Extracts from the 2005 Senate hearing “High Costs of Crude”

[ In Mason Inman’s outstanding biography of M. King Hubbert, “The Oracle of Oil”, he shows five different models Hubbert used to predict the continental peak of U.S. production that all came up with roughly the same, correct answer.

Here are some other forgotten predictions from a 2005 Senate hearing “High Costs of Crude”:

1. James R. Schlesinger, former U.S. Secretary of Defense predicted that “by about 2010, we should see a significant increase in oil production as a result of investment activity now under way. There is a danger that any easing of the price of crude oil will, once again, dispel the recognition that there is a finite limit to conventional oil. “
2. James Woolsey, former Director of the CIA said that “Even if other production comes online from unconventional sources such as shale in the American West, the relatively high cost of production could permit low-cost producers, particularly Saudi Arabia, to increase production, drop prices for a time, and undermine the economic viability of the higher cost competitors, as occurred in the mid-1980s”.

Quite often, electricity generating contraptions like wind, solar, and nuclear are called on as the answer to the energy crisis.  But back in 2005 it was understood why anything generating electricity wouldn’t solve the problem:

• James Woolsey: “The current transportation infrastructure is committed to oil and oil-compatible products. And since our electricity system scarcely uses any oil, ”you can put windmills and nuclear reactors on every hilltop and you would have a negligible effect on our use of oil. For the foreseeable future, as long as vehicular transportation is dominated by oil as it is today, the Greater Middle East, and especially Saudi Arabia, will remain in the driver’s seat.”
• James Schlesinger: Advocating the construction of nuclear plants may be desirable, but it does not confront the critical issue of the liquids crisis. The intractable problem lies in liquid fuel for land, sea and air transportation.

So here we are now, the energy crisis forgotten, lots of excitement about wind, solar and nuclear despite their irrelevancy, electric cars, cellulosic ethanol, and other non-solutions.

And tight “fracked” shale oil is getting its ass kicked by the Saudi’s as Woolsey predicted.  Yet both Houses of Congress proclaim a century or more of energy independence, with the most recent energy bill expediting the export of U.S. natural gas (LNG) at a time when the fracking bubble appears to be bursting (shalebubble.org).  Ten years ago, congress was having meetings on the alarming shortages of conventional natural gas looming in the not too distant future.  Fracked NG delayed that crisis a few years, but won’t be able to in the future, since fracked natural gas wells only produce for the first few years before rapidly declining to low levels of production.

So here is a refreshing Senate hearing back when our dependence on oil was acknowledged, and our leaders knew and cared that an energy crisis was coming. First a few remarks, and then more excerpts from the hearing.

Indiana Senator Richard Lugar: In the long run our dependence on oil is pushing the U.S. toward an economic disaster of lower living standards, increased risks of war, and environmental degradation. When we reach the point where the world’s oil-hungry economies are competing for insufficient supplies of energy, oil will become an even stronger magnet for conflict than it already is.

James R. Schlesinger, Former U.S. Secretary of Defense.  In the decades ahead we shall reach a plateau or peak, beyond which we can’t increase production of conventional oil worldwide. The day of reckoning draws nigh.

A growing consensus accepts that the peak is not that far off. It was a geologist, M. King Hubbert, who outlined the theory of peaking and correctly predicted that production in the United States would peak around 1970.

Sometime in the decades ahead, the world will no longer be able to accommodate rising energy demand with increased production of conventional oil.  We need to … begin to prepare for that transition.

We have a growing gap between our discoveries and production, which will continue to increase… unless we discover oil, we will not be able to produce it. Most of our giant fields were found 40 years ago and more. Even today, the bulk of our production comes from these old and aging giant fields. More recent discoveries tend to be small with high decline rates and are soon exhausted.

The energy bill … doesn’t  deal with the long term problem that for two centuries we have been dependent on the growth of our economies and on the rise of living standards from the exploitation of a finite resource: oil.

The public does not really get interested in energy problems until the price of gasoline runs up. Other than that it is indifferent. We move as a country from complacency to panic. Gasoline prices are high at the moment, and it has gotten the public’s attention. Other than that, ]the public only pays attention] when there are supply interruptions and [long] gasoline lines, as we had in 1973 and 1979. That gets the public’s attention.

Pointing to the reality [of the end of] vast discoveries of super giant oil fields] in the Middle East doesn’t do it, until such time as there’s some impact. I hesitate to mention to you, gentlemen, that politicians don’t usually like to be associated with bad news. And that is bad news and it is very hard to persuade people to emulate Jimmy Carter, and go out there and say there’s a problem coming.

One additional point needs to be made. When gasoline prices are rising, public anger rises at least correspondingly. Public anger immediately draws the attention of politicians—and here in the United States it elicits a special type of political syndrome: Wishful thinking. It is notable that in the last election both candidates talked about ‘‘energy independence,’’ a phrase that traces back to the presidency of Richard Nixon and to the reaction to the Arab oil embargo. One should not be beguiled by this forlorn hope.

The transition [from oil] will be the greatest challenge this country and the world will face— outside of war. The longer we delay, the greater will be the subsequent trauma. For this country, with its 4 percent of the world’s population, using 25 percent of the world’s oil, it will be especially severe.

Senator HAGEL, Nebraska. Maybe the answer is, as you said earlier in your remarks, there has to be a crisis –a big crisis.

Alice Friedemann   www.energyskeptic.com  author of “When Trucks Stop Running: Energy and the Future of Transportation, 2015, Springer]

Senate 109–385. November 16, 2005. High costs of crude: the new currency of foreign policy.  U.S. Senate Hearing.    

Excerpts from this 39 page hearing follow (out of order, some paraphrasing).

RICHARD G. LUGAR, U.S. SENATOR FROM INDIANA.

The committee meets today to examine the effects of U.S. oil consumption on American foreign policy and on our wider economic and security interests. High oil prices have hurt American consumers at the gas pump, and record revenues flowing into oil producing nations are changing the world’s geopolitical landscape. Increasingly, oil is the currency through which countries leverage their interests against oil dependent nations such as ours.

Oil is not just another commodity. It occupies a position of singular importance in the American economy and way of life. In 2003, each American consumed about 25 barrels of oil. That is more than double the per capita consumption in the United Kingdom, Germany, and France and more than 15 times that of China. With less than 5% of the world’s population, the United States consumes 25% of its oil.

In the short run, our dependence on oil has created a drag on economic performance at home and troubling national security burdens overseas. In the long run, this dependence is pushing the United States toward an economic disaster that could mean diminished living standards, increased risks of war, and accelerated environmental degradation.

Up to this point, the main issues surrounding oil have been how much we have to pay for it and whether we will experience supply disruptions. But in decades to come, the issue may be whether the world’s supply of oil is abundant and accessible enough to support continued economic growth, both in the industrialized West and in large rapidly growing economies like China and India. When we reach the point where the world’s oil-hungry economies are competing for insufficient supplies of energy, oil will become an even stronger magnet for conflict than it already is.

Since 1991, we have fought two major wars in the oil-rich Middle East, and oil infrastructure and shipping lanes are targets for terrorism. In addition to the enormous dollar cost we pay for the military strength to maintain our access to foreign oil, our petroleum dependence exacts a high price in terms of foreign policy and international security. Massive infusions of oil revenue distort regional politics and can embolden leaders hostile to U.S. interests. Iran, where oil income has soared 30% this year, threatened last month to use oil as a weapon to protect its nuclear ambitions. At a time when the international community is attempting to persuade Iran to live up to its nonproliferation obligations, our economic leverage on Iran has declined due to its burgeoning oil revenues. Similarly, the Chavez government in Venezuela resists hemispheric calls for moderation, in part because it has been emboldened by growing oil revenues. Russia uses its gushing oil and natural gas income and reserves as leverage over new democracies in East Europe. Globally, critical international security goals, including countering nuclear weapons proliferation, supporting new democracies, and promoting sustainable development are at risk because of dependence on oil. Diversification of our supplies of conventional and nonconventional oil, such as Canada’s tar sands, is necessary and under way. Yet because the oil market is globally integrated, the impact of this diversification is limited.

Our current rate of oil consumption, coupled with rapidly increasing oil demand in China, India, and elsewhere, will leave us vulnerable to events in the tumultuous Middle East and to unreliable suppliers such as Venezuela. Any solution will require much more than a diversification and expansion of our oil supply.

Despite the widening discussion of our energy vulnerability, the U.S. political system has been capable of only tentative remedial steps that have not disturbed the prevailing oil culture. The economic sacrifices imposed on Americans recently by rising oil prices have expanded our Nation’s concern about oil dependence. But in the past, as oil price shocks have receded, motivations for action have also waned. Currently, policies for mediating the negative effects of oil dependence continue to be hamstrung in debate between supply-side approaches and those preferring to decrease demand. We must consider whether the political will now exists to commit to a comprehensive strategy.

 

JAMES R. SCHLESINGER, Former U.S. Secretary of Defense

…We face a fundamental, longer term problem. In the decades ahead, we do not know precisely when, we shall reach a plateau or peak, beyond which we shall be unable further to increase production of conventional oil worldwide. We need to understand that problem now and to begin to prepare for that transition.

The underlying problem is that for more than three decades, our production has outrun new discoveries. Most of our giant fields were found 40 years ago and more. Even today, the bulk of our production comes from these old and aging giant fields. Ghawar in Saudi Arabia, for example, produced 7 percent of the world’s petroleum all by itself. There are other examples. More recently discoveries tend to be small with high decline rates and are soon exhausted.

The problem is that demand and production continue to grow and the discoveries are not matching those increases. The fact of the matter is that unless we discover oil, we will not be able to produce it over time. And we have a growing gap between our discoveries and production, which will continue to increase. The consequence is that as we look to the future, and we begin to drain off those giant fields like Ghawar, like the Burgen Field in Kuwait, we are going to be faced with an oil stringency.

As the years roll by the entire world will face a prospectively growing problem of energy supply. Moreover, we shall inevitably see a growing dependency on the Middle East.

By about 2010, we should see a significant increase in oil production as a result of investment activity now under way. There is a danger that any easing of the price of crude oil will, once again, dispel the recognition that there is a finite limit to conventional oil. In no way do the prospective investment decisions solve the long-term, fundamental problem of oil supply.

Let me underscore that energy actions tend to be a two-edged sword. To some extent, the recent higher prices for oil reflect some of our own prior policies and actions. For example, the sanctions imposed upon various rogue regimes, by reducing world supply, have resulted in higher prices. Operation Iraqi Freedom, followed by the insurgency, has caused unrest in the Middle East. The consequence has been somewhat lower production and a significant risk premium that, again, has raised the price of oil. The effect of higher oil prices has been significantly higher income for producers. A much higher level of income has meant that a range of nations, including Russia, Iran, Venezuela, as well as gulf Arab nations have had their economic problems substantially eased. As a result, they have become less amenable to American policy initiatives. Perhaps more importantly, the flow of funds into the Middle East inevitably has added to the moneys that can be transferred to terrorists. As long as the motivation is there and controls remain inadequate, that means that the terrorists will continue to be adequately or amply funded. To the extent that we begin to run into supply limitations and to the extent that we all grow more dependent on the Middle East, this problem of spillover funding benefits for terrorists is not going to go away.

The United States is today the preponderant military power in the world. Still, our military establishment is heavily dependent upon oil. At a minimum, the rising oil price poses a budgetary problem for the Department of Defense at a time that our national budget is increasingly strained. Moreover, in the longer run, as we face the prospect of a plateau in which we are no longer able worldwide to increase the production of oil against presumably still rising demand, the question is whether the Department of Defense will still be able to obtain the supply of oil products necessary for maintaining our military preponderance. In that prospective world, the Department of Defense will face all sorts of pressures at home and abroad to curtail its use of petroleum products, thereby endangering its overall military effectiveness.

 

JAMES WOOLSEY, former CIA Director

The testimony I’m presenting today is in large measure of the substance of a paper by former Secretary of State, George P. Shultz, and I. We wrote and published it on the Web site of the Committee on the Present Danger, which he and I co-chair this summer.  [Today} I’m going to … point out why a pure market approach is something that will not work under the current circumstances.

First of all the current transportation infrastructure is committed to oil and oil-compatible products. So there’s no effective short-term substitutability. One simply has to eat whatever increases in oil prices come upon us. We can’t shift as we can with many other commodities.

Second, that dependence is one which operates today in such a way that the transportation fuel market and the electricity market are effectively completely separate things. In the 1970s about 20% of our electricity came from oil, so if one introduced nuclear power, or wind power, one was substituting them to some extent for oil use. Today that’s essentially not true anymore. Only 2 to 3 percent of our electricity comes from oil. Whether you’re a fan of nuclear power or wind or whatever, you can put windmills and nuclear reactors on every hilltop and you would have only negligible effect on our use of oil.

So the transportation fuel market and the electricity market today are very different. Secretary Shultz and I focused on the importance of proposals that could get something done soon. And in that regard let me be very blunt. We should forget about 95 percent of our effort on hydrogen fuel cells for transportation. We found on the National Energy Policy Commission that ‘‘hydrogen offers little to no potential to improve oil security and reduce climate change risks in the next 20 years.’’ Hydrogen fuel cells have real utility in niche markets for stationary uses. But the combination of trying to get the cost of these one-to-two-million-dollar vehicles that run on hydrogen down, at the same time one coordinates a complete restructuring of the energy industry so one has hydrogen at filling stations, and does a complete restructuring of the automotive industry so one has hydrogen fuel cells, is a many decades-long undertaking.

Hydrogen fuel cells for transportation in the near term are, in my judgement, a snare and a delusion and we should stop spending the kind of money on them that we are spending now.

The second point is that the Greater Middle East will continue to be the low-cost and dominant petroleum producer for the foreseeable future. If one looks at the coming demand growth from China and India, and the relatively high cost of production elsewhere, it is still going to be the case that the gulf—Saudi Arabia in particular—is going to be the swing producer and have a dominant influence on oil prices.

If the Saudi fields are in the negative shape that Mr. Simmons and others have suggested in some of their writings it may be a bit harder for the Saudis to increase production quickly, drop the price of oil as they did in the mid-1980s, and bankrupt other approaches.

The petroleum infrastructure is very vulnerable to terrorist and other attacks. My friend, Bob Baer, the former CIA officer, who wrote the recent book, ‘‘Sleeping With the Devil,’’ opens with a scenario in which a hijacked airliner is flown into the sulfur-cleaning towers up near Ras Tanura in northeastern Saudi Arabia. That takes 6 million barrels a day or so offline for a year or more. It sends world oil prices well over $100/barrel and crashes the world’s economy.

And that’s not to speak of some of the vulnerabilities from attacks on shipping, from hurricane damage in the gulf and all the rest. So the infrastructure of oil worldwide is vulnerable both to accidents and certainly to terrorism. But neither Secretary Shultz nor I talk in terms of just oil imports. We don’t solve anything in this country by importing a lot less from the Middle East and importing, say, more from Canada and Mexico, and then Europe importing more from the Middle East.

The possibility exists, particularly under regimes that could come to power in the Greater Middle East, of embargoes or other disruptions of supply. People sometimes say, whoever is in power in Saudi Arabia, they’re going to need to sell the oil in order to live. Well, they don’t need to pump that much of it if they want to live in the seventh century.

Bin Laden has explicitly said that he thinks $200/barrel or more is a perfectly reasonable price for oil. And we should remember that in 1979 there was a serious coup attempt in Saudi Arabia. In this part of the world, however successful or unsuccessful, our current efforts to help bring democracy and the rule of law into that part of the world are, we are looking at a decade or two or three of chaotic change and unpredictable governmental behavior in the Middle East. And that bodes concern, at the very least, for the stability of oil supplies.

Wealth transfers from oil have been used, and continue to be used, to fund terrorism and ideological support. The old Pogo cartoon line, ‘‘We have met the enemy and he is us,’’ is certainly true with respect to the funding of terrorism in the Middle East. For the ideological underpinnings of terrorism and the hate which is reflected in the al-Qaeda doctrine and related doctrines, we have only to look to the funding which takes place from Saudi Arabia and from wealthy individuals in that part of the world. Estimated generally at $3–$4 billion a year these funds go into teaching hatred in the madrassas of Pakistan, in the textbooks of Indonesia, in the mosques of the United States. We hear Prince Turki bin Faisal, the new Ambassador in Washington from Saudi Arabia and my former counterpart when he headed Saudi intelligence, say that we don’t appreciate how much the Saudis are doing in fighting against terrorism. Well, in a sense they are. They are perfectly willing to cooperate with us in fighting al-Qaeda, but it is not because the underlying views of the Wahhabis in Saudi Arabia and those of the Salafist jihadis such as al-Qaeda are different: They are not. The underlying views are genocidal for both groups with regard to Shiite Muslims, Jews, and homosexuals and they are absolutely filled with hatred with respect to Suffi and other Muslims, Christians, those with other religious beliefs, and democracy. Both are on the side of terrible oppression of women.

The current account deficits for a number of countries create risks ranging from major world economic disruption to deepening poverty, and could be substantially reduced by reducing oil imports. The United States essentially borrows about $2 billion now every day, principally from major Asian states, to finance its consumption. The single largest category of imports is the approximately $1 billion per working day that we borrow in order to finance our imported oil.

Global-warming gas emissions from man-made sources do create at least the risk of climate change, and one important component of potential climate change is, of course, transportation and oil.

The Greater Middle East will continue to be the low-cost and dominant petroleum producer for the foreseeable future.  Home of around two-thirds of the world’s proven reserves of conventional oil—45 percent of it in just Saudi Arabia, Iraq, and Iran—the Greater Middle East will inevitably have to meet a growing percentage of world oil demand.

Even if other production comes on line, e.g., from unconventional sources such as tar sands in Alberta or shale in the American West, their relatively high cost of production could permit low-cost producers, particularly Saudi Arabia, to increase production, drop prices for a time, and undermine the economic viability of the higher cost competitors, as occurred in the mid-1980s.

For the foreseeable future, as long as vehicular transportation is dominated by oil as it is today, the Greater Middle East, and especially Saudi Arabia, will remain in the driver’s seat.

Biodiesel and renewable diesel. The National Commission on Energy Policy pointed out some of the problems with most current biodiesel ‘‘produced from rapeseed, soybean, and other vegetable oils— as well as . . . used cooking oils.’’ It said that these are ‘‘unlikely to become economic on a large scale’’ and that they could “cause problems when used in blends higher than 20% in older diesel engines.’’ It added that ‘‘waste oil is likely to contain impurities that give rise of undesirable emissions.’’

Senator Lugar.  Let me begin the questions by noting, Director Woolsey, that when we wrote the article 6 years ago, there was great enthusiasm. President Clinton came over to the U.S. Department of Agriculture. There was a celebration of a breakthrough of energy independence in our country. I think the enthusiasm only lasted throughout that rally at USDA. Even though we tried to make the points that you’ve made today, 6 years later we are now sobered by war in the Middle East. And we are sobered by the fact, as you suggested, that in the future, events could make oil politically unavailable.

But all the assumptions on which our economy and our security, are based have consequences on our external affairs, over which we may not have a great deal of control. Ditto for the oil wells or lines in Iraq. Even as we try to protect them, we are not bringing more oil into the world. We are struggling to get back to the levels under Saddam.

Now, I ask the two of you: What sort of shock value is required, so that we will understand the world in which we live, and so that these modest suggestions will have some hearings, some legislation?

Secretary SCHLESINGER.   The public does not really get interested in energy problems until such time as the price of gasoline runs up. Other than that it is indifferent. We move as a country from complacency to panic. Gasoline prices are high at the moment, they have risen and it has gotten the public’s attention. Other than that, to get [attention, are] supply interruptions and [long] gasoline lines, as we had in 1973 with the Arab oil embargo, and to some extent with the fall of the Shaw in 1979. That gets the public’s attention.

Pointing to the reality that we have this trend ending the period of vast discoveries of elephants [also called super giant fields], also called, in the Middle East doesn’t do it, until such time as there’s some impact. I hesitate to mention to you, gentlemen, that politicians don’t usually like to be associated with bad news. And that is bad news and it is very hard to persuade people to emulate Jimmy Carter, and go out there and say there’s a problem coming.

Mr. WOOLSEY. I would think that $3-a-gallon gasoline, preceded by 15 of the 19 people who flew the planes on 9/11 coming from the world’s largest oil producer, would have done it. But the only thing I can say is that one wants to make these steps as palatable as possible.  Both financially and in terms of people’s lifestyles.

 

Senator Lugar.  We could be in a situation in which the Chinese, the Indians, and the European countries finally decide they are desperate. In the past, countries that were desperate often took over other people’s territory. And we could say—well, we’re in a small world. People are fighting world wars because they don’t have energy.

Mr. WOOLSEY. This is an issue on which all us oil importers are in the same fix together. I would have thought it would have been a wonderful major topic for cooperative discussion between the President and the Japanese and the Chinese, that we could work on programs like this together. We have no reason to want China to need lots of oil. We’d rather have them happy with using their grass to drive home.

Senator Lugar. Exactly. And each one of us who travel find hotels in African countries filled with people from India, China, as well as our own country, looking for the last acre on the preemptive possibility.

Senator CHUCK HAGEL, Nebraska.  How do we then take everything that the two of you have talked about in a way where we can address it, find solutions for it, develop the policy needed to do the things that you’re talking about to avert the things that are coming down the track at us?

I would like to have you each address it because in your opinions does it start to address, at all, what we must deal with here, and the decisions we’re going to have to make in order to avert, I think, an international catastrophe that’s headed straight at this country.

I wonder whether the President of the United States should lift this above where we are now, and essentially put this on the same plain as a Manhattan Project which has been mentioned before. The seriousness of this I don’t think takes second place to any issue. And yet, we seem to kind of be sleepwalking through this. Yes, we passed the bill, kind of interesting, good. I voted for it, I suspect most of my colleagues voted for it. It just doesn’t, in my opinion, really address what you’re talking about.

And it is complicated. I understand that you talked to Secretary Schlesinger about, I think, 17 different blends of gasoline that our refineries have to deal with. You talk about, Director Woolsey, the Pogo quote. Much of this, I think, is self-inflicted because we have not had the courage in this country, administrations, Congresses, to deal with this. But these hearings, as important as they are, are not going to lift this up and do what we need to do to address this impeding disaster.

My question is: How do we then fix this? How do we address it? Maybe we start with the energy bill, whether that’s really relevant to what needs to be done. Should the President come up here and sit down with the leadership of the Congress of the United States, and say now we’re going to get it above this. We’re going to make this a Manhattan Project, it is the focus of this country and the energy that we’re going to harness, private public partnerships and get this done.

We hear a lot of talk about, especially politicians, energy independence. It’s in our press releases. We’re going to get this country to a point where there’s energy independence. I’d like to hear from each of you whether that’s possible. How do you do that? I didn’t hear anything too encouraging from either one of you today, about that’s going to happen.

We need friends, we need alliances, we need relationships. I think we’re destroying our infrastructure in this country because of Iraq and because of over-commitments. We’re destroying our budgets, but yet Rome burns.

 

Secretary SCHLESINGER. The first point is: No, we’re not going to have energy independence until such time as we move away from oil as our principal source of transportation fuel. We have a long-term liquids problem.

The energy bill was quite useful. But it dealt essentially with shorter term problems: The failure to build our infrastructure; the difficulty in stringing out transmission lines or pipe lines; it eased a number of those problems and that was desirable. But it doesn’t  deal with this longer term problem that for two centuries we have been dependent on the growth of our economies and on the rise of living standards of the exploitation of a finite resource which is oil.

How do we deal with that? I would hope that we can focus the national attention on this longer term problem and begin to prepare now to get through that transition that we face, 20 years out, 25 years out, I don’t know what the date is. That depends, of course, on Presidential leadership and the need to focus on the realities of that future and possibly to develop a number of what I’ll call ‘‘mini Manhattan Projects’’ because there are a range of developments that can help. Hybrid cars, plug-ins, look most promising. But that is not going to happen unless we are prepared to contravene to some extent, at least, the decisions of the marketplace. Senator Sununu’s concerns about electric power supply are appropriate. But once again until we can link up electric power and the transportation sector, we are not going to deal with the larger oil problem.

Senator HAGEL. I don’t know if there is an answer here.  But then, what do you do to get it out of neutral, and take it up somewhere where we can start to put all these pieces together, bring some leadership, resources, harness, focus policy,

And maybe the answer is, you said it earlier in your remarks, there has to be some crisis. A big crisis. And I think the margins of error today in the world are so much different than they were when you were Secretary of Energy, to recover from such a crisis, that is a very frightening prospect if we don’t get serious about this, and I think both political parties, the Congress, and the President, have this as its greatest responsibility.

Secretary SCHLESINGER. That is absolutely right, Senator. We need to have a chorus of all political, almost all political figures, in Washington and throughout the country, Governors as well, pointing to this problem, that it is something we must address. And if we don’t have that, we are not going to get on with these major adjustments that are necessary. We must remember that societies have difficulty facing distant threats.

We saw that in the case of Hurricane Katrina. For over a century we’ve known that sooner or later a CAT 4 or CAT 5 would hit a city that was below sea level. But it wasn’t today’s problem. Somebody has commented, it’s like the fella who plays Russian roulette, and he spins five or six times, nothing happens, and he puts the revolver aside and says that’s not dangerous. Well, we’ve been to two or three of those occasions, starting—possibly starting with the Suez crisis in 1956 and then, of course, with 1973 and 1979 and we’ve recovered from them and the reaction is like that fella with the revolver and Russian roulette.

 

Mr. WOOLSEY. Energy independence is really the wrong phrase. The problem is oil, as Jim suggested.

Secretary S CHLESINGER.  We must remember that we are working against the grain of the price mechanism, or the market economy. And that we are working against the predilections of the public and that’s what makes it hard.

 

Senator BILL NELSON, FLORIDA.  Some of these things can work, and we are suddenly at a position that we’re using half of the gasoline that we are using now. By a combination of all the things that you have very articulately laid out. Realistically, in what period of time would that be?

Mr. WOOLSEY. Well, a lot would have to do with how fast the fleet of passenger vehicles turns over. I think the average American passenger vehicle stays in service 10 years or 12 years

 

Senator BILL NELSON. And, as a result of that we would be, if at the end of that period of time, however long it is. We would be almost not dependent on foreign oil, and the question is: Are we going to be well on our way to that goal, or achieving that goal before the crisis comes that you mentioned, Senator Hagel? Because the crisis is coming. We just don’t know how it’s going to come. It may be that a terrorist sinks a supertanker in the Strait of Hormuz, or they blow up a refinery, or some other—maybe another major hurricane. And why we can’t get the American public and the American leadership focused on this is beyond me.  We have been seduced by cheap oil. And now it is so omnipresent in our system of distribution of energy that it’s hard to change it, and it’s going to take a crisis. It’s going to force us to change.

And that’s sad. Now this Senator’s going to continue to speak out, and I assume my colleague on the basis of your leadership, Mr. Chairman, are going to continue to speak out and let’s see if we can influence whoever’s occupying the White House for the next 3 years, and for the next years after that, whoever the new administration is, to see if we can break this stranglehold that we’re in. I don’t know what else to say.

 

Senator Lugar.  Thank you very much, Senator Nelson. This committee is declaring intellectual independence, even if we can’t declare energy independence.

But let me just say, the thing that all segments of Ukraine politics pointed to, were maps. They drew all sorts of oil lines to various countries, or gas, because of a sense of their independence conceivably being lost. The people who have the spigots and could turn them off could create a cause of war. They could create financial chaos in the meanwhile, a physical torture of the country. In other words, fortunately we are not in that condition. We are talking about a situation down the trail, but if you are in that condition as are many countries, either Ukraine or those coming to that point in this world. I stress again the international implications of our conversation today.

Even as we get our own act straightened out, and I think that we will, we must exude optimism. We must try to work with other countries, so that they do not face this crushing sense of dependence. This is critical, or we are going to be involved, I fear, in military conflict elsewhere in the world, trying to mediate either wars or disputes among others who did not work things out. And that is a very serious problem. For the moment, we’re talking about competition with the Chinese, the Indians, everybody grasping for the last barrel, with the understanding that if they don’t get it, and the dynamics of their public demand a good for their country, they may take means to get it. We have a strong need for diplomacy.

 

SENATOR RUSSELL D. FEINGOLD, WISCONSIN. As I have said many times, we must move away from our dependence on oil, most of which comes from foreign soil, if we are to truly meet our responsibility to future generations.

I would like to thank today’s witnesses, James Woolsey and James Schlesinger, for appearing before the committee. Given their active role in bringing attention to the concerns surrounding dependency on foreign oil, I look forward to hearing their ideas for avoiding future policy crises through an intelligent, well-informed non-fossil-fuel-based energy policy.

 

[From The National Interest, Winter 2005/06] THINKING SERIOUSLY—ABOUT ENERGY AND OIL’S FUTURE (By James R. Schlesinger)

The run-up in gasoline and other energy prices—with its impact on consumers’ purchasing power—has captured the public’s attention after two decades of relative quiescence. Though energy mavens argue energy issues endlessly, it is only a sharp rise in price that captures the public’s attention. A perfect storm—a combination of the near-exhaustion of OPEC’s spare capacity, serious infrastructure problems, most notably insufficient refining capacity, and the battering that Hurricanes Katrina and Rita inflicted on the Gulf Coast have driven up the prices of oil and oil products beyond what OPEC can control—and beyond what responsible members of the cartel prefer. They, too, see the potential for worldwide recession and recognize that it runs counter to their interests. But the impact is not limited to economic effects. Those rising domestic energy prices and the costs of fixing the damage caused by Katrina have weakened public support for the task of stabilizing Iraq, thereby potentially having a major impact on our foreign policy. What is the cause of the run-up in energy prices? Is the cause short term (cyclical) or long term? Though the debate continues, the answer is both. Clearly there have been substantial cyclical elements and ‘‘contradictions’’ at work. For several decades, there has been spare capacity in both oil production and refining. Volatile prices for oil and low margins in refining have discouraged investment. The International Energy Agency, which expresses confidence in the adequacy of oil reserves, urges substantially increased investment in new production capacity and has recently warned that, in the absence of such investment, oil prices will increase sharply. Such an increase in investment clearly would be desirable, but it is more easily said than done. In the preceding period of low activity, both the personnel and the physical capacity in the oil service industry have diminished—and it will take time to recruit and train personnel, to restore capacity and to produce equipment.

One additional point needs to be made. When gasoline prices are rising, public anger rises at least correspondingly. Public anger immediately draws the attention of politicians—and here in the United States it elicits a special type of political syndrome: Wishful thinking. It is notable that in the last election both candidates talked about ‘‘energy independence,’’ a phrase that traces back to the presidency of Richard Nixon and to the reaction to the Arab oil embargo. One should not be beguiled by this forlorn hope—and this brings us to the real problem for the foreseeable future. What is the prospect for oil production in the long term? How does it bear on the prospects for ‘‘energy independence’’?

THE DAY OF RECKONING DRAWS NIGH.  At the end of World War II came the period of the opening-up and rapid development of Middle East oil production, notably in the Arabian Peninsula. Both Europe and the United States embraced the shift from coal to oil as their principal energy source. The beginning of flush production in the Middle East coincided with and fostered the tremendous expansion of world oil consumption. In the 1950s and 1960s, oil production and consumption more than doubled in each decade. Annual growth rates in consumption of 8, 9 or 10 percent were typical. By contrast, no one, not even the most optimistic observers, expects a doubling of production in the decades ahead. The present expectation is markedly different. In increasing numbers, now approaching a consensus, knowledgeable analysts believe that the world will, over the next several decades, reach a peak—or plateau— in conventional oil production (Hirsch) Timing varies among these observers, but generally there is agreement on the outcome.

The implication is clear. Even present trends are unsustainable. Sometime in the decades ahead, the world will no longer be able to accommodate rising energy demand with increased production of conventional oil.

It should be emphasized that that would pose not a general ‘‘crisis in energy,’’ but instead a ‘‘liquids crisis.’’ Problems in energy other than oil are infrastructure problems, solvable through appropriate investment. To talk of a general ‘‘energy crisis’’ aside from oil is to divert attention from the central long-term problem. Advocating the construction of nuclear plants, for example, may be desirable, but it does not confront the critical issue of the liquids crisis. Basically, there is no inherent problem in generating and transmitting electric power, for which the resources are available. The intractable problem lies in liquid fuel for land, sea and air transportation.

We get clear indications regarding oil’s future from those in the industry. Though the United States and other consuming nations seem to believe that Saudi Arabia can and should increase production as demand rises, when he was asked at a recent conference whether oil production would peak, Ali Naimi, the long-time head of Saudi Aramco, responded that it would reach a plateau. It is quite telling that when, in 2004, the Energy Information Administration (EIA) projected Saudi production in 2025 of some 25 million BPD to satisfy world demand, the Saudis demurred—and quite politely indicated that such figures were ‘‘unrealistic.’’ The Saudis have never discussed a figure higher than 15 million BPD.

This is why David O’Reilly, CEO of Chevron has stated that the ‘‘era of easy oil is over.’’ Projections by Shell and by BP put that plateau several decades out. BP now says that its initials stand for ‘‘Beyond Petroleum.’’ Others, more pessimistic, suggest that the peak is much closer at hand—in the next decade. It is interesting to note, in light of the recent discussion of Chinese ambitions in acquiring oil assets, that the Chinese seem to believe that world production will reach a peak around 2012 (Pang Xiongqi).

So any indication of relative optimism is greeted with sighs of relief: The peak is not that near. For example, when Daniel Yergin of Cambridge Energy Research Associates recently stated that the peak will not come until after 2020, it was greeted with something approaching cries of elation: The threat is not that immediate!

What lies behind this now-changed view? In brief, most of the giant fields were found forty years or more ago. Only a few have been found since 1975. Even today the bulk of production comes from these old and now aging giant fields.

The Ghawar oilfield in Saudi Arabia, discovered in the 1940s, is by itself still producing 7 percent of the world’s oil. Would that there were more Ghawars, but, alas, that is probably not to be.

Moreover, the announcement by the Kuwait Oil Company in November that its Burgan field, the world’s second largest, is now past its peak output caused considerable consternation. The field’s optimal rate is now calculated at 1.7 million BPD, not the two million that had been forecast for decades ahead. In addition, that announcement has called into question the EIA’s estimate in its reference case that Kuwait would be able to produce five million BPD; it now appears likely that the emirate will not be able to produce over three million BPD.

Recent discoveries have typically been relatively small with high decline rates— and have been exhausted relatively quickly. With respect to the United States, it has been observed: ‘‘In the old days, we found elephants—now we find prairie dogs.’’

A growing consensus accepts that the peak is not that far off. It was a geologist, M. King Hubbert, who outlined the theory of peaking in the middle of the last century, basing it on the experience that as an oilfield passes the halfway point in extracting its reserves, its production goes into decline. Hubbert correctly predicted that production in the United States itself would peak out around 1970. Dissenting from that view are the economists, who have a deep (and touching) faith in the market mechanism—and a belief that over time market forces can adequately cope with any limits on oil supply.  In the extreme, some economists have regarded oil supplies as almost inexhaustible.

Administration of the Department of Energy, as well as the International Energy Agency. What lies behind it? While it is conceded that we have not been finding many new giants, it is contended that ‘‘additions and extensions’’ of existing fields will sustain growth. There is some truth in that contention—in that new technologies have been the basis of much of the additions to existing fields—and the hope is always there that we can increase overall recovery from the already discovered fields.

Optimists are buttressed in their views and are fond of pointing to the many earlier statements about ‘‘running out of oil.’’ Perhaps the most notable example was one by the director of the U.S. Geological Survey, George Otis Smith, who suggested in 1920 that we had already used up 40 percent of the oil to be found here in this country. That was a decade before the discovery in 1930 of the vast East Texas field, a bonanza that made oil supply so available that it drove oil prices below a dollar a barrel during the 1930s. A recent Chevron advertisement makes this substantive point quite dramatically: ‘‘It took us 125 years to use the first trillion barrels of oil. We’ll use the next trillion in 30.’’

Such past failed predictions are far less comforting than the journalists who cite them believe. The future may actually be different from the past. The optimists, mostly non-experts, seem unable to think quantitatively. Things are different now. In 1919 the world consumed a modest 386 million barrels of oil. Today the world is consuming some thirty billion barrels of oil each year. Statements like that of Director Smith were made before we had something approaching a billion automobiles worldwide, before we had aircraft and air transportation, before agriculture depended upon oil-powered farm machinery.

[Note: this is not true, see Inman’s “The Oracle of Oil”. Hubbert did consider technology and unconventional oil]

Hubbert’s peaking theory, based on observation of individual oil fields, was static in that it abstracted from improvements in technology. It also dealt strictly with conventional oil supplies. One notes that today those who are challenging Hubbert’s Peak are changing the rules of the game. They rightly point to dramatic improvements in technology, most notably deep-sea drilling. Somewhat less legitimately, they include in their projections all sorts of unconventional oil, like the Canadian tar sands and the prospects for shale oil. For example, of late, estimates of Canadian oil reserves have jumped by 180 billion barrels, now including the tar sands of Alberta. This is not a refutation of Hubbert’s theory (though it is frequently treated as such); it is simply a change in the rules that does not gainsay the fear that we will reach a plateau in conventional oil production.

We must bear in mind that earlier estimates suggested that there were some two trillion barrels of conventional oil in the earth’s crust. Now the estimate has grown to around three trillion. We have now consumed over a trillion barrels of oil. As indicated, we are consuming oil at the rate of thirty billion barrels a year. If one accepts Department of Energy projections, worldwide we would be consuming forty billion barrels of oil by 2025.

At such rates of consumption, the world will soon have reached the halfway point—with all that that implies—of all the conventional oil in the earth’s crust. At that point, the plateau or the peak will be near. And such calculations presuppose what cannot be assumed, that all the nations with substantial oil reserves will be willing to develop those reserves and exploit them at the maximum efficient rate. Both the Russian Federation and Saudi Arabia seem to intend to reach a plateau that they can sustain for a long time—the Russians at around ten million BPD, the Saudis up to but no more than 15 million BPD.

The inability readily to expand the supply of oil, given rising demand, will in the future impose a severe economic shock. Inevitably, such a shock will cause political unrest—and could impact political systems. To be sure, we cannot anticipate with any precision the year or even the decade that we will reach that plateau. Yet, as Justice Potter Stuart suggested, in seeking to define pornography, we shall know it when we see it.

Many economists take great comfort from the conviction that there is always a price at which markets will clear, and that the outcome determined by supply and demand is not only inevitable, but is also politically workable and acceptable. An outcome in which the price of a crucial commodity like oil rises to a level causing widespread economic disruption, along with the political consequences that flow from such disruption, turns out to be a secondary consideration, if considered at all. One is reminded of the phrase used by Wesley Clair Mitchell and Arthur F. Burns in their classic, Measuring Business Cycles (1946), when they spoke scornfully of the ‘‘Dreamland of Equilibrium.’’

That brings us to the question of the transition away from conventional oil as the principal source of energy for raising living standards of the world’s population. That transition will be the greatest challenge this country and the world will face— outside of war. The longer we delay, the greater will be the subsequent trauma. For this country, with its 4 percent of the world’s population, using 25 percent of the world’s oil, it will be especially severe.

The Day of Reckoning is coming, and we need to take measures earlier to cushion the shock. To reduce the shock, measures to ameliorate it should start ten years earlier at a minimum, given the length of time required to adjust the capital stock—and preferably much longer. The longer we delay, the greater the subsequent pain.

Both people and nations find it hard to deal with the inevitable. Even though it was long recognized that a Category 4 or Category 5 hurricane would inevitably strike New Orleans, a city substantially below sea level, Hurricane Katrina reminds us that political systems do not allocate much effort to dealing with distant threats—even when those threats have a probability of 100 percent.

We should heed a lesson from ancient Rome. In the towns of Pompeii and Herculaneum, scant attention was paid to that neighboring volcano, Vesuvius, smoking so near to them. It had always been there. Till then, it had caused little harm. The possibility of more terrible consequences was ignored—until those communities were buried in ten feet of ash.

Nonetheless, it does appropriately point to our greater vulnerability to a future period.

References

Robert L. Hirsch, ‘‘The Inevitable Peaking of World Oil Production,’’ (Atlantic Council of the United States, October 2005), which includes a range of different estimates for the peak year. For a more comprehensive analysis, see Robert L. Hirsch, Roger Bezdek and Robert Wendling, ‘‘Peaking of World Oil Production: Impacts, Mitigation and Risk Management’’   (National Energy Technology Laboratory, February 2005).

Pang Xiongqi, et al., ‘‘The Challenge Brought by the Shortage of Oil and Gas in China and their Countermeasures,’’ a presentation at an international seminar in Lisbon, 2004. One may assume that such presentations do not depart significantly from the views of the Chinese government. The optimistic view is held by the Energy Information

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I thank the committee for this invitation to discuss the quest for energy security, the implications of our heavy dependence on imported oil, the rise in oil prices, and their manifold political and economic repercussions for our Nation. In so many ways, the use of oil as our primary energy source turns out to be a two-edged sword. Actions that we take may reduce supply or add to the resources of those who are hostile to us.

The problem of energy security is of relatively recent origin. When mankind depended upon windmills, oxen, horses, and the like, energy security was not a strategic problem. Instead, as a strategic problem it is a development of modern times and reflects most crucially the turn to fossil fuels as increasingly the source of energy. The Industrial Revolution in the 19th century, strongly reinforced by the rapid growth of oil-dependent transportation in the 20th century, unavoidably posed the question of security of supply. Imperial Germany took over Lorraine with its coal fields after the Franco-Prussian War to insure its energy security. When Britain, pushed by Churchill, converted its Navy to oil early in the 20th century, it sought a secure supply of oil under its own control in the Persian Gulf, which incidentally increased its concern for the security of the Suez Canal.

For the United States, where the production of oil had started, in 1869, and for long was primarily located, the question of security of supply did not arise until the 1960s and 1970s. Since then, we have regularly talked about and sought, by various measures, to achieve greater energy security. Such measures, limited as they were, have generally proved unsatisfactory. The Nation’s dependence on imported hydrocarbons has continued to surge.

Until such time as new technologies, barely on the horizon, can wean us from our dependence on oil and gas, we shall continue to be plagued by energy insecurity. We shall not end dependence on imported oil nor, what is the hope of some, end dependence on the volatile Middle East with all the political and economic consequences that flow from that reality.

We shall have to learn to live with degrees of insecurity—rather than that elusive security we have long sought. To be sure, some insecurity will be mitigated by the Strategic Petroleum Reserve, and other emergency measures. That will provide some protection against short-term supply disruptions, but it will not provide protection against the fundamental long-term problem.

Senator Lugar, Indiana. Our weak response to our own energy vulnerability is all the more frustrating given that alternatives to oil do exist. Oil’s importance is the result of industrial and consumption choices of the past. We now must choose a different path. Without eliminating oil imports or abandoning our cars, we can offset a significant portion of demand for oil by giving American consumers a real choice of automotive fuel. We must end oil’s near monopoly on the transportation sector, which accounts for 60% of American oil consumption.

I believe that biofuels, combined with hybrid and other technologies, can move us away from our extreme dependence on oil. Corn-based ethanol is already providing many Midwesterners with a lower cost fuel option. Cellulosic ethanol, which is made of more abundant and less expensive biomass, is poised for a commercial takeoff. We made progress in the 2005 energy bill, which includes incentives to produce 7.5 billion gallons of renewable biofuel annually. I introduced legislation last week that would require manufacturers to install flexible-fuel technology in all new cars. This is an easy and cheap modification, which allows vehicles to run on a mixture of 85 percent ethanol and 15 percent gasoline. We will get even greater payoffs for our investment in oil alternatives if American technological advances can be marketed to the rest of the world. Nations containing about 85 percent of the world’s population depend on oil imports.

 

JAMES WOOLSEY, former CIA Director

Secretary Shultz and I suggested three proposed directions for policy in these circumstances. The first policy is to encourage improved vehicle mileage, using technology that is now in production. First, with modern diesel vehicles: One needs to be sure that they are clean enough with respect to emissions, but one of the main reasons that European fuel mileage is 42 miles a gallon for their fleet and ours is 24 miles a gallon, is because over half of the passenger vehicles in Europe are diesels; modern diesels.

Light weight carbon composite construction of vehicles. The Rocky Mountain Institute’s publication of a year ago, ‘‘Winning the Oil Endgame’’ (WTOE) talks about this. This is a technology that is now in place for at least racing cars. Formula 1 racers are constructed out of carbon composites that are about 80 percent of the strength of aviation composites but about 20 percent of the cost. What that does is separate weight from safety. If one is in a light weight carbon composite vehicle like a Formula 1 racer it is extremely resistant to being crushed or damaged, many times better than steel. So having light-weight vehicles that are fuel efficient, but also strong enough that you don’t have to worry that your family’s going to get crushed if they get hit by an SUV, has some real advantages.

The second policy we suggest is the commercialization of alternative transportation fuels—fuels that can be available soon, are compatible with existing infrastructure, and can be derived from waste or otherwise produced cheaply. The first is cellulosic ethanol. The chairman and I stressed it in the Foreign Affairs article that he mentioned. Ethanol of any kind can be used for up to 85 percent of the fuel in flexible-fuel vehicles.  The cost of cellulosic ethanol looks like it is headed down to well below $1 a gallon for production.

There are also new technologies for producing diesel encouraged in the Energy Act. It’s called renewable diesel rather than biodiesel, because it focuses on waste products of all kinds as we said in the Energy Commission Report.

The Toyota Priuses that are sold in Japan and Europe have a button on them, which if you push it you can drive all electric for a kilometer or so. For some reason those buttons are not put on the Priuses that are sold in the United States. But if one improves the capabilities of the batteries in a hybrid, and you can punch a button of that sort and drive for, let’s say, 30 miles before the hybrid feature cuts in—that is the movement back and forth between gasoline power and electric power—and you have topped off the battery by plugging in the hybrid overnight, using off-peak night-time power, you are driving on the equivalent of something between 25-cent and $1-a-gallon gasoline. Most cars in the United States are driven less than 30 miles a day. So, if that’s the second car in the family, the car that’s used for errands and taking kids to school and so forth, you could well go weeks or months before you visited the filling station. On the average that type of a feature makes my 50-mile-a-gallon Prius into about a 125-mile-a-gallon Prius. If you make that vehicle out of carbon composites, then instead of 125 miles a gallon you would be getting around 250 miles a gallon, because halving the weight would approximately double the mileage.

There are imaginative proposals for transitioning to other fuels for transportation, such as hydrogen to power automotive fuel cells, but this would require major infrastructure investment and restructuring. If privately owned fuel cell vehicles were to be capable of being readily refueled, this would require reformers (equipment capable of reforming, say, natural gas into hydrogen) to be located at filling stations, and would also require natural gas to be available there as a hydrogen feed-stock. So not only would fuel cell development and technology for storing hydrogen on vehicles need to be further developed, but the automobile industry’s development and production of fuel cells also would need to be coordinated with the energy industry’s deployment of reformers and the fuel for them. Moving toward automotive fuel cells thus requires us to face a huge question of pace and coordination of large-scale changes by both the automotive and energy industries. This poses a sort of industrial Alphonse and Gaston dilemma: Who goes through the door first? (If, instead, it were decided that existing fuels such as gasoline were to be reformed into hydrogen on board vehicles instead of at filling stations, this would require onboard reformers to be developed and added to the fuel cell vehicles themselves—a very substantial undertaking.) It is because of such complications that the National Commission on Energy Policy concluded in its December 2004, report ‘‘Ending The Energy Stalemate’’ that ‘‘hydrogen offers little to no potential to improve oil security and reduce climate change risks in the next 20 years.’’ To have an impact on our vulnerabilities within the next decade or two, any competitor of oil-derived fuels will need to be compatible with the existing energy infrastructure and require only modest additions or amendments to it.