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	<title> - U.S. ENERGY AND MINERAL NEEDS, SECURITY AND POLICY</title>
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	[House Hearing, 109 Congress]
	[From the U.S. Government Publishing Office]





	U.S. ENERGY AND MINERAL NEEDS, SECURITY AND POLICY

	=======================================================================

	OVERSIGHT HEARING

	before the

	SUBCOMMITTEE ON ENERGY AND
	MINERAL RESOURCES

	of the

	COMMITTEE ON RESOURCES
	U.S. HOUSE OF REPRESENTATIVES

	ONE HUNDRED NINTH CONGRESS

	FIRST SESSION

	__________

	Wednesday, March 16, 2005

	__________

	Serial No. 109-4

	__________

	Printed for the use of the Committee on Resources



	Available via the World Wide Web: http://www.access.gpo.gov/congress/
	house
	or
	Committee address: http://resourcescommittee.house.gov


	______

	U.S. GOVERNMENT PRINTING OFFICE
	20-126 WASHINGTON : 2005
	_____________________________________________________________________________
	]For Sale by the Superintendent of Documents, U.S. Government Printing Office
	Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; (202) 512�091800
	Fax: (202) 512�092250 Mail: Stop SSOP, Washington, DC 20402�090001

	COMMITTEE ON RESOURCES

	RICHARD W. POMBO, California, Chairman
	NICK J. RAHALL II, West Virginia, Ranking Democrat Member

	Don Young, Alaska Dale E. Kildee, Michigan
	Jim Saxton, New Jersey Eni F.H. Faleomavaega, American
	Elton Gallegly, California Samoa
	John J. Duncan, Jr., Tennessee Neil Abercrombie, Hawaii
	Wayne T. Gilchrest, Maryland Solomon P. Ortiz, Texas
	Ken Calvert, California Frank Pallone, Jr., New Jersey
	Barbara Cubin, Wyoming Donna M. Christensen, Virgin
	Vice Chair Islands
	George P. Radanovich, California Ron Kind, Wisconsin
	Walter B. Jones, Jr., North Grace F. Napolitano, California
	Carolina Tom Udall, New Mexico
	Chris Cannon, Utah Raul M. Grijalva, Arizona
	John E. Peterson, Pennsylvania Madeleine Z. Bordallo, Guam
	Jim Gibbons, Nevada Jim Costa, California
	Greg Walden, Oregon Charlie Melancon, Louisiana
	Thomas G. Tancredo, Colorado Dan Boren, Oklahoma
	J.D. Hayworth, Arizona George Miller, California
	Jeff Flake, Arizona Edward J. Markey, Massachusetts
	Rick Renzi, Arizona Peter A. DeFazio, Oregon
	Stevan Pearce, New Mexico Jay Inslee, Washington
	Devin Nunes, California Mark Udall, Colorado
	Henry Brown, Jr., South Carolina Dennis Cardoza, California
	Thelma Drake, Virginia Stephanie Herseth, South Dakota
	Luis G. Fortuno, Puerto Rico
	Cathy McMorris, Washington
	Bobby Jindal, Louisiana
	Louie Gohmert, Texas
	Marilyn N. Musgrave, Colorado

	Steven J. Ding, Chief of Staff
	Lisa Pittman, Chief Counsel
	James H. Zoia, Democrat Staff Director
	Jeffrey P. Petrich, Democrat Chief Counsel
	------

	SUBCOMMITTEE ON ENERGY AND MINERAL RESOURCES

	JIM GIBBONS, Nevada, Chairman
	RAUL M. GRIJALVA, Arizona, Ranking Democrat Member

	Don Young, Alaska Eni F.H. Faleomavaega, American
	Barbara Cubin, Wyoming Samoa
	Chris Cannon, Utah Solomon P. Ortiz, Texas
	John E. Peterson, Pennsylvania Jim Costa, California
	Stevan Pearce, New Mexico Charlie Melancon, Louisiana
	Thelma Drake, Virginia Dan Boren, Oklahoma
	Bobby Jindal, Louisiana Edward J. Markey, Massachusetts
	Louie Gohmert, Texas Nick J. Rahall II, West Virginia,
	Richard W. Pombo, California, ex ex officio
	officio


	------
	C O N T E N T S

	----------
	Page

	Hearing held on Wednesday, March 16, 2005........................ 1

	Statement of Members:
	Gibbons, Hon. Jim, a Representative in Congress from the
	State of Nevada............................................ 1
	Prepared statement of.................................... 3
	Grijalva, Hon. Raul M., a Representative in Congress from the
	State of Arizona........................................... 3
	Prepared statement of.................................... 4

