Changing energy markets and U.S. National Security. House hearing 2011

House 112-89. December 16, 2011. Changing energy markets and U.S. National Security. House of Representatives Hearing. 69 pages.

Excerpts follow:

Edward R. Royce, California.  Energy has become a national security issue in the United States. And one of the realities that we have to explore is the impact that energy has on so much of the trade issues, terrorism issues, even the nonproliferation issues.

We compete with China. It is going to impact jobs in the United States if energy costs go down in China as a result and if energy costs go up in the United States. So we have an opportunity. The United States has this opportunity, if you read the financial press, of being a net fuel exporter if we can access the oil sands from Alberta.  If we go forward with the Keystone pipeline. For the first time in 60 years our country would have the opportunity to be independent of the current circumstances where we depend upon the OPEC cartel, where we shift our dollars, our petro dollars into that market. And we should ask ourselves, at this point in time, are we better served recirculating those dollars, sending money to an ally, Canada.  We can continue with that trade imbalance with respect to the OPEC cartel or we can have our dollars stay at home, not being shipped to Saudi Arabia and Venezuela.

You can have American jobs if the U.S. Government and State governments will assist. There is a reason why unemployment is under 4 percent in North Dakota, and that is because of the booming energy sector there, that is because the administration has yet to find a way to shut that down. But not only does that benefit North Dakota, it is also benefiting Pennsylvania and other States.

I am going to go back to the Keystone pipeline, a 1,700-mile extension that would transport 830,000 barrels of oil per day from Alberta to our refineries here rather than in China. By the Chamber’s estimate—we know that the estimate of 20,000 direct jobs— by the Chamber estimate it is 200,000 indirect jobs in the United States. Yet we face delay after delay and now this suggestion of delay until the next election. Well, the Chinese are not waiting and if the energy isn’t piped to Texas refineries and refineries throughout the Midwest it is going to go instead to China.

The difficulty is that China has already invested $10 billion in Canada’s oil sands. Canada’s Prime Minister, as a result of this decision by our President, has already said the necessity of making sure that we are able to access Asian markets for our energy products is underscored by this delay.

Gerald E. Connolly, Virginia.   According to the EIA, the primary reason our dependence on foreign oil will decline is the adoption of aggressive vehicle efficiency standards, which will increase corporate average fuel economy standards to 54.5 miles by the year 2025. A projected increase in domestic oil production also will make a contribution

Proponents of the Keystone XL pipeline have argued it will increase U.S. access to Canadian oil. While this position has intuitive appeal, it deserves further examination. Five major oil pipelines already transport this oil derived from Canadian tar sands into the United States. These pipelines now terminate in Oklahoma, Illinois and Michigan, providing much of the United States with an ample supply of tar sands derived oil. In fact industry analysts note that these pipelines have produced an oversupply of oil in some parts of our country, creating low gas prices for some Americans at diminished oil company profits. The Keystone pipeline will provide an export outlet for Canadian oil, actually reducing supply in the Midwest by allowing oil companies to sell at higher priced markets elsewhere in the world.

While Canadian oil companies might increase their profits from selling oil overseas, such exports come at the expense of American consumers and American national security. If we are in conceptual agreement that there is a relationship between domestic oil supply and national security, then perhaps we should acknowledge that hemorrhaging oil overseas would undercut those benefits.

Proponents of the pipeline have argued it will create jobs. I ask unanimous consent to enter into the record a Washington Post Fact Check article noting that many job estimates offered by prominent elected officials have been wildly exaggerated. In reality the pipeline likely will produce at most some 6,000 annual temporary construction related jobs and as few as 50 permanent jobs. Compared to the half million public sector jobs that have been lost in the recent recession and nascent recovery, this is an anemic job boost at best. Irrespective of whether one is a climate change science denier or accepter, surely all of us could agree that additional oil transported by the Keystone pipeline should stay in the United States and absent legal guarantees likely will not.

Bill Johnson, Ohio.  You know, the lack of stability surrounding our energy markets today and the potential for even greater instability in the near future will not only continue to stunt the growth of our economy, it will jeopardize our national security. By importing oil from nations such as Saudi Arabia and Venezuela, the West is funding the spread of terrorism and foreign activism that stands in stark contrast to our foreign policy objectives.

