Senate 110-6. January 10, 2007. Geopolitics of Oil. United States Senate Hearing. 90 pages.

Excerpts:

Senator Jeff Bingaman (New Mexico). The idea of this hearing is to try to look at the big picture, to begin the year with an overview of the geopolitics of oil. There is a quote that my staff dug out of the files of the committee, from Scoop Jackson, when he chaired this committee back in 1980, and he said, at that time, ‘‘The world will witness a growing struggle for secure access to oil through the end of this century and into the next. This gathering energy crisis deserves the highest priority in the counsels of Government. Few other problems are more complicated, few other problems will be more difficult to resolve. Moreover, many of the policies we are currently pursuing to deal with the energy crisis are only making it worse.’’ Today, we still have the struggle for access to oil. We also, of course, have a competition among consumers that has developed, particularly with the increasing appetite for oil in places like China and India. There are great implications for the United States in all of that, both for our economy and for our national security.

GENERAL CHARLES WALD, U.S. AIR FORCE [RETIRED]

Former Deputy Commander, U.S. European Command, & member of the Energy Security Leadership Council

I recently retired from the Air Force after 35 years of service and during my career had the opportunity to fly combat over Vietnam, Cambodia, Iraq and Bosnia and learned much regarding how to use military assets to effectively solve national security problems.

But I also learned that many believed the U.S. military is solely responsible for security. I like to call this the ‘‘Dial 1-800-The-U.S.- Military’’ syndrome, because it reflects how people assume the U.S. military is a “toll-free” resource that can be called on to perform tasks that no one else has either the capability or will to execute.

I recall a recent meeting with several major global oil company executives in Kazakhstan. Before we began our discussion, one of the executives thanked me and the U.S. military for protecting the free flow of oil around the world. The executive’s world view included the expectation that the U.S. military will be there to provide worldwide security and to ensure the free flow of oil without any assistance from others. This struck me, and frankly, does not seem like a good model, particularly for the United States. The U.S. cannot and should not be everywhere to protect all the vulnerable components of the global oil infrastructure. The global economy relies on a massive oil infrastructure that stretches far beyond the Persian Gulf to pipelines in the Caucasus and offshore drilling rigs in the Gulf of Guinea. Surveying this situation, I realized that the U.S. military could not protect this vast infrastructure without partners. And, trust me, there should be partners out there, because the free flow of oil is in the best interest of many people all over the world.

With regard to the oil dependence issue, military response and capabilities are by no means the only effective tools available and in many cases are not appropriate. In fact, the single most effective step the United States can take to improve its energy security is to increase transportation efficiency. The transportation sector is responsible for nearly 70 percent of the oil the United States consumes. Within the transportation sector, oil—nearly 13 million barrels per day of it—accounts for 97% of delivered energy. More than 8 mb/d are used to fuel the over 220 million light-duty vehicles that Americans rely on for mobility.

CAFE standards legislated in 1973 during the Arab oil embargo were instrumental in helping America lower oil usage by the 1980’s, but there has been little progress since the original mileage targets were met. As a consequence, America’s light-duty vehicle fleet now has the worst average fuel efficiency in the developed world.

Some may be surprised to hear from a former General talk about fuel efficiency standards but they shouldn’t be. In the military, we learned that forced protection isn’t only about protecting weak spots, it’s also about reducing vulnerabilities before you go into harm’s way. That’s why lowering the Nation’s demand for oil is so critical.

Nearly all of our U.S. military commands have some oil security tasks and in essence they provide a blanket of security that benefits all nations. Central Command guards access to the oil supplies in the Middle East; Southern Command defends Colombia’s Cano Limon pipeline; Pacific Command patrols the tanker routes in the Indian Ocean, the South China Sea and the Western Pacific; and my last assignment, as deputy commander of European Command, which included, by the way, most of Africa. We patrolled the Mediterranean, provided security in the Caspian Sea and off the West Coast of Africa.

During that assignment, I became more appreciative of the size and scope of the oil security challenge. While surveying that challenge, it became apparent that the U.S. military could not protect that vast infrastructure without partners—and trust me, there should be partners in this mission. The free flow is clearly in the best interests of people all over the world. These interested parties certainly cannot replicate all the capabilities of the U.S. military, but their contributions can free up military tasks that only the U.S. military can successfully accomplish.

The armed forces of the United States have thus far been successful in fulfilling our energy security mission and they continue to carry out their duties professionally and with great courage. As a result of this success, many have come to believe—and I believe, falsely—that energy security can be achieved solely by military means. We need to change this paradigm because the U.S. military is not the best instrument for confronting all the strategic dangers emanating from oil dependence. The 1973 oil embargo is the most famous example of the use of energy as a political strategic weapon.

THE MILITARY’S HISTORICAL INVOLVEMENT IN ENERGY SECURITY

Since 1980, the U.S. Government, through military application, has put about $50 billion to $60 billion a year into the Persian Gulf. That doesn’t count the current Iraq war or the 1990 Iraq war. And that’s good for our country, for security interests, but the problem is, we’re subsidizing world energy. There is nobody else in the world doing this, and really, if you look at how much we’re paying per gallon, me, as a U.S. citizen today, for gasoline, you could almost say it’s $7 a gallon, based on the fact that we’re subsidizing world security on this issue.

The United States protects the global oil trade for the benefit of all nations. In part, this is because the U.S. has unmatched military capabilities. But another reason is that other nations know the U.S. military is out there doing the job.

The implicit strategic and tactical demands of protecting the global trade have been recognized by national security officials for decades, but it took the Carter Doctrine of 1980, proclaimed in response to the Soviet Union’s invasion of Afghanistan, to formalize this critical military commitment.

The Carter Doctrine committed the U.S. to defending the Persian Gulf against aggression by any ‘‘outside force.’’ President Reagan built on this foundation by creating a military command in the Gulf and ordering the U.S. Navy to protect Kuwaiti oil tankers during the Iran-Iraq War. The Gulf War of 1991, which saw the United States lead a coalition of nations in ousting Iraqi leader Saddam Hussein from Kuwait, was an expression of an implicit corollary of the Carter Doctrine: the U.S. would not allow Persian Gulf oil to be dominated by a radical regime—even an ‘inside force’ that posed a dangerous threat to the international order. More recently, the security agenda in the Gulf has expanded beyond state actor aggression to include concerns about terrorist attacks on facilities and supply lines.

THREATS ABOUND

Since issuing his 1996 ‘‘Declaration of War’’ against the U.S. and its partners, Osama bin Ladin has warned of attacks on oil installations in the Persian Gulf. Last year, the world came close to experiencing an oil supply shock when an Al- Qaeda attack on the Abqaiq facility through which approximately 60% of Saudi Arabian oil exports pass was barely foiled. In addition to attacking physical infrastructure, Al Qaeda operatives have also targeted expatriates in their residential areas, in particular in Riyadh, Saudi Arabia (October 2002) and in al-Khobar (May 2004).

Iraq is also the scene of persistent insurgent and terrorist attacks on pipelines and pumping stations, especially in the North of the country. These attacks have severely limited Iraqi oil exports to the Mediterranean through Turkey, and they are a major reason why Iraqi oil production has stubbornly remained below its prewar peak. The lost output has cost Iraq billions of dollars at a time when it needs every dollar and while U.S. taxpayers have spent billions on the reconstruction of the country. But if violence continues, and especially if it spreads to the south, where most of the oil and export facilities are located, then all of Iraq’s oil production could be at risk. The implications of this supply cut would be severe.

The danger of attacks on shipping is proven—in October 2002, the French supertanker Limburg was rammed by a small boat packed with explosives off the coast of Yemen. Most oil shipments have to pass through a handful of maritime chokepoints. Roughly 80% of Middle East oil exports pass through the Strait of Hormuz (17 mb/d), Bab el Mandeb (3 mb/d), or the Suez Canal/Sumed Pipeline (3.8 mb/d). Another 11.7 mb/d pass through the Straight of Malacca and 3.1 mb/d through the Turkish Straits. All of these passageways are vulnerable to accidents, piracy, and terrorism. Since alternative routes are lacking, the effect of a major blockage at one of these points could be devastating. Even unsuccessful attacks on tankers are likely to raise insurance rates and thus oil prices.

MILITARY POWER HAS LIMITS

The armed forces of the United States have been extraordinarily successful in fulfilling their energy security missions, and they continue to carry out their duties with great professionalism and courage. But, ironically, this very success may have weakened the nation’s strategic posture by allowing America’s political leaders and the American public to believe that energy security can be achieved by military means alone. We need to change the paradigm, because the U.S. military is not the best instrument for confronting all of the strategic dangers emanating from oil dependence. This is particularly true when oil is used a political weapon.

The 1973 Arab embargo is still the most famous example of the use of energy as a political strategic weapon. But in recent years, it has been Russia that has shown the most willingness to play this dangerous game, as at the beginning of 2006, when it stopped natural gas exports to the Ukraine, which in turn withheld the natural gas destined for Western Europe. The danger of conflict with a nuclear power like Russia should make it abundantly clear that there are limits on how we can use military power to guarantee energy flows. But we can take political steps to counter Russia’s brandishing oil and natural gas as political weapons. Russia wants to join the World Trade Organization (WTO) as a full member. Russia’s entry into this organization must be made contingent on its behavior. Russia must make a commitment to fostering energy security; there should be no reward for sowing insecurity.

Of course, energy exporting governments don’t need to resort to full-fledged embargoes to hurt the U.S. and other importers. Exporters can manipulate price through less drastic production cuts. Tellingly, after oil prices dropped from their 2006 peak of $78 to about $60 in the U.S. market, OPEC members began to cut back on production. Governments in oil-producing countries can also constrain future supply through investment decisions that lead to long-term stagnant or glowing growth in production and exports, or even decline. Often enough, future supply destruction is the unintended or accepted consequence of an insistence on government control of natural resources. Currently, an estimated 80-90% of global oil reserves are controlled by national oil companies (NOCs), which are highly susceptible to being constrained by political objectives, even if these undermine long-term supply growth.

State-controlled production is frequently inefficient, relying on outdated technology and reserve management techniques. Russia, whose government has made it abundantly clear that it wants to maintain near absolute control over its energy resources. This power grab has curtailed foreign investment, and ultimately limited production as well. Russia’s oil industry stands as a testament to the dangers of political meddling in oil production. After the collapse of the Soviet Union, Russian production plummeted to only 6 mb/d in the mid-1990s, but then the efforts of private companies helped push production back to over 9 mb/d, achieving 10% annual growth rates in 2003 and 2004.1 However, with the subsequent expropriations of private enterprises such as Yukos, the production growth curve has flattened. Government control over production in Russia will also adversely impact the massive Shtokman natural gas field and Sakhlain-2 oil projects. President Putin has determined that tight government control of resources is more important than the greater revenue that would accrue from increased production achieved through cooperation with Western oil companies.

In an oil-dependent world facing increasingly tight supplies, the growing power of oil exporting countries and the shift in strategic calculations of other important countries have all added up to lessen U.S. diplomatic leverage.

Iran, which exports to the United States’ European and Asian allies, has threatened the use of the oil weapon to retaliate against efforts to constrain their nuclear program. The European Union relies on Middle Eastern oil, and Russian gas continues to complicate U.S. foreign policy efforts, especially when considering our efforts to stop Iran from developing nuclear weapons. China, with its rapidly growing dependence on foreign oil also blocks U.S. diplomatic initiatives in an effort to strengthen its own ties with oil exporters.

Given all these factors, it is imperative that the United States make energy security a top strategic priority. Toward that end, we should mobilize and leverage all of our national security resources, including our economic power, our investment markets, our technological products and our unsurpassed military strength. Curtailing demand is the most important security step we can take.

We need a comprehensive national security strategy for energy security. We must be prepared for sudden supply shocks triggered by terrorism or politics. We must promote greater diversity of fuel options while improving the efficiency of our Nation’s fleet.

Senator Pete V. Domenici (New Mexico). I think it is most beneficial that we put into perspective who owns access to the oil in the world today. It is rather frightening when you get just that picture before you …, to know how things have changed dramatically and how little of the oil of the world is owned by the American companies that we are constantly arguing with and how little these oil companies of America have access and/or control over these oils. I have had staff reduce the world’s oil to a chart that shows where we are, and there is no question that private investors are already at a disadvantage. The rise in national oil companies has decreased access to reserves through the use of strategic energy agreements between governments. U.S. companies are being squeezed out. Examples are the Chinese national oil company’s development of an energy production agreement in Sudan and Iran, Russia’s reclaiming of oil producing assets from Yukos to form a state oil company and just yesterday, Venezuelan President Hugo Chavez called for the end to foreign ownership of crude oil refineries in the Orinoco region. This activity further limits investment opportunities for investor-owned companies. These trends are doubly concerning, given the many producer nations, political instability, and the lack of a legal system for enforcement of contract rights resulting in only a sufficient capital investment in the infrastructure necessary to sustain existing production, much less new capital on line.