	Statement of Witnesses:
	Caruso, Hon. Guy F., Administrator, Energy Information
	Administration, U.S. Department of Energy.................. 5
	Prepared statement of.................................... 8
	Copulos, Milton R., President, National Defense Council
	Foundation................................................. 41
	Prepared statement of.................................... 43
	Hegburg, Alan S., Senior Fellow, Energy Program, Center for
	Strategic and International Studies........................ 50
	Prepared statement of.................................... 51
	Logan, Jeffrey, Senior Energy Analyst and China Program
	Manager, International Energy Agency....................... 19
	Prepared statement of.................................... 21
	Menzie, W. David, Geologist, U.S. Geological Survey.......... 29
	Prepared statement of.................................... 31


	OVERSIGHT HEARING ON ``U.S. ENERGY AND MINERAL NEEDS, SECURITY AND
	POLICY: IMPACTS OF SUSTAINED INCREASES IN GLOBAL ENERGY AND MINERAL
	CONSUMPTION BY EMERGING ECONOMIES SUCH AS CHINA AND INDIA.''

	----------


	Wednesday, March 16, 2005

	U.S. House of Representatives

	Subcommittee on Energy and Mineral Resources

	Committee on Resources

	Washington, D.C.

	----------

	The Subcommittee met, pursuant to call, at 10:00 a.m., in
	Room 1324, Longworth House Office Building, Hon. Jim Gibbons,
	Chairman of the Subcommittee] presiding.
	Present: Representatives Gibbons, Peterson, Pombo (ex
	officio), Grijalva, Faleomavaega, and Costa.

	STATEMENT OF THE HON. JIM GIBBONS, A REPRESENTATIVE IN CONGRESS
	FROM THE STATE OF NEVADA

	Mr. Gibbons. Good morning. The Subcommittee on Energy and
	Mineral Resources will come to order. The Subcommittee today is
	going to hear testimony on U.S. energy and mineral needs,
	security and policy: impacts of sustained increases in global
	energy and mineral consumption in emerging economies such as
	China and India. Under Committee Rule 4(g), the Chairman and
	Ranking Minority Member can have opening statements. And any
	Member other than that who wishes to make a statement can have
	it included in the record under unanimous consent.
	Let me begin with my remarks this morning before we start.
	First of all, I want to welcome all of our witnesses today.
	It is a pleasure to have you here before us. We may be
	interrupted by a series of votes, which are usually something
	we have to deal with. That is what you hired us to come here to
	do is to vote on the Floor. So we will try to do it as
	expeditiously as possible and make sure the impact on your
	presence and the time you have to spend here is minimal.
	But the Subcommittee today meets to hear testimony on
	global energy and mineral transactions and the potential
	impacts on U.S. energy and mineral needs and the impact on
	security and policy as well. My opening remarks are not laden
	with a bunch of statistics, because I am certain that our
	witnesses who are here with us today will have that aspect of
	this debate fully covered. My intent is to set the tone of this
	important oversight hearing and encourage an open discussion on
	the future of U.S. energy and mineral policies in light of
	sustained increases in resource demand by emerging economies
	such as China and India.
	This hearing should not be viewed as an attempt to do China
	or India-bashing. These countries simply are learning that
	economic success is directly linked to energy consumption. It
	just so happens that economic growth in these countries is not
	only outpacing the rest of the world, but is also exceeding
	their own growth expectations. Last Friday, for example, the
	International Energy Agency, IEA, revised upward by 25 percent
	China's demand for oil for the year 2005. And in order to
	sustain this economic growth, emerging economies such as China
	and India will need more and more supplies of energy and
	minerals. This is an issue which has garnered a great deal of
	attention in the mainstream media. And I would demonstrate to
	the audience, this package here, what I am holding in my hand,
	is a small sample of recent media coverage given to this
	meteoric economic growth, and thus the energy and mineral
	consumption in India and China is at issue today.
	Many of these articles that I have just pointed to, along
	with information from numerous reports covering a range of
	issues and topics related to U.S. energy and mineral security,
	can now be found on our Subcommittee's website. I encourage my
	colleagues and their staffs to utilize this information in
	going forward in reviewing our domestic energy and mineral
	strategy for the future.
	So where does this fit into the U.S. and to the U.S.
	picture? Well, the U.S. has been at the top of the food chain
	for most of recent history. One of the major reasons we are in
	the U.S. and have been so successful is that we recognized
	early that the foundation for economic growth is built with
	energy and minerals, but continued success tends to foster
	apathy and disinterest in that which has created this success
	and the U.S. is no exception to that rule. Our domestic energy
	and mineral policies have languished over the years driving
	investment overseas, increasing our reliance on foreign sources
	of energy and mineral resources. Last year, the U.S. imported
	more than 63 percent of its oil, placing our energy needs
	increasingly at the mercy of foreign governments. Yet, we
	continue the cycle of tolerating irresponsible energy and
	mineral policies and thereby continuing to discourage
	investment in domestic energy and mineral production and
	subsequently becoming more dependent on foreign sources.
	Yesterday, crude oil prices closed at $54.85 a barrel.
	Natural gas closed at $7.16 per million BTU. The U.S. trade
	deficit in energy is more than 25 percent of our total balance
	of payment and continues to increase at a rapid rate. The U.S.
	must take a serious look at its energy and mineral supply
	strategy for the long-term. And we must start by enacting a
	comprehensive national energy policy that encourages diversity
	of fuel use, increases domestic production and self-
	sufficiency.
	I welcome our witnesses, as I said earlier. I look forward
	to their testimony. But before I turn to our witnesses, I would
	like to turn to our Ranking Member, Mr. Grijalva. And I would
	like to welcome him at this time for any remarks he may have.
	[The prepared statement of Mr. Gibbons follows:]

