Energy as a weapon: Implications for U.S. policy U.S. House hearing 2006

[ My favorite quotes from this session:

Mr. Lynch: E.F. Schumacher said in 1964: “There is no substitute for energy: the whole edifice of modern life is built upon it. Although energy can be bought and sold like any other commodity, it is not ‘just any other commodity’ but the precondition of all commodities, a basic factor equally with air, water, and earth.”

Mr. Shays: Without fuel, obviously, the world would grind to a halt.  It seems to me is that when we are done with this hearing, an honest assessment is that the United States is very vulnerable and so is the rest of the world. But given that we consume 20 to 25 percent of the world’s energy, we are going to feel the impact the most.

With less than 3% of the world’s oil but 25% of its use, we can never drill our way to energy security.

We need to slow the growth of demand significantly by better conservation, better mileage. When is the administration going to weigh in on that side of the equation to say minivans, SUVs, and trucks need to be getting the same gas mileage as cars and we need to bring cars up significantly? When is that going to happen?

Ms. HARBERT. I think we’ve been very, very aggressive on the energy conservation, energy efficiency front. We have tremendous incentives out there for consumers to change their behavior. We have a philosophy of incentivizing change, not mandating change.

Mr. SHAYS. Why? Why, why, why? Why would we do that? My daughter’s life was saved because we mandated seat belts and air bags. It would not have happened soon enough if the market did it. Why is this administration only looking at the market without trying to add value to it by getting us to act sooner? Why, why, why? I don’t understand it.

Ms. HARBERT. We believe in a balance, and there are certain things we’re willing to mandate and certain things we’re willing to leave to consumer choice. Things that affect consumer choice, we ought to incentivize that behavior and not force that behavior.

Mr. SHAYS. I think you put our Nation at risk by that policy. I think you put our Nation at big risk.

Alice Friedemann   www.energyskeptic.com  author of “When Trucks Stop Running: Energy and the Future of Transportation”, 2015, Springer and “Crunch! Whole Grain Artisan Chips and Crackers”]

House 109-204. May 16, 2006, Energy as a weapon: Implications for U.S. policy. U.S. House of Representatives. 146 pages.

Excerpts:

Darrell E. Issa. Gasoline is over $3 a gallon, and it is a very visible sign of our energy dependence. But far less visible and perhaps far more serious threat to our economic well-being and the pursuit of our vital national interest is the increasing constraint producing countries place on the full range of our foreign and domestic policy options. As we see these stress points on our ability to make independent domestic and foreign decisions, this committee has become increasingly concerned that oil is not only a weapon but is a viable weapon of those who have an agenda not in sync with the United States and perhaps not with the rest of the free world. Some producers have proven entirely too willing to use energy as a weapon, or as blackmail, in the words of Vice President Cheney. Others cannot resist the populist temptation to nationalize energy resources despite history’s lessons that it undermines production over the long term and acts as a destabilizing force once prices drop.

At this time, other producers are undermined by emerging groups seeking to cutoff energy supplies from world markets. Consuming countries are belatedly reassessing their options in a shifting world of geopolitics, and more cooperation must be and should be absolutely necessary. However, some consumers, such as China, have naively and seemingly stepped away from the open market and sought out long-term supplies through state-to-state agreements.

What if we had an abrupt shock to the oil supply when we have, in fact, no spare production? What would a supply shock do to our economy and to those of our trading partners? How are the Departments of State and Energy, represented here today, working to ensure the supply of energy? And is the Federal Government doing enough to meet the challenges not just for today, but for tomorrow?

It is my hope that today’s hearing will not only more clearly identify the ramifications of our oil dependency on the economic and national security interest, but also begin to identify—and this is most important—how to deal with those ramifications.

Mr. LynchI want to read you something E.F. Schumacher said in 1964: “There is no substitute for energy: the whole edifice of modern life is built upon it. Although energy can be bought and sold like any other commodity, it is not ‘just any other commodity’ but the precondition of all commodities, a basic factor equally with air, water, and earth.”

Mr. Shays.  Dependency on foreign-supplied fuels is an emerging threat to our national security and to the security of the international community. Suppliers understand fuels such as oil or natural gas can be used to influence or compromise our policies. The U.S. economic growth is a key force that propels the world economy. Fuels supply the energy that helps nations increase their standard of living.

Without fuel, obviously, the world would grind to a halt.  It seems to me is that when we are done with this hearing, an honest assessment is that the United States is very vulnerable and so is the rest of the world. But given that we consume 20 to 25 percent of the world’s energy, we are going to feel the impact the most.

President Bush highlighted the risks of foreign fuel dependency when he declared ‘‘America is addicted to oil’’ and insisted the United States ‘‘break this addiction.’’ While recognizing the problem is laudable, little has been done to solve it. We must break this addiction because suppliers exploit American energy dependency to influence our policies and terrorists see oil as our Achilles heel. Frankly, it is our Achilles heel.