Brad Sherman, California. Energy really comes down to two separate issues and that is how do we generate electricity and how do we move our vehicles. It is moving vehicles that has been the national security crisis because the world hasn’t found a better system yet.

I look forward to hearing from our witnesses chiefly as to how we are going to propel our vehicles without propelling to greater power the enemies of the United States, and finally I want to echo the gentleman from Virginia that a pipeline that bypasses America’s Midwest markets and takes oil to ports in the United States for possible export may not be the best way to assure our national security.

Mr. Neelesh Nerurkar, Specialist in Energy Policy, Congressional Research Service

Energy-intensive economic growth in developing countries has raised global energy demand in recent years. Economic growth is the main driver of energy demand. Energy production has been unable to keep up with this demand at previously prevailing prices. This contributed to rising energy prices, particularly for oil, and gave rise to energy security and economic concerns. Energy production is capital intensive. Projects have long lead times and can face policy and geopolitical constraints.

Oil prices fell with the global economic downturn in 2008 but have rebounded. Demand from developing countries has pushed global oil consumption to new highs in 2010 and 2011. Higher prices in turn have motivated investment, technology development and policy incentives, which have contributed to increasing energy supplies particularly from new, complex or expensive resources around the world.

A number of examples come from the United States and elsewhere in the Western Hemisphere; for instance, U.S. tight oil and shale gas production, U.S and Brazilian ethanol production, Brazil’s offshore pre-salt resources and Canada’s oil sands.

Turning to the oil market, the world consumes 88 million barrels a day of oil and related liquid fuels. Forty percent of that is met with oil from OPEC, which includes major oil producers in the Middle East, Africa and South America. The world’s largest non-OPEC oil producers are Russia and the United States. The United States is also the world’s largest oil consumer and largest importer. Net imports meet 45% of U.S. oil consumption, but this is down from a peak of 60% 2005. Net imports have declined by 4 million barrels a day in 6 years. Nearly half these declines can be attributed to lower consumption, a result of the economic downturn, and higher oil prices. The rest is due to higher domestic production of oil and other liquid fuels, particularly onshore crude oil and ethanol.

Among the largest declines in U.S. production have been in Alaska and California.

The oil market is globally integrated and oil market events anywhere can affect prices everywhere. For example, even though the United States imported little oil from Libya, the crisis there contributed to higher oil costs here whether that oil was imported by ship, by pipeline or produced at home. Foreign oil market disruptions could continue to affect U.S. oil prices even if the U.S. were to produce as much it consumed.

Robert McNally, President of the Rapidan Group, on Changing Energy Markets and US National Security.

Oil is the only major energy commodity we import and lies at the center of our national security concerns.  Our energy security is and will remain strongly linked to trends and developments in the global oil market, not just our import share. We are and will remain vulnerable to price shocks caused by tightening global supply-demand fundamentals and geopolitical disruptions anywhere in the global oil market. And the strategic importance of the Persian Gulf region and its enormous, low-cost hydrocarbon reserves is likely to grow in the coming decades as Asia taps them to fuel growth. Our geopolitical and homeland security interests will remain closely bound to the security of the Persian Gulf region, the sea-lanes to and from it, and the ability to prevent Gulf countries from spending their windfalls on threats to US and global security.

It must not be overlooked that the world urgently needs new productions just to offset declining production in mature fields. The global oil industry needs to find an amount equal to two-thirds of existing conventional production, or 47 mb/d, in coming decades just to offset declines in mature fields. This is in addition to the new oil needed to meet demand growth in Asia and the Middle East.

Ethanol accounts for about 10% of gasoline, and EIA projects all biofuels will rise from 4% of liquids supply in 2009 to 11% by 2035.

While higher US and hemispheric production can and should help fill the gap, OPEC and the Persian Gulf producers hold the bulk of the world’s low-cost, proved reserves (70% and 55%, respectively).

Foreign policy makers should take into account three global energy market changes that will pose large challenges to our energy and economic security.

The first is voracious growth in demand for energy, as well as for other natural resources, particularly from densely populated, fast-growing Asia, especially China and India. Achieving modern living standards in developing countries is impossible without consuming large amounts of dense, storable, reliable, and affordable energy. By these measures, fossil fuels are and will remain far superior to alternatives, especially in transportation. Unfortunately, no large scale, commercially viable alternatives to oil exist or are visible on the horizon. The US and other developed countries have made massive investments in oil fields, pipelines, terminals, refineries, tanks and dispensing stations in past decades. And rising Chinese, Indian and other Asian and Middle Eastern economies are starting to do the same.

Second, China and India are going to become tremendously dependent on flows of oil from the Middle East. The International Energy Agency projects China’s oil import dependence will rise from 54% in 2010 to 84% in 2035, and India’s will rise from 73% to 92% over the same period.3 The lion’s share of these imports will come from the Middle East. This is going to make China and India extremely concerned about protecting their access to Gulf supplies and sea-lanes, which is already a strategic concern for the United States.

Third, oil prices are going to gyrate more wildly than in the past as Saudi Arabia and OPEC’s ability to prevent price spikes erodes due to reduced spare capacity. This transition is overlooked but just as important as the first two noted above. The world oil market is leaving the relatively stable OPEC era and entering a new “Swing Era” in which large price swings rather than cartel production changes will balance global oil supply and demand. The Swing Era portends much higher oil price volatility, investment uncertainty in conventional and alternative energy and transportation technologies, and lower consensus estimates of global GDP growth. Ironically, Western governments and investors will miss OPEC, or at least the relative price stability OPEC tried to provide.  

In summary, soaring Asian energy demand, sharply increasing Asian dependence on the Persian Gulf, and wild oil price gyrations pose major challenges to US energy security and foreign policy.

What is the future role of OPEC? What happens to price stability?

The changing role of OPEC, with its implications for oil price stability, is the most important, and so far overlooked, feature of global energy markets. It will have enormous consequences for US economic and foreign policy, especially in our bilateral relations with Saudi Arabia, as noted further below. In short, soaring global demand and constrained supply growth is causing OPEC to lose its spare capacity cushion and therefore its ability to stabilize oil prices. While intuitively OPEC losing control may seem like a good thing, it actually means global oil prices, and therefore our pump prices, are going to swing much more wildly in the future, at times high enough to contribute to recessions as they did in 2008.

As a commodity, oil exhibits what economists call a very low price elasticity of demand. In plain English, this means supply and demand are very slow to respond to price shifts. Oil is a must-have commodity with no exact substitutes; when pump prices rise, most consumers have little choice in the near term but to pay more rather than buy less. And on the supply side, it takes years to develop new resources, even when the price incentive to do so rises sharply.

Since the beginning of the modern oil market, producers have tried to mitigate the tendency of oil prices to swing wildly. Standard Oil, the Texas Railroad Commission and the “Seven Sisters” (major western oil companies) succeeded at stabilizing prices by controlling supply, most importantly by holding spare production capacity back from the market and using it to balance swings in supply and demand. The 1967 Arab oil embargo did not lead to a major oil disruption or price spike, partly because the United States had spare capacity in reserve and increased production to make up for lost Arab producer exports. The 1973 Arab oil embargo did lead to an oil price spike, mainly because the year before – in March 1972 to be exact – the United States ran out of spare capacity.

OPEC took over control of the global oil market from the US and the Seven Sisters in the early 1970s. Since the mid-1980s, OPEC’s main tool to stabilize prices has been holding and using spare production capacity. If demand jumped unexpectedly or if supplies were suddenly disrupted, OPEC producers with spare capacity, especially Saudi Arabia, would release more oil, reducing the need for prices to swing in order to balance supply and demand.

But the years 2005-2008 marked the first time spare capacity ran out in peacetime since 1972. As in 1972, the reason was demand was racing faster than production. But today, no new cartel waited in the wings to satisfy global crude appetites. In 2008, market balance was achieved by sharply rising oil prices along with the financial crisis. While many in Washington, Paris, Riyadh, and Beijing publicly blamed speculators, energy experts and economists pointed instead to strong demand for a price inelastic commodity running up against a finite supply.

Going forward, OPEC will still be able to influence how and when oil prices bottom. It can and will likely still take oil off the market to keep prices from falling or to raise them, as it did in late 2008 and 2009.

But OPEC’s ability – really, Saudi Arabia’s ability – to prevent damaging price spikes has eroded. Therefore a replay of 2005-2008 is more a question of when than if. Global GDP growth remains oil intensive. When it picks up (and there are many macroeconomic risks currently, so the timing is uncertain), net non-OPEC supply growth is not expected to rise fast enough to meet incremental demand, requiring OPEC producers to increase production. OPEC is not investing enough in total production capacity to meet demand growth and still maintain the 4-5 mb/d spare capacity buffer needed to assure market participants it can respond to disruptions or tighter than expected fundamentals by adding supply. Saudi Arabia, the main spare capacity holder, says it will hold only 1.5 to 2.0 mb/d of spare capacity, and most other OPEC countries hold little if any back in spare.

As OPEC falters, the price mechanism will return to balance the market through demand destruction, enforcing the iron law that consumption cannot exceed production. Even if our import dependence declines, we will still be vulnerable to price gyrations that are very harmful for consumers and producers and will bedevil economic and foreign policy making.

What role do/should energy markets play in U.S. national security policy? In U.S. defense posturing?

Even if our import dependence falls, the US will still have a vital national security interest in the Persian Gulf region. Instability or disruptions in the Gulf will be felt quickly and directly at the pump in the US. Gulf producers will earn billions of dollars in revenue, and the US has an interest in seeing that those dollars do not finance terrorism or other threats to our security. And the US will need to ensure no country can use oil as a weapon or threaten vital trade routes and chokepoints.

While the US must find ways to share the costs, burdens, and responsibilities for protecting the global energy commons, our interest in preventing a regional or external hegemon from dominating the Persian Gulf will remain as vital in the next thirty years as it was in the past. The Carter Doctrine and its Reagan corollary must remain cornerstones of our energy security doctrines. The Carter Doctrine states: “An attempt by any outside force to gain control of the Persian Gulf region will be regarded as an assault on the vital interests of the United States of America, and such an assault will be repelled by any means necessary, including military force.” And its Reagan corollary extends the policy to include hegemonic threats to our Gulf allies by hostile regional powers, like Iran.

It will be especially important to repair and strengthen the fraying US relationship with Saudi Arabia. The relationship will likely loosen somewhat as Saudi Arabia and other Gulf producers see future sales growth and profits in Asia instead of the western hemisphere. But something bigger is at stake: The grand bargain whereby the US provides Saudi Arabia protection from regional and global adversaries in return for Riyadh ensuring stable oil supplies and prices. This grand bargain has served our national and economic interests, and mitigated occasional wars and disruptions in the region.

At present, each side is less certain the other can uphold his end of the bargain. If, as noted above, Saudi Arabia can no longer prevent oil price spikes from damaging the economy, it becomes less important in global affairs and US foreign policy. And if the US can no longer protect Saudi Arabia from a nuclear, belligerent Iran, then Riyadh’s interest in cooperating with us in many areas, including counter-terrorism and regional security, could decline.

Vulnerability of current and future energy markets to terrorism

Terrorists understand the vulnerability of energy infrastructure.  One consequence of low spare capacity is that any disruption, even of a relatively small size, can lead to an oil price spike. We saw this earlier this year in Libya, when the world lost about 1.7 mb/d of supply, equal to about half of total OPEC spare capacity. Prices jumped about $15 per barrel, helping to push gasoline prices here up to $4.00 per gallon and thereby hurting family budgets and economic growth.

What role does energy play in China’s foreign policy? What can be done to check China’s energy development in the western hemisphere?

China’s leaders are preoccupied with finding resources to supply its voracious growth, including energy resources. As its oil imports increase rapidly, China has followed an energy strategy similar to our policies over recent decades. As the US did forty years ago, China is reacting to the prospect of high and rising dependence on imports by building strategic stocks and implementing fuel economy and other efficiency standards. China is also fostering the growth of globally competitive energy companies and diversifying its sources of energy. And it is developing political relationships and strategic capabilities to protect its investment and supply lines.

China’s energy security policies could pose major indirect threats to our national security if Beijing concludes it can and should ignore our national security interests when engaging with foreign producers. This is of concern with Sudan, Venezuela, and especially Iran.

The Energy Information Administration (EIA) estimates US shale gas production has increased twelve-fold over the last decade, now amounting to 25% of total production. EIA projects shale gas will rise to 47% of total production by 2035. Whereas a few years ago we faced the prospect of importing increasing amounts of liquefied natural gas (LNG), we are now permitting export facilities. This new supply holds the potential to revitalize our chemical industry and economically depressed regions of our country, use more natural gas in electricity generation, and possibly fuel natural gas vehicles (though the cost of converting car and truck fleets and fueling infrastructure to natural gas would be very high and the transition would be long, making it impractical except in some centrally-fueled commercial fleets).

Even if we didn’t import a drop from the Middle East, our vital national interest there would remain. The Middle East and the Persian Gulf is and will remain the world’s most important energy region. As of 2009 it held 56% of global proven oil reserves, nearly all of those in the Persian Gulf.

With a higher market share and higher prices, Middle Eastern oil producers are going to earn trillions and trillions of dollars in revenues. We must remain engaged in that region partly to ensure that windfall is not spent to threaten us or our allies.

Another interest is to make sure that China and India’s soaring dependence on Middle East oil flow, mentioned earlier, does not lead to strategic competition or conflict. The International Energy Agency sees China’s import dependence headed over 84 percent and India’s over 92 percent by 2035.

U.S. foreign policy can and should aim to share the costs, burdens and responsibilities of protecting the Gulf and sea lanes with other friendly and capable importers. Such cooperation exists to some extent already, such as with multi national anti-piracy patrols. But for the foreseeable future only the United States can play the role of guaranteeing the stability of the Persian Gulf. And this brings

Gal Luft, Executive director, Institute for the analysis of global security & Adviser, U.S. Energy Security council.

Oil’s inordinate strategic importance

The vulnerabilities associated with oil dependency do not stem from the magnitude of petroleum imports or consumption but rather from oil’s status as a strategic commodity. Oil’s strategic status does not stem from the electricity sector – today only 1% of U.S. electricity is generated from oil and only 1% of U.S. oil demand is due to electricity generation – but from its virtual monopoly over transportation fuel. Transportation underlies the global economy and for the most part, our automobiles are blocked to fuels not made from oil. As long as this remains the case, those who control oil will enjoy inordinate power over global commerce and by extension the global economy. Petroleum today occupies the strategic ground that salt did many years ago when it dominated food preservation. Salt deposits conferred national power and wars were even fought over their control. Salt’s status as a strategic commodity ended with the invention of alternative ways to preserve food like canning and refrigeration.

The lion’s share of global oil reserves are controlled by a cartel with 79% of global conventional oil reserves are controlled by the OPEC cartel which by its very nature as a cartel is engaged in a deliberate effort to manipulate production in order to maximize the revenue of its member regimes. In terms of control over assets, OPEC is second to none. At $100 a barrel the value of its proven reserves is more than double the market capitalization of all the world’s publically traded companies combined.

The Arab Spring has exacerbated the situation. Hoping to avoid the fate of Egypt and Tunisia, Persian Gulf regimes of Saudi Arabia, Kuwait and the UAE showered their subjects with gifts and subsidies which increased their budget obligations significantly. Saudi Arabia alone almost doubled its $154 billion 2011 budget, committing $129 billion in salary hikes, subsidies and increase in pensions. Given that the primary income of these regimes is petrodollars, the bill for keeping the Persian Gulf monarchies in power is now being footed by every American. According to the Institute of International Finance, before the recent handouts were announced Saudi Arabia needed oil to sell for $68.50 a barrel to keep its budget balanced. The expensive response to the protests increased the breakeven price the Saudis need in order to balance their budget to at least $110 in 2015. The premium on the price of oil exacted by the increase in Gulf social spending has already added in 2011 about 35 cents to the price of a gallon of gasoline Americans had to pay at the pump or roughly $6 per fill up. Since oil price affects everything we buy from food to plastics, saving the House of Saud added roughly $1,500 annually to the expenditures of the average American family. At the very same time Americans are engaged in a heated debate about cutting entitlement programs at home, we are forced to fund more and more social programs aimed at keeping Middle Eastern dictators in power.

The need for high oil prices is not unique to Saudi Arabia. As Russia’s population dwindles, and the output of its newer fields fails to offset fast decline at mature deposits, Russia’s economy will growingly depend on high prices to meet its budgetary obligations. Contrary to popular belief, Russia is much more of an oil exporter than a gas exporter. In 2010, Russia produced 10.2 million barrels a day (mbd) of oil, while consuming only 3.2 mbd. This means that 70% of its crude production was exported or processed into petroleum products, half of which were sent abroad. By contrast, when it comes to natural gas, most of Russia’s production remains at home. In 2010, Russia consumed 414 billion cubic meters (bcm) of the 588 bcm it produced, leaving only 30% of total production for exports. This means that Russia will strengthen its engagement and coordination with OPEC with the aim of keeping prices sufficiently high.

Iran, Iraq, Kuwait, Venezuela and Nigeria will all need a higher per barrel oil price as they move toward a rocky future. With a population of 73 million in Iran and 30 million in Iraq and vast governmental sectors and social expenditures, the two countries need today a breakeven price of $125. By 2025 their populations will stand at 88 million and 45 million respectively. Where will the money come from? There is a limit to the amount of money to be made from exporting carpets, dates and pistachio nuts. There is no limit to the amount of revenues to be made from oil exports.

Massive growth in demand emanating from developing Asia

This month 70 years ago a surprise attack against the U.S. Naval base in Pearl Harbor plunged America into a horrific war against Imperial Japan. In focusing on the intelligence failure that enabled the attack, we have ignored the root cause of the calamity: the strategic importance of oil. Oil has always been the bottleneck of Japan’s industrialization. To satisfy its needs, Japan adopted an expansionist policy, attacking China in 1937 and French Indochina in 1940. The U.S., source of 80% of Japan’s imported oil, responded with a total oil embargo. Japan decided to up the ante and seize the petroleum-rich Dutch East Indies. To do so it was necessary to neutralize the U.S. Pacific fleet and this paved the way to Pearl Harbor. One lesson from the war in the Pacific is that when countries become oil starved they tend to miscalculate and resort to assertive foreign policy. This is something worth remembering today as another Asian power, China, thirsts for oil.

China’s economic growth is currently the life support mechanism of the world economy. Without it we would all be mired in a deep global recession. But this blistering growth creates challenges that need to be confronted head on today. China’s annual vehicle sales jumped about 10-fold in the past decade making it the world’s largest auto market. It is the world’s second largest oil consumer, and according to the recently published 2011 outlook of the International Energy Agency, it is projected to surpass the U.S. as the world’s number one importer by the end of the decade. Beijing’s commitment to “peaceful rise” may be genuine, but in a world competing over resources such good intentions might not be kept. Today, energy is already the main driver of China’s international behavior. Its energy needs have brought Beijing to turn a blind eye to human rights violations in Sudan, Myanmar and Uzbekistan. China’s pursuit of oil and gas resources in the East China Sea and the South China Sea has created tension in its relations with Japan and the members of the Association of East Asian Nations. In the energy rich Caspian Basin, China is strengthening its energy bonds with Turkmenistan, Uzbekistan and Kazakhstan while curbing U.S. influence in the region. In Africa and Latin America, the Sino-American relations may be heading toward a Fashoda moment as China’s neo-colonialism takes root. Last but not least, in the tumultuous Persian Gulf, the U.S. and China are increasingly likely to step on each other toes as the 21st century progresses. China’s energy deals with Iran have already brought Beijing to block U.S. attempts to get the UN Security Council to impose crippling sanctions against Tehran for continuing to develop nuclear weapons.

An oil thirsty China is likely to be one of America’s most pressing international security concerns in the decades to come, and in all likelihood the next president of the U.S. may be called to lead the country during an international crisis sparked by China’s oil pursuits.

Even if the scramble for resources can remain peaceful, the impact on energy markets would be profound. According to U.S. Energy Security Council member John Hofmeister, former President of Shell Oil North America, China’s oil demand is projected to grow from 9 mbd today to 15 mbd by 2015. India’s demand will grow from 4 to 7 mbd and the rest of the developing world would need another one mbd. In total, 10 million new barrels per day, equivalent to another Saudi Arabia, would have to come online in just a few years. No one can convincingly point out where this oil might come from.