	Statement of The Honorable Jim Gibbons, Chairman,
	Subcommittee on Energy and Mineral Resources

	The Subcommittee meets today to hear testimony on global energy and
	mineral trends and their potential impacts on U.S. energy and mineral
	needs, security and policy. My opening remarks are not laden with
	endless statistics because I'm certain our witnesses who are in the
	``statistics business'' will have that aspect of this debate fully
	covered. Rather, my intent is to set the tone of this important
	oversight hearing and encourage an open discussion on the future of
	U.S. energy and mineral policies in light of sustained increases in
	resource demands by emerging economies such as China and India. This
	hearing should not be viewed as an attempt to do China or India-
	bashing. These countries simply are learning that economic success is
	directly linked to energy consumption. And it just so happens that
	economic growth in these countries is not only outpacing the rest of
	the world, but is also exceeding their own growth expectations.
	Last Friday, for example, the International Energy Agency (IEA)
	revised upward by 25 percent its estimates of China's demand for oil
	for the year 2005. And in order to sustain this economic growth,
	emerging economies such as China and India will need more and more
	supplies of energy and minerals. This is an issue that has garnered a
	great deal of attention in the mainstream media. I hold in my hand a
	small sampling of the recent media coverage given to the meteoric
	economic growth--and thus energy and minerals consumption--in China and
	India. Many of these articles, along with information from numerous
	reports covering a range of issues and topics related to U.S. energy
	and mineral security can now be found on our Subcommittee website. I
	encourage my colleagues and their staffs to utilize this information as
	we go forward in reviewing our domestic energy and minerals strategy
	for the future.
	So, where does the U.S. fit into this picture? The U.S. has been at
	the top of the food chain for most of recent history. One of the major
	reasons we in the U.S. have been so successful is that we recognized
	early-on that the foundation for economic growth is built with energy
	and minerals. But continued success tends to foster apathy and
	disinterest in that which has created the success, and the U.S. is no
	exception.
	Our domestic energy and minerals policies have languished over the
	years, driving investment overseas and increasing our reliance on
	foreign sources of energy and mineral resources. Last year, the U.S.
	imported more than 63% of its oil, placing our energy needs
	increasingly at the mercy of foreign governments. Yet we continue the
	cycle of tolerating irresponsible energy and mineral policies, thereby
	continuing to discourage investment in domestic energy and mineral
	production, and subsequently becoming more dependent on foreign
	sources. Yesterday, crude oil prices closed at $54.85 per barrel.
	Natural gas closed at $7.16 per million Btu. U.S. trade deficit in
	energy is more than 25 percent of our total balance of payments, and
	continues to increase at a rapid rate. The U.S. must take a serious
	look at its energy and mineral supply strategy for the long-term. We
	must start by enacting a comprehensive national energy policy that
	encourages diversity of fuel use, increased domestic production, and
	self-sufficiency.
	I welcome our witnesses today and look forward to their testimony.
	Before turning to our Ranking member I would like to welcome my friend
	and Full Committee Chairman from California, Mr. Pombo, and recognize
	him for any opening remarks he may wish to give at this time.
	______


	STATEMENT OF THE HON. RAUL GRIJALVA, A REPRESENTATIVE IN
	CONGRESS FROM THE STATE OF ARIZONA

	Mr. Grijalva. Thank you very much, Chairman Gibbons, and I
	join you in welcoming our guests and look forward to the
	information in the hearing. Global energy supply and demand are
	becoming an increasingly important issue with the potential to
	adversely affect the United States as global demand for energy
	increases particularly in the emerging powerhouse economies of
	China and India. While a number of supply side and supply chain
	factors have contributed to the situation, the most significant
	long-term factor contributing to rising oil prices is an
	increase in Asian demand, most notably from China. China's
	unprecedented growth not only makes it a driver of long-term
	increase in energy prices, but also the most vulnerable to
	rising oil prices.
	In the United States, a key domestic fossil fuel that we
	have become so dependent on--oil--is diminishing, though our
	appetite for it continues to grow. We have only 3 percent of
	the world's oil reserves, yet we consume 25 percent of the
	world's yearly supply. While we have known for years that
	conservation, energy efficiencies, alternative energy
	technologies are feasible and available, the U.S. has remained
	an economy overwhelmingly dependent on fossil fuels. As a
	Nation, we have resisted options to raise fuel mileage
	standards or to increase renewable portfolio standards, