that
matters most over a 20-, 30-year time horizon is even beyond
reserves. Because as was mentioned, reserves only prove up
maybe a decade or so of production. Beyond that, it is the
technically recoverable resource base that becomes even more
important. But reserves are important in the near term because
they speak to areas that companies have demonstrated and taken
the effort to say that they can produce economically under
current prices and technological conditions. So it is relevant
for near-term projections.
I think from the grand scheme of things, if one was to more
carefully assess the U.S., it could change. In terms of the
global balance, though, I think it is unlikely to change in
terms of sheer magnitude just because so much of both reserves,
and then also beyond that, recoverable resources, are outside
of North America. I think that basic high-level U.S. context
would not change significantly based on that.
If I may just say one thing to respond to a couple of
questions posed earlier? Is that----
The Chairman. Yes, go right ahead.
Mr. Newell. One minute. Senator Hoeven had asked what
percent of our petroleum consumption comes from Canada and the
United States. The U.S. is the source of about 48 percent of
our liquid fuels consumption, and Canada would add about
another 12 percent. So you would get up to 60 percent if you
added those 2 together.
The other thing for the record I just want to state is that
my tie is hand-tailored in the United States of America.
[Laughter.]
The Chairman. You are a rare individual, but we are glad to
know that.
Senator Murkowski. Thank you.
The Chairman. Senator Portman, you have not had a chance to
ask any questions. All of us have had at least one round of
questions. So why don't you go ahead with your questions?
Welcome to the committee.
Senator Portman. Thank you, Mr. Chairman. I appreciate your
welcoming me, and it is good to be here with a few of my
colleagues.
I apologize that, as a new member, I am still trying to
figure out how to be at 3 different hearings at the same time.
In this case, I didn't get the chance to hear all of the
interesting testimony. I did read some of it.
I hope this question is not one that has already been
addressed, but my focus would be on the economy and the impact
of your prediction of increased demand and, therefore,
increased cost of oil. I looked at some of your data indicating
that we are going to be approaching $100 a barrel in the next
couple of years if your projections are correct.
I know we are not looking at the economic analysis here as
much as pricing and supply, but have you looked at the impact
on U.S. economic growth during that period, assuming that your
projections are correct on the increased cost of oil?
Although we are producing a lot domestically, as you just
said in response to Governor Hoeven's question, obviously, as
Egypt and other countries experience issues that affect the
cost of oil, what will the impact of that be, and has that been
calculated into your projections on the cost of oil over the
next couple of years?
I open it up to any and all of our witnesses today.
Mr. Newell. Sure. I can respond. Both our short-term and
our longer-term outlook really take assumptions of both U.S.
domestic and global economic growth as an input into that
analysis, but it does take account of oil prices within that.
One question is if there were to be changes in oil prices, what
could be the potential ramifications for the U.S. economy?
This is a complex question, but let me give some thought to
it. Other things equal, every $10 per barrel increase in the
price of oil tends to add about $40 billion per year to our oil
import bill. Since imports are subtracted from gross domestic
product, this tends to weigh on gross domestic product. So
every $10 per barrel increase in the price of oil may lower GDP
by 0.2 percent or so. That is one way to look at it.
Now a key issue, though, is what is causing the price
increase? If it is demand-side economic growth that is causing
the price increase, along with that economic growth--which may
be coming from abroad--our exports may be increasing because
China or other countries may demand more materials, more
equipment from us.
So, demand-side increases in prices can be consistent with
continued global economic growth. The place that tends to be
more of a concern is if it is a supply side shock to oil that
causes prices to increase, which pretty unambiguously tends to
be a more significant headwind for the economy.
The one other point that I will mention is it also depends
upon the state of the economy into which this oil price change
is entering. If you are in a situation of a weakened economy or
if you are in a situation where things like monetary response
would not be sufficient, then you could be in a more
problematic situation.
Our sense of the current situation is that a lot of the
price increase right now is demand driven, and so that is
consistent with continued economic growth. We don't see that,
at least at this point, providing a significant headwind for
the U.S. economy.
Senator Portman. I noted in your testimony you also,
though, said that the demand side dynamic here is driven
primarily by emerging economies. You cited China and India and
Brazil. So, our experience certainly in the last couple of
years is, is those countries have increased their economic
growth and have continued to grow. It hasn't reflected on a
change in our balance of trade in terms of the export-import
issue you talked about or our economic growth certainly in
2009, going into 2010.
But I appreciate your answer, and I hope that these very
important energy inputs are being taken into account as we look
at what the economic forecasts are going forward. Any other
responses from the panel?
Mr. Burkhard. Very briefly, it is an excellent question,
tough to answer because there is no magic price that elicits a
response on the part of consumers or governments. Certainly,
there are psychological points. When oil hits $100, when the
price of gasoline hits $3, or if it were to go up to $4, you
will see the higher it goes, the stronger the reaction will be.
But that is in the United States, but oil is priced
differently, different areas around the world. Some consumers
are shielded from high prices, others exposed to it. So the
reaction globally is very uneven.
Senator Portman. Any other responses?
Mr. Jones. Yes, just picking up on the global response, I
mean, a lot of countries are less well positioned than the
United States to handle high prices, and they are price takers.
It will have an impact on their economies.
I mean, I had a chart in my testimony where I talked about
the oil burden. Basically, at $100 oil, you are getting up to
about 5 percent of world GDP going for oil imports. In the past
when that has happened, it has been a harbinger of a recession.
Whether or not it would occur this time, nobody knows. But
if that price were sustained for all of 2011, we would have
concerns of the economic impact.
Mr. Diwan. There is one last element which is important,
which is the value of the dollar. Because a lot of countries
pay for oil in dollar, and if dollar is rising or the declining
also have an impact into that equation.
Senator Portman. Thank you, Mr. Chairman.
The Chairman. Thank you.
Senator Wyden.
Senator Wyden. Thank you, Mr. Chairman.
Mr. Burkhard, I want to continue this line of questioning
that I began with the whole question of financial markets and
what is going on in the Middle East and this time turn to the
question of oil that is now in storage. If you take a look at
the EIA figures, the Energy Information Agency figures on
inventory, what they show is there are people out there who
have been holding a lot of barrels of oil in storage
significantly above the normal inventory levels, sometimes tens
of millions of barrels.
Now, through the summer, as the prices climb, the petroleum
in storage also climb. When the oil was sold off at the end of
the year, prices dipped. Now we have this whole array of
immense challenges, obviously, in the Middle East. Mr. Diwan
said that that is unlikely to actually impact oil supply, but
oil in storage is rising again at levels well above normal
inventory levels.
So my question to you is break down for us what all this
buying and holding and storage is all about. Because it
suggests to me, picking up on the theme that you touched on
earlier, oil in storage is also part of the oil as new gold,
which is going to be driving investors staking out positions in
the years ahead that brings a new element of speculation into
this debate that we are going to have to concentrate on.
So break down for me what you think this set of changes in
storage is all about.
Mr. Burkhard. Part of the oil storage story over the past
year is investors, companies are responding to market signals
because the oil market in the U.S. has been generally in a
state of contango. Now, what the heck is ``contango''?
Contango is where the price to buy a barrel today is let us
say it is $90. In the futures market, it means that 6 months
from now, a year from now, that price could be $95 or $100. So
that means if I buy a barrel of oil today at $90, I lock in the
price to sell it at $95, 6 months down the road, I can lock in
a return.
So, investors have been responding to that contango
environment in the oil price. What it is generally signaling is
the market's expectation that supplies, oil supplies will be
more valuable in the future. So buy today will pay you more
later because the market thinks it will be more valuable.
One of the drivers of that--not the only one, but an
important one--was last year, in 2010, we saw the second-
largest increase in oil demand globally in more than 30 years.
So this sense that the oil market will become tighter over time
is one of the factors that explains the behavior in this
contango-type environment.
Senator Wyden. We are going to have to get into contango
because I will tell colleagues--Senator Murkowski, I don't
think you were here when I laid out this point that the Wall
Street Journal talked about. At the beginning of the week, they
ran their ``Heard on the Street'' column that had a title
``Unrest Pits Oil Bulls Versus the Gold Bugs,'' basically
making the discussion for the future essentially where people
are going to make their bets.
Obviously, these issues with respect to how oil and gas
prices get set are complicated, difficult kinds of questions.
But to me, these questions that are finally making the pages of
the Wall Street Journal are ones that have gotten short shrift,
and that is why I think Mr. Burkhard, Mr. Diwan have given us a
lot of valuable information.
Mr. Jones, I appreciate your moving toward Mr. Diwan's
position because when I read your prepared statement, I saw a
sharp difference between what you were saying and what Mr.
Diwan was saying that, to me, undervalues how important this
financial market issue is going to be as we try to get into
these questions.
Mr. Chairman, I thank you for this additional round because
I think oil in storage represents yet another iteration of what
Mr. Burkhard calls the new gold because this is going to be
part of what drives the debate about financial assets and where
they are headed in the future and one I certainly am going to
spend a lot of time on.
So I thank you.
The Chairman. Thank you.
Senator Hoeven, did you have additional questions?
Senator Hoeven. Thank you, Mr. Chairman.
This follows a little bit on my earlier question. You
talked about looking at supply in this country in a continental
way with Canada and Mexico, talked about efficiency, talked
about technology. Of course, Mr. Diwan said, well, you know,
price drives that. That is important and true in many respects.
It is interesting, though, once that technology is out there
and deployed, of course, it tends to bring down the price at
which you can produce oil or gas or most any other energy at a
lower threshold, which is very important for our production
going forward.
So, with that in mind, I want to ask and maybe start with
Mr. Diwan because, I mean, obviously, it is price driven. But
we need to find ways to deploy technology that helps us produce
more energy in environmentally sound ways and work to bring
that cost down. So how do we do that? Maybe talk in terms of
countries around the world that are doing some things that we
should be looking at doing, and I am really talking from the
production side.
Most of your projections you talk about the demand side,
which I understand. China's incredible growing demand, India,
so on and so forth. But from the production supply side, talk a
little bit about that. Who is doing things to produce more? Who
is using technology in new and innovative ways that is going to
really have an impact going forward and, again, something that
we can look at?
Mr. Diwan. The good new here is really the bright, shiny
example of how economics work and incentive works and price
works is the United States. What we have seen in the United
States over the last 5 years is phenomenal.
Gas prices increased, and this increase in gas prices have
triggered a technology called breakthrough. We knew about the
shale gas. We had an idea a little bit how to go about it. But
what happened in the United States in terms of breaking the
code, if you want, and being able to produce that gas and now
extending that technology to oil is just phenomenal.
Most oil companies, the large oil companies, the large
national oil companies drill very few wells every year, and
they tend to do a lot of experimentation in labs, et cetera. In
the United States, it is very different. You have a very large
entrepreneurial sector, both of oil companies and service
companies. They don't go into labs and think about 3 years how
we are going to drill that well. They go and they drill it.
The wells are fairly small. The investments are fairly
small. Capital is available. Risk capital is available. They
basically try and try and try and try.
What we have seen in the gas world is we brought all these
ingredients together--capital, technology, experimentation,
resources--and we broke the code of the shales. That has
tremendous application globally, and that what we have seen
since is because of that, the natural gas supply increased, gas
prices went down. So you have that surplus of capital,
technology, people, material, wells, et cetera, and it shifted
to oil. This is how we have seen now this tremendous
development in onshore oil in the United States, which was a
dead sector 10 years ago, and it was perceived as a dead sector
with very little future.
A year and a half ago, we were talking about what is
happening in the Bakken. Now we are talking about what is
happening in the Eagle Ford, what is happening in Colorado. So
it expanded very quickly. At these prices, you can experiment.
You can try.
After all, I think over 80 percent of oil wells drilled in
the world every year are drilled in the United States. So this
is where you experiment and where this experimentation goes. So
the question right now is how much the experimentation made in
the United States can branch out and go and have impact on
other resources that we know exist, but we couldn't get out
because prices were too high. We didn't have the technology, et
cetera. How much we can replicate the example of the United
States in terms of technology and success.
That is really the big question, both for gas and for oil.
Senator Hoeven. I think it is interesting the way you
describe it and, right, breaking the code in terms of producing
these different types of energy because it also, over time,
brings the price down. So other thoughts on what we can do to
continue that kind of entrepreneurial development here?
Obviously, price is one. But the regulatory environment?
What else? I mean, are there other things companies are
specifically looking for or that you are seeing having a real
impact on production around the world?
Mr. Newell. I will just expand a little bit on what was
said. We are currently at EIA going beyond the domestic
assessment of shale gas and broadening that internationally to
assess the potential for shale gas development globally.
We are working on that. That, depending upon what we find
there, would tend to enter into our international energy
outlook, which we also produce each year. Some of the main
prospects there that we already see certainly include Canada.
It clearly has shale gas basins, which, in effect, extend
upward from ours across the border.
Also, China and some parts of Eastern Europe seem to be
promising places. But my sense is this has been very much
driven by market response to high prices that existed at one
point, which then encouraged the application of certain
technology, and then there was innovation in that technology.
The Chairman. Any other final comment on this?
Mr. Jones. I was going to ask the Senator, you only focused
on oil and gas. Are you talking about technologies in general?
Because there are a lot of examples of innovative policies, for
example, that are being deployed in Europe and elsewhere on
renewable energy.
Senator Hoeven. I really was interested in other energy
sectors as well, including renewables. But I do see that I am
past my time. So out of deference, Mr. Chairman, I will
relinquish back.
The Chairman. Did you want to make a short response----
Mr. Jones. Yes. Just shortly, I mean, there are a lot of
things like feed-in tariffs, for example, or portfolio
standards that are used in various places. But the key thing
seems to us to be clear, consistent policies that are as
technology neutral as possible, but that also take into account
the development stage of the technology.
A lot of technologies need a hand up, so to speak, to get
across what is called the ``valley of death'' between the R&D
of the development of the technology and the full
commercialization of it because you have got get economies of
scale. So, those are areas where some countries have
demonstrated how to get across that valley by supporting
companies at a key stage of the development of their
technologies.
Senator Hoeven. Mr. Chairman? So, if you had some of those
examples, I would love to get them from you. Any that you think
have been particularly effective in stimulating production.
Thank you, Mr. Chairman.
The Chairman. All right.
Senator Franken.
Senator Franken. Thank you, Mr. Chairman.
Senator Manchin asked why there weren't subsidies for coal,
and none of you seemed to want to answer that. I don't know if
it was a rhetorical question, but it seems that coal is doing
pretty well without subsidies. It is very plentiful. It is very
cheap, relatively, and relatively, compared to other fuels,
kind of dirty and, therefore, we don't subsidize it.
But speaking of subsidies, President Obama has called for
kind of a suite of cuts in subsidies and tax preferences for
oil companies. What effect, Dr. Newell, do you think that such
a cut would have on domestic oil production or gasoline prices?
Mr. Newell. We haven't specifically evaluated the
Administration proposals for changes in those tax incentives.
Senator Franken. OK. Fair enough.
In a 2009 statement to the Senate Finance Committee--and I
have this is right here--Alan Krueger, Assistant Secretary for
Economic Policy and chief economist at the Treasury Department,
said, and I quote, ``Because we expect little or no effect on
the world supply of oil, removing these subsidies would have an
insignificant effect on world oil prices.''
He goes on to say that the decrease in domestic production
due to these cuts would be less than 0.5 percent. Even in the
long run--this might sound rhetorical, but anyone wants to pick
up on it--doesn't this sound like an industry that doesn't need
tax benefits and subsidies to survive? Anybody?
Mr. Burkhard. One thing to keep in mind as you discuss the
future of the fiscal terms that govern oil and gas companies--
and again, I am not an expert on subsidies. So, but one aspect
to keep in mind is American oil and gas companies are competing
in a very competitive global marketplace. How they are taxed
here or at home can affect how they can compete against
companies from Asia, Europe, or other places.
So I don't have a specific answer, but I think having that
global----
Senator Franken. The largest 5 oil companies in the last
decade have made over $1 trillion in profits. 2010 profits were
double that of 2009. Now we have seen ads from these companies
talking about how much they are doing to invest in alternative
energy production. You see it all the time. They are feel-good
ads, I think.
I remember I felt great about BP because it had the little
green thing. It was beyond petroleum. I think everyone in
America thought like, ``BP, that is the future. Boy, that is
great.'' I loved those ads. Then we learn that BP had like the
worst safety record of any of these oil companies.
So these ads, I am wondering how much really are these
companies doing, investing in alternative energy? I mean, Mr.
Diwan, you said that oil and gas companies are in the business
of oil and gas. Isn't this really what they are doing
negligible?
Mr. Diwan. They are oil and gas companies. I repeat that.
There is a scale issue. These are huge companies. I mean, Exxon
is the largest company in the world. Chevron is $200 billion
capitalization. The renewables business is very small.
So even if they are doing a lot, it would not be material
for the companies.
Senator Franken. But it would be material for the world of
renewables?
Mr. Diwan. Correct. But they are companies. I mean, they
have a mission, and that is what they are doing.
The scale issue is that you wouldn't expect these large
companies to be the key innovator, investor, et cetera. I mean
just from an economic perspective. So we can't ask them to be
what they are not. They might pretend to be something that they
are not, but that is a different issue.
Senator Franken. OK. So you can't ask them to be what they
pretend?
Mr. Diwan. Yes.
Senator Franken. OK. I will write that one down.
But going back, Mr. Burkhard, to my question, you were
saying that they have to compete on a world basis. They are
doing unbelievably well, right?
Mr. Burkhard. They----
Senator Franken. That is a relative term, ``unbelievably.''
But they are doing very well. I mean, if Exxon makes $9 billion
this quarter, that is--do they really need these subsidies? Do
they really need these tax preferences?
Mr. Burkhard. I mentioned earlier that oil companies are
price takers and not price makers. There, the level of their
revenue, which is large, the level of their capital
expenditures is large. When prices are high, that we see what
the results are. So they are a reflection of what has been
happening in the global oil market.
Last year, we saw Chinese oil demand grow 10 percent, 10
percent in 1 year from China.
Senator Franken. So I think your answer to my question is,
no, they don't really need these subsidies. So that is what it
sounds like. That is my interpretation. You don't have to nod
or agree. But for the record, he wasn't nodding.
[Laughter.]
Senator Franken. Thank you, Mr. Chairman.
The Chairman. Senator Coons.
Senator Coons. Thank you, Mr. Chairman.
I would like to follow up on the colloquy with both Senator
Hoeven and Senator Franken. Ambassador Jones, you were talking
about, I believe, the valley of death and other nice ways to
describe the challenges of early stage commercialization and
scale-up of innovations.
To the exchange you just had with Senator Franken, Mr.
Burkhard, there is a real question in my mind about the
appropriate role of the Federal Government in either
subsidizing ongoing oil and gas exploration and development or
alternative energy technologies. The projections that are made
in the World Energy Outlook for the makeup of the total sort of
global energy picture in 2035 is a bracing reminder that this
is largely a petroleum-based economy and will remain so for
much of the next few decades.
You mentioned in the conversation with Senator Hoeven, he
asked for some insights about how we could be more effective,
what other countries are doing. I would welcome input from any
member of the four who are in front of us, the panel, how we
are most likely to be successful in securing capital investment
and job growth in the United States as renewable energy
technologies scale up.
Given the numbers you gave, it seems to me as if wind and
hydropower have the largest potential, and solar comes next.
Admittedly, they are small in scale in the global economy. But
there is a great deal of interest in them in most of our home
States.
So, the question is if we have to choose between continuing
essentially to expend Federal dollars in subsidizing oil and
gas development, drilling, distribution or in providing
subsidies that will encourage and accelerate the development of
renewables, how can we have the best bang for the buck in terms
of employment and deployment, the creation of jobs in the
United States and the deployment of technologies that have
positive long-term opportunities for us?
I also just wanted to clarify something. I assume, from
some of these projections about the renewables sector, that
most of the growth will come outside the United States, that
the actual use of renewable source energies will be mostly in
China and less in the United States. But I may have misread
that in the materials I looked at before coming today.
So I would appreciate your wading through the complicated
question. I would be happy to focus it if any of you want to
take a particular piece of it.
Mr. Newell. I will just quickly respond to the last part of
your question in terms of the magnitude of renewable energy
deployed into the United States relative to the rest of the
world. You are correct, but the U.S. is a small fraction of the
entire world.