U.S. response thus far: More self-sufficiency, less prosperity

Historically, the U.S. has focused on policies that increase either the availability of petroleum or the efficiency of its use. These approaches, while useful, are tactical rather than strategic. Reducing oil demand through fuel economy absent competitive markets in transportation fuels serves to reduce the trade deficit but it is insufficient to change the strategic status of oil. When oil-consuming countries increase their domestic production or reduce net demand, OPEC responds by throttling down supply to drive prices back up. This is essentially what has happened in recent years. Since President George W. Bush’s second term, the U.S. response to the undergoing changes has been mainly in the realm of increasing the fuel efficiency of cars and trucks as well as supply side solutions. Oil’s strategic importance was not reduced by the increase in efficiency or by the expansion of domestic production. During the 2005-2011 period, nearly 100 million new petroleum only vehicles rolled onto U.S. roads, each with a lifespan of nearly 15 years. In doing so, we extended oil’s virtual monopoly over transportation fuel by nearly two decades.

Congress can break oil’s virtual monopoly over transportation fuel by enacting an Open Fuel Standard, ensuring that every new car put on the road is open to some sort of fuel competition. The cheapest way to enable fuel competition is the flex fuel car, which looks and operates exactly like a gasoline car but has a $100 feature which enables it to run on any combination of gasoline and a variety of alcohol fuels made from natural gas, coal and biomass.

200 years ago Napoleon was preparing his army to march into Russia. At the time salt was the most important strategic commodity by virtue of its monopoly over food preservation. Salt deposits conferred national power and wars were even fought over the salt. Salt was the Achilles heel of Napoleon’s war machine. Its status as a strategic commodity ended with the invention of alternative ways to preserve food, like canning and refrigeration. Napoleon’s disastrous Russia campaign was the last time in history that salt played a role in world politics. Today we consume and import more salt than ever. Yet I doubt that anybody in this room is concerned about our salt dependence or where our salt is coming from. Petroleum today occupies the same strategic ground that salt did. With a simple legislative fix, at a zero cost to taxpayers, the U.S. Congress can deliver to oil the same fate that humanity delivered to salt. So let’s get it done.

Mr. ROYCE. In the near future, China is going to make up a third of the world’s oil demand growth, and that need has driven their foreign policy around the world. We have seen that whether it is in Sudan or in Burma or in Central Asia. We have seen some of the consequences because it is all about resources for Beijing. And I would add where China goes corruption often follows in terms of their attempts to have access to this. Now they are in our hemisphere. Now China is here. They have established a working group on energy, and Chinese companies have invested $10 billion in Canada’s oil sands. Now this is my perspective on this, but it seems to me that the Obama administration has laid out a welcome mat for China with respect to the Keystone pipeline project and the decision not to go forward. I base that partly on the reaction in Canada, or if any of the members of the press would like to talk to the Canadian Embassy about this, this really pained the Canadian Government. Just days after the Obama administration announced the Keystone delay, Canadian Prime Minister, Stephen Harper, met with China’s Hu Jintao. Harper was painfully blunt. What he said was, ‘‘This does underscore the necessity of Canada making sure that we are able to access Asia markets for our energy products.’’ That was his quote. And those remarks spurred headlines around the world. Reuters said, ‘‘Asia a priority for Canada after U.S. delays Keystone.’’ And the Wall Street Journal: ‘‘Canada shops oil after pipeline halt.’’ And it is a halt.

And indeed there are now Canadian proposals to dramatically increase the capacity for oil from Alberta to reach the Canadian West Coast in order to be shipped to China. These plans are being set with a view toward diversifying away from an unreliable partner, the United States. And instead they are looking at China. And this is all being planned with a long-term focus on the Chinese market in mind.

Again, we had the study from the Department of Energy that said gasoline prices in all markets served by the Gulf Coast and the East Coast refineries would decrease, including the Midwest. I am perplexed on the question of the Midwest. I assume that part of the answer is that the excess refining capacity must be in the Gulf.

Mr. DURBIN. Correct.

Mr. ROYCE. And the Midwest must be running at full throttle. So if you dictated that all the Alberta oil capacity go to the Midwest refineries they wouldn’t be able to handle the excess; is that the issue here?

Mr. DURBIN. Well, and again, the Midwest refineries are currently processing oil sands crude oil. So yes, this does provide greater flexibility and greater diversity of supply in the Gulf Coast refineries to serve our domestic market.

Mr. ROYCE. So the problem is that you have got limited refinery capacity around the United States. I know that is the problem in California. And we won’t—the government will not allow new refineries to be built easily, past experience. So the question is getting it to the refineries with excess capacity here in the United States to serve the domestic market.

Mr. DURBIN. Correct.



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