Senator Gordon H. Smith (Oregon): Hurricane Katrina showed how vulnerable the United States is to a domestic supply disruption. It also helped us to understand how geographically concentrated U.S. refining capacity has become. All of these factors should lead us to reexamine our energy security strategy. We cannot reduce our dependence on oil without aggressively addressing the transportation sector. Transportation accounts for 70 percent of our nation’s oil use, and the transportation sector is almost exclusively fueled by oil. CAFE standards for automobiles have been stagnant for more than a decade. In 2002, I joined with Senators Kerry and McCain to sponsor an amendment to the energy bill to increase CAFE standards to 36 miles per gallon by 2015. We were told at the time that this would harm the domestic auto industry and reduce consumer choice.

Senator Bernie Sanders (Vermont). [Note: I’ve included most of his testimony because he is now a candidate for President in 2016]

I am pleased to be a member of the Energy and Natural Resources Committee and look forward to the excellent work that this Committee will be doing to ensure a more sane energy policy for our country. Whether it is requiring an increased commitment to renewable sources of energy in the electricity sector or to ensuring appropriate royalty payments from drilling on our public lands, this Committee has a tremendous responsibility. The geopolitics of oil is a topic that none of us can afford to ignore and while I don’t agree with every idea put forward by today’s witnesses, I thank them for their time to address us this morning. What is most striking to me is that, in the prepared testimony, each of the witnesses discusses the dire need to increase efficiency in our transportation sector. I believe—in no uncertain terms—that our failure to increase mileage standards has let the American people down. As consumers look to make each and every dollar go further, they find that, despite the technology being available, their automobiles get the same, or worse—even lower, gas mileage than they did twenty years ago. Additionally, as we grapple with global warming, I believe we must do everything we can to get the most out of each gallon of fuel because the emissions from our cars are simply off the charts. In fact, in Vermont, vehicle emissions are the single largest source of greenhouse gas emissions. I hope, with the help of the witnesses, that we can begin moving forward by starting with a serious discussion of increasing CAFE standards.

Senator Byron L. Dorgan (North Dakota): Oil is critically important. We will always use fossil fuels, always need oil. We suck about 84 million barrels out of the earth a day. Here, in the United States, with our population, we use 1/4 of all the oil that is sucked out of this earth. We are overly dependent on foreign sources of oil, especially given the national security implications of that dependency, and yet I think we’re baby stepping on these issues.   When we passed the energy bill of 2005, I was proud of it. It moves us down the road, but we need to be much bolder and much, much more aggressive, and I think what we will hear today is about the national security implications of us not doing the right thing and not being bold enough.

Senator Ken Salazar (Colorado): I think that the energy issue, at the end of the day, is one of the very most important issues, perhaps one of the top two issues that face our world today

LINDA G. STUNTZ, on behalf of a Council on Foreign Relations Independent Task Force

Linda is a partner with Stuntz, Davis and Staffier and has been involved previously with the Department of Energy in a high position and, most recently, was part of the Council on Foreign Relations Task Force that worked up a report on the national security consequences of U.S. oil dependency.

It is an honor to be before you today to discuss the report prepared by an independent task force organized by the Council on Foreign Relations, released this past October, entitled, as you described, The National Security Consequences of U.S. Oil Dependency. Today, let me highlight four points from this report.

First, you will not find in this report support for the concept of energy independence for this country. As much as I know many of you on both sides of the aisle espouse this, it is, in fact, unrealistic. Barring Draconian measures, the United States will depend on imported oil for a significant fraction of its transportation fuel needs for the next several decades. Moreover, so long as we consume any oil, even if it is produced domestically, we will be affected by what happens in the global oil market, just as corn or other markets of that nature are affected. We cannot wall ourselves off for that market. Our allies are also dependent on this oil.

Second, the constraints on foreign policy caused by energy require greater integration of foreign policy and energy policy. The newspapers this morning and every morning are replete, whether in Asia, Africa, South America or even Europe, with incidents of energy and foreign policy intermingling, yet the task force was unanimous in the view that energy issues have not received sufficient attention in the formulation and implementation of U.S. foreign policy. Among other things, the task force recommends that an energy directorate be established at the National Security Council, similar to those that exist now, for counter-proliferation defense policy and international economics.

Third, and it was highlighted by Senator Domenici in his opening speech, one of things that I believe has changed since Senator Jackson and I and some of you first began looking at this very difficult challenge of energy security is the increasing role of national oil companies. The reality today is that national oil companies control some 3.4 of the world’s oil reserves, as best we can tell. Exxon ranks #14.

Fourth, in order to address the national security consequences of U.S. oil dependency, we need a comprehensive approach. And this will not be a surprise or news to this committee, but we need it all, we cannot focus on one or the other. We need to increase the efficiency of oil use, primarily in transportation fuels. We need to use alternative fuels. We need to diversify oil supplies, particularly outside the Persian Gulf, which includes in the United States. We need to make oil and gas infrastructure more efficient and secure. And we need to increase the investment in new energy technologies. The task force considered—and had a lively debate on—increasing the gasoline tax, increasing CAFE requirements and a tradable permit program for gasoline allowances. Again, it will probably be no surprise to you that while the task force unanimously believed we needed to do one or several of these things, we did not have an agreement on which one of these should be pursued.

Every 10 days, China is opening a coal plant with the capacity to serve a town the size of Dallas or San Antonio. Most of those coal plants are not controlled even as well as most of the plants in the United States. They don’t even have the base technology that we are putting on right now. A fifth of them are actually characterized as illegal because they haven’t been approved by the Federal Government of China.

ROBERT D. HORMATS, Vice Chairman, Goldman Sachs (International)

I was economic advisor to Dr. Henry Kissinger on the National Security Council staff in the mid 1970s when this country experienced its first energy crisis after the 1973 Yom Kippur War, and participated in his Middle Eastern shuttle diplomacy during the period that followed. At that time, I had high hopes that the Arab oil embargo, the sharp increase in the price of oil, and the longlines at gas stations would produce a bipartisan consensus on energy policy and jolt our nation into a bold and effective effort to reduce oil dependence and future vulnerability.

Let me make just a few points about the situation we face today. First is that we have a history in this country of going through periods of great crisis followed by periods of prolonged complacency and that has caused energy policy to be sort of light switch—on/ off. But when prices fell later in the decade, a sense of complacency set in. Then we were hit by another crisis that caused oil prices to spike at the end of the 1970s; that was triggered by the fall of the Shah of Iran and the Iranian Revolution. Complacency set in once again after that crisis receded and prices fell. Another oil crisis occurred in 1990 when Iraq invaded Kuwait, after which the sense of urgency about dramatic alterations in energy policy and use faded again. Decade after decade our dependence on foreign oil has risen. In the mid-1970s, 35% of this nation’s oil consumption was supplied by imports. Now, three decades later, it is 60%.

American dependence on potentially vulnerable oil supplies continues to grow, with little prospect that it will change—despite the fact that we are engaged in a War on Terrorism in which oil imports by the U.S. and other nations provide funds to nations hostile to the U.S. and countries friendly to us. It is often said that ‘‘9/ 11 changed everything!’’ Sadly, in the area of energy policy it hasn’t changed very much. American oil vulnerability continues unabated.

There are several national economic and security consequences of this situation:

• If the situation in Iraq continues to deteriorate and other oil producing nations become more involved, the risks increase to oil supplies not only from disruptions in Iraq but also from greater tensions between the Sunni nations on the western side of the Persian Gulf and the Shiites on the eastern side, with oil facilities and shipments becoming increasingly vulnerable. Moreover, added western pressures on Iran over its nuclear program could lead to oil disruptions or threats thereof
• The American economy remains highly vulnerable to supply disruptions in oil exporting nations; these could result from acts or terrorism, political instability, efforts to use oil as leverage, or natural calamities
• High oil prices resulting from strong demand from countries such as the U.S. and other major importers give countries such as Iran and Venezuela added resources to take actions inimical to American interests
• Oil-dependent friends and allies feel more vulnerable to the pressures and potential use of oil leverage from supplying countries and therefore are reluctant to side with the U.S. on key issues affecting those suppliers
• Oil-related tensions and competition are likely to intensify—as countries such as China seek to lock up scarce supplies or make political deals to solidify long term supply relationships, or suppliers such as Russian and Iran use oil as leverage to extract political concessions from consumers.

My concerns about this untenable and dangerous situation led me—together with a group of other concerned citizens to join the Energy Security Leadership Council in an effort to press for greater and more resolute national action on this matter— and for an end to the divisive, highly polarized debate that has stymied genuine progress on many fundamental issues. The Council, a project of Securing America’s Future Energy (SAFE), is a nonpartisan group of business executives and retired military leaders. It recently unveiled a report entitled ‘‘Recommendations to the Nation on Reducing U.S. Oil Dependence.’’ (I will discuss a few of these later in my testimony, along with a number of recommendations that I believe can also contribute to progress in this area.) The members of the Council believe that America’s energy security is in a perilous state. Along with my fellow Council members, I am convinced that America’s leaders must move quickly and steadfastly to confront our high level of oil dependence as a profound national security challenge.

Energy policy really has not changed very much. We’re fighting a war on terrorism. We are spending money, lots of money, for oil. We’re heavily dependent on countries that are very unreliable suppliers. A large portion of money is spent by us and other importers, and goes to countries whose interests are hostile to those of the United States. Some of that money finds its way into terrorist hands. We should accept the fact that that is the case. So what we’re doing now is we’re fighting in a post-9/11 environment with a pre-9/11 energy policy. It is simply not sufficient to deal with the national security crisis that we face today. The crisis is a geopolitical one and the vulnerability of this country to disruptions— look what is happening in Nigeria today, kidnappings of people on these oil rigs. We have Venezuela making very tough statements about further nationalization. We have Russia using oil as a political lever. We have instability in the Middle East. If Iran deteriorates further in the relationship—that will affect oil. It has happened before. If Iraq deteriorates further and the civil war increases and other countries start getting involved, then you have additional tensions. If you have tensions between the Shiites on one side of the Persian Gulf and the Sunni on the other, that’s going to make transportation of oil all the more vulnerable. And therefore, we have to come up with a much bolder set of energy policies for national security reasons.

I think Linda has made a very good point: energy independence, at this point, is not possible, but we can manage our vulnerability a lot better than we are doing today and it’s the vulnerability that is the huge problem. Calls for ‘‘energy independence’’ offer a false promise to the American people. Even if the U.S. could substitute domestic energy for all foreign oil—a goal the Council believes to be impossible—American economic prosperity would still be linked to the health of a global economy dependent on international oil flows.

How do we do that? We have the capability, for instance, by insisting on tougher fuel standards for automobiles, to improve the efficiency with which we use oil. And it’s quite possible to do. It’s within the realm of technological possibility. Now there may be reasons why you can’t go as fast as we would like, but there should be the target of much greater energy fuel—oil fuel efficiency standards. The goal ought to be to reduce the efficiency—to improve the efficiency of the use of oil as a transportation fuel because, by and large, in this country, oil is a transportation fuel and if we can’t address that issue, we’re not going to address the overall vulnerability issue.

One key goal must be to make America’s prosperity less dependent on a commodity the production level of which responds only very slowly to changes in price. Combine this price inelastic supply with 1) the vulnerability of oil supplies to various types of disruption, 2) the fact that some countries see oil as a political as well as an economic commodity, and 3) the fact that much of the world’s production is in the hands of state owned oil companies, many of which use oil revenue for political or social ends rather than reinvest it in new production capacity, and you have the recipe for severe energy-related economic disorder.

By 2020, world energy demand is forecast to jump by 50% over 2000 levels, with most of the increase coming in developing countries. The safe and affordable delivery of all this energy is by no means assured. Even if resources turn out to be sufficient in the aggregate, their distribution will not map closely to the topography of demand. The resultant uncertainty of supply and upward pricing pressure will exacerbate international tensions stemming from non-energy issues. Oil provides only 40% of global energy, but, as the premier transportation fuel, it has emerged as the touchstone of the world’s energy outlook. On both economic and psychological grounds, oil price spikes threaten the prosperity of many nations, including many of the poorest on this planet. They also sow the seeds of tension between exporting and importing nations, among consuming nations, and among different groups within countries. Indeed, since so much oil is used for personal transportation, oil prices have an enormous impact on the pocketbooks of virtually every American family. Correspondingly, policy efforts that impact oil’s cost and availability must take into account the interests of the average American family and quickly become major political issues.

America’s Clear and Present Dangers

For much of the last century, surplus domestic oil production reduced U.S. vulnerability to oil disruptions elsewhere in the world. But America’s oil production is now dwarfed by current consumption. Thus, while the U.S. remains the third largest oil producer in the world, domestic production can satisfy barely 40% of its requirements.

The U.S. generates 28% of the world’s goods and services while consuming roughly a quarter of its oil production. This may seem like a balanced, even favorable energy equation, but closer inspection reveals a different story. Despite considerable progress toward more efficient energy use, America requires substantially more oil to create a dollar of Gross Domestic Product (GDP) than is the case in most other developed countries. Some of this differential in ‘‘oil intensity’’ can be attributed to our nation’s vast size, the dispersion of our population, and less reliance on public transportation. Global military obligations, which are inextricably linked to our commitment to secure the flow of oil for the benefit of all nations, further increase American consumption. But even with these extenuating factors, there can be little doubt that the U.S. can and must use energy far more efficiently.

America’s long-term supply and demand balance is no more encouraging. U.S. oil demand is expected to grow 24% over the next two decades, and even if new discoveries raise its current 3% share of global oil reserves, our nation will almost certainly still require substantial amounts of petroleum imports. Import dependence will also define energy security for our key allies and most of the world’s manufacturing nations. Unfortunately, the developed nations that consume most of the world’s oil are not in a good position to produce the fuels they need.

A large portion of the world’s oil reserves are owned by state-owned or controlled oil companies in non-O.E.C.D. countries. It is worth underscoring this point—especially because when oil prices were rising last summer there were many accusations, misguided in my view, that this was a conspiracy among the big oil majors, when in fact the six largest state oil companies have ten times the reserves of the top six privately owned companies. Some of these state companies are highly efficient and well run, but others are highly politicized and are not able to utilize their profits to increase production or modernize capacity. Because of the large state company role in the world’s oil markets, there is not a ‘‘free market’’ for oil. As a result, a substantial portion of production is politically influenced and production decisions and practices are frequently economically suboptimal.

With each passing year, the global oil trends now at work—rising consumption, reduced spare production capacity, politicized spending decisions, and potentially high levels of instability in key exporting countries—all increase the likelihood of an energy crisis. The odds in favor of a crisis are further heightened by the rise of terrorist movements bent on targeting critical elements of the world’s vulnerable oil production, processing, and delivery infrastructure.

Given today’s precarious balance between oil supply and demand, taking even a small amount of oil off the market could cause prices to rise dramatically. In Oil Shockwave, a cabinet-level oil crisis simulation conducted in 2005 by SAFE and the National Commission on Energy Policy (NCEP), a 4% global shortfall in daily oil supply—only 3.5 million barrels in a 84 million barrel daily market resulted in a 177% increase in the price of oil, to over $150 per barrel. The simulation was played out by men and women who have served in the highest ranks of the U.S. government; Robert M. Gates, our current Secretary of Defense, for example, filled the role of National Security Advisor. The hypothetical scenarios put before the participants were designed to simulate a decline in world oil production due to regional instability and to terrorism. The incidents were completely plausible, and some, such as unrest in Nigeria, have subsequently come to pass. But there was little these skilled officials could do to stop a gut-wrenching increase in the price of oil. Indeed, one of the major lessons of the simulation was that the Strategic Petroleum Reserve (SPR), the emergency supply of federally owned crude oil, offers only very limited protection against a major supply disruption. Emergency reserves cannot sustain the United States through a prolonged crisis, and it will be extremely difficult to reach political consensus on when it is appropriate to begin using them.

Even under normal conditions, oil dependence has severe economic consequences. In 2005, direct outlays for imported oil accounted for a third of the country’s $800 billion current account deficit. In 2006 prices, these outlays have gone still higher. By diverting funds away from domestic consumption and investment, oil imports put a drag on U.S. economic growth and undercut the nation’s long-term competitive position. Oil dependence also adds billions to our defense expenditures by making overseas protection of oil supplies a high strategic priority.

There Are No Silver-Bullet Solutions

Improving efficiency: In the view of the Council, the most important thing the U.S. can do to lessen its oil dependence in the near and medium-term is to utilize oil considerably more efficiently. With the goal of once again halving oil intensity— as in the 1980s and 1990s—in the space of two decades, Americans can do much to protect the economy against the effects of oil shocks that can be unleashed by forces beyond our control. Improved vehicle fuel efficiency is the single most important avenue for further cutting the nation’s oil intensity.

We must face the hard fact that in the U S. oil is primarily a transportation fuel; unless we can dramatically curb the use of oil in our cars and trucks, we will be unable to reduce our oil dependence. Reliance on a single non-substitutable input creates profound economic dangers. Currently the direction is not positive; through 2030 oil usage by SUVs and light duty trucks is expected to surge by roughly 77%. The transportation sector accounts for nearly 70% of all the oil the country uses; and oil fuels almost 97% of all transportation. With most of the vehicles on the nation’s roads operating at efficiency levels far below what is achievable with currently available technologies, there is a clear opportunity to realize sizable fuel economy gains without overall loss of safety or functional utility. We propose empowering the National Highway Traffic Safety Administration (NHTSA) to mandate annual fuel efficiency increases of 4%.

In his 1975 State of the Union address, President Ford recognized the energy dangers threatening the country. He expressed a ‘‘very deep belief in America’s capabilities,’’—its innovative capacity and technological skills to overcome its growing dependence on imported oil. He also rallied support for fuel efficiency standards. I share President Ford’s optimism in the capacity of Americans to respond to the challenge of growing energy dependence, and his belief that Americans will rally around tougher energy measures, if they are given strong leadership.

America has a long history of pulling together in the face of national security challenges. I am currently completing a book entitled The Price of Liberty: How America Pays for its Wars.

In all the major national security challenges of the twentieth century, Americans demonstrated a remarkable willingness to make patriotic wartime sacrifices. During World War I and World War II, American’s not only paid dramatically higher taxes but also participated in massive bond drives to mobilize billions of dollars to support out troops.

Roosevelt’s Secretary of the Treasury Henry Morgenthau, when asked about the significance of such drives, said that they were launched not only to raise massive amounts of funds, but also to respond to people who asked ‘‘What can I do to help.’’

Today, the answer to this question lies not in buying more bonds but in buying less gasoline. Since 9/11 there have been no major bond drives as in past wars—and only limited steps to reduce our dependence on oil. The time has come to recognize that energy security is central to the national security challenges of twenty-first century, and to present the American people with the unvarnished truth regarding how oil affects the struggle in which we are engaged. We must meet the threats we face in the same spirit as our parents and grandparents during past wars—with farsighted patriotism and willingness to compromise narrow partisan, ideological, philosophical and economic positions in the long-tern national interest.

 

FLYNT LEVERETT, Senior fellow & Director, Geopolitics of Energy Initiative, New America Foundation, Washington, DC;  visiting professor of Political Science at MIT

I will start with a very stark assessment and that is, in my view, during the next quarter century, the most profound challenges to America’s continued global leadership will flow from the strategic and political consequences of the structural shifts in global energy markets that previous witnesses have been laying out for you.

On both the supply and demand side of the global oil market, we have seen strategic and political responses to the kinds of structural shifts that Dr. Birol and others have described for you. On the supply side, we’ve seen the rise of what a lot of folks call ‘‘resource nationalism’’. Resource nationalism is often defined as national government with oil and gas resources asserting their ownership rights over those resources in ways that work against the interests of international energy companies, something like Mr. Chavez’s recent declaration about nationalizing projects to develop extra heavy crude in the Orinoco region. But there is another dimension to resource nationalism that I think is very important here and that is the use by energy suppliers of their status as suppliers in a tight market as a source of political leverage. Venezuela is a good example in this hemisphere, obviously Russia is an important example, but there are many others that you could lay out that are very important for American interests. Saudi Arabia, for example, using its unique status as the swing producer in the world oil market to cultivate a kind of alternative strategic partnership with China, as a hedge against a further deterioration in its traditional strategic partnership with the United States. This phenomenon, this aspect of resource nationalism will, I think, pose an increasingly serious set of challenges to American interests in coming years.

Resource nationalism and resource mercantilism pose significant challenges to American interests, each in its own way, but I would also point out that these two phenomena can intersect in some particularly challenging ways for the United States. One of the ways in which they intersect is in what I have described as a ‘‘new axis of oil’’, namely a loose coalition of states— energy-producing states and energy-importing states, loosely organized around a Sino-Russian axis. This axis of oil is bolstering Sino-Russian cooperation on a whole host of strategic issues and I believe this axis of oil is emerging as the principle counterweight to American hegemony in global affairs.

The axis of oil, this Sino-Russian axis of oil, has been quite successful over the last 2 to 3 years in essentially rolling back the projection of U.S. influence into central Asia following the September 11 terrorist attacks. Russia and China have cooperated in standing up the Shanghai Cooperation Organization, the world’s largest regional security organization and the only such organization in the world in which the United States is not a participant. Working together in the Shanghai Cooperation Organization, Russia and China have basically been able to lock us out of central Asia.

Iran’s resource base is truly impressive. If you take its gas reserves— the second largest in the world—convert them into barrels of oil equivalent, and add them to their oil reserves—also the world’s second largest—you basically have a situation in which the aggregate hydrocarbon reserves of Iran and the aggregate hydrocarbon reserves of Saudi Arabia are effectively the same. And each of those countries is significantly larger in terms of aggregate hydrocarbon reserves than Russia. What this means, given Iran’s low rate of production, is that Iran is basically the only major energy producing country in the world that has the resource potential to increase its production of both oil and natural gas by orders of magnitude in coming decades. But to do that, Iran is going to have to get a lot of investment and a lot of technology transfer.

I think that the question of the possibilities for Russian and Iranian cooperation on energy matters is an issue that has potentially very, very profound geopolitical and geostrategic implications for the United States. Russia and Iran together control almost half of the world’s proven reserves of natural gas. If those two countries are cooperating, coordinating in terms of the way they develop and market their gas exports, they could be potentially twice as influential in the global gas trade as Saudi Arabia is in the global oil trade. And I think that within the last 18 months, Russia and Iran have announced their intention to begin cooperating in this area. There is a highlevel Russian/Iranian working group set up to do this. A senior official of Gazprom chairs it on the Russian side, the deputy oil minister of Iran chairs it on the Iranian side, and Russia and Iran are discussing an increasingly wide array of potential energy initiatives, marketing projects and pipeline projects that would increase both Iranian and Russian influence in regional energy markets.

The potential for Russian and Chinese cooperation to develop Iran’s hydrocarbon resources, I think, the potential for that cooperation and its impact on American interests goes beyond Iran. Such cooperation has the potential, basically, to remake the geopolitics of all Eurasia; to establish Moscow as a leading energy supplier, not just to Europe, but also to Asia; to have Moscow as the major influence on energy trade in this part of the world and to consolidate the Sino-Russian axis of oil as the leading counterweight to American hegemony in regional and international affairs.

I think there needs to be a grand bargain between the United States and the Islamic Republic of Iran. My criticism of the Baker-Hamilton Iraq Study Group recommendations on engaging Iran is not that they go too far, but that they don’t go far enough. Unless there is a comprehensive deal between the United States and Iran in which all of the major bilateral differences between the U.S. and Iran are resolved in a package, not only will there be no diplomatic solution to the nuclear issue, but basically, the United States will lose the race for Iran that I described to you a few minutes ago. I think it is very important that the United States embrace a comprehensive wrap approach with Iran as an important foreign policy objective.

In my view, the most profound challenges to America’s global leadership during the next quarter century are not posed by the risk of strategic failure in Iraq, further proliferation of weapons of mass destruction, or the growth and consolidation of extremist forces in the Islamic world. Rather, the most profound challenges to U.S. preeminence during the next 25 years flow from the strategic and political consequences of ongoing structural shifts in global energy markets, especially the global oil market. Most notably, cooperation between China and Russia on energy matters is bolstering Sino-Russian cooperation on strategic issues, effectively creating a Sino-Russian ‘‘axis of oil’’ as the principal counterweight to America’s global hegemony.

FATIH BIROL, CHIEF ECONOMIST, HEAD OF THE ECONOMIC ANALYSIS DIVISION, INTERNATIONAL ENERGY AGENCY, PARIS, FRANCE. Looking at the next few decades, we think the world is facing twin energy-related threats. One is the increasing risk for energy security and the second one is the energy-related environmental concerns.

1. The world is facing twin energy-related threats: that of not having adequate and secure supplies of energy at affordable prices and that of environmental harm caused by its use. The World Energy Outlook 2006 confirms that fossil-fuel demand and trade flows, and greenhouse-gas emissions would follow their current unsustainable paths through to 2030 in the absence of new government action—the underlying premise of the Reference Scenario. It also demonstrates, in an Alternative Policy Scenario, that a package of policies and measures that countries around the world are considering would, if implemented, significantly reduce the rate of increase in demand and emissions. Importantly, the economic cost of these policies would be more than outweighed by the economic benefits that would come from using and producing energy more efficiently.
2. Oil demand grows by 1.3% per year through 2030 in the Reference Scenario, reaching 116 million barrels per day (mb/d) in 2030—up from 84 mb/ d in 2005. The pace of demand growth slackens progressively over the period. More than 70% of the increase in oil demand comes from developing countries (notably China and India), which see average annual demand growth of 2.5%.
3. The transport sector absorbs most of the increase in global oil demand. In the OECD, oil use in other sectors barely increases at all. In developing countries too, transport contributes the bulk of the increase in oil demand. The lack of cost-effective substitutes for oil-based automotive fuels will make oil demand more rigid.
4. Oil supply is increasingly dominated by a small number of major producers, most of them in the Middle East, where oil resources are concentrated. Non-OPEC production of conventional crude oil is set to peak within a decade. OPEC’s share of global supply grows significantly, from 40% now to 48% by 2030. Iran and Iraq have significant potential to expand their production, but Saudi Arabia remains by far the largest producer. The need for more transparent and comprehensive data on oil (and gas) reserves in all regions is a pressing concern.
5. The oil industry needs to invest a total of $4.3 trillion (in year-2005 dollars) over the period 2005-2030, or $164 billion per year. The upstream sector accounts for the bulk of this. Almost three-quarters of upstream investments will be required to maintain existing capacity.
6. A critical uncertainty is whether the substantial investments needed in the oil production sector in key Middle East countries will, in fact, be forthcoming. These governments could choose deliberately to develop production capacity more slowly than we project in our Reference Scenario. Or external factors such as capital shortages could prevent producers from investing as much in expanding capacity as they would like. As demonstrated by a Deferred Investment Case, slower growth in OPEC oil production drives up the international oil price and, with it, the price of gas.
7. The new policies analyzed in the Alternative Policy Scenario halt the rise in OECD oil imports by 2015. OECD countries and developing Asia become more dependent on oil imports in 2030 compared to today, but markedly less so than in the Reference Scenario. Global oil demand reaches 103 mb/d in 2030 in the Alternative Policy Scenario—13 mb/d lower than in the Reference Scenario. Additional policy measures to promote improved fuel efficiency of cars and trucks, as well as a greater market share for biofuels, therefore have the effect of improving energy security.
8. Our analysis demonstrates the urgency with which policy action is required. Each year of delay in implementing the policies analyzed would have a disproportionately larger effect on energy security. Yet there are formidable hurdles to be overcome. It will take considerable political will to push through the policies and measures in the Alternative Policy Scenario, many of which are likely to encounter resistance from some industry and consumer groups. Politicians need to spell out clearly the benefits to the economy and to society as a whole of the proposed measures. In most countries, the public is becoming familiar with the energy-security and environmental advantages of action to encourage more efficient energy use and to boost the share of renewables.

SUPPLY: Resources and Reserves

According to the Oil and Gas Journal, the world’s proven reserves2 of oil (crude oil, natural gas liquids, condensates and non-conventional oil) amounted to 1293 billion barrels3 at the end of 2005—an increase of 14.8 billion barrels, or 1.2%, over the previous year. Reserves are concentrated in the Middle East and North Africa (MENA), together accounting for 62% of the world total. Saudi Arabia, with the largest reserves of any country, holds a fifth. Of the twenty countries with the largest reserves, seven are in the MENA region (Figure 2). Canada has the least developed reserves, sufficient to sustain current production for more than 200 years. The world’s proven reserves, including non-conventional oil, could sustain current production levels for 42 years.

The amount of oil discovered in new oilfields has fallen sharply over the past four decades, because of reduced exploration activity in regions with the largest reserves and, until recently, a fall in the average size of fields discovered. These factors outweighed an increase in exploration success rates.

A lack of reliable information on production decline rates makes it difficult to project new gross capacity needs. A high natural decline rate—the speed at which output would decline in the absence of any additional investment to sustain production— increases the need to deploy technology at existing fields to raise recovery rates, to develop new reserves and to make new discoveries. Our analysis of capacity needs is based on estimates of year-on-year natural decline rates averaged over all currently producing fields in a given country or region. The rates assumed in our analysis vary over time and by location. They range from 2% per year to 11% per year, averaging 8% for the world over the projection period.5 Rates are generally lowest in regions with the best production prospects and the highest RIP ratios. For OPEC, they range from 2% to 7%. They are highest in mature OECD producing areas, where they average 11%.

The average quality of crude oil produced around the. world is expected to become heavier (lower API gravity) and more sour (higher sulfur content) over the Outlook period.6 This is driven by several factors, including the continuing decline in production from existing sweet (low-sulfur) crude oilfields, increased output of heavier crude oils in Russia, the Middle East and North Africa (Figure 7), and the projected growth of heavy non-conventional oil output. This trend, together with increasing demand for lighter oil products and increasing fuel-quality standards, is expected to increase the need for investment in upgrading facilities in refineries.

The availability of capital is unlikely to be a barrier to upstream investment in most cases. But opportunities and incentives to invest may be. Most privately-owned international oil and gas companies have large cash reserves and are able to borrow at good rates from capital markets when necessary for new projects. But those companies may not be able to invest as much as they would like because of restrictions on their access to oil and gas reserves in many resource-rich countries. Policies on foreign direct investment will be an important factor in determining how much upstream investment occurs and where. A large proportion of the world’s reserves of oil are found in countries where there are restrictions on foreign investment (Figure 10). Three countries—Kuwait, Mexico and Saudi Arabia—remain totally closed to upstream oil investment by foreign companies. Other countries are reasserting state control over the oil industry. Bolivia recently renationalized all its upstream assets. Venezuela effectively renationalized 565 kb/d of upstream assets in April 2006, when the state-owned oil company, PdVSA took over 115 kb/d of private production and took a majority stake in 25 marginal fields producing 450 kb/d after the government unilaterally switched service agreements from private to mixed public-private companies. The Russian government has tightened its strategic grip on oil and gas production and exports, effectively ruling out foreign ownership of large fields and keeping some companies, including Transneft, Gazprom and Rosneft, in majority state ownership. Several other countries, including Iran, Algeria and Qatar, limit investment to buy-back or production- sharing deals, whereby control over the reserves remains with the national oil company.

Even where it is in principle possible for international companies to invest, the licensing and fiscal terms or the general business climate may discourage investment. Most resource-rich countries have increased their tax take in the last few years as prices have risen. The stability of the upstream regime is an important factor in oil companies’ evaluation of investment opportunities. War or civil conflict may also deter companies from investing. No major oil company has yet decided to invest in Iraq. Geopolitical tensions in other parts of the Middle East and in other regions may discourage or prevent inward investment in upstream developments and related LNG and export-pipeline projects.

National oil companies, especially in OPEC countries, have generally increased their capital spending rapidly in recent years in response to dwindling spare capacity and the increased financial incentive from higher international oil prices. But there is no guarantee that future investment in those countries will be large enough to boost capacity sufficiently to meet the projected call on their oil in the longer term. OPEC producers generally are concerned that overinvestment could lead to a sharp increase in spare capacity and excessive downward pressure on prices. Sharp increases in development costs are adding to the arguments for delaying new upstream projects. For example, two planned GTL plants in Qatar were put on hold by the government in 2005 in response to soaring costs and concerns about the long-term sustainability of production from the North field. An over-cautious approach to investment would result in shortfalls in capacity expansion.

Environmental policies and regulations will increasingly affect opportunities for investment in, and the cost of, new oil projects. Many countries have placed restrictions on where drilling can take place because of concerns about the harmful effects on the environment. In the United States, for example, drilling has not been allowed on large swathes of US federal onshore lands—such as the Arctic National Wildlife Refuge (ANWR)—and offshore coastal zones for many years.7 Even where drilling is allowed, environmental regulations and policies impose restrictions, driving up capital costs and causing delays. The likelihood of further changes in environmental regulations is a major source of uncertainty for investment.

Local public resistance to the siting of large-scale, obtrusive facilities, such as oil refineries and GTL plants, is a major barrier to investment in many countries, especially in the OECD. The not-in-my-backyard (NIMBY) syndrome makes future investments uncertain. It is all but impossible to obtain planning approval for a new refinery in many OECD countries, though capacity expansions at existing sites are still possible. The risk of future liabilities related to site remediation and plant emissions can also discourage investment in oil facilities. The prospect of public opposition may deter oil companies from embarking on controversial projects. Up to now, NIMBY issues have been less of a barrier in the developing world.

Technological advances offer the prospect of lower finding and production costs for oil and gas, and opening up new opportunities for drilling. But operators often prefer to use proven, older technology on expensive projects to limit the risk of technical problems. This can slow the deployment of new technology, so that it can take decades for innovative technology to be widely deployed, unless the direct cost savings are clearly worth the risk. This was the case with the rotary steerable motor system, which has finally become the norm for drilling oil and gas wells. These systems were initially thought to be less reliable and more expensive, even though they could drill at double or even triple the rate of penetration of previous drilling systems. The slow take-up of technology means that there are still many regions where application of the most advanced technologies available could make a big impact by lowering costs, increasing production and improving recovery factors. For example, horizontal drilling, which increases access to and maximizes the recovery of hydrocarbons, is rarely used in Russia.

Unless major new discoveries are made in new locations, the average size of large-scale projects and their share in total upstream investment could fall after the end of the current decade. That could drive up unit costs and, depending on prices and upstream-taxation policies, constrain capital spending. Capital spending may shift towards more technically challenging projects, including those in arctic regions and in ultra-deep water. The uncertainties over unit costs and lead times of such projects add to the uncertainty about upstream investment in the medium to long term.

The Reference Scenario presents a sobering vision of the next two-and-a-half decades, as the major oil-consuming regions—including the United States—become even more reliant on imports, often from distant, unstable parts of the world along routes that are vulnerable to disruption. In July 2005, G8 leaders, meeting at Gleneagles with the leaders of several major developing countries and heads of international organizations, including the IEA, recognized that current energy trends are unsustainable.

In the Alternative Policy Scenario, the implementation of more aggressive policies and measures significantly curbs the growth in total primary and final energy demand— a reduction of about 10% relative to the Reference Scenario. That saving is roughly equal to the current energy demand of China. Demand still grows, by 37% between 2004 and 2030, but more slowly: 1.2% annually against 1.6% in the Reference Scenario. The reduction in the use of fossil fuels such as oil is even more marked than the reduction in primary energy demand (Figure 13). It results from the introduction of more efficient technologies and switching to carbon-free energy sources. Nonetheless, fossil fuels still account for 77% of primary energy demand by 2030 (compared with 81% in the Reference Scenario).

By 2015, demand reaches 95 mb/d, a reduction of almost 5 mb/ d on the Reference Scenario.

We would like to know the amount of oil left in [the Middle East] as all the numbers show that the bulk of the oil in the future will need to come from those countries.

Saudi Arabia is a key player and will remain so for several years to come and the Saudis have the highest reserves in the world. We do believe that Saudi Arabia has enough oil to meet the growth in global oil demand. However, we would like to be sure how much oil is there to make everybody feel better and give more confidence to the investor. Another issue which is as crucial is that the growth which will come from Saudi Arabia will not be mainly as a function of their reserves but as a function of their willingness to increase the production capacity. Saudi Arabia has the reserves, Saudi Arabia has the money to transform these reserves to production, but whether or not in the future Saudi Arabia will increase the production as they did in the past, as much as the world demands from them, or they will leave their oil for the next generations. And Saudi Arabia is differently— they will decide what they are going to do. But it is also the consumers’ right to recognize that one day, production from those countries in which we do not have excess, free, extra capital, to go directly into production, may change their policies and this may have serious implications for the consumers. The structure of the oil market is changing, Mr. Chairman. In the past, the money could have access to many oil deposits in the North Sea, the Gulf of Mexico, but in the future, it will not be the case. Therefore, how much oil will come will be decided by a very few number of national oil companies. And again, market conditions may not be the primary determinant when they are making those decisions. So, from that point of view, there are two major uncertainties: one, whether or not we will have the reserves and the money we’ll need in the future, and two, it would be very good to have a more transparency on the reserves in all Middle East countries and the rest of the world.

SENATOR DOMENICI. I don’t know what we have to do to convince both ourselves and the American people that we must change and do things differently.

SENATOR SMITH (ALABAMA). I think our focus needs to be domestically and then just have a really good military capacity to deal with this. When it comes to Iran, sitting down with them, they made it very clear what they would want from us and that is essentially a military domination of the Middle East. That is a horrifying prospect. If I was an Israeli, I know what that means: I’m gone, I’m exterminated. And I don’t think we can accede to that in the name of energy cooperation. So I just wanted to say that.

Senator SESSIONS. It gives them [oil producing nations like Russia and Iran] the ability to increase benefits for th[eir] citizens by a small amount and use the extra to invest in military ventures and bad behavior, and it seems to be absolutely happening And I’m part a caucus with Senators Joe Lieberman and Lindsay Graham and a number of others that says we should treat the energy question as a matter of national security, and I think some of the comments made here today are real chilling.

[The last 20 pages are questions from senators for the witnesses, but their replies are not included]