In many cases, the supply of these fuels is threatened by individual groups and regimes opposed to U.S. policies, often located in the more politically unstable parts of the world. The former Primer Minister of Malaysia Mahathir Mohamad said, ‘‘If we reduce oil output, prices will rise. Oil can be used as a weapon to protect the interests of Muslims.’’ I find it interesting he used the word ‘‘Muslims’’ and not just his own folks. Al Qaeda’s Osama bin Laden and his deputy al-Zawahiri have repeatedly called for attacks on key economic targets, especially energy sources. Ali Larijani, secretary of Iran’s Supreme National Council, said ‘‘we would not like to use our oil as a weapon. We would not like to make other countries suffer.’’ Interesting way of saying, basically, they will.

We are funding both sides in the war on terrorism, ironically— U.S. military and, on the other side, energy suppliers who support Islamic militants. Kicking the habit is an urgent necessity. Our national security is threatened by our dependency on foreign countries that share neither our views on democracy nor our commitment to combat radical Islamist terrorists. With less than 3% of the world’s oil but 25% of its use, we can never drill our way to energy security. Only by creating a forward-looking energy policy that reduces demand for fuels, especially oil, will we be able to lower gas prices and ensure a long-term independence.

KAREN HARBERT, Assistant Secretary for Policy & International Affairs, U.S. DEPARTMENT OF ENERGY.

Energy is the lifeblood of economies around the world; global economic growth depends on adequate, reliable and affordable supplies of energy.

As traditional energy resources become less available and more difficult to develop, energy security will become an even more critical component of economic security and national security.

A few key trends are of particular concern. Most of the energy that drives world economies today is derived from fossil fuels, in particular petroleum, and this energy comes from a relatively small number of producers.  The world’s dependence on a few countries is neither responsible nor sustainable over the long term. Resources are often located in places that are geographically hard to reach, geologically difficult to develop, politically unstable, or unfriendly to new foreign investment.

We believe that energy security is inextricably intertwined with our economic prosperity and our national security. Access to a secure, reliable, affordable supply of energy is fundamental to our national economic security. As such, and as the world’s largest producer and consumer of energy, the United States must play a leading role in addressing the world’s energy challenges and ensuring a secure energy future for all.

As traditional energy resources become less available and more difficult to develop, energy security will become an even more critical component of economic security and national security. A few trends are of particular concern: The world’s energy dependence on a few countries. Obviously, record-high oil prices. Resources that are now located in places that are geographically hard to reach, geologically difficult to develop, politically unstable, and unfriendly to new investment.

Much of the world’s untapped hydrocarbon resources are controlled by governments and national oil companies, with limited access afforded to United States and multinational energy companies. The new resources are concentrated in the Middle East, North Africa, Russia, and Central Asia. Saudi Arabia is estimated to have over 260 billion barrels of oil, while in Africa, Nigeria and Libya have about 75 billion barrels of oil reserves. Other countries with sizable reserves include Iraq, the United Arab Emirates, and Kuwait. And the EIA estimates that proven oil reserves are between 17 and 44 billion barrels in the Central Asian Caspian region.  Russia has proven oil reserves and they are conservatively estimated at about 60 billion barrels, and it has tremendous natural gas reserves.

The real threat is lack of investment. The International Energy Agency estimates that in order to meet world demand by 2025, $16 trillion of investment will be required. That investment largely depends on market transparency in producing countries. Complex, capital-intensive projects require stable, predictable investment climates. With long time horizons, investment is needed now—not tomorrow, but now.

The Advanced Energy Initiative is focused on technologies that we believe hold the greatest promise for American taxpayers—solar, wind, biofuels, hydrogen, nuclear, and clean coal technologies. We have an abundant source of coal here in this country. We need to be able to have more nuclear power.

I think in the short term we have the strategic petroleum reserve. But we also can’t forget the next best source of energy is the one that we currently waste. And there’s a tremendous amount that we can do in energy efficiency and conservation in the short term.   The spare production capacity right now is between about a million and 1.5 million barrels per day. Which means that we’re operating a very razor thin margin.

Mr. SIMONS. Oil investment has very long lead times and there are very, very long cycles that are involved. So the production that’s coming on board today really comes about as a result of investment decisions that were made back in 1997, 1998. And the price of oil, of course, is very cyclical as well. So we had low prices in the late 1990’s, throughout the 1990’s, and we really had a deficit of investment. So we don’t have the volumes coming onstream right now that take care of the expansion in global economic growth. But a lot of this had to do with the low price environment back then. Today we have, obviously, a much more robust pricing environment. Companies and countries are investing much more aggressively. But we do have to consider this lead-time issue.

Mr. VAN HOLLEN. Our short-term options are constrained now because we failed to take significant steps early on. A very simple step we could have taken was to increase the CAFE standards. I think this Government—and I speak for Congress and the administration both—have been grossly negligent in not taking action much earlier to raise it above the 27.5 miles per gallon and closing the SUV loophole. There are things that we could have done that would at least limit the severity of the price hikes and reduce our reliance on foreign oil.