So, one would expect that----
Senator Coons. We tend to forget that.
Mr. Newell. Yes. So the other key factor there is that the
U.S. need for energy is growing much more slowly than it is in
other parts of the world. So, key factors are how big we are
currently, and the growth is predominantly elsewhere in terms
of energy consumption. So, that really does reorient both
energy consumption as well as different types of energy supply.
Growth is in other parts of the world.
Our assessment looking out over the next 25 years is that
energy consumption by the OECD countries, of which the United
States is one, is growing modestly-roughly flat whereas overall
energy consumption globally will have perhaps 50 percent growth
over the next 25 years. So, very significant global growth,
most of it outside of OECD.
Senator Coons. I assume also some of it in countries that
don't have an existing power distribution system or grid so
that renewables may grow more rapidly in remote parts of the
world where there is no existing infrastructure so that you are
literally leapfrogging the existing largely petroleum-based
infrastructure in the United States.
Ambassador.
Mr. Newell. That has certainly been one of the interests in
solar energy technology and other distributed energy
generation, yes.
Mr. Jones. I just would like to add to Richard's comment
that there is probably a lot of headroom still left for
expansion in energy consumption overseas, especially in China.
Because even with all the growth that they have seen, I think
China's per capita energy consumption is like a third of the
OECD average. So they can keep growing for a long, long time.
That is, I think, what is going to drive the development of
energy consumption. The energy industry, technology, everything
is going to be driven because you have got a huge mass of
people there that have--basically, their growth has become
self-sustaining. They are no longer dependent on imports, and
their disposable income has risen dramatically, as we heard,
and they have got a lot more development to undertake, and they
are going to do it. It is going to change the world.
They are not alone. India is the same. Maybe not quite as
far up the development scale as China, but they are also going
through this. So that is why in the International Energy
Agency, we are very concerned about the growth in the
technologies they use. If they use coal, we really are going to
have a tremendous increase in carbon dioxide in the atmosphere,
for example.
It is not just carbon dioxide, it is other pollutants
associated with coal. Those pollutants can cross the Pacific
Ocean. So we are very concerned about how China and India
satisfy their insatiable appetite for energy over the next 2 to
3 decades. It matters a lot for our welfare here.
Even though we are not consuming increasing amounts of
energy, if they are, it is going to affect our environment. It
is going to affect our prices and our economy.
The Chairman. Any other comment anyone wanted to make in
answer to this?
Let me then see, Senator Murkowski, did you have additional
questions?
Senator Murkowski. No, Mr. Chairman.
The Chairman. Senator Coons, did you have additional
questions?
Senator Coons. No, Mr. Chairman.
The Chairman. Thank you all very much. I think it has been
a useful hearing, and we appreciate your expertise and your
time today.
Thank you. That concludes our hearing.
[Whereupon, at 11:55 a.m., the hearing was adjourned.]
APPENDIX
Responses to Additional Questions
----------
Department of Energy,
Energy Information Administration,
Washington, DC, July 25, 2011.
Hon. Jeff Bingaman,
Chairman, Committee on Energy and Natural Resources, U.S. Senate,
Washington, DC.
Dear Mr. Chairman: On July 22, 2011, you were provided answers to
47 questions submitted by Senator Sanders, Murkowski, and Cantwell
following the February 3, 2011, testimony by Richard Newell before the
United States Senate Committee on Energy and Natural Resources.
The Department of Energy provided answers to questions outside of
the U.S. Energy Information Administration's purview. Specifically,
Senator Murkowski's question number three (Liquid Fuel Imports)
directed to Dr. Richard Newell and questions one (US Energy Companies
Versus National Oil Companies), three (Major Oil Discoveries), four
(Crisis-Drive Energy Policy), five (Clean Energy Standard), seven
(Foreign Oil Dependence), 12 (Impact of Federal Policies), and 13
(Modular Nuclear Reactors) directed at all panelists. Senator
Cantwell's question 4a (Effect of New Production Technologies on
Prices), 8 (Implications of Business as Usual) and 11 (How to Increase
Energy Diversity) asked of all witnesses.
Sincerely,
Howard K. Gruenspecht,
Acting Administrator.
Responses to Questions From Senator Sanders
CLEAN ENERGY STANDARD
Question 1. The President has proposed a ``clean energy standard''
that would require 80 percent of our electricity to come from ``clean''
sources by 2035. Based on the Energy Information Administration's
resources and data, if such a policy was established and it permitted
natural gas, nuclear, and coal with carbon capture and sequestration to
qualify either in whole or in part for credits toward the 80 percent
goal, what impact, if any, would this standard have on renewable energy
production from wind, solar, geothermal, and biomass?
What are your projections for solar in particular under such a
standard; would we be likely to see any significant solar energy
deployment under this standard? What percentage of ``clean energy'' in
2035 do you foresee, under the new standard, as coming from solar, both
photovoltaic and concentrated solar.
If such a policy included a tier system, whereby at least one tier
of the 80 percent requirement (perhaps 25 percent) was stipulated for
renewable energy production, would that serve to increase projected
renewable energy deployment under this standard?
Answer. The clean energy goal proposed by the President has not yet
taken the form of a specific legislative proposal. Without the specific
structure of a proposed policy, EIA cannot provide reliable estimates
of its potential impacts.
In the past, however, EIA has analyzed several legislative
proposals for renewable portfolio standards, renewable energy
standards, clean energy standards, and similarly-structured policies to
require minimum shares for specific generating resources. Through these
analyses, EIA has found that numerous policy details can significantly
influence the impact of the policy on key indicators such as the
generation mix, cost to consumers, cost to industry, and even
achievement of the targeted generation share. These key parameters
include the existence and level of any limits on the price of
renewable/clean energy credits; exemptions for certain classes of
utilities or exclusion of certain generation from requirements of the
program; the ability to ``bank'' early compliance credits; and the
existence of ``credit multipliers,'' ``set-aside'' targets, and tiered
compliance systems that incentivize specific technologies within the
suite of eligible technologies. However, since the broad outline of the
President's proposed goal is different from the proposals previously
analyzed by EIA, one should be cautious in relying on earlier analyses
for guidance on the new goal. When this goal is more completely
specified as a policy proposal, EIA will be in a better position to
evaluate its potential impacts.
OIL AND EFFICIENCY
Question 2. As you know, the current greenhouse gas and fuel
economy standards will take us to roughly 35.5 miles per gallon for
cars and light trucks by 2016, and the Administration has announced
plans to develop new standards through 2025. What would the impact be
on oil consumption and greenhouse gas emissions in the United States if
the Administration announced a new standard of 60 miles per gallon by
2025, as has been encouraged by a bi-partisan group of Governors and a
number of retired senior military officers, and which is still somewhat
less ambitious than the announced standards for fuel economy in Europe?
How many barrels of oil would we save compared to business as usual?
Answer. EIA has not performed a specific analysis of increasing
light-duty vehicle fuel economy to 60 miles per gallon by 2025. Our
forthcoming Annual Energy Outlook 2011 (AE02011), to be released this
spring, will include alternative scenarios of increased light-duty
vehicle fuel efficiency.
SOLAR
Question 3a. Does EIA have a projection for when residential and
commercial solar photovoltaic energy will reach grid parity in cost for
a significant segment of electric customers in the United States (such
as 20 percent or 50 percent of electric customers)?
Answer. EIA does not have a projection for when the price of
residential and commercial solar photovoltaic energy will be at or
below the retail price of electricity from the grid for a significant
number of electric customers. The cost of electricity from the grid
varies significantly across the Nation. Also, grid electricity and
electricity produced by on-site photovoltaic systems are not identical
products, since the former is generally available to follow load
requirements while the latter follows the availability of the
intermittent solar resource.
In EIA's Annual Energy Outlook 2011 Reference case, near-term
average growth in residential and commercial solar photovoltaic
generation is 26 percent per year from 2010 through 2016 while the 30-
percent Federal investment tax credit is available. From 2017 through
2035, after the Federal tax credit for residential systems expires as
currently scheduled and the business investment tax credit returns to
its permanent 10-percent level, average annual growth in residential
and commercial solar generation slows to 1 percent per year, even as
technology costs are projected to decline. The rate of adoption after
2016 indicates that purchasing electricity from the grid is projected
to remain the economic choice for most residential and commercial
customers in the United States through 2035.
Question 3b. How would it impact EIA's projections for solar energy
deployment, as compared to business as usual, if solar energy reached
parity with the price of electricity from the grid in 50 percent of the
United States by 2013?
Answer. EIA has not analyzed a scenario with the price of solar
energy at or below the price of electricity from the grid in 50 percent
of the United States by 2013 and cannot provide estimates of the
potential impacts of this specific scenario. EIA's Annual Energy
Outlook 2011 (AE02011) Reference case provides an illustrative example
of the impacts that solar costs can have on projected deployment. In
the Reference case, electricity prices to residential and commercial
consumers are expected to remain stable through 2035 in real terms.
Near-term average growth in residential and commercial solar
photovoltaic generation is 26 percent per year from 2010 through 2016
while the 30 percent Federal investment tax credit is available, as is
currently scheduled. From 2017 through 2035, after the Federal tax
credit for residential systems expires and the business investment tax
credit returns to its permanent 10-percent level, average annual growth
in residential and commercial solar generation slows to 1 percent per
year, even as technology costs are projected to decline. The full
release of the AE02011 will contain a number of additional cases that
assume lower technology costs or extended incentive policies for solar
energy. These cases can be used to better understand the potential
deployment of these technologies under more favorable conditions than
may be found in the Reference case.
GREEN JOBS
Question 4. Do you have data on solar photovoltaic energy and wind
energy utilized in this country that includes breakdowns for country of
manufacture of solar panels and wind turbines by year, and job creation
related to solar and wind manufacturing, installation, and maintenance
in the United States? If you do not have this type of data, can you
inform the committee whether you could supply such data and whether you
plan to, similar to your efforts in documenting manufacturing of
geothermal heat pumps?
Answer. EIA collects some data on the import of solar PV generating
equipment to the United States if it passes through a U.S.
manufacturer. In 2009, U.S. PV manufacturing companies reported
shipments of 987 MW of solar photovoltaic equipment, including cells
and modules, and 587 MW of imported solar photovoltaic equipment.
During that year, U.S. solar PV manufacturers also reported solar
photovoltaic exports of 462 MW. While EIA does not collect import or
manufacturing data for the wind industry, a report released by Lawrence
Berkeley National Laboratory in August of 2010 indicates that in 2009
the U.S. imported 39 percent of wind turbine equipment on an equipment-
cost basis.
Although EIA collects import and export data on shipments of
photovoltaic equipment from U.S. manufacturers, and while this data can
be useful in illuminating gross trends in equipment sourcing for this
market, this data can only provide limited insight into the actual
point-of-origin composition of the installed photovoltaic capacity
market. In the current market, component manufacturing activities may
occur in different locations for the same finished, installed module.
Even core components like the photovoltaic cells can pass through
several locations, perhaps with initial cell casting in the United
States, shipment to a foreign facility for assembly into a finished
module, and re-shipment to the United States for integration with other
components into a final installed system. EIA does not track the
movements of specific shipments, and thus cannot disaggregate the
specific path-of-travel of any given module. Neither does EIA track
photovoltaic modules to the final point-of-installation, and thus
cannot provide installed module locations or other statistics on
installed capacity for most photovoltaic modules. Finally, EIA does not
track shipments that do not have a domestic manufacturing component,
and may miss modules that are entirely manufactured overseas and
shipped to U.S. installers without passing through a U.S. manufacturer
along with way.
Although the researchers at Lawrence Berkeley National Laboratory
have access to different data sources for their estimate of wind
equipment imports, they also report problems with accounting for cross-
national, multi-stage manufacture of this complex product.
EIA survey respondents report over 14,000 jobs in 2009 in
photovoltaic manufacturing. EIA does not have sufficient data on wind
or solar distribution and installation industries to estimate industry
employment. Employment estimates for specific industries are usually
provided by the U.S. Bureau of Labor Statistics, which collects primary
labor survey data and is better equipped than EIA to provide industry-
specific estimates of U.S. employment trends for other manufacturing,
distribution, and installation activities.
Responses to Questions From Senator Murkowski
CELLULOSIC FUELS
Question 1. It appears that your agency has forecast continued--and
significant--shortfalls in cellulosic biofuels production. Can you
explain where cellulosic technology is today, why it has been so slow
to take off, and how far below our targets we may be in 2022? What will
it mean for the Renewable Fuel Standard if we continue to fall so
acutely short of its annual production mandates?
Answer. A review of the industry reveals several significant
factors that have contributed to the delay in available advanced
biofuels production. Studies show that capital costs have risen
significantly above the original expectations for these technologies.
In addition, biomass feedstock costs have also been substantially
higher than originally expected and process yields have not achieved
goals. At least 6 planned facilities have delayed startup by 6 months
or longer, while only 3 plants have reached the startup phase--with
many more awaiting financing. Many in the industry face important
financial, legal, and technological issues that have yet to be
resolved.
A direct consequence of the slow market penetration of the
technology is the requirement that EPA make available for sale
cellulosic biofuel credits at costs significantly below the current
production cost for the cellulosic biofuels. If this were to continue,
EPA would need to evaluate whether to utilize the discretion authorized
by Paragraph (7) of section 211(o) of the Clean Air Act to also reduce
the advanced and total schedules which would ultimately delay the
timetable for attainment of the total volume target for renewable motor
fuels under the Renewable Fuel Standard.
EPA REGULATIONS
Question 2. Understanding that proposed legislation and regulations
are not incorporated into the agency's forecasts. [sic] Now that the
EPA's climate regulations have begun to go into effect, will those be
included in your agency's work? Is it possible for EIA to model those
regulations? Can you tell us anything about what you expect their costs
to be, on energy prices or for our economy as a whole?
Answer. While EPA is developing regulations pertaining to
greenhouse gas (GHG) emissions from power plants and other large
sources, together with the states, it has not released specific
standards for different plant types. Without such standards, EIA cannot
effectively model any impacts of EPA's proposed regulations. EIA is
monitoring EPA's progress in developing the rules, and when more
information on the specific standards is available, we will adjust our
analysis accordingly.
EIA does try to capture current market behavior with respect to
concerns about GHG emissions and their potential regulation in its
modeling. In order to account for the uncertainty surrounding
investment decisions in GHG-intensive technology, and to reflect
current market behavior, EIA assumes a 3 percent increase in the cost
of capital for new coal-fired power plants and other GHG intensive
technologies, which is one of the reasons that relatively few new coal-
fired power plants beyond those already under construction are added in
the AE02011 Reference case projections. In addition, 10 states in the
Northeast are required to meet the requirements set by the Regional
Greenhouse Gas Initiative (RGGI) and this is represented in the EIA
analyses.
LIQUID FUELS IMPORTS
Question 3. Your agency has forecasted that liquid fuels imports
will decrease by just a fractional amount over the next 25 years, from
9.7 million barrels a day last year to 9.4 million barrels a day in
2035. Assuming that accounts for higher fuel economy standards and the
emergence of advanced vehicles and biofuels. Can you describe any other
actions we might take, such as increasing domestic oil production, that
would cut our foreign oil dependence?
Answer. The EIA projections you refer to represent a ``business as
usual'' forecast that includes existing policies but not new
initiatives. In March, the President laid out a bold goal of cutting
goal imports by one-third by the year 2025, relative to 2008. To
achieve that goal, the Administration is committed to expanding the
safe and responsible production of domestic oil and natural gas;
improving the efficiency of our vehicles; and promoting innovation in
new technologies like advanced biofuels and electric vehicles.
US ENERGY COMPANIES VERSUS NATIONAL OIL COMPANIES (NOCS)
Question 1. Can you describe how U.S. oil and gas producers operate
with any disadvantages relative to National Oil Companies such as the
OPEC owner companies?
Answer. National oil companies (NOCs) now control over three-
quarters of the world's oil reserves. The OPEC NOCs have the obvious
advantage that the bulk of conventional oil resources are located in
their home countries and they usually have exclusive access to these
oil reserves. About 40 percent of the world's current production comes
from OPEC and this oil is relatively inexpensive to produce. How OPEC
manages its supply has an important impact on world markets. OPEC is
capable of expanding their low-cost production and OPEC has
historically played a role in adjusting supplies of oil in response to
growing demand.
OIL MARKETS
Question 2. If only about 3 percent of the world's oil travels
through the Suez Canal and the SUMED pipeline, yet we are seeing some
influence on the global commodity price resulting from the instability
around the Suez, does this indicate seemingly small disruptions, real
or potential, can have comparatively large impacts on global markets?
Answer. The market impact of such a supply disruption can go beyond
volumetric loss. Although Egypt is not a large exporting country, it is
important to the oil markets for several reasons: as a transit
corridor, because of its very high profile in a broader region--the
Middle East and North Africa--that is of critical importance to energy
markets, and because of the risk of unrest rippling through the rest of
the region. Earlier this year, as unrest mounted in Egypt, the market
grew concerned that oil traffic though the Suez Canal and the Sumed
(Suez-Mediterranean) pipeline might be halted. The market also became
increasingly concerned about the risk that unrest and potential
disruptions could spread--as eventually happened in Libya. Also, even
though the disruption occurred against a context of relatively
comfortable spare oil production capacity, and total Organization for
Economic Cooperation and Development (OECD) oil inventory levels are
generally comfortable by historical standards, the latter were not
evenly distributed throughout the world and were markedly tighter in
Europe, the primary market for Libyan crude, than in North America, The
European Brent crude oil market had been tightening before the start of
unrest.
At the same time, there is not enough surplus capacity to offset an
unlikely scenario where the oil supplies would be halted in the
countries in the Middle East and North Africa where political protests
have taken place. These countries produce a combined 30.4 million
barrels per day of petroleum liquids, or 35 percent of the world's
total supply. In addition, these countries have virtually all of the
world's spare production capacity. Because of the large amount of
global oil supplies produced in these areas, markets have been
concerned that political protests in the Middle East and North Africa
could potentially have large effects on world oil markets.
MAJOR OIL DISCOVERIES
Question 3. What was the impact on global investment and markets
when the Tupi field was discovered off Brazil in 2006, and how does the
addition of a multibillion barrel discovery impact the host nation and
the industry?
Answer. The first discoveries in the pre-salt area offshore Brazil
were located in the Tupi field in the Santos Basin in late 2006.
Petrobras (Brazil's state-owned oil company) confirmed that the Tupi
field alone holds 5-8 billion barrels of light grade crude oil and is
at a depth of three miles below the surface of the ocean. With an
estimated potential of 50-80 billion barrels of oil equivalent in the
pre-salt area (due to its geologic location under a cap of salt),
Brazil's oil production potential represents one of the most
significant finds in the industry over the last three decades.
President Dilma Rousseff is deeply involved in setting Brazil's
policies on oil production.
Impact on global investment and markets
Brazil is producing approximately 100,000 barrels per day this year
in the pre-salt area. Production could reach 1 million barrels per day
by the middle of this decade. Brazil's oil production has risen
steadily in recent years, and the country has recently become a net oil
exporter. The new pre-salt discoveries are world class and some
analysts believe Brazil has the potential to become a significant
exporting country. However, considerable challenges must still be
overcome in order to bring these reserves to market. The difficulty of
accessing reserves, considering the large depths and pressures involved
with the pre-salt oil production, represent significant technical
hurdles that must be overcome. Further, the scale of the proposed
expansion in production will also stretch Petrobras' exploration and
production resources and Brazil's infrastructure, as well as its
financial capacity to meet investment demands.
Many countries, either through direct negotiation with the
Brazilian government or through their respective National Oil Companies
(NOC) or conglomerates, are aggressively seeking access to these new
resources.
CRISIS-DRIVEN ENERGY POLICY
Question 4a. The Outer Continental Shelf Lands Act was implemented
after the Arab oil embargo and subsequent price controls and economic
shocks of the 1970's, as was the authorization of the Trans-Alaska
Pipeline System. Are these patterns of crisis and response an
unavoidable trend in U.S. energy policy?
Answer. The United States has naturally paid increased attention to
energy policy after particular events such as the oil embargo of 1973
and other periods of sharply increased energy prices. Nonetheless,
important energy initiatives have been enacted in more normal times due
to continuing concerns on the part of the Congress, the Administration,
the States, U.S. industry, and the public. Examples of important policy
initiatives that have been enacted without any shocks to the energy
supply system include the Energy Policy Act of 2005 and the American
Recovery and Reinvestment Act of 2009 (ARRA). ARRA included more than
$80 billion for increasing generation from renewable energy sources;
expanding manufacturing capacity for clean energy technology; advancing
vehicle and fuel technologies; and building a bigger, better, smarter
electric grid, all while creating new, sustainable jobs. Other examples
are described in the following answer.
Question 4b. Is the U.S., in your group's view, more proactive or
reactive in its energy policy?
Answer. While an answer necessarily has a subjective element, there
are reasons to believe that the United States has become more proactive
in its energy policy compared to past years. For example, there have
been other reasons besides high energy prices to develop advanced
energy technologies. Concerns over climate change have motivated clean
energy policies even when energy prices have been low. Often,
environmental and energy security concerns line up to redouble our
energy policy efforts. We achieve both objectives, for instance, when
we improve energy efficiency. New requirements for higher motor-vehicle
efficiency and low-emission biofuels fuels are moving the
transportation sector away from oil dependence while also reducing
greenhouse gas emissions.
CLEAN ENERGY STANDARD
Question 5. Should we learn a lesson from the Renewable Fuel
Standard, which has fallen short of expectations, when considering an
aggressive electricity mandate like the one the President is calling
for? How likely is it that we will create unforeseen problems if we put
a CES in place? To name just one example, will transmission problems--
and our inability to add significant amounts of renewable energy to the
grid--become the new ``blend wall''?
Answer. The President's Clean Energy Standard is designed to
achieve the deployment of clean energy technologies as cost-effectively
as possible. Rather than picking winners and losers among technologies,
the CES would include a very broad range of energy sources, including
renewable (like wind, solar, hydro, and geothermal) as well as nuclear,
efficient natural gas, and clear coal. To address your specific
question on the issue of transmission needs under a CES, the amount of
new transmission that would be needed relative to the transmission
needed under `` business as usual'' is difficult to predict, given that
the CES does not choose among clean technologies. To the extent that
expanding renewable energy generation creates needs for new
transmission infrastructure, the Administration is working hard to
address those needs. For example, the President's FY 2012 budget
proposal includes two new Energy Innovation Hubs, one devoted to Smart
Grid Technologies and Systems and another to Energy Storage,
technologies that can ease the integration of variable renewables into
the electric grid. This is in addition to the research and development
work in these areas already funded by the Department of Energy in its
Office of Science, Office of Electricity Delivery and Energy
Reliability, and Office of Energy Efficiency and Renewable Energy.
Moreover, the Administration recently announced the creation of a
Renewable Energy Rapid Response team to address barriers to the
permitting and siting of renewable projects, including transmission
lines.
ALTERNATIVES TO OIL
Question 6. How substantial of an impact do you believe advanced
biofuels, electric vehicles, and other technologies will have on
petroleum consumption by 2020? By 2030?
Answer. The Annual Energy Outlook 2011 Reference case projects that
advanced biofuels will displace 300,000 barrels per day of crude
consumption by 2020 (3 percent of projected refinery crude inputs) and
830,000 barrels per day by 2030 (6 percent of projected refinery crude
inputs). Although sales of plug-in electric vehicles, which includes
battery electric vehicles and plug-in hybrid electric vehicles,
increase over the projection period and reach 2 percent of new light
vehicle sales by 2030, they account for less than 1.5 percent of all
light-duty vehicles in use by that time and have only a modest impact
on light-duty vehicle petroleum demand. Hybrid vehicles, diesel
vehicles, and other advanced conventional vehicle technologies (e.g.,
turbo charging and light weight materials) are projected to make more
significant contributions to fuel economy improvement in the Reference
case projection. The cumulative effect of increased use of biofuels,
advanced biofuels, and fuel economy improvements results in a slight
decline in light-duty vehicle petroleum demand from current levels over
the Reference-case projection period, despite the significant increase
in the number of vehicles and vehicle miles of travel.
FOREIGN OIL DEPENDENCE
Question 7. If Congress had allowed the Coastal Plain of ANWR and
other parts of Alaska to be opened to production, in 1995 for example,
we would be producing domestic oil at a considerably higher rate. What
would that mean for our nation's energy security? Would we be more
protected, or less protected, from civil unrest in Egypt, Jordan, and
other parts of the Middle East? In the event of a supply disruption
abroad, would we be better equipped, or less prepared, to deal with
import shortages?
Answer. The amount of oil produced would depend on a number of
economic, geologic and technical factors, with production not occurring
until about ten years after the beginning of exploration. The most
recent USGS evaluation of potential oil reserves from the area occurred
in 1998. USGS estimated a 95 percent probability that at least 5.7
billion barrels of technically recoverable undiscovered oil are in the
ANWR coastal plain and a 5 percent probability of at least 16 billion
barrels. The mean estimate was 10.3 billion barrels.
Based on these estimates, EIA has conducted several analyses of the
potential annual production from this area. In its most recent analysis
in 2008, EIA concluded that the opening of the ANWR 1002 Area to oil
and natural gas development was projected to increase domestic crude
oil production starting in 2018 (assuming exploration started in 2008).
In the mean resource case, production peaks at 780,000 barrels per day
(bpd) in 2027 and declines to 710,000 bpd by 2030.
According to the EIA's 2008 analysis, additional oil production
resulting from the opening of ANWR would be a small portion of total
world oil production. Based on the most recent estimates of U.S.
production and imports from the EIA Annual Energy Outlook 2011, ANWR
production of approximately 750,000 bpd could potentially displace
between 8 and 9 percent of U.S. oil imports annually or about 1 percent
of world production. The impact on world oil prices--and therefore U.S.
crude oil and gasoline prices--would be correspondingly small; in the
mean resource case, EIA estimated a reduction in low sulfur, light
crude oil prices of $0.75/barrel (translating into less than 2 cents
per gallon of gasoline). As a result the opening of ANWR would have
little effect on U.S. energy security in terms of our vulnerability to
high world oil prices.
Because oil is priced in a global market, however, the opening of
ANWR would have little effect on the consequences of political unrest
or a supply disruption in the Middle East. The main impact of these
events would likely be higher oil prices worldwide, which would
adversely impact the economies of all oil-consuming nations, including
the United States. That is why the President is committed to reducing
our nation's overall consumption of oil, for example through increased
vehicle efficiency, at the same time that it is taking steps to promote
safe and responsible oil and gas development and alternative fuels.
PROJECTED OIL PRICES
Question 8. In a hypothetical scenario of September 2012, with
unemployment down to 8%, the economy growing at greater than 3% each
quarter, and world markets on the upswing, where would you forecast the
price of oil?
Answer. In EIA's March's Short-Term Energy Outlook, U.S. gross
domestic product (GDP) growth for 2011 and 2012 was 3.2 percent and 2.8
percent, respectively, with the unemployment rate averaging 9.0 and 8.5
for 2011 and 2012, respectively. EIA projects U.S. liquid fuel
consumption to increase by an average 130,000 barrels per day in 2011
and a further 190,000 barrels per day in 2012, while world consumption
grows by roughly 1.6 million barrels per day in each year. The price of
West Texas Intermediate crude oil is projected to be $102 in 2011 and
$105 in 2012.
With the somewhat higher domestic economic growth and lower
unemployment rate posited by your question, a modest further increase
in U.S. liquid fuels consumption would be expected but the effect on
oil prices would be small given that the consumption increment is a
very small fraction of projected world oil demand.
OFFSHORE MORATORIUM
Question 9. How does the amount of oil that could be taken offline
by unrest in the Middle East compare to the amount of production that
will be lost because of the absence of new exploratory permits in the
Gulf of Mexico, and the absence of resumed exploratory operations?
Answer. The impacts on Gulf of Mexico (GOM) production associated
with the stoppage, now ended, of deepwater development and exploration
drilling in the aftermath of the April 2010 Macondo well blowout
involve significantly lower volumes than the losses of production from
the Middle East and North Africa that are the current focus of oil
market attention. For example, roughly 1.5 million barrels per day of
crude oil supply has been shut down since March 2011 due to the
conflict in Libya. EIA's July 2011 Short-term Energy Outlook (STEO)
assumes that only half of this production will be restored by the end
of 2012. Because of the large amount of global oil supplies produced in
the Middle East and North Africa (about 30.4 million barrels per day),
markets continue to be concerned that political protests in these,
regions could potentially lead to further disruptions that could have
large effects on world oil markets.
In contrast, oil production in the Federal GOM is forecast to be
close to its 2009 level in 2010 once final information from the Bureau
of Ocean Energy Management is incorporated in EIA's data. While EIA's
expects Federal GOM production to decline in both 2011 and 2012, the
change from the 2009 level, at 0.07 million barrels per day in 2011 and
0.17 million barrels per day in 2012, is much smaller than the Libyan
outage, and not all of this change can be directly attributed to the
stoppage, now ended, in deepwater drilling following the Macondo well
blowout.
ECONOMIC RECOVERY
Question 10. Adam Sieminski, the Chief Energy Economist for
Deutsche Bank, recently wrote that ``We estimate that a 10 dollar rise
in the oil price subtracts approximately 0.5 percentage points off U.S.
growth.'' Do any of you agree with Mr. Sieminski's assessment? Would
this calculation change if the US supplied 60% of its own oil as
opposed to importing 60% of its oil?
Answer. Some caution should be used when attempting to estimate the
response of the U.S. economy to an oil price change. The magnitude of
macroeconomic impacts depends on the magnitude of the price shock, its
persistence, and the relative importance of oil to the economy. A major
challenge to estimating the magnitude of oil price shocks on the
economy is that some historically large oil price increases have been
accompanied by other macroeconomic factors and policies that have also
impacted aggregate demand. That said, EIA's analysis suggests a lower
impact of oil price increases on the U.S. economy, implying a rough
rule of thumb that each $10 per-barrel increase in the price of oil
lasting for one year would reduce gross domestic product by about 0.2
percent in that year, as well as in the following year.
The magnitude of the impacts on the U.S. economy depends upon how
long the oil price increase lasts, whether the change in the oil price
is gradual, the oil price level when the price change occurs, and the
availability of substitutes to oil. Economic impacts vary depending on
whether the oil price change results from supply constraints or from
increased demand due to robust economic and income growth. The impact
on the economy also depends on pre-existing economic conditions
including the rate of inflation, interest rates, and monetary policy.
These results would change if the U.S. were not a net oil importer.
Since the United States imports a large percentage of its oil, the
terms of trade (the volume of exports needed to purchase a given volume
of imports) deteriorate when the price of oil increases because U.S.
consumers pay more for the same amount of oil and are therefore less
able to purchase other goods.
PRICE INCREASES
Question 11. The head of the Bipartisan Policy Center noted earlier
this week that ``A one-dollar, one-day increase in a barrel of oil
takes $12 million out of the U.S. economy. If tensions in the Mideast
cause oil prices to rise by $5 for even just three months, over 5
billion dollars will leave the U.S. economy.'' Do any of you disagree
with that assessment?
Answer. In 2010, U.S. net crude oil imports averaged around 9.2
million barrels per day and net petroleum product imports averaged 0,4
million barrels per day, for a total of 9.6 million barrels per day.
Assuming the average level of imports did not change in response to the
price increase or other factors, a one-dollar increase in the price of
oil would cost about $9.6 million dollars per day in increased import
costs. Again, holding constant the volume of imports, a $5-per-day
increase would amount to an increase of about $48 million per day and
result in a cumulative $4.4 billion in increased import costs over a
three-month period.
IMPACT OF FEDERAL POLICIES
Question 12. What role does the federal government's stimulus
policies, and the Federal Reserve's second round of quantitative
easing, have played in boosting commodity prices? Have these policies
boosted the price of oil, and, if so, by how much?
Answer. The price of oil and other commodities is determined by
many factors related to current economic and market conditions, as well
as expectations about future conditions. Some major factors affecting
current oil prices are expectations about the global economic recovery,
the growth rate of Asian demand, and whether OPEC producers will be
willing or able to meet demand growth without increased supply from
non-OPEC producers.
The American Recovery and Reinvestment Act of 2009 (ARRA), the
cornerstone of the federal government's stimuluS policies, includes
measures that provide both upward and downward pressure on oil prices.
Two overall aims of ARRA are to create new jobs and save existing ones,
as well as to spur economic activity and invest in long-term growth.
Historically, increased economic activity has been linked to oil
demand. Promoting economic growth provides upward pressure to current
prices through expectations of higher future oil demand.
Measures funded by ARRA provide downward pressure on oil prices by
reducing U.S. consumption of oil. The Department of Energy (DOE) is
investing in energy-efficient and advanced vehicle technologies
(hybrids, electric vehicles, plug-in electric hybrids, hydraulic
hybrids, and compressed natural gas vehicles) that will reduce
petroleum consumption by displacing conventional gasoline-and diesel-
powered vehicles. DOE is also investing ARRA funds to support increased
production and use of biofuels to directly displace petroleum
products.\1\
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\1\ Department of Energy--Recovery and Reinvestment webpage, at
http://www.energy.gov/recovery/vehicles.htm, accessed Feb 16, 2011.
---------------------------------------------------------------------------
According to the Federal Reserve's Statement Regarding Purchases of
Treasury Securities, the second round of quantitative easing aims to
``promote a stronger pace of economic recovery and to help ensure that
inflation, over time, is at levels consistent with its mandate.''\2\ As
noted earlier, expectations of improved economic recovery provide
upward price pressure on oil prices as economic activity is commonly
linked directly to oil consumption.
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\2\ Federal Reserve of New York, Operating Policy: Statement
Regarding Purchases of Treasury Securities, at http://
www.newyorkfed.org/markets/opolicy/operating_policy_101103.html,
accessed Feb 16, 2011.
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MODULAR NUCLEAR REACTORS
Question 13. What role do you believe small modular nuclear
reactors will have in meeting the global demand for electricity? What
countries are moving forward with this technology and what countries
are interesting in acquiring these reactors?
Answer. Small Modular Reactors (SMRs) could play a significant role
in meeting the global demand for electricity. Many countries desire to
pursue or expand nuclear energy programs and would see value in
pursuing SMRs because of their potential benefits, such as lower
capital costs, greater flexibility in siting due to lesser cooling
requirements, ability to support smaller electrical grids, capability
to replace fossil plants that have existing electrical infrastructure,
and the lower risks of construction delays. Argentina, Japan, Korea,
Russia, and the United States are moving forward in the development of
SMR technology. Based on statements by representatives at international
forums such as IAEA interactions, the following countries also have
indicated interest in SMRS: Bangladesh, China, Estonia, Ghana,
Indonesia, Jordan, Kazakhstan, Kenya, Malaysia, Mongolia, Morocco,
Namibia, Nigeria, Russia, Senegal, Singapore, Sri Lanka, Switzerland,
and Venezuela.
OIL SPILL REPORT
Question 14. Have you reviewed the recommendations made by the
Presidents' Oil Spill Commission? Have your conducted any analysis on
the impact those recommendations, if fully implemented, would have on
domestic oil production, our import levels, and the global price of
oil?
Answer. EIA's Annual Energy Outlook 2011 Reference case includes
only current laws and regulations and thus our projections do not
include recommendations of the President's Oil Spill Commission.
CHINA
Question 15. Can you shed light on what China's energy picture
really looks like, not just for renewable energy, but also its future
demand for oil, natural gas, and coal?
Answer. In the long-term, EIA projects all forms of energy will
grow substantially to meet China's future demand. Between 2007 and
2035, China's renewable energy consumption alone more than quadruples
according to the International Energy Outlook 2010 (1E02010), EIA's
latest assessment of world energy markets. China remains among the
world's fastest growing regional markets for wind power expansion, with
its total net wind-powered generation projected to increase from 6
billion kilowatthours in 2007 to 374 billion kilowatthours in 2035.
Nonetheless, hydroelectricity remains China's largest source of
renewable energy and, even in 2035, wind generation is only 30 percent
the size of hydroelectric generation.
Although China's is poised for a substantial rise in renewable
energy use, fossil fuels will likely be used to meet much of the
country's future long-term energy needs. Oil, natural gas, and coal
still account for 86 percent of China's projected total energy use in
2035 in the 1E02010 Reference case, a decrease from its 2007 share of
93 percent. With its large domestic reserves, coal remains China's
largest energy source throughout the projection, fueling both electric
power and industrial sector requirements. Though the Chinese government
intends to consolidate the coal sector by focusing on larger, more
efficient mines, coal use grows at an annual average rate of 2.9
percent and roughly doubles by 2035 in the 1E02010 Reference case
projection. Significant changes to existing law or technological
breakthrough could, however, change this Reference case outlook.
Liquid fuels demand also increases rapidly, primarily to fuel
China's growing transportation sector needs, rising in total
consumption by 2.9 percent per year in the forecast period of the
1E02010. Natural gas, though a small contributor to China's fuel mix in
absolute terms, is expected to be the fastest-growing fossil fuel
during the forecast period, increasing 5 percent per year and doubling
its share of the overall energy mix.
In the short term, China's oil consumption is projected to continue
to grow during 2011 and 2012, with oil demand reaching almost 10.4
million barrels per day (bbl/d) in 2012. The anticipated growth of 1.2
million bbl/d between 2010 and 2012 represents about 38 percent of
projected world oil demand growth during the 2-year period according to
the March 2011 EIA Short-Term Energy Outlook.
EFFECT OF DOMESTIC DRILLING ON GAS PRICES AND FOREIGN OIL DEPENDENCE
Question 1a. In response to the recent political unrest in the
Middle East, and rising oil prices, we have heard familiar calls to
expand domestic drilling in the United States--including offshore and
in the pristine Arctic National Wildlife Refuge (ANWR)--typically with
the claim that such actions will lower gasoline prices or reduce our
dangerous over-reliance on foreign oil.
An Energy Information Administration (EIA) study from May 2008
projected the effects on oil prices of drilling in the Arctic National
Wildlife Refuge. According to EIA's projections, in the most optimistic
case, drilling in ANWR would reduce crude oil prices by approximately
$1.44 per barrel. I understand this would translate to approximately 3
to 4 cents per gallon of gasoline at the pump about 20 years from now.
It seems that EIA has found that drilling offshore would have a
similarly negligible effect on prices. EIA issued an analysis in 2009
that examined the impact of maintaining the historical moratorium on
drilling off the Atlantic, Pacific, and Eastern Gulf of Mexico.
According to that analysis: ``With limited access to the lower 48
OCS...there [would be] a small increase in world oil prices... The
average price of imported low-sulfur crude... is $1.34 per barrel
higher, and the average U.S. price of gasoline is 3 cents per gallon
higher.''
Mr. Newell, does EIA still stand by the findings in these recent
reports?
Answer. EIA would not expect the overall findings in the
aforementioned analyses of opening ANWR or maintaining the historical
moratoria on drilling off the Atlantic and Pacific coasts and in the
Eastern Gulf of Mexico (GOM) to change significantly if the analyses
were to be updated. The results in both of these analyses reflect the
significant amount of time that would be required for these sources to
add to global oil supplies and the likelihood of offsetting demand and
supply responses over an extended period.
Question 1b. Even if every acre of the United States were open to
oil drilling both on and offshore would that lower gasoline prices
today? Or in 2 years, 5 years, 10 years, or 20 years?
Answer. Although near-term production from areas that have already
been leased can be highly sensitive to the pace of drilling activity,
opening access to drilling on every acre of the United States not
currently open to leasing would not necessarily have an impact on
production and prices in the short-term. Before any drilling in such
areas can begin, at a minimum, leases must be purchased, environment
impact studies performed, and drilling permits submitted and approved.
In the undeveloped areas of the offshore, the lead time between leasing
and production is 5-10 years, depending on water depth and proximity to
existing infrastructure. In the aggregate, by 2030 greater access to
Federal lands and waters could increase crude oil production by about 1
million barrels per day (excluding oil shale) with ANWR accounting for
most of the increase at about 700,000 to 800,000 barrels per day. The
remaining volume is from the Gulf of Mexico. Regarding oil shale, the
primary constraint to production is the rate of technological progress,
particularly with respect to developing a commercially-viable in-situ
production process. In the Annual Energy Outlook 2011 Reference case,
large-scale oil shale production is projected to begin in 2029 and
reach 135,000 barrels per day in 2035, however, small-scale mining and
retorting of oil shale on private lands could occur earlier.
Because oil prices are largely determined by the international
market, the substantial lead time for new Federal leasing to result in
new production allows for demand and supply responses over an extended
period that can significantly offset the impacts of production from
newly-leased areas. As a result, the longer-term impact of increased
domestic oil production on gasoline prices is expected to be modest; a
few cents per gallon in 2035.
Question 1c. EIA predicts that oil imports in 2035 will be about
the same level as they are today. Is there any way that domestic
drilling could significantly impact that level of dependency?
Answer. U.S. dependence on imported liquid fuels, which reached 60
percent in 2005 and 2006 before falling to 52 percent in 2009, is
expected to continue to decline to 42 percent by 2035 as a result of
increases in biofuels, natural gas liquids, domestic production from
onshore enhanced oil recovery projects (primarily carbon dioxide
flooding), shale oil plays, deepwater drilling in the Gulf of Mexico,
and consumption increases that are moderated by fuel economy standards.
More rapid technological improvements and wider application of existing
technologies to emerging oil plays, as well as increased access to
domestic oil resources in Alaska and the Outer Continental Shelf, could
further reduce dependence on imported liquid fuels.
Question 1d. Would a permanent moratorium on drilling offshore the
West Coast of the United States have any impact on future oil prices or
the prices consumers pay at the gasoline pump?
Answer. A permanent moratorium on drilling offshore the West Coast
of the United States is not expected to have a significant impact on
gasoline prices. In addition to the more general points made in the
response to question lb, the Bureau of Ocean Energy Management,
Regulation and Enforcement has indicated that there is low resource
potential in that offshore region.
Responses to Questions From Senator Cantwell
IS OPEC ABLE TO OFFSET ANY INCREASED DOMESTIC DRILLING
Question 2. A number of experts have argued that any price impact
of increased domestic production can be easily offset by OPEC.
According to another EIA factsheet:
One of the major factors on the supply side is OPEC, which
can sometimes exert significant influence on prices by setting
an upper production limit on its members, which produce about
40% of the world's crude oil. OPEC countries have essentially
all of the world's spare oil production capacity, and possess
about two-thirds of the world's estimated crude oil reserves.
Is it true that OPEC, by modestly curtailing its output, has the
power to offset any downward pressure that a marginal increase in US
oil production might otherwise produce?
Answer. EIA agrees that OPEC could modestly curtail crude oil
production to offset increased U.S. oil production. This would
eliminate the downward price pressure of increased U.S. oil production.
However, it could also reduce OPEC revenue because of lower production
by its members, which may affect some OPEC member countries'
willingness to reduce production. It should also be recognized that, as
was the case during 2007 and early 2008, OPEC spare capacity could fall
to lower levels, reducing the ability of OPEC member countries to
influence world oil prices by controlling production. Under such
circumstances, OPEC countries may not want to curtail their production
in response to higher U.S. production.
In the past, OPEC has demonstrated the ability and willingness to
reduce production to limit price declines. In the fall of 2008, in
response to rapidly falling world oil prices, OPEC reduced its target
oil production from 29.7 million barrels per day (bbl/d) to 24.8
million bbl/d, or a targeted drop of 4,8 million bbl/d over a period of
3 months. Actual output from OPEC, including from Iraq, fell from 31.4
million bbl/d in October 2008 to 28.9 million bbl/d in February 2009, a
reduction of 2.5 million bbl/d in less than 4 months. OPEC nations'
government control of oil production levels, combined with their
relatively low cost to develop and maintain production capacity,
provides them with the ability to enact such significant supply
reductions.
In contrast, during periods of significant non-OPEC supply
expansion and ample OPEC spare capacity--such as during much of the
1990s--OPEC's pricing power has been much lower.
EFFECT OF SPECULATION ON OIL PRICES
Question 3a. Several of the [sic] testified that the oil price
movements can be explained by supply and demand fundamentals and these
explain the upward pressure we've seen in recent months. We often hear
about the lack of a ``conclusive'' smoking gun that links oil price
spikes to speculation in the derivatives markets.
However, as you may know, the recently-passed Dodd-Frank Act
requires the Commodities Future Trading commission (CFTC) to establish
rules to eliminate excessive position limits. Unfortunately, 180-day
deadline for those rules has passed and the regulatory process of
establishing position limits is still in the early stages, and the
limits are planned to be phased in over time.
Can the witnesses please comment on the likelihood of seeing a huge
oil price spike this summer of the magnitude that we saw in the summer
of 2008?
Answer. In July 2008, the WTI futures price rose to an all-time
high, in both real and nominal terms. A review of information from both
the financial and physical markets suggests the futures market is
pricing in only a low chance of the July futures contract exceeding the
$145 price level seen in July 2008. As of March 25, the futures market
for North Sea Brent crude oil is pricing in a 7 percent probability
that the July contract will exceed price levels seen in 2008 and a 2
percent chance for the similar WTI contract. Several key fundamental
factors of the oil market also are drastically different from 2008 and
may help explain this result. First, using EIA estimates, OPEC spare
production capacity is projected to be 2.7 million barrels per day
higher in the first half of 2011 than in the first half of 2008.
Second, crude oil inventories in the United States are near historic
highs. Lastly, world economic growth, which is an indicator of oil
demand growth, is expected to average 3.6 percent in the first half of
2011. This is below the 4-6 percent growth that the world economy saw
from 2005 through first quarter of 2008. Thus, there is considerably
more ``slack'' in crude oil production and inventory levels compared to
2008 and lower projected demand. These factors support the market's
opinion of a low probability of seeing a sharp rise in oil prices this
summer; however, geopolitical events, weather, or other unforeseen
events could increase the chance of prices rising rapidly.
Question 3b. Do any of the witnesses believe that putting some
limits on excessive speculation reduces the changes of rapid rise in
oil prices similar to the summer of 2008?
Answer. Position limits on energy futures, which are in the process
of being developed by the Commodity Futures Trading Commission pursuant
to last year's Dodd-Frank financial reform legislation, are intended to
prevent one entity from obtaining an undue influence on a market. EIA
has not evaluated the specific consequences of position limits on oil
price movements. Nonetheless, the effect of position limits on future
price movements will depend in part on the degree to which prices--in
the absence of such limits--would be driven by the actions of
individual market entities or rather by broader market trends and
behavior.
Question 3c. Recent years have provided us with plenty of fresh
evidence that markets are susceptible to irrational behavior, both
exuberance and fear. We have seen this not only in energy markets, but
in financial markets in general, whether for securities, home
mortgages, or other commodities. Can you please comment on how, and
whether, your organizations attempt to incorporate market forces into
your energy pricing models?
Answer. EIA examines supply, demand, economic growth, futures
markets, and other market forces, as well as other analysts' forecasts,
in its energy pricing analyses. EIA also quantifies the uncertainty, or
risk, in the market by using ``implied volatilities'' derived from the
NYMEX options markets to construct confidence intervals around the
NYMEX crude oil futures prices. The confidence intervals are
essentially a way of assessing the market's uncertainty around the
current price paths, and thus, take into account all factors, including
``non-fundamental'' factors. Information from futures trading is also
used to calculate probabilities of prices exceeding certain levels.
These probabilities are included in a supplement to EIA's Short-Term
Energy Outlook.
EFFECT OF NEW PRODUCTION TECHNOLOGIES ON PRICES
Question 4a. There seems to be some disagreement on whether
investment in developing new production technologies ends up reducing
the price of fossil fuels. We have heard a great deal about how oil and
gas production is a capital intensive business that requires
significant investment in new technologies to access new resources,
whether those are unconventional resources, such as oil sands or shale,
or hard to access resources, such as ultra-deepwater drilling.
Does investment in developing such hard-to-access resources result
in lower fossil fuel prices? Or does it simply enable the production of
harder to access and more expensive resources, thereby ensuring that
oil and natural gas will only continue to flow as long as global prices
remain high? Are you concerned that the U.S. is locking itself into
dependence on a resource that is destined to get more and more
expensive over time?
Answer. Private and national oil companies are using advanced
technologies to bring unconventional oil and natural gas resources to
market.\3\ There is no question that with these new technologies oil
and natural gas prices are lower than they otherwise would be. No
technology, of course, will be employed if it has a cost of production
greater than expected market price. In the United States the expanded
use of horizontal drilling and hydraulic fracturing technologies in
tight sands and shale deposits have had very large impacts on U.S.
natural gas supplies and they are beginning to have a noticeable impact
on U.S. oil supplies.\4\ As there is not a world-wide natural gas
market, beyond LNG, there can be considerable disparity of natural gas
prices across different regions of the world.
---------------------------------------------------------------------------
\3\ The Bakken Formation of the Williston Basin is a success story
of horizontal drilling, fracturing, and completion technologies. EIA,
Technology-Based Oil and Natural Gas Plays: Shale Shock! Could There Be
Billions in the Bakken?
\4\ EIA estimates U.S. natural gas production from shale was 3,110
billion cubic feet (bcf) in 2009 out of a total U.S. marketed natural
gas production of 21,604 bcf. Oil production from the Bakken formation
by the end of 2010 reached 458,000 barrels per day, outstripping the
capacity to ship the oil from the region. (Bentek Energy) By
comparison, in November 2010, total U.S. crude oil production was 5.595
million barrels per day. (EIA)
---------------------------------------------------------------------------
Price is the market equilibrium of supply and demand. Improvement
in production technology increases the technically recoverable
resource. Reserves are determined by what portion of the technically
recoverable resource is economical to produce. Producers use future
price projections to evaluate what production technologies and resource
plays are likely to result in the greatest return on investment.
Technological advances have lowered the cost of resource access and
production for shale gas, shale oil and oil sands. EIA projects a
doubling of natural gas production from shale gas formations and 20
percent higher natural gas production.\5\ These represent substantial
improvements compared with the production and price forecasts in the
EIA Annual Energy Outlook 2010 (AE02010) Reference case.\6\ The
improvement in the U.S. natural gas outlook is much greater when
compared to the widely held expectation of earlier years that the
United States would have to rely on LNG imports.\7\
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\5\ AE02011 Early Release, 2035, lower-48 states.
\6\ EIA, AE02011 Early Release.
\7\ The Annual Energy Outlook 2004 projected that, by 2025, 7.2
TCF, or 22%, of domestic consumption, would be met by natural gas
imports.
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For oil produced from shale formations, company announcements and
industry reports have noted that technology developments have reduced
drilling time to an average of 24 days to drill a well in 2010, down
from 56 days in 2006.\8\ The technology developments have made
accessible new areas that were previously marginal drilling and
exploration opportunities and made wells profitable at prices as low as
$50 a barrel, down from $80 three years ago according to market
analysts.\9\ For oil sands, technological developments are helping to
hold down rapid increases in labor and capital costs which have pushed
break-even prices to $60-$80 per barrel according to industry
sources.\10\ These cost reductions are typical after advanced
technologies are first deployed. Through a process often referred to as
``technology learning,'' new technologies usually achieve a steady
reduction in cost with expanded commercial deployment. As other
unconventional technologies are deployed to develop harder-to-reach oil
and gas resources, we can expect that this process of technology
learning will continue with each new innovation.
---------------------------------------------------------------------------
\8\ Wall Street Journal, February 26, 2010, Oil Industry Booms--in
North Dakota
\9\ Ibid.
\10\ Business Week, June 2, 2010, Production Costs Climb for
Canadian Oil Sands, Companies Say
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It is less important whether the cost of unconventional oil and gas
development is ever competitive with the easy-to-reach oil and gas
resources of the past. The real test is whether they remain competitive
in the oil and gas markets of the future. The investments being made by
private and national oil companies indicate a high degree of confidence
that they will, although there is always the possibility that oil or
natural gas prices could fall sufficiently to make these investments
unprofitable, at least temporally. These risks are not fundamentally
different than those that have to be considered by any investor.
Question 4b. Do you believe there is now a new normal for fossil
fuel prices? Just a decade ago OPEC had a $22 to $28 a barrel target
range. In 2004 Ali Naimi, the Saudi oil minister, called $30 to $34 a
barrel a ``fair and reasonable price'' for oil. Why is the world now so
willing to accept considerably higher levels of fossil fuel prices?
Answer. Recent statements from OPEC members have identified ``fair
and reasonable'' price levels significantly higher than the price range
they discussed a few years ago. Saudi Minister Al Naimi stated in
January 2011 that a $70-$80 oil price range was fair for the world
market. Some OPEC members appear to be targeting price levels even
higher than indicated by his statement. In January of this year, Iran,
Libya and Venezuela (all members of OPEC) identified $100 a barrel as a
fair market price.
Rapidly rising oil consumption in non-OECD (Organization for
Economic Cooperation and Development) countries is one important reason
for higher oil price levels. Oil consumption in non-OECD countries
soared 40 percent from 2000 to 2010, an absolute increase of
approximately 12 million barrels per day (bbl/d). Developing countries
often see a smaller demand response to higher prices due in part to the
widespread existence of oil product subsidies. OECD countries, on the
other hand, had decreasing oil consumption during the last decade,
which fell from 48 bbl/d in 2000 to less than 46 bbl/d in 2010. On the
supply side, oil producers are exploring and developing reserves in
more costly areas, including deep water and oil sands. The combination
of rising demand and more costly supply has been the major factor in
price levels beyond those seen a decade ago.
ROLE OF ENERGY EFFICIENCY
Question 5a. Can you please talk about the role of energy
efficiency standards--for lighting or vehicles or otherwise--in your
reference case? What assumptions are made as to how future efficiency
standards enacted via legislation or a rulemaking process will impact
future fossil fuel consumption levels?
Answer. The Annual Energy Outlook 2011 Reference case includes, for
light-duty vehicles, the attribute-based Corporate Average Fuel Economy
(CAFE) standards for model year (MY) 2011 and CAFE and greenhouse gas
emissions standards for MY 2012-2016 as promulgated by final
rulemakings. The MY 2011 minimum fuel economy requirement increases
from 25.6 mpg in MY 2010 to 27.3 mpg in MY 2011 and to 34.1 mpg in MY
2016. CAFE standards are assumed to further increase in the Reference
case to a combined 35 mpg for MY 2020 as mandated by the Energy
Independence and Security Act of 2007. In the Reference case, CAFE
standards are held constant in subsequent model years, but the minimum
requirement is exceeded over the projection period due to the continued
adoption of advanced technologies, with new vehicle fuel economy
reaching 37.8 mpg by 2035.
The Annual Energy Outlook 2011 Reference case also includes energy
efficiency standards for residential and commercial equipment that have
been promulgated by the U.S. Department of Energy, legislated by
Congress, or agreed upon by manufacturers and other interested parties.
Many major end-use devices in buildings are covered by efficiency
standards. When a new or revised standard goes into effect, equipment
that does not meet the efficiency standard is assumed by EIA to be no
longer available. Impacts on future fuel consumption increase over time
as worn-out equipment is replaced and equipment is purchased for new
buildings. In the industrial sector, minimum efficiency standards for
motors also reduce fuel consumption. In the Reference case, increased
energy efficiency lowers energy consumption about 13 percent from where
it otherwise would be in 2035. The full AEO, to be released this
spring, will include a range of sensitivity cases that alter the
assumptions about energy efficiency improvements and consider the
impact of extensions of energy efficiency policies.
Question 5b. There have been recent legislative proposals to
overturn the U.S. lighting efficiency standard enacted in the Energy
Independence and Security Act of 2007. I have seen analysis showing
that this single policy will result in the United States foregoing the
need for 30 additional large power plants and consumers will
collectively save more than $10 billion on electricity bills each year.
Do you agree with that analysis and how would repeal of this lighting
standard affect your long-term modeling results?
Answer. By 2020, residential lighting technologies in the Annual
Energy Outlook 2011 (AE02011) Reference case are three times more
efficient than those marketed today due to lighting standards in the
Energy Independence and Security Act of 2007. EIA has not analyzed the
lighting standards in isolation. However, average annual lighting use
per household falls 622 kilowatt-hours (kWh) between 2011 and 2025 in
our projections, from 1,757 kilowatt hours (kWh) to 1,135 kWh.
Projected lighting energy use for all 135 million U.S. households in
2025 is 153 billion kWh in our Reference case projection. If per-
household lighting energy use in 2025 remained the same as in 2011,
projected aggregate electricity use for residential lighting would be
about 84 billion kWh higher in 2025. While translating this into the
number of power plants potentially avoided is complicated, if one were
to assume that on average each gigawatt of capacity generates about 6
billion kWh, the 84 billion kWh reduction in lighting use would
eliminate the need for about 14 gigwatts of new capacity or about 28
500-megawatt generating units. Regarding electricity bill savings, this
amounts to about $9 billion per year in lower electricity bills when
priced at the AE02011 residential electricity prices of 10.5 to 11
cents per kWh, although this does not include the additional up-front
cost for more expensive lighting.
U.S. OIL DEMAND CURVE
Question 6a. I found one of the most interesting trends across your
collective forecasts is the flat, or even declining, demand for oil in
developed countries, including the United States, over the next 25
years.
Mr. Burkhard's testimony notes that CERA believes aggregate oil
demand in developed markets peaked in 2005 and will not exceed that
level again.
The IEA predicts U.S. oil demand will drop by 10% by 2035.
The EIA reference case predicts that total liquid fuel consumption
in the U.S. will increase 17%, to 22.0 million barrels per day, but all
of that increase will come from biofuels. Oil demand appears
essentially flat or falling.
If Congress and the Bush and Obama Administrations had failed to
enact these policies, how likely is it that forecasted U.S. oil demand
would be falling over the next 25 years?
Answer. If vehicle fuel economy standards had not been increased
during the past decade and policies that support and/or require
biofuels production and consumption had not been enacted, then U.S.
total liquids consumption would be higher than the 22 million barrels
per day in 2035 projected in EIA's Annual Energy Outlook 2011 Reference
case. Without these policies, U.S. biofuels production and consumption
would be lower and thus oil consumption would be increasing instead of
being essentially flat.
Question 6b. If Congress and the Administration had failed to enact
these policies, what would you anticipate would be the effect on global
oil prices in 2035, compared with your reference case?
Answer. If these fuel economy and biofuels policies had not been
enacted--which effectively reduce demand for oil--then global oil
prices would be higher in 2035 compared with the $125 per barrel (2009
dollars) in the Reference case.
MEETING RENEWABLE FUELS TARGETS
Question 7a. I am discouraged by EIA's prediction that the market
will be unable to meet the targets set forth in the RFS-2, which is the
revised Renewable Fuels Standard that Congress passed 2007.
That standard mandates production of thirty six-billion gallons of
biofuels a year by the year 2022, sixteen billion gallons of which must
be of ``cellulosic'' origin.
Your agency's analysis states that: ``EIA's present view of the
projected rates of technology development and market penetration of
cellulosic biofuel technologies suggests that available quantities of
cellulosic biofuels will be insufficient to meet the renewable fuels
standards targets for cellulosic biofuels before 2022.''
In EIA's analysis, what are the primary barriers to achieving the
RFS targets? Are they on the supply side--simply producing enough fuel?
Or are there also barriers on the demand side--creating an adequate
distribution infrastructure and enough flexible fuel vehicles on the
road?
Answer. The expected shortfall in meeting the cellulosic biofuels
targets primarily reflects high production costs and technological
challenges that are exacerbated by current market and regulatory
conditions. Some observations that support this statement include:
Technological progress on process yields and scaling up
designs has been observed to be slower than initially
anticipated. At least 6 planned facilities have delayed startup
by 6 months or longer, while only 3 plants have reached the
startup phase--with many more awaiting financing.
Many in the industry have been observed to face important
financial, legal, and technological issues that have yet to be
resolved. Recent bankruptcy, plant closure, and repeatedly
missed production goals are examples of serious setbacks for
companies identified by the EPA as potential cellulosic
suppliers in 2011.
The recent financial downturn has also been cited by
technology developers as a reason for the reduction in private
investment in the technology. Studies show that capital costs
have risen significantly above the original expectations for
these technologies. In addition, biomass feedstock costs have
also been substantially higher than originally expected and
process yields have not achieved goals.
The slow market penetration of the technology has led to the EPA
granting waivers for large shares of the cellulosic biofuels mandates
for 2010 and 2011. This in turn has made EPA cellulosic biofuels
credits available to obligated parties at a cost significantly less
than the current production cost for the technology.
On the demand side, EIA's projections do not assume a near-term
infrastructure constraint in marketing the ethanol that is produced.
The majority of U.S. corn ethanol production and smaller volumes of
imported ethanol and cellulosic ethanol are assumed to be absorbed in
E10 and recently-approved E15 gasoline blends. In addition:
After the E15 blend pool is saturated by 2020, new volumes
of ethanol are assumed to be sold as E85--with the partial
resolution of some infrastructure barriers--and Flex-Fuel
Vehicles are assumed to be more widespread.
E85 is assumed to be sold at a discount factoring in its
lower energy density compared to motor gasoline, with E85
selling for $2.87 per gallon vs. $3.64 per gallon for gasoline
in 2030. E85 volumes thus increase from 0.1 billion gallons in
2020 to over 9 billion gallons at the end of the forecast
(2035).
A number of next-generation biomass-to-liquid technologies,
including clean diesel fuel produced from cellulosic biomass, are
assumed to be ``drop-in'' fuels that can be distributed and consumed
using existing infrastructure and vehicle fleets and do not face
significant infrastructure hurdles. These fuels contribute to the
overall level of cellulosic biofuels in EIA's projections.
Question 7b. Does EIA's analysis include cellulosic biofuels other
than ethanol? For example, does it include the possibility that the
RFS-2 mandate might be met with other cellulosic fuels such as
methanol?
Answer. The majority of cellulosic biofuel consumption growth is
projected to come from cellulosic ethanol. However, the Annual Energy
Outlook 2011 Reference case also projects the penetration of Biomass-
to-Liquids (BTL) technologies that use cellulosic biomass to produce
other motor fuels. These next-generation technologies yield fuels that
can be distributed and consumed using existing infrastructure and
vehicle fleets.
While methanol is not an approved RFS-2 pathway for direct use in
transportation fuels under current rulemakings, EPA has indicated that
it would allow cellulosic Renewable Identification Numbers (RINs) to be
generated for qualified cellulosic methanol feedstock used in biodiesel
production based on its ethanol-equivalent energy value (approximately
0.75 RINs per unit of methanol or 0.1 RIN per gallon of biodiesel).
Since volumes are expected to be very small and are currently only
being produced in testing phases, the AE02011 does not explicitly model
a cellulosic methanol RFS credit.
Question 7c. Do you believe there will be enough flexible fuel
vehicles available in America in 2022 to be able to consume biofuels
production mandates in the RFS-2?
Answer. The Annual Energy Outlook 2011 Reference case projects that
41 million flex-fueled vehicles will be on the road in 2022,
representing about 16 percent of the total light-duty vehicle stock.
These flex-fueled vehicles could consume 27.5 billion gallons of E85 in
2022, if fueled entirely by that fuel. The actual ethanol content of
E85 fuel varies by region and season and typically averages well under
85 percent, with petroleum gasoline making up the difference. Using the
assumption that 75 percent of E-85 is actually ethanol, if all flexible
fuel vehicles were fueled with E85 nearly 21 billion gallons of
biofuels could be consumed. Biofuels are also blended into motor
gasoline and diesel fuel, with ethanol blending into motor gasoline
being by far the most significant. Ethanol can be blended into motor
gasoline to up to 10 percent of volume and up to 15 percent of volume
for light-duty vehicles from model year 2001 and later. The Annual
Energy Outlook 2011 Reference case projects that over 17 billion
gallons of ethanol will be blended into motor gasoline in 2022. If
sufficient production was available, ethanol blended into motor
gasoline and E85 consumed in flex-fueled vehicles could in principle
reach approximately 38 billion gallons by 2022, surpassing the total
36-billion-gallon RFS-2 mandate.
IMPLICATIONS OF BUSINESS AS USUAL
Question 8. One thing I found lacking from most of the analyses was
any kind of discussion of their broader implications. For example, what
kind of world will we live in 2035 if the forecasts contained in the
reference cases prove accurate, a world that consumes 107 million
barrels of oil per day.
. . . I completely agree. Energy policy raises complex questions of
equity and justice. I believe that too often people who point to the
unsustainable nature of our energy system are labeled as ``anti-
growth''. For all our sakes, I hope we can begin to move beyond such
characterizations, and start talking about policy that can foster both
growth and sustainability.
Would you please comment on the implications of continuing our
business as usual trajectory (i.e. the trajectory outlined in the EIA
reference case)?
Answer. The Energy Information Administration (EIA) includes
information regarding the economic and energy implications of the
Annual Energy Outlook Reference case. The broad implications are
summarized below.
The U.S. real gross domestic product grows by an average of 2.7
percent per year from 2009 to 2035 in the Annual Energy Outlook 2011.
The Nation's population, labor force, and productivity grow at annual
rates of 0.9 percent, 0.7 percent, and 2.0 percent, respectively, from
2009 to 2035. Assuming no changes in policy related to greenhouse
gases, carbon dioxide emissions grow slowly, but do not again reach
2005 levels until 2027.
Although energy-intensive industries are expected to recover
rapidly from the recent recession, long-term growth is slowed by
increased competition from overseas manufacturers and a shift in U.S.
manufacturing toward higher-value consumer goods which are less energy-
intensive to manufacture. Net imports of energy meet a major, but
declining, share of total U.S. energy demand. The projected growth in
energy imports is moderated by increased use of biofuels (much of which
are produced domestically), demand reductions resulting from the
adoption of new efficiency standards, and rising energy prices. Rising
fuel prices also spur domestic energy production across all fuels,
particularly natural gas from plentiful shale gas resources, and temper
the growth of energy imports.
It is important to note that the EIA Reference case is based on
current laws and regulations and thus does not assume new policies,
such as increased fuel economy standards, changes in access policy for
domestic resource development, a Clean Energy Standard, or any new
climate change policies. This practice is necessary to provide a clear
reference point and to avoid speculative policy assumptions, and it
serves as a starting point for analysis of potential changes in energy
policies, rules, or regulations through the uses of alternative
modeling cases. The EIA Reference case therefore is meant to provide an
outlook where the assumptions and implications are clearly understood,
but not necessarily as the world might unfold.
INVESTMENT LEVELS NEEDED IN NEXT HALF CENTURY
Question 9. Has EIA done a comparable analysis [of the amount of
worldwide investment that might be required over the next half-century
to prevent energy shortages and greenhouse gas emissions from
undermining global economic growth] that could be used for comparison
[with the TEA figure of $45 trillion]?
Answer. EIA has not developed an estimate of the future investment
required in the world energy supply infrastructure nor has it
considered how such an estimate might be affected by policies to limit
greenhouse gas emissions. There are few publically-available sources of
international statistics that would allow EIA to confidently make such
estimates. In general, worldwide statistics on the costs associated
with installing energy infrastructure are costly and difficult to
obtain. Thus, without making heroic assumptions about current and
future global costs associated with an array of potential energy
infrastructure projects, EIA would be unable to derive such estimates
either in the present or in the long-term future. However, EIA's U.S.
Annual Energy Outlook Reference case projections and additional
analysis cases provide extensive information regarding U.S. energy
infrastructure requirements.
IMPACT OF GREENHOUSE GAS REGULATIONS
Question 10. Now that the Environmental Protection Agency has begun
to implement regulations to limit greenhouse gas emissions from
stationary sources, how has that impacted EIA's modeling results? What
assumptions has EIA incorporated into its modeling runs to account for
these EPA regulations in terms of greenhouse gas emissions reductions
relative to 2005 levels? If EIA has yet to incorporate these new
regulations, does the agency plan to in the future?
Answer. While EPA is developing regulations pertaining to
greenhouse gas (GHG) emissions from stationary sources, it has not
released specific standards for the various types of power plants and
energy-using industrial facilities. Without such standards, EIA cannot
effectively model the impacts of EPA's proposed regulations. EIA is
monitoring EPA's progress in developing the rules, and when more
information on the specific standards is available, we will adjust our
analysis accordingly.
EIA does try to capture current market behavior in its modeling
with respect to concerns about GHG emissions and their potential
regulation. In order to account for the market's uncertainty
surrounding investment decisions in GHG-intensive technologies, EIA
assumes a 3 percent premium in the cost of capital for new coal-fired
power plants and other GHG-intensive technologies, which is one factor
that leads to few new coal plants beyond those already under
construction being added to the AE02011 Reference case projection. In
addition, 10 states in the Northeast are participating in the Regional
Greenhouse Gas Initiative (RGGT) cap and trade program and this is
represented in the EIA analyses. Most states participating in the
program have already met their state level caps.
HOW TO INCREASE ENERGY DIVERSITY
Question 11a. A common theme across all the witness testimony is
that global energy demand is increasing and fossil fuel prices are
likely to continue to increase. So it seems like if the U.S. continues
to ignore this problem, the economic and security impacts will be
significant. The witnesses also all seem to agree that diversifying
America's sources of energy is a key way to mitigate these harmful
impacts.
What are the most economically efficient policies to increase U.S.
energy diversity without the need for government to pick technology or
special interest winners or losers?
Answer. The most effective policies are those which clearly define
the attributes or requirements that the Nation wants to achieve to
address energy security, economic growth, and climate change. A
technology-neutral approach, such as the Clean Energy Standard (CES)
proposed by President Obama in the State of the Union, which seeks to
double the share of electricity from clean energy sources by 2035 to 80
percent, is an example of such a policy. Under a CES, as proposed by
President Obama, any technology that uses energy in a clean, efficient
way will have the opportunity to advance.
The President has also outlined a portfolio of actions which, taken
together, could cut U.S. oil imports by a third by 2025. These include
programs that would increase the fuel economy of our cars and trucks,
put one million electric vehicles on the road by 2015, and increase the
use of nonpetroleum fuels.
Question 11b. Do you agree with many energy experts who argue that
a predictable price on carbon designed in a way that minimizes price
volatility is the most economically efficiency and technology neutral
way to realize greater energy efficiency and diversity?
Answer. A predictable, long-term price on carbon that minimizes
volatility is one way that the actual costs of fuels usage can be
reflected in their prices and one way to transform the energy system
toward cleaner and more secure energy sources. However, other policies
can assist in this transition in a cost-effective and technology
neutral way. For example, the President's proposed Clean Electricity
Standard would create a broad, technology-neutral incentive to
transform the power sector, and many other policy options exist to
increase the efficiency of energy consumption in end-use sectors.
Question 11c. Are there links between policies to reduce greenhouse
gas emissions and increasing energy diversity? If such policies are
successful in significantly reducing world demand for fossil fuels,
what impact on future prices is that likely to have?
Answer. Policies that reduce greenhouse gas emissions will
generally lead to greater deployment of cleaner and more secure energy
technologies. If the transportation sector, for instance, gradually
transitions away from petroleum through electrification, it will be
important to encourage cleaner sources of electricity to maximize the
environmental benefits of this transition, and the diversity of the
energy supply increase as a result. Such transformation could be
achieved through policies like the President's proposed Clean Energy
Standard, coupled with policies to promote electric vehicles. If global
fuel consumption declines, this would put downward pressure on global
prices for such fuels, but the actual outcome will also depend on
trends in global supply.
______
Responses of Richard H. Jones to Questions From Senator Corker
Question 1. Your organization has looked extensively at fossil fuel
consumption subsidies. Does the U.S. pay any consumption subsidies and
if so, how much, and how is that related to the price consumers pay for
petroleum?
Answer. Using the price gap methodology, which compares
international market prices for fossil-fuels with end-use prices paid
by consumers, the IEA does not measure any fossil-fuel consumption
subsidies paid by the United States. The United States does, however,
administer a targeted program to assist low-income households with
immediate home energy needs through the Low Income Home Energy
Assistance Program (LIHEAP). This is not captured by our measurement
approach since it does not affect the pricing of energy products, but
it does support fossil-fuel and other energy consumption.
Question 2. If we were to look at all the costs paid by the U.S.
Government to manage supply lanes and ensure the safe transport of
crude, what would the true price of petroleum be? Are these costs
reflected in any way in the price that consumers pay, and what would
happen to the price per gallon of petroleum if these support measures
were to be eliminated?
Answer. Crude oil prices comprise many elements, ranging from short
term market fundamentals, oil refining bottlenecks, perceptions of
future supply/demand, macro and micro-financial influences and
geopolitical risks. To the extent that the protection of supply lanes
lowers the perception of risk in producing or transit areas it would
also lower the international crude oil price. One can only guess at the
extent to which this component of international prices might change if
sea lanes were not kept clear, but ceteris paribus, were less resources
dedicated to ensuring the secure movement of oil supplies, then crude
prices might well rise.
Responses of Richard H. Jones to Questions From Senator Murkowski
SUEZ CANAL
Question 1. You said in a recent interview with the Financial Times
that you've heard reports of ``difficulties in providing security for
some of the crews passing through the Suez Canal. And of course, if
there is a blockage of the Suez Canal, that would be cause for
concern.'' Can you tell us what, exactly, you've heard about security
concerns in that region? Do they remain?
Answer. The Suez Canal is a choke point for transport of many
commodities, including crude oil and petroleum products. The blockades
in 1956-1957 and 1968-1975, when some 10% of global oil trade passed
the Suez Canal, caused oil prices to spike and triggered economic
downturn. Therefore oil market participants are still closely watching
the Suez Canal and react nervously to any news of interruptions. Times
have changed however. The introduction of Very Large Crude oil Carriers
(VLCCs) in the early seventies resulted in more crude oil transport
around Cape of Good Hope of Africa, so nowadays less than 1% of the
crude oil production is transported through the Suez Canal, in almost
balanced quantities going north and south. So the cause of concern is
not so much a loss of crude oil supply (in fact no oil would be lost,
but transportation time and costs would go up), but the Suez Canal is
in the heart of the Middle East, the dominant oil producing region, and
any increased tension in the Middle East results in nervousness on the
oil market. For example, the specific press reports referenced in the
FT interview turned out not to be significant.
SUBSIDIES
Question 2. Your organization has been quite active in opposing
fossil fuel consumption subsidies. Do you believe the U.S. government
offers any fossil fuel subsidies? What are they and what would be some
of the consequences if these were removed? Would you describe LIHEAP--
financial assistance for heating oil purchases--as the sort of
consumption subsidy which IEA supports ending? Between consumption
subsidies and production incentives, which result more directly in
increased consumption of fossil fuels?
Answer. The US government offers some fossil-fuel subsidies; most
are on the production side. Although not captured by our methodology
for measuring fossil-fuel consumption subsidies, where we compare
international market prices for fossil fuels with end-use prices paid
by consumers, the targeted Low Income Home Energy Assistance Program
(LIHEAP) supports fossil-fuel and other energy consumption. We do not
recommend phasing out subsidies that are well-targeted and assist the
poor with the most basic of energy needs.
The IEA has not attempted to quantify US subsidies to fossil-fuel
production, but these do exist within our broad definition of energy
subsidies which is ``any government action that lowers the cost of
energy production, raises the price received by energy producers or
lowers the price paid by energy consumers''. Instruments used to confer
support to fossil-fuels production are often tax incentives, including
for the US: limiting taxable income based on percentage depletion of
oil and gas reserves, allowing the expensing of intangible drilling
costs, and domestic manufacturing deductions. The IEA has not tried to
measure the effect on energy production of phasing out these subsidies,
although they would increase costs for producers to some extent.
US ENERGY COMPANIES VERSUS NATIONAL OIL COMPANIES (NOCS)
Question 3. Can you describe how U.S. oil and gas producers operate
with any disadvantages relative to National Oil Companies such as the
OPEC owner companies?
Answer. IOCs (including US companies), which have traditionally
dominated the global oil and gas industry, are increasingly being
squeezed by the growing power of the national companies and by
dwindling reserves and production in accessible mature basins outside
OPEC countries. The main advantage held today by NOCs over IOCs is
access to reserves. We may see stronger partnerships between the
national and international oil companies in the future to ensure
adequate oil and gas supplies in the long term. The mutual benefits
that could accrue are compelling: the national companies control most
of the world's remaining reserves, but in some cases lack the
technology, capital and/or skilled personnel to develop them
efficiently; the international companies are opportunity-constrained,
but have the finance and management skills, and technology to help
national companies develop their reserves.
OIL MARKETS
Question 4. If only about 3 percent of the world's oil travels
through the Suez canal and the SUMED pipeline, yet we are seeing some
influence on the global commodity price resulting from instability
around the Suez, does this indicate that seemingly small disruptions,
real or potential, can have comparatively large impacts on global
markets?
Answer. It is true that because both the supply and demand for oil
are slow to respond in the short term to changes in international
prices, so relatively minor dislocations of supply or demand can have
an exaggerated impact on price. But events in Egypt this last month
have had an impact that went far beyond concerns over Egyptian
infrastructure and transit routes. Concerns about contagion of
political instability for the rest of the MENA region, where much of
the world's oil and gas resources are concentrated, likely played at
least as much of a role in influencing prices.
MAJOR OIL DISCOVERIES
Question 5. What was the impact on global investment and markets
when the Tupi field was discovered off of Brazil in 2006, and how does
the addition of a multi-billion barrel discovery impact the host nation
and the industry?
Answer. The Tupi discovery has consolidated Brazil's position as
one of the three main contributors to non-OPEC supply growth over the
next decade. Major oilfield announcements tend to affect the share
price or valuation of individual companies concerned, rather than
commodity prices per se. Brazil faces challenges in constructing
infrastructure according to the ambitious schedule it has set itself,
and in managing windfall oil revenues once production starts in a major
way.
CRISIS-DRIVEN ENERGY POLICY
Question 6. The Outer Continental Shelf Lands Act was implemented
after the Arab oil embargo and subsequent price controls and economic
shocks of the 1970's, as was the authorization of the Trans-Alaska
Pipeline System. Are these patterns of crisis and response as an
unavoidable trend in U.S. energy policy?
a. Is the U.S., in your group's view, more proactive or
reactive in its energy policy?
Answer. After the Arab oil embargo and the creation of the
International Energy Agency (IEA), all Member countries of the IEA
committed themselves to a number of actions to reduce their oil
(import) dependency. The actions taken differed, according to the
circumstances of the country. Those countries that could increase
domestic production did so, like the US, but notably also countries in
Western Europe, who started successfully exploring the North Sea.
Also all IEA countries implemented energy savings and energy
efficiency programs.
The efforts of the Member countries have been reviewed over the
last 35 years during a series of Energy Reviews and Emergency Response
Reviews (each conducted in a 5 year cycle). Generally speaking, the
crisis response measures of the United States are well developed and
the Strategic Petroleum Reserve of the United States is a valuable
asset for the country and for the group of IEA Member countries as a
whole.
CLEAN ENERGY STANDARD
Question 7. Should we learn a lesson from the Renewable Fuel
Standard, which has fallen short of expectations, when considering an
aggressive electricity mandate like the one the President is calling
for? How likely is it that we will create unforeseen problems if we put
a CES in place? To name just one example, will transmission problems--
and our inability to add significant amounts of renewable energy to the
grid--become the new ``blend wall''?
Answer. Ambitious targets for low-carbon electricity, especially at
the federal level, as announced by President Obama , are important
signals of the USA's willingness and determination to move the country
onto a sustainable energy trajectory. The 450 Scenario of the IEA's
World Energy Outlook 2010 details a medium-term carbon-constrained
energy pathway, which projects that 89% of the United States' power
output could be zero or low-carbon by 2035 given concerted policy
support. [NB: the WEO's definition of ``zero or low'' carbon energy is
much stricter than the definition given by President Obama: the WEO
only includes fossil fuel generation with CCS, while President Obama's
CES proposal includes `clean coal' in general and `efficient natural
gas'.]
Carefully defining the Clean Energy Standard (CES) and its eligible
technologies, possible technology set-asides and interim targets are
crucial first steps to boosting investor confidence. Given that a
majority of US states already have renewable portfolio standards in
place, the effective implementation of a federal clean energy standard
will require careful coordination and a predictable and transparent
transition that avoids disadvantaging existing clean energy
investments.
Targets must be supported by an effective system of financial and
non-financial incentives to ensure appropriate conditions for
exploiting the large potential for clean energy technologies. These
clean energy technologies, including renewables, such as wind and
solar, are generally not yet as mature and cost-competitive as
conventional carbon-intensive generating technologies, but their costs
are declining rapidly thanks to increasing economies of scale and
technology learning gained through significant market deployments with
targeted policy support.
Doubling the contribution of clean energy technologies to the USA's
generation mix by 2035 is evidently a tremendous challenge requiring a
systems approach to ensure sustainable market growth while controlling
overall cost, both in terms of policy support and technical
infrastructure. Upgrading and expanding existing grids to keep pace
with capital stock turnover in the power sector is a fundamental
challenge regardless of the specific type of generation technologies
entering the mix. As part of this challenge, in parallel to the
introduction of a Clean Energy Standard, the system integration of
variable renewable energy technologies, such as wind and solar PV,
needs to be assessed carefully. However, the IEA's research suggests
that the capacities of grids, based only on current resources and
improving operational measures, are usually broad enough in most cases,
e.g. in the Western US grid, which we have analysed in detail.
ALTERNATIVES TO OIL
Question 8. How substantial of an impact do you believe advanced
biofuels, electric vehicles, and other technologies will have on
petroleum consumption by 2020? By 2030?
Answer. IEA analysis shows that there is tremendous potential to
cut transport oil demand in the 2030 time frame. However, this will
depend heavily on the policies deployed over this period, as well as on
the success of improving and lowering the costs of key technologies
that are still in the development phase, such as for advanced biofuels
and batteries. In our baseline projections (which assume that no new
policies are introduced by governments), biofuels and EVs do not take
sufficient market share to save very much oil by 2030.
However, in a world committed to low-carbon and lower-oil
dependence futures, we believe there could be a substantial shift away
from oil by 2030, with some of this shift in evidence by 2020. For
example, in our WEO 2010 and ETP 2010 reports (which are consistent),
our low CO2 scenarios show a reduction in global transport oil use,
compared to our baseline projection, of 150 million tonnes (about 7%)
in 2020 and 600 million tonnes (about 30%) in 2030. Through 2030,
substantially more than half of these reductions are attributable to
improved energy efficiency across a range of vehicles and modes (cars,
trucks, aircraft etc), including strong improvements to internal
combustion engines (such as hybridization). About 10% of the oil
savings in 2030 are attributable to biofuels, and another 10% from
electric vehicles. Other alternative fuels, such as natural gas, also
play a role. However after 2030 the contributions from EVs and biofuels
rise rapidly. With the right policy framework we believe that these
technologies can become fully competitive, and in fact dominant, by
2050.
Realising a 30% cut in transport oil use relative to the baseline
projection by 2030 would have enormous benefits for energy security,
less air pollution in cities and the climate. It could also help
restrain oil prices. For these reasons, the IEA is committed to helping
countries move onto such a pathway.
FOREIGN OIL DEPENDENCE
Question 9. If Congress had allowed the Coastal Plain of ANWR and
other parts of Alaska to be opened to production, in 1995 for example,
we would be producing domestic oil at a considerably higher rate. What
would that mean for our nation's energy security? Would we be more
protected, or less protected, from civil unrest in Egypt, Jordan, and
other parts of the Middle East? In the event of a supply disruption
abroad, would we be better equipped, or less prepared, to deal with
import shortages?
Answer. Generally speaking, if a country has more domestic oil
production, it is less exposed to physical disruptions from abroad. At
the same time, oil is traded on global markets, so a severe disruption
can cause prices to rise in all countries, because the oil will flow to
the highest bidder. So a country with more domestic production has less
to fear that its oil supply will be disrupted when a major incident
happens abroad, but prices may still rise, even in those countries that
do not need to import any oil.
PROJECTED OIL PRICES
Question 10. In a hypothetical scenario of September 2012, with
unemployment is down to 8.0%, the economy growing at greater than 3.0%
each quarter, and world markets on the upswing, where would you
forecast the price of oil?
Answer. The IEA does not forecast the price of oil. See below.
OFFSHORE MORATORIUM
Question 11. How does the amount of oil that could be taken offline
by unrest in the Middle East compare to the amount of production that
will be lost because of the absence of new exploratory permits in the
Gulf of Mexico, and the absence of resumed exploratory operations?
Answer. In our short and medium term market analysis, we do not
forecast oil prices. Rather our models are driven by the shape of the
oil futures curve at the time that projections are made. However, the
scenario you paint of strong global economic growth would likely be
accompanied by strong oil demand growth and, because of the lead times
necessary to develop new oil production capacity, by a narrowing margin
of OPEC spare capacity. Our own medium term market outlook under a high
economic growth scenario envisages OPEC spare capacity shrinking from
around 6% of global demand in 2010 to less than 5% of global demand on
average in 2012. Spare capacity would still be higher than the very low
levels evident during 2004-2008, but nonetheless the very fact of a
shrinking level of market flexibility suggests more volatile markets.
Our latest view is that 2015 US GoM oil production could turn out
around 300 kb/d lower than we previously forecast because of delays in
new field developments and to drilling required to sustain production
at older fields. Those volumes could be higher if drilling remains at
markedly lower levels for longer or new drilling is banned altogether
in prospective resource-bearing areas. However, they would still
probably pale in comparison to the amount of production that could be
taken off line if political unrest were to disrupt production for a
significant period in even one Middle Eastern exporting country.
ECONOMIC RECOVERY
Question 12. Adam Sieminski, the Chief Energy Economist for
Deutsche Bank, recently wrote that ``We estimate that a [10 dollar]
rise in the oil price subtracts approximately 0.5 percentage points off
U.S. growth.'' Do any of you agree with Mr. Sieminski's assessment?
a. Would this calculation change if the US supplied 60% of
its own oil as opposed to importing 60% of its oil?
Answer. Our static analysis of oil price impacts on the US economy
indicates that $100 per barrel oil (on average) in 2011 translates to
an import bill of $385 billion at expected import levels (10.5 million
barrels per day in our projections). This would be equivalent to
roughly 2.6% of US GDP, approaching similar levels to those experienced
in 2008, and risk undermining economic recovery. At $110 per barrel in
2011, our estimate for the yearly US import bill would rise to $425
billion (simplified using the same import and GDP levels in the
calculation), or 2.8% of US GDP. The calculation provides only a rough
estimate, but supports the notion that a $10 swing in oil prices can
have a major effect on the economy. The import bill we calculate, and
thus its relation to GDP, depends on volume of net imports rather than
the percentage of imports or domestic production. Assuming that
domestic production accounted for 60% of US oil consumption at levels
we project for 2011, US net imports would amount to about 7.1 mb/d.
With $100 per barrel of oil, the import bill would then total $260
billion for the year, or 1.7% of US GDP.
IMPACT OF FEDERAL POLICIES
Question 13. What role does the federal government's stimulus
policies, and the Federal Reserve's second round of quantitative
easing, have played in boosting commodity prices? Have these policies
boosted the price of oil, and, if so, by how much?
Answer. Federal stimulus and QE2 could theoretically boost
commodity prices through physical or financial transmission mechanisms
(note, these are two very different policies; the former is fiscal
while the latter is monetary). Both may have demand side impact on
commodities, but it is simply not possible to attribute specific price
effects.
Insofar as stimulus and QE have buoyed economic activity in the US
and abroad, physical demand for commodities would tend to rise and
prices would increase, all other factors being equal. Both US economic
growth and oil demand came in higher than expected in 2H10, one factor
behind tightening global fundamentals and rising oil prices. However,
it is difficult to isolate the effect of these policies on the economic
rebound and on oil prices, particularly given the cyclical recovery in
US oil demand that had already been underway since early-2010 and
overarching role of global supply/demand fundamentals in tightening the
physical market.
On the financial side, QE2 could potentially boost commodity prices
through the exportation of currency inflation to dollar-pegged
economies or through increased financial flows into commodities and
emerging markets. Price pass-through resulting from the former
mechanism could ultimately manifest itself through physical
fundamentals, with currency inflation in emerging markets acting to
stimulate oil demand. Increased capital flows into emerging markets
could also stimulate higher levels of economic activity, thus raising
oil demand and prices. However, it is unclear the degree to which QE2
itself has inflated developing economies. The domestic monetary policy
of such countries probably plays a larger role and, indeed, several
large economies (e.g. China and Brazil) have already begun tightening
interest rates in order to cool economic expansion. Finally, while
increased financial flows into commodities may amplify oil price
movements in the short-term, there is little empirical evidence
quantifying the effect of such flows. The linkage of oil futures
markets to underlying physical markets also suggests that any such
price dislocation brought about through purely financial reasons may be
short-lived in any case.
OIL SPILL REPORT
Question 14. Have you reviewed the recommendations made by the
President's Oil Spill Commission? Have you conducted any analysis on
the impact those recommendations, if fully implemented, would have on
domestic oil production, our import levels, and the global price of
oil?
Answer. No, we have not connected an analysis of the possible
impact of these recommendations, beyond that mentioned above (see
question on Offshore Moratorium).
MODULAR NUCLEAR REACTORS
Question 15. What role do you believe small modular nuclear
reactors will have in meeting the global demand for electricity? What
countries are moving forward with this technology and what countries
are interesting in acquiring these reactors?
Answer. Small modular reactors are discussed in the joint IEA/NEA
(Nuclear Energy Agency) 2010 publication Technology Roadmap/Nuclear
Energy. Countries involved in developing the technology include:
Argentina, China, Japan, Korea, Russia, South Africa and the United
States. Companies involved include: Areva, Babcock & Wilcox, General
Atomics, NuScale and Westinghouse. Two small units are known to be
under construction in Russia, reportedly for deployment via barge to a
remote coastal settlement on the Kamchatka peninsula. Elsewhere, some
other designs are well advanced, with initial licensing activities
underway. Demonstration plants could potentially be in operation before
2020, if funding becomes available. However, no firm commitments have
been made to date.
CHINA
Question 16. Can you shed light on what China's energy picture
really looks like, not just for renewable energy, but also its future
demand for oil, natural gas, and coal?
Answer. Over the past year or so we have just seen an historic re-
ordering of energy heavyweights, with China surpassing the United
States to become the world's top energy consumer. Already a major actor
in global energy markets, it has become abundantly clear that the
developments in China will be key to shaping the world's energy future.
Chinese energy use was only half that of the United States in 2000. The
increase in China's energy consumption between 2000 and 2008 was more
than four times greater than in the previous decade. Prospects for
further growth remain strong, given that China's per-capita consumption
level remains low, at only one-third of the OECD average, and that it
is the most populous nation on the planet, with more than 1.3 billion
people. Consequently, developments on the global energy landscape
remain highly sensitive to the various factors that drive energy demand
in China, including prospects for economic growth, changes in economic
structure, developments in energy and environmental policies, and the
rate of urbanisation.
The momentum of economic development looks set to generate strong
growth in energy demand in China throughout the Outlook period. In the
New Policies Scenario, China's primary energy demand reaches two-thirds
of the level of consumption of the entire OECD. In absolute terms,
industry accounts for the single biggest element in the growth in final
energy demand. China's electricity demand is projected to almost triple
in 2008-2035, requiring capacity additions equivalent to 1.5 times the
current installed capacity of the United States. During much of the
period of its economic expansion, China was able to meet all of its
energy needs from domestic production, but now a growing share is being
met by imports. China has extensive coal resources, but in recent years
has become a net importer. It has struggled to expand its mining and
rail-transport infrastructure quickly enough to move coal from its vast
inland reserves to the prosperous coastal areas where demand has been
growing most rapidly. In the New Policies Scenario, China's net imports
of coal increase to 2015, but the country once again becomes a net
exporter towards the end of the Outlook period. Its oil imports jump
from 4.3 mb/d in 2009 to 12.8 mb/d in 2035, the share of imports in
demand rising from 53% to 84%. Natural gas imports also increase
substantially to reach a share of 53% of demand in 2035, requiring a
major expansion of pipeline and liquefied natural gas (LNG)
regasification infrastructure.
China's growing need to import fossil fuels to meet its rising
domestic demand will have an increasingly large impact on international
markets. Similarly, if pursued vigorously, China's efforts to expand
the use of clean energy could have far-reaching implications throughout
the rest of the world. First, its drive to deploy clean energy will
lower the cost of those technologies everywhere, made possible by the
economies of scale achievable in such a vast market and the
acceleration of learning rates bound to occur. Second, there will be
strong effects on global trade. China will most certainly attain status
as the leading exporter of clean energy technologies and we may see,
like Japan's auto manufacturers have done, an internationalisation of
Chinese clean energy firms and manufacturing of clean energy equipment
in destination markets. Third, China will gain a firmer economic stake
in global action to reduce greenhouse-gas emissions.
Note: The graph ``China's share of the projected net global
increase for selected indicators'' has been retained in committee
files.
Responses of Richard H. Jones to Questions From Senator Cantwell
EFFECT OF DOMESTIC DRILLING ON GAS PRICES AND FOREIGN OIL DEPENDENCE
Question 1. In response to the recent political unrest in the
Middle East, and rising oil prices, we have heard familiar calls to
expand domestic drilling in the United States--including offshore and
in the pristine Arctic National Wildlife Refuge (ANWR)--typically with
the claim that such actions will lower gasoline prices or reduce our
dangerous over-reliance on foreign oil.
An Energy Information Administration (EIA) study from May 2008\1\
projected the effects on oil prices of drilling in the Arctic National
Wildlife Refuge. According to EIA's projections, in the most optimistic
case, drilling in ANWR would reduce crude oil prices by approximately
$1.44 per barrel. I understand this would translate to approximately 3
to 4 cents per gallon of gasoline at the pump about 20 years from now.
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\1\ http://www.eia.doe.gov/oiaf/servicerpt/anwr/results.html
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It seems that EIA has found that drilling offshore would have a
similarly negligible effect on prices. EIA issued an analysis in 2009
that examined the impact of maintaining the historical moratorium on
drilling off the Atlantic, Pacific, and Eastern Gulf of Mexico.
According to that analysis: ``With limited access to the lower 48 OCS.
. .there [would be] a small increase in world oil prices.The average
price of imported low-sulfur crude. . .is $1.34 per barrel higher, and
the average U.S. price of gasoline is 3 cents per gallon higher.''
Would you please comment on your views on the ability of expanded
domestic drilling to affect world oil prices?
Answer. As noted already, crude oil prices are influenced by
today's market conditions, but also by perceptions of how easy it will
be to meet expected demand growth in the future. A widespread
perception among industry players today is that it is difficult to
expand the supply base rapidly, largely because of barriers to
investment. For the most part, these concerns centre on key areas of
low-cost resources being completely off limits to international
investment (such as Russia and the Middle East). But improved access to
known hydrocarbon resources within major consuming countries could also
go some way to easing concerns about future supplies, thus potentially
acting as a restraining factor on future oil price rises.
IS OPEC ABLE TO OFFSET ANY INCREASED DOMESTIC DRILLING?
Question 2a. IEA forecasts that most the growth in oil production
will occur in OPEC Countries like Saudi Arabia, Iraq, Venezuela, UAE,
Kuwait, Iran, Qatar, Nigeria, Libya, and Algeria--not exactly America's
best friends or even regimes that support the basic rights of their
citizens. I understand that IEA projects that by 2035, world dependence
on OPEC oil will rise from 41 percent to 52 percent. That's a level not
seen since the oil shocks of the early 1970s.
What can oil importing nations do to mitigate the national and
economic security threat posed by such a high degree of dependence on
OPEC?
Answer. To enhance their energy security, countries need to take
near-term actions in five key areas: (i) promote energy efficiency;
(ii) ensure adequate energy diversity by minimising dependency on any
single fuel, single supplier or single transportation route/mechanism;
(iii) improve oil market data transparency; (iv) maintain an adequate
safety net for use in the case of a supply shortage; and (v)
participate in global cooperation on emergency preparedness as an oil
supply disruption anywhere in the world would result in severe knock-on
effects throughout the entire market. In the longer term, the
progressive decarbonisation of electricity generation and the
introduction of alternative transportation technologies would also help
by reducing the growth in demand for fossil fuels.
Question 2b. It seems that the policies in the bipartisan 2007
Energy Bill that have increased vehicle fuel economy and the use of
biofuels are the only things that have helped reduce the forecast for
U.S. oil imports in decades. What lessons can be learned from that?
Answer. Both fuel economy and the use of biofuels have the
potential to significantly lower oil use in the US and elsewhere.
Strong provisions in the 2007 Energy Bill have helped to leverage this
potential. There are still other areas of strong potential to cut oil
use, such as promoting electric and plug-in hybrid vehicles. The recent
Obama administration initiatives appear to put the US on a strong
course in this regard as well, with a target of 1 million plug-in
vehicles on the road by 2015.
EFFECT OF SPECULATION ON OIL PRICES
Question 3a. Several of the testified that oil price movements can
be explained by supply and demand fundamentals, and these explain the
upward pressure we've seen in recent months. We often hear about the
lack of a ``conclusive'' smoking gun that links oil price spikes to
speculation in the derivatives markets.
However, as you may know, the recently-passed Dodd-Frank Act
requires the Commodities Future Trading Commission (CFTC) to establish
rules to eliminate excessive position limits. Unfortunately, the 180-
day deadline for those rules has passed and the regulatory process of
establishing position limits is still in the early stages, and the
limits are planned to be phased in over time.
Can the witnesses please comment on the likelihood of seeing a huge
oil price spike this summer of the magnitude that we saw in the summer
of 2008?
Do any of the witnesses believe that putting some limits on
excessive speculation reduces the chances of rapid rise in oil prices
similar to the summer of 2008?
Question 3b. Recent years have provided us with plenty of fresh
evidence that markets are susceptible to irrational behavior, both
exuberance and fear. We have seen this not only in energy markets, but
in financial markets in general, whether for securities, home
mortgages, or other commodities.
Can you please comment on how, and whether, your organizations
attempt to incorporate market forces into your energy pricing models?
Answer. We think that the rise in prices seen since September 2010
has in large part been rooted in a tightening of global market
fundamentals, with oil demand having run ahead of supply to the tune of
over 1 mb/d in 2Q and 3Q 2010. But a tightening market is not the same
as a tight market. The first half of 2011 sees a market that still
looks well supplied, with a cushion of flexibility provided by spare
OPEC crude capacity and OECD refining capacity, plus levels of OECD oil
inventories that still look comfortable. So the period through summer
2011 does not have the same precursors of surging prices that were
evident in early 2008. Of course, in recent weeks uncertainties
regarding future supply due to the ongoing turmoil in the region have
also had a major impact on prices. How long this might persist depends
on the course of political events which are impossible to forecast.
We are generally in favour of greater regulatory oversight of
commodity futures and derivatives markets and of moves to enhance the
visibility of trades both on and off exchanges. Measures aimed at
reducing systemic risks are to be supported. But at the same time,
regulators are aware that well functioning markets need liquidity, ease
of price discovery and ample opportunities for physical market players
to hedge price risks for the future. The concept of `excessive'
speculation is difficult to define, and we would argue in favour of
caution as regards position limits, so as to avoid sharply curbing
market liquidity. Arguably, the sharpest spell of short term commodity
price volatility occurred in autumn 2008 when liquidity flooded out of
the market. So there is a risk of unintended consequences from over-
zealous regulation, although many regulators seem well aware of this
issue.
EFFECT OF NEW PRODUCTION TECHNOLOGIES ON PRICES
Question 4. There seems to be some disagreement on whether
investment in developing new production technologies ends up reducing
the price of fossil fuels. We have heard a great deal about how oil and
gas production is a capital intensive business that requires
significant investment in new technologies to access new resources,
whether those are unconventional resources, such as oil sands or shale,
or hard to access resources, such as ultra-deepwater drilling.
Does investment in developing such hard-to-access resources result
in lower fossil fuel prices? Or does it simply enable the production of
harder to access and more expensive resources, thereby ensuring that
oil and natural gas will only continue to flow as long as global prices
remain high? Are you concerned that the U.S. is locking itself into
dependence on a resource that is destined to get more and more
expensive over time?
Do you believe there is now a new normal for fossil fuel prices?
Just a decade ago OPEC had a $22 to $28 a barrel target range. In 2004,
Ali Naimi, the Saudi oil minister called $30 to $34 a barrel a ``fair
and reasonable price'' for oil. Why is the world now so willing to
accept considerable higher level of fossil fuel prices?
Answer. It is less a case that investment in these new resources
might perpetuate higher prices, more a case that failing to invest in
new sources of supply would likely lead to still higher prices.
International oil companies face barriers to investment. Much of the
world's low cost oil is situated in countries which deliberately
restrict access or limit extraction rates. So international companies
have had to `move up the cost curve'. Structurally, and in the long
term, the marginal barrel of non-OPEC supply is likely to become higher
cost. This will ultimately lead to policies which lessen dependence on
oil in the longer term. But we cannot wean our economies off oil and
other hydrocarbons overnight. So investment in new sources of oil and
gas, even if they are higher cost, needs to be encouraged.
There are great dangers in heralding any concrete new `range' for
oil prices. Technology, changing economic circumstances and geopolitics
often conspire to alter perceptions of what might constitute any new
price `norm'. Opportunity constraints, rising costs, stretching project
lead times and producer revenue aspirations all pushed price
perceptions higher in the last decade. And indeed in the longer term,
the exploitation of more costly oil resources, and moves toward an
effective price for carbon dioxide emissions could indeed lead to a
sustained period of higher prices. But as the economic recession of
2008 showed, periods of sharply lower prices are also possible. In the
short term, the global economic recovery would benefit from prices
lower than currently, as the global oil burden is approaching levels
which in the past have acted to curb economic activity.
ROLE OF ENERGY EFFICIENCY
Question 5. Can you please talk about the role of energy efficiency
standards--for lighting or vehicles or otherwise--in your reference
cases? What assumptions are made as to how future efficiency standards
enacted via legislation or a rulemaking process will impact future
fossil fuel consumption levels?
There have been recent legislative proposals to overturn the U.S.
lighting efficiency standard enacted in the Energy Independence and
Security Act of 2007. I have seen analysis showing that this single
policy will result in the United States foregoing the need for 30
additional large power plants and consumers will collectively save more
than $10 billion on electricity bills each year. Do you agree with that
analysis and how would repeal of this lighting standard affect your
long-term modeling results?
Answer. The IEA models estimate that the EISA regulations will
result in a sharp rise in demand for CFLi from 2012 to 2015 peaking at
just fewer than 900 million lamps. This is followed by a sharp down-
turn in demand of about 560 million lamps in 2018. Thereafter, the
second tier regulations take effect but only require a modest increase
in sales because a large proportion of the screw-base lamp stock is
already converted to higher efficiency lamps and the intermediate xenon
halogen options that are now being replaced have a longer lifetime and
slower replacement cycle than the GLS they replaced. Sales continue to
rise more modestly but show ongoing fluctuations as the replacement
lamp market responds to the 2015 peak and trough. In addition solid
state lighting begins to make accelerated inroads into the lighting
market in the 2020 to 2030 timeframe at the expense of CFLi (see: IEA
(2010) Phaseout of Incandescent Lights, OECD/IEA).
We have not yet carried out a detailed energy impact analysis on
these figures, however we assume that the replacement of GLS with
CFLi's on a like-for-like basis would result in an electricity savings
of 28% on average.
U.S. OIL DEMAND CURVE
Question 6. I found one of the most interesting trends across your
collective forecasts is the flat, or even declining, demand for oil in
developed countries, including the United States, over the next 25
years.
Mr. Burkhard's testimony notes that CERA believes aggregate oil
demand in developed markets peaked in 2005 and will not exceed that
level again.
The IEA predicts U.S. oil demand will drop by 10% by 2035.
The EIA reference case predicts that total liquid fuels consumption
in the U.S. will increase 17%, to 22.0 million gallons per day, but
almost all of that increase will come from biofuels. Oil demand appears
essentially flat or falling.
All witnesses, if Congress and the Bush and Obama Administrations
had failed to enact these policies, how likely is it that forecasted
U.S. oil demand would be falling over the next 25 years?
All witnesses, if Congress and the Administration had failed to
enact these policies, what would you anticipate would be the effect on
global oil prices in 2035, compared with your reference case?
Answer. Progressive improvements in vehicle fuel efficiency,
spurred by higher fuel costs as well as fuel-economy mandates (CAFE
standards), and an expansion in biofuels production (Renewable Fuels
Standard) contribute to the decline in US oil demand in the World
Energy Outlook projections. In our Current Policies Scenario, US oil
demand drops from 17.8 mb/d in 2009 to 16.1 mb/d by 2035. This takes
account of recent changes to CAFE standards through 2016, in which cars
must average fuel economy of 35.5 miles per gallon, and targets for
biofuels production (that can substitute for use of oil products in
transport). By 2035, our business-as-usual projections show US biofuels
consumption rising to 1.21 mb/d, from 0.5 mb/d in 2009. The net change
(+0.7 mb/d) in US biofuels consumption equates to roughly 40% of the
drop in total oil demand during that time (1.7 mb/d). Without policies
to promote vehicle efficiency and alternative fuels, the United States
would undoubtedly see a higher level of oil demand and therefore some
tightening of the global oil market, although our analysis in the World
Energy Outlook does not specifically contain projections of such a
scenario.
MEETING RENEWABLE FUELS TARGETS
Question 7. I am discouraged by EIA's prediction that the market
will be unable to meet the targets set forth in RFS-2, which is the
revised Renewable Fuels Standard that Congress passed in 2007.
That standard mandates production of thirty-six billion gallons of
biofuels a year by the year 2022, sixteen billion gallons of which must
be of ``cellulosic'' origin.
Your agency's analysis states that: ``EIA's present view of the
projected rates of technology development and market penetration of
cellulosic biofuel technologies suggests that available quantities of
cellulosic biofuels will be insufficient to meet the renewable fuels
standard targets for cellulosic biofuels before 2022.''
All witnesses, do you believe there will be enough flexible fuel
vehicles available in America in 2022 to be able to consume biofuels
production mandates in the RFS-2?
Answer. The IEA has not looked at this specific question in its
scenarios. However, the vast majority of vehicles that will be on the
road in 2022 are not yet on the road today, so can still be strongly
influenced by policy. While it may require new incentives to reach the
number of flex-fuel vehicles needed to match blending requirements in
RFS-2, the cost of producing such vehicles is relatively low and there
are no technical barriers to producing these in quite large volumes
over the next 11 years.
IMPLICATIONS OF BUSINESS AS USUAL
Question 8. One thing I found lacking from most of the analyses was
any kind of discussion of their broader implications. For example what
kind of world will we live in 2035 if the forecasts contained in the
reference cases prove accurate, a world that consumes 107 million
barrels of oil per day.
Mr. Burkhard, in your testimony you describe a world in which
access to energy services has allowed an unprecedented number of people
to join the ranks of the middle class. Further reduction in global
poverty is an outcome we can all celebrate.
But I appreciated Ambassador Jones' testimony as well, which
devoted some attention to the risks of continuing on our present path.
These include serious risks to national security, economic development,
and of course the environment.
If I may quote from the Ambassador's written testimony:
. . . the global energy system, in which all countries are
interdependent, faces a future that is increasingly untenable.
To continue business-as-usual risks heightened insecurity,
increasing economic volatility, and irreparable harm to the
environment. We truly need a transformation in the world's
energy system to a more secure, sustainable model.
I completely agree. Energy policy raises complex questions of
equity and justice. I believe that too often, people who point to the
unsustainable nature of our energy system are labeled as ``anti-
growth''. For all our sakes, I hope we can begin to move beyond such
characterizations, and start talking about policy that can foster both
growth and sustainability.
All Witnesses, would you please comment on the implications of
continuing on our business-as-usual trajectory (i.e. the trajectory
outlined in the EIA reference case)?
Answer. Continuing a business-as-usual trajectory leads to a future
fraught with risk and unsustainable from an economic, security and
environmental perspective. In our Current Policies Scenario, in which
government policies are unchanged, we project world primary energy
demand to rise by almost 50% over the next 25 years, underpinned by an
unmitigated increase in global consumption of fossil-fuels (oil, gas
and coal) led by emerging economies. The result is an energy mix that
still remains heavily slanted toward fossil-fuels in 2035, and tighter
energy markets characterized by higher prices and heightened
volatility. Furthermore, continued dependence on fossil-fuels at levels
in our Current Policies Scenario results in a global average
temperature increase exceeding six degrees Celsius by 2100. At the same
time, energy security risks on the supply side also increase. Suppliers
of oil and gas become more concentrated, with the OPEC share of global
oil supply rising toward half of the market by 2035. The level of
investment to maintain existing supply and develop new ones is massive.
There is a real risk that this spending will not fully come forward.
National companies, which often have other demands placed on their
financial resources and are not always market-oriented, are exercising
greater control over development of indigenous supplies.
INVESTMENT LEVELS NEEDED IN NEXT HALF CENTURY
Question 9. The International Energy Agency has said that
investment totaling $45 trillion might be needed over the next half-
century to prevent energy shortages and greenhouse gas emissions from
undermining global economic growth. Is this analysis still up to date
and accurate?
Answer. Analysis performed for the IEA publication Energy
Technology Perspectives 2010 (ETP) shows that a transition to a low-
carbon energy system would require the investment of USD 46 trillion
additional to the investment required in the ETP's Baseline scenario
from 2010 to 2050. These additional investments are needed to achieve
the global goal of halving energy related CO2 emissions by 2050
compared to 2005 levels. Half of these additional investments are
needed in the transport sector for advanced vehicle technologies.
However, the transition to a low-carbon economy will result in
significant energy security and economic benefits. For example, this
additional investment would yield important fuel cost savings, due to
efficiency improvements and as lower fuel demand drives down prices.
Gross fuel-cost savings are estimated to be USD 112 trillion over this
period. Subtracting these fuel savings from the additional investment
costs yields net savings of USD 66 trillion. Even if both the
investments and fuel savings over the period to 2050 are discounted
back to their present values using a 10% discount rate, the net savings
amount to USD 8 trillion.
HOW TO INCREASE ENERGY DIVERSITY
Question 10a. A common theme across all the witness testimony is
that global energy demand is increasing and fossil fuel prices are
likely to continue to increase. So it seems like if the U.S. continues
to ignore this problem, the economic and security impacts will be
significant. The witnesses also all seem to agree that diversifying
America's sources of energy is a key way to mitigate these harmful
impacts.
What are the most economically efficient policies to increase U.S.
energy diversity without the need for government to pick technology or
special interest winners or losers?
Answer. Energy security is enhanced both by measures to diversify
the energy mix and to reduce the intensity (and overall level) of
energy use. Measures to promote energy efficiency represent the most
economical opportunities for increasing US energy security. Significant
opportunities exist in vehicles, buildings, appliances, lighting,
industrial equipment and power generation technology.
Diversity, however, is also critical. Unfortunately, the US primary
energy mix today remains heavily weighted toward fossil-fuels (37% oil,
24% coal, 24% gas). Nuclear accounts for only about 9.5% of primary
energy demand. The shares of other sources are even less: biomass,
under 4%; hydropower, less than 1%; and other renewable energy sources,
less than 1%. In the Current Policies Scenario of the World Energy
Outlook 2010, fossil fuels still dominate the mix in 2035, accounting
for more than three-quarters of US primary energy demand. IEA
recommendations that would promote US energy diversity include: i)
focus on decreasing fossil fuel dependence by pushing for strong energy
efficiency and clean energy supply policies, ii) evaluate the costs and
benefits of establishing a consistent CO2 price, taking account of
international experience in order to support market-pull measures for
the accelerated introduction of clean energy technologies and iii)
reinforce the development of open and competitive energy markets
through consistent regulatory frameworks.
Question 10b. Do you agree with many energy experts who argue that
a predictable price on carbon designed in a way that minimizes price
volatility is the most economically efficiency and technology neutral
way to realize greater energy efficiency and diversity?
Answer. Putting a price on carbon is a cornerstone policy in
climate change response. It is inherently economically efficient
because it captures a wider range of activities across the economy than
a policy targeted only on a particular technology or narrow sector, and
as such a lower-cost mix of measures should come forward to meet a
given target. Also, It has the benefit of being technology neutral.
Carbon price volatility can be managed in many ways, which is
important for investor confidence. In an emissions trading scheme,
banking of allowances between years is a critical tool for participants
to be able to manage changing conditions, and has been very successful
in managing price volatility in the US SO2 allowances
program and in the European Emissions Trading System. Other proposed
trading schemes introduce price caps and floors as a safety-valve
against price excursions. These could be helpful if they are set at
high enough levels, and if there is confidence in the market that they
will not be altered. Finally a fixed carbon price (carbon tax) provides
the most predictable investment climate, as long as there is investor
confidence that the price is not subject to change with political
cycles. However a fixed carbon price has the disadvantages that there
is no guarantee on the level of emissions reductions that will be
delivered, and it relies on the political will to set the tax at a high
enough level, and willingness to increase it if emissions are higher
than anticipated. Given the revolution in our energy systems needed to
stay within the 2 degrees climate target agreed at Canc#n, caps on
emissions may be preferable to give certainty over delivery of
emissions targets, and in this case price volatility is manageable with
appropriate design choices (such as banking). However in the real world
there is no one ``right'' policy mix: the most effective policy is that
which maximises economic efficiency, within the constraints of
political and public acceptability.
Moreover there are market barriers and imperfections that mean that
a carbon price alone is not sufficient. In particular for energy
efficiency, there is a huge reservoir of untapped potential for
efficiency improvements that are already cost-effective at today's
energy prices. The key to unlocking this potential is not so much to
increase prices further, as it is to remove the non-economic barriers
to energy efficiency's exploitation. These barriers include lack of
information and split incentives (i.e. those manufacturing equipment or
constructing buildings are usually not those who will use them), and
policies need to be designed in light of real-world, rather than
theoretical, consumer behaviour. Energy efficiency standards,
labelling, and incentive schemes are all powerful tools in
supplementing a carbon price to unlock this energy efficiency
potential.
Question 10c. Are there links between policies to reduce greenhouse
gas emissions and increasing energy diversity? If such policies are
successful in significantly reducing world demand for fossil fuels,
what impact on future prices is that likely to have?
Answer. In practice, many policies aimed at reducing GHG emissions
from the energy sector will also have the effect of increasing energy
diversity. Policies that promote the development and deployment of non-
fossil fuel and renewable energy sources will lead to diversification
away from fossil fuels. These can include renewables standards, feed-in
tariffs, direct support to utilities to expand or develop non-fossil
fuel energy sources, or the implementation of a carbon price (through a
cap and trade system or through taxation). Policies designed to
increase energy efficiency will not, per se, increase energy diversity,
but can contribute to energy security as well as reducing GHG
emissions.
The 450 Scenario of the IEA's World Energy Outlook 2010 assumes
strong global action to reduce GHG emissions. In this scenario energy
diversity is greatly increased by 2035 compared to 2008. In the US, in
2008, 49% of electricity generation came from coal, and 21% from gas,
with just under 29% coming from non-fossil fuel sources. By contrast,
in the 450 Scenario in 2035, these fossil fuels' combined contribution
to electricity generation is projected to fall to just over 37%, with
nuclear contributing just over one quarter, and various renewable
technologies making up the remaining 37%, with none of these making up
more than 14% of the total energy mix. The reduced demand for fossil
fuels compared to a scenario with no additional policy to reduce GHGs
is expected to lead to significantly lower prices. For instance, in the
450 Scenario, the oil price is expected to reach $90 per barrel in 2009
dollars by 2035, as compared to $135 per barrel in 2035 in the Current
Policies Scenario, which assumes no policy change from mid-2010.
______
[Responses to the following questions were not received at
the time the hearing went to press:]
Questions for Jim Burkhard From Senator Murkowski
Question 1. The need for oil exploration: About two years ago you
said that ``If oil demand does not begin to recover next year, the oil
market could face a large surplus of production capacity for the next
several years--even if growth in production capacity slows
significantly:'' This of course was when oil was barely above $40 a
barrel, and it's obvious that demand has picked up enough and that OPEC
has restricted enough output to more than double that price. My
question is on investment in new reserves. Are enough exploratory
operations underway to comfortably back up production for projected
demand growth?
US ENERGY COMPANIES VERSUS NATIONAL OIL COMPANIES (NOCS)
Question 2. Can you describe how U.S. oil and gas producers operate
with any disadvantages relative to National Oil Companies such as the
OPEC owner companies?
OIL MARKETS
Question 3. If only about 3 percent of the world's oil travels
through the Suez canal and the SUMED pipeline, yet we are seeing some
influence on the global commodity price resulting from instability
around the Suez, does this indicate that seemingly small disruptions,
real or potential, can have comparatively large impacts on global
markets?
MAJOR OIL DISCOVERIES
Question 4. What was the impact on global investment and markets
when the Tupi field was discovered off of Brazil in 2006, and how does
the addition of a multibillion barrel discovery impact the host nation
and the industry?
CRISIS-DRIVEN ENERGY POLICY
Question 5. The Outer Continental Shelf Lands Act was implemented
after the Arab oil embargo and subsequent price controls and economic
shocks of the 1970's, as was the authorization of the Trans-Alaska
Pipeline System. Are these patterns of crisis and response as an
unavoidable trend in U.S. energy policy?
a. Is the U.S., in your group's view, more proactive or
reactive in its energy policy?
CLEAN ENERGY STANDARD
Question 6. Should we learn a lesson from the Renewable Fuel
Standard, which has fallen short of expectations, when considering an
aggressive electricity mandate like the one the President is calling
for? How likely is it that we will create unforeseen problems if we put
a CES in place? To name just one example, will transmission problems
and our inability to add significant amounts of renewable energy to the
grid--become the new ``blend wall''?
ALTERNATIVES TO OIL
Question 7. How substantial of an impact do you believe advanced
biofuels, electric vehicles, and other technologies will have on
petroleum consumption by 2020? By 2030?
FOREIGN OIL DEPENDENCE
Question 8. If Congress had allowed the Coastal Plain of ANWR and
other parts of Alaska to be opened to production, in 1 995 for example,
we would be producing domestic oil at a considerably higher rate. What
would that mean for our nation's energy security? Would we he more
protected, or less protected, from civil unrest in Egypt, Jordan, and
other parts of the Middle East? In the event of a supply disruption
abroad, would we be better equipped, or less prepared, to deal with
import shortages?
PROJECTED OIL PRICES
Question 9. In a hypothetical scenario of September 2012., with
unemployment is down to 8.0%, the economy growing at greater than 3.0%
each quarter, and world markets on the upswing, where would you
forecast the price of oil?
OFFSHORE MORATORIUM
Question 10. How does the amount of oil that could he taken offline
by unrest in the Middle East compare to the amount of production that
will be lost because of the absence of new exploratory permits in the
Gulf of Mexico, and the absence of resumed exploratory operations?
ECONOMIC RECOVERY
Question 11. Adam Sieminski, the Chief Energy Economist for
Deutsche Bank, recently wrote that ``We estimate that a [10 dollar]
rise in the oil price subtracts approximately 0.5 percentage points off
U.S. growth.'' Do any of you agree with Mr. Sieminski's assessment?
a. Would this calculation change if the US supplied 60% of
its own oil as opposed to importing 60% of its oil?
PRICE INCREASES
Question 12. The head of the Bipartisan Policy Center noted earlier
this week that ``A one-dollar, one-day increase in a barrel of oil
takes $12 million out of the U.S. economy. If tensions in the Mideast
cause oil prices to rise by $5 for even just three months, over 5
billion dollars will leave the U.S. economy.'' Do any of you disagree
with that assessment?
IMPACT OF FEDERAL POLICIES
Question 13. What role does the federal government's stimulus
policies, and the Federal Reserve's second round of quantitative
easing, have played in boosting commodity prices? Have these policies
boosted the price of oil, and, if so, by how much?
MODULAR NUCLEAR REACTORS
Question 14. What role do you believe small modular nuclear
reactors will have in meeting the global demand for electricity? What
countries are moving forward with this technology and what countries
are interesting in acquiring these reactors?
OIL SPILL REPORT
Question 15. Have you reviewed the recommendations made by the
President's Oil Spill Commission? I lave you conducted any analysis on
the impact those recommendations, if fully implemented, would have on
domestic oil production, our import levels, and the global price of
oil?
CHINA
Question 16. Can you shed light on what China's energy picture
really looks like, not just for renewable energy, but also its future
demand for oil, natural gas, and coal?
Questions for Jim Burkhard From Senator Cantwell
EFFECT OF DOMESTIC DRILLING ON GAS PRICES AND FOREIGN OIL DEPENDENCE
Question 1. In response to the recent political unrest in the
Middle East, and rising oil prices, we have heard familiar calls to
expand domestic drilling in the United States--including offshore and
in the pristine Arctic National Wildlife Refuge (ANWR)----typically
with the claim that such actions will lower gasoline prices or reduce
our dangerous over-reliance on foreign oil.
An Energy Information Administration (EIA) study from May 2008\1\
projected the effects on oil prices of drilling in the Arctic National
Wildlife Refuge. According to EIA's projections, in the most optimistic
case, drilling in AN WR would reduce crude oil prices by approximately
$1.44 per barrel. I understand this would translate to approximately 3
to 4 cents per gallon of gasoline at the pump about 20 years from now.
---------------------------------------------------------------------------
\1\ http://www.eia.doe.gov/oiaf/servicerpt/anwr/results.html
---------------------------------------------------------------------------
It seems that EIA has found that drilling offshore would have a
similarly negligible effect on prices. FIA issued an analysis in 2009
that examined the impact of maintaining the historical moratorium on
drilling off the Atlantic, Pacific, and Eastern Gulf of Mexico.
According to that analysis: ``With limited access to the lower 48
OCS...there [would be] a small increase in world oil prices...The
average price of imported low-sulfur crude...is $1.34 per barrel
higher, and the average U.S. price of gasoline is 3 cents per gallon
higher.''
Mr. Jones, Diwan, or Burkhard, would you please comment on your
views on the ability of expanded domestic drilling to affect world oil
prices?
IS OPEC ABLE TO OFFSET ANY INCREASED DOMESTIC DRILLING
Question 2. A number of experts have argued that any price impact
of increased domestic production can be easily offset by OPEC.
According to another EIA factsheet\2\:
---------------------------------------------------------------------------
\2\ EIA Factsheet. ``Gasoline Explained: Factors Affecting Gasoline
Prices'', available at http://tonto.eia.doe.gov/energyexplained/
index.cfm?page=gasoline_factors_affecting_prices
One of the major factors on the supply side is OPEC, which
can sometimes exert significant influence on prices by setting
an upper production limit on its members, which produce about
40% of the world's crude oil. OPEC countries have essentially
all of the world's spare oil production capacity, and possess
---------------------------------------------------------------------------
about two-thirds of the world's estimated crude oil reserves.
Mr. Newell, Diwan, and Burkhard, is it true that OPEC, by modestly
curtailing its output, has the power to offset any downward pressure
that a marginal increase in US oil production might otherwise produce?
EFFECT OF SPECULATION ON OIL PRICES
Question 3. Several of the testified that oil price movements can
be explained by supply and demand fundamentals, and these explain the
upward pressure we've seen in recent months. We often hear about the
lack of a ``conclusive'' smoking gun that links oil price spikes to
speculation in the derivatives markets.
However, as you may know, the recently-passed Dodd-Frank Act
requires the Commodities Future Trading Commission (CFTC) to establish
rules to eliminate excessive position limits. Unfortunately, the 180-
day deadline for those rules has passed and the regulatory process of
establishing position limits is still in the early stages, and the
limits are planned to be phased in over time.
Can the witnesses please comment on the likelihood of seeing a huge
oil price spike this summer of the magnitude that we saw in the summer
of 2008?
Do any of the witnesses believe that putting some limits on
excessive speculation reduces the chances of rapid rise in oil prices
similar to the summer of 2008?
EFFECT OF NEW PRODUCTION TECHNOLOGIES ON PRICES
Question 4. There seems to he some disagreement on whether
investment in developing new production technologies ends up reducing
the price of fossil fuels. We have heard a great deal about how oil and
gas production is a capital intensive business that requires
significant investment in new technologies to access new resources,
whether those are unconventional resources, such as oil sands or shale,
or hard to access resources, such as ultra-deepwater drilling.
Does investment in developing such hard-to-access resources result
in lower fossil fuel prices? Or does it simply enable the production of
harder to access and more expensive resources, thereby ensuring that
oil and natural gas will only continue to flow as long as global prices
remain high? Are you concerned that the U.S. is locking itself into
dependence on a resource that is destined to get more and more
expensive over time?
Do you believe there is now a new normal for fossil fuel prices?
Just a decade ago OPEC had a $22 to $28 a barrel target range. In 2004,
Ali Naimi, the Saudi oil minister called $30 to $34 a barrel a ``fair
and reasonable price'' for oil. Why is the world now so willing to
accept considerable higher level of fossil fuel prices?
U.S. OIL DEMAND CURVE
Question 6. I found one of the most interesting trends across your
collective forecasts is the flat, or even declining, demand for oil in
developed countries, including the United States, over the next 25
years.
Mr. Burkhard's testimony notes that CERA believes aggregate oil
demand in developed markets peaked in 2005 and will not exceed that
level again.
The IEA predicts U.S. oil demand will drop by 10% by 2035.
The EIA reference case predicts that total liquid fuels consumption
in the U.S. will increase 17%, to 22.0 million gallons per day, but
almost all of that increase will come from biofuels. Oil demand appears
essentially flat or falling.
If Congress and the Bush and Obama Administrations had failed to
enact these policies, how likely is it that forecasted U.S. oil demand
would be falling over the next 25 years?
If Congress and the Administration had failed to enact these
policies, what would you anticipate would be the effect on global oil
prices in 2035, compared with your reference case?
MEETING RENEWABLE FUELS TARGETS
Question 7. I am discouraged by EIA's prediction that the market
will be unable to meet the targets set forth in RFS2, which is the
revised Renewable Fuels Standard that Congress passed in 2007.
That standard mandates production of thirty-six billion gallons of
biofuels a year by the year 2022, sixteen billion gallons of which must
be of ``cellulosic'' origin.
Your agency's analysis states that: -ETA's present view of the
projected rates of technology development and market penetration of
cellulosic biofuel technologies suggests that available quantities of
cellulosic biofuels will be insufficient to meet the renewable fuels
standard targets for cellulosic biofuels before 2022.''
Do you believe there will be enough flexible fuel vehicles
available in America in 2022 to be able to consume biofuels production
mandates in the RFS-2?
IMPLICATIONS OF BUSINESS AS USUAL
Question 8. One thing I found lacking from most of the analyses was
any kind of discussion of their broader implications. For example what
kind of world will we live in 2035 if the forecasts contained in the
reference cases prove accurate, a world that consumes 107 million
barrels of oil per day.
Mr. Burkhard, in your testimony you describe a world in which
access to energy services has allowed an unprecedented number of people
to join the ranks of the middle class. Further reduction in global
poverty is an outcome we can all celebrate.
But I appreciated Ambassador Jones' testimony as well, which
devoted some attention to the risks of continuing on our present path.
These include serious risks to national security, economic development,
and of course the environment.
If I may quote from the Ambassador's written testimony:
...the global energy system, in which all countries are
interdependent, faces a future that is increasingly untenable.
To continue business-as-usual risks heightened insecurity,
increasing economic volatility, and irreparable harm to the
environment. We truly need a transformation in the world's
energy system to a more secure, sustainable model...''
I completely agree. Energy policy raises complex questions of
equity and justice. I believe that too often, people who point to the
unsustainable nature of our energy system are labeled as ``anti-
growth''. For all our sakes, I hope we can begin to move beyond such
characterizations, and start talking about policy that can foster both
growth and sustainability.
Would you please comment on the implications of continuing on our
business-as-usual trajectory (i.e. the trajectory outlined in the EIA
reference case)?
HOW TO INCREASE ENERGY DIVERSITY
Question 11. A common theme across all the witness testimony is
that global energy demand is increasing and fossil fuel prices are
likely to continue to increase. So it seems like if the U.S. continues
to ignore this problem, the economic and security impacts will be
significant. The witnesses also all seem to agree that diversifying
America's sources of energy is a key way to mitigate these harmful
impacts.
What are the most economically efficient policies to increase U.S.
energy diversity without the need for government to pick technology or
special interest winners or losers?
Do you agree with many energy experts who argue that a predictable
price on carbon designed in a way that minimizes price volatility is
the most economically efficiency and technology neutral way to realize
greater energy efficiency and diversity?
Are there links between policies to reduce greenhouse gas emissions
and increasing energy diversity? If such policies are successful in
significantly reducing world demand for fossil fuels, what impact on
future prices is that likely to have?
______
Questions for Roger Diwan From Senator Murkowski
US ENERGY COMPANIES VERSUS NATIONAL OIL COMPANIES (NOCS)
Question 1. Can you describe how U.S. oil and gas producers operate
with any disadvantages relative to National Oil Companies such as the
OPEC owner companies?
OIL MARKETS
Question 2. If only about 3 percent of the world's oil travels
through the Suez canal and the SUMED pipeline, yet we are seeing some
influence on the global commodity price resulting from instability
around the Suez, does this indicate that seemingly small disruptions,
real or potential, can have comparatively large impacts on global
markets?
MAJOR OIL DISCOVERIES
Question 3. What was the impact on global investment and markets
when the Tupi field was discovered off of Brazil in 2006, and how does
the addition of a multibillion barrel discovery impact the host nation
and the industry?
CRISIS-DRIVEN ENERGY POLICY
Question 4. The Outer Continental Shelf Lands Act was implemented
after the Arab oil embargo and subsequent price controls and economic
shocks of the 1970's, as was the authorization of the Trans-Alaska
Pipeline System. Are these patterns of crisis and response as an
unavoidable trend in U.S. energy policy?
a. Is the U.S., in your group's view, more proactive or
reactive in its energy policy?
CLEAN ENERGY STANDARD
Question 5. Should we learn a lesson from the Renewable Fuel
Standard, which has fallen short of expectations, when considering an
aggressive electricity mandate like the one the President is calling
for? How likely is it that we will create unforeseen problems if we put
a CES in place? To name just one example, will transmission problems
and our inability to add significant amounts of renewable energy to the
grid--become the new ``blend wall''?
ALTERNATIVES TO OIL
Question 6. How substantial of an impact do you believe advanced
biofuels, electric vehicles, and other technologies will have on
petroleum consumption by 2020? By 2030?
FOREIGN OIL DEPENDENCE
Question 7. If Congress had allowed the Coastal Plain of ANWR and
other parts of Alaska to be opened to production, in 1 995 for example,
we would be producing domestic oil at a considerably higher rate. What
would that mean for our nation's energy security? Would we he more
protected, or less protected, from civil unrest in Egypt, Jordan, and
other parts of the Middle East? In the event of a supply disruption
abroad, would we be better equipped, or less prepared, to deal with
import shortages?
PROJECTED OIL PRICES
Question 8. In a hypothetical scenario of September 2012., with
unemployment is down to 8.0%, the economy growing at greater than 3.0%
each quarter, and world markets on the upswing, where would you
forecast the price of oil?
OFFSHORE MORATORIUM
Question 9. How does the amount of oil that could he taken offline
by unrest in the Middle East compare to the amount of production that
will be lost because of the absence of new exploratory permits in the
Gulf of Mexico, and the absence of resumed exploratory operations?
ECONOMIC RECOVERY
Question 10. Adam Sieminski, the Chief Energy Economist for
Deutsche Bank, recently wrote that ``We estimate that a [10 dollar]
rise in the oil price subtracts approximately 0.5 percentage points off
U.S. growth.'' Do any of you agree with Mr. Sieminski's assessment?
a. Would this calculation change if the US supplied 60% of
its own oil as opposed to importing 60% of its oil?
PRICE INCREASES
Question 11. The head of the Bipartisan Policy Center noted earlier
this week that ``A one-dollar, one-day increase in a barrel of oil
takes $12 million out of the U.S. economy. If tensions in the Mideast
cause oil prices to rise by $5 for even just three months, over 5
billion dollars will leave the U.S. economy.'' Do any of you disagree
with that assessment?
IMPACT OF FEDERAL POLICIES
Question 12. What role does the federal government's stimulus
policies, and the Federal Reserve's second round of quantitative
easing, have played in boosting commodity prices? Have these policies
boosted the price of oil, and, if so, by how much?
MODULAR NUCLEAR REACTORS
Question 13. What role do you believe small modular nuclear
reactors will have in meeting the global demand for electricity? What
countries are moving forward with this technology and what countries
are interesting in acquiring these reactors?
OIL SPILL REPORT
Question 14. Have you reviewed the recommendations made by the
President's Oil Spill Commission? I lave you conducted any analysis on
the impact those recommendations, if fully implemented, would have on
domestic oil production, our import levels, and the global price of
oil?
CHINA
Question 15. Can you shed light on what China's energy picture
really looks like, not just for renewable energy, but also its future
demand for oil, natural gas, and coal?
Questions for Roger Diwan From Senator Cantwell
EFFECT OF DOMESTIC DRILLING ON GAS PRICES AND FOREIGN OIL DEPENDENCE
Question 1. In response to the recent political unrest in the
Middle East, and rising oil prices, we have heard familiar calls to
expand domestic drilling in the United States--including offshore and
in the pristine Arctic National Wildlife Refuge (ANWR)----typically
with the claim that such actions will lower gasoline prices or reduce
our dangerous over-reliance on foreign oil.
An Energy Information Administration (EIA) study from May 2008\1\
projected the effects on oil prices of drilling in the Arctic National
Wildlife Refuge. According to EIA's projections, in the most optimistic
case, drilling in AN WR would reduce crude oil prices by approximately
$1.44 per barrel. I understand this would translate to approximately 3
to 4 cents per gallon of gasoline at the pump about 20 years from now.
---------------------------------------------------------------------------
\1\ http://www.eia.doe.gov/oiaf/servicerpt/anwr/results.html
---------------------------------------------------------------------------
It seems that EIA has found that drilling offshore would have a
similarly negligible effect on prices. FIA issued an analysis in 2009
that examined the impact of maintaining the historical moratorium on
drilling off the Atlantic, Pacific, and Eastern Gulf of Mexico.
According to that analysis: ``With limited access to the lower 48
OCS...there [would be] a small increase in world oil prices...The
average price of imported low-sulfur crude...is $1.34 per barrel
higher, and the average U.S. price of gasoline is 3 cents per gallon
higher.''
Mr. Jones, Diwan, or Burkhard, would you please comment on your
views on the ability of expanded domestic drilling to affect world oil
prices?
IS OPEC ABLE TO OFFSET ANY INCREASED DOMESTIC DRILLING
Question 2. A number of experts have argued that any price impact
of increased domestic production can be easily offset by OPEC.
According to another EIA factsheet\2\:
---------------------------------------------------------------------------
\2\ EIA Factsheet. ``Gasoline Explained: Factors Affecting Gasoline
Prices'', available at http://tonto.eia.doe.gov/energyexplained/
index.cfm?page=gasoline_factors_affecting_prices
One of the major factors on the supply side is OPEC, which
can sometimes exert significant influence on prices by setting
an upper production limit on its members, which produce about
40% of the world's crude oil. OPEC countries have essentially
all of the world's spare oil production capacity, and possess
---------------------------------------------------------------------------
about two-thirds of the world's estimated crude oil reserves.
Mr. Newell, Diwan, and Burkhard, is it true that OPEC, by modestly
curtailing its output, has the power to offset any downward pressure
that a marginal increase in US oil production might otherwise produce?
EFFECT OF SPECULATION ON OIL PRICES
Question 3. Several of the testified that oil price movements can
be explained by supply and demand fundamentals, and these explain the
upward pressure we've seen in recent months. We often hear about the
lack of a ``conclusive'' smoking gun that links oil price spikes to
speculation in the derivatives markets.
However, as you may know, the recently-passed Dodd-Frank Act
requires the Commodities Future Trading Commission (CFTC) to establish
rules to eliminate excessive position limits. Unfortunately, the 180-
day deadline for those rules has passed and the regulatory process of
establishing position limits is still in the early stages, and the
limits are planned to be phased in over time.
Can the witnesses please comment on the likelihood of seeing a huge
oil price spike this summer of the magnitude that we saw in the summer
of 2008?
Do any of the witnesses believe that putting some limits on
excessive speculation reduces the chances of rapid rise in oil prices
similar to the summer of 2008?
EFFECT OF NEW PRODUCTION TECHNOLOGIES ON PRICES
Question 4. There seems to he some disagreement on whether
investment in developing new production technologies ends up reducing
the price of fossil fuels. We have heard a great deal about how oil and
gas production is a capital intensive business that requires
significant investment in new technologies to access new resources,
whether those are unconventional resources, such as oil sands or shale,
or hard to access resources, such as ultra-deepwater drilling.
Does investment in developing such hard-to-access resources result
in lower fossil fuel prices? Or does it simply enable the production of
harder to access and more expensive resources, thereby ensuring that
oil and natural gas will only continue to flow as long as global prices
remain high? Are you concerned that the U.S. is locking itself into
dependence on a resource that is destined to get more and more
expensive over time?
Do you believe there is now a new normal for fossil fuel prices?
Just a decade ago OPEC had a $22 to $28 a barrel target range. In 2004,
Ali Naimi, the Saudi oil minister called $30 to $34 a barrel a ``fair
and reasonable price'' for oil. Why is the world now so willing to
accept considerable higher level of fossil fuel prices?
U.S. OIL DEMAND CURVE
Question 6. I found one of the most interesting trends across your
collective forecasts is the flat, or even declining, demand for oil in
developed countries, including the United States, over the next 25
years.
Mr. Burkhard's testimony notes that CERA believes aggregate oil
demand in developed markets peaked in 2005 and will not exceed that
level again.
The IEA predicts U.S. oil demand will drop by 10% by 2035.
The EIA reference case predicts that total liquid fuels consumption
in the U.S. will increase 17%, to 22.0 million gallons per day, but
almost all of that increase will come from biofuels. Oil demand appears
essentially flat or falling.
If Congress and the Bush and Obama Administrations had failed to
enact these policies, how likely is it that forecasted U.S. oil demand
would be falling over the next 25 years?
If Congress and the Administration had failed to enact these
policies, what would you anticipate would be the effect on global oil
prices in 2035, compared with your reference case?
MEETING RENEWABLE FUELS TARGETS
Question 7. I am discouraged by EIA's prediction that the market
will be unable to meet the targets set forth in RFS2, which is the
revised Renewable Fuels Standard that Congress passed in 2007.
That standard mandates production of thirty-six billion gallons of
biofuels a year by the year 2022, sixteen billion gallons of which must
be of ``cellulosic'' origin.
Your agency's analysis states that: -ETA's present view of the
projected rates of technology development and market penetration of
cellulosic biofuel technologies suggests that available quantities of
cellulosic biofuels will be insufficient to meet the renewable fuels
standard targets for cellulosic biofuels before 2022.''
Do you believe there will be enough flexible fuel vehicles
available in America in 2022 to be able to consume biofuels production
mandates in the RFS-2?
IMPLICATIONS OF BUSINESS AS USUAL
Question 8. One thing I found lacking from most of the analyses was
any kind of discussion of their broader implications. For example what
kind of world will we live in 2035 if the forecasts contained in the
reference cases prove accurate, a world that consumes 107 million
barrels of oil per day.
Mr. Burkhard, in your testimony you describe a world in which
access to energy services has allowed an unprecedented number of people
to join the ranks of the middle class. Further reduction in global
poverty is an outcome we can all celebrate.
But I appreciated Ambassador Jones' testimony as well, which
devoted some attention to the risks of continuing on our present path.
These include serious risks to national security, economic development,
and of course the environment.
If I may quote from the Ambassador's written testimony:
...the global energy system, in which all countries are
interdependent, faces a future that is increasingly untenable.
To continue business-as-usual risks heightened insecurity,
increasing economic volatility, and irreparable harm to the
environment. We truly need a transformation in the world's
energy system to a more secure, sustainable model...''
I completely agree. Energy policy raises complex questions of
equity and justice. I believe that too often, people who point to the
unsustainable nature of our energy system are labeled as ``anti-
growth''. For all our sakes, I hope we can begin to move beyond such
characterizations, and start talking about policy that can foster both
growth and sustainability.
Would you please comment on the implications of continuing on our
business-as-usual trajectory (i.e. the trajectory outlined in the EIA
reference case)?
HOW TO INCREASE ENERGY DIVERSITY
Question 11. A common theme across all the witness testimony is
that global energy demand is increasing and fossil fuel prices are
likely to continue to increase. So it seems like if the U.S. continues
to ignore this problem, the economic and security impacts will be
significant. The witnesses also all seem to agree that diversifying
America's sources of energy is a key way to mitigate these harmful
impacts.
What are the most economically efficient policies to increase U.S.
energy diversity without the need for government to pick technology or
special interest winners or losers?
Do you agree with many energy experts who argue that a predictable
price on carbon designed in a way that minimizes price volatility is
the most economically efficiency and technology neutral way to realize
greater energy efficiency and diversity?
Are there links between policies to reduce greenhouse gas emissions
and increasing energy diversity? If such policies are successful in
significantly reducing world demand for fossil fuels, what impact on
future prices is that likely to have?