Mr. SHAYS. We need to slow the growth of demand significantly by better conservation, better mileage. When is the administration going to weigh in on that side of the equation to say minivans, SUVs, and trucks need to be getting the same gas mileage as cars and we need to bring cars up significantly? When is that going to happen?

Ms. HARBERT. I think we’ve been very, very aggressive on the energy conservation, energy efficiency front. We have tremendous incentives out there for consumers to change their behavior. We have a philosophy of incentivizing change, not mandating change.

Mr. SHAYS. Why? Why, why, why? Why would we do that? My daughter’s life was saved because we mandated seat belts and air bags. It would not have happened soon enough if the market did it. Why is this administration only looking at the market without trying to add value to it by getting us to act sooner? Why, why, why? I don’t understand it.

Ms. HARBERT. We believe in a balance, and there are certain things we’re willing to mandate and certain things we’re willing to leave to consumer choice. Things that affect consumer choice, we ought to incentivize that behavior and not force that behavior.

Mr. SHAYS. I think you put our Nation at risk by that policy. I think you put our Nation at big risk.

 

Ms. HARBERT. The problem is everybody wants us to have a magic bullet, a panacea that we have that we’re not willing to use. We don’t have it. It takes a long time to get in this situation and it’s going to take us a long time to get out of it. We need to do everything we can in the short term to be better consumers of energy, and we need to have the foresight to make the investments now in those technologies that will help us over the long term to not be energy vulnerable.

 

DANIEL YERGIN, CHAIRMAN, CAMBRIDGE ENERGY RESEARCH ASSOCIATES.  We hear that half of Brazil’s motor fuel is ethanol, but that is equivalent to 3 percent of our gasoline supply. So what we have to keep in mind is the scale of our more than 20 million barrels a day of consumption.

 

[It is important] to protect infrastructure and the energy supply chain. That was not something that was really thought about when the current energy system was created in the 1970’s. Energy efficiency and conservation is terrifically important.

 

In the United States, we talk about energy independence, but as we know, we have gone from a third to 60 percent of our oil being imported, and we are going to be importing a lot of gas. We are at a historic juncture. This great surplus of extra capacity that was a legacy of the 1980’s is, at least for the time being, gone. We like to talk about energy as though we are an island. We are not. We import more oil than any other nation consumes.

 

The biggest growth in demand worldwide has been for “middle distillates”: diesel, jet fuel, and heating oil. But the global refining system does not have enough deep conversion capacity to turn heavier crudes into middle distillates. This shortfall in capacity has created additional demand for the lighter grades of crude.

 

As always happens when prices are high and supplies uncertain there is much discussion about whether the world is going to run out of oil. In the 1970s the term was “the oil mountain” as in “the world was about to fall off the oil mountain”. The geographic imagery has become more elevated—today it is “peak oil”. [But it’s more likely to be a] plateau in production reached closer to the middle of the century.  We currently project worldwide liquids production capacity (not actual production ) to gro to 105.3 mbd in 2015, and include oil sands, gas-to-liquids, and deepwater.  After 2010, growth capacity will be concentrated in the “Oil 15” (the O-15) which will cause increased foreign policy concern.

 

Every day 40 million barrels of oil cross oceans on tankers.

 

Mr. Lynch. Among the chief factors that have facilitated recent rises in oil prices has been increased worldwide consumption and demand as countries such as China and India have experienced significant economic growth. However, it is the United States that remains the world’s leading oil consumer, consuming over 20 million barrels of the roughly 80 million barrels produced worldwide each day, while producing only about 7 million barrels daily. Notably, our high oil consumption, coupled with the weakened reserve position, means that the United States for the most part, will continue to rely on the world markets for its crude oil supply. According to the Energy Information Administration’s last International Energy Outlook, 70 percent of U.S. oil consumption is projected to be satisfied by crude oil and petroleum product imports by the year 2025. Regrettably, our growing dependence on foreign oil not only poses a substantial risk to our economic security, but may also serve to compromise the effectiveness of American foreign policy as high domestic demand leaves the United States susceptible to the threat of hostile oil-related political actions by foreign governments in oil-producing countries.

 

Iran, for example, the second-largest producer within the Organization of Petroleum Exporting Countries, has repeatedly issued thinly veiled supply disruption threats in response to U.S.-led efforts to curb that country’s uranium enrichment program. In addition, Venezuela President Hugo Chavez, whose country is the United States fifth-largest source of crude imports, has similarly asserted the possibility of retaliatory oil-related actions stemming from his opposition to U.S. policy. In April 2004, Hugo Chavez threatened to stop selling oil to the United States if we did not stop ‘‘intervening in Venezuela’s domestic affairs.’’ And in February 2006, President Chavez again asserted that the U.S. Government should know that if it crosses the line it will not get Venezuelan oil. As evidenced by these examples, America’s addiction to foreign oil means that our economy and foreign policy is extremely vulnerable to oil-related threats issued by, in some cases, rogue oil-producing states.

 

 

 

 

 

 

 

 

 

 

 

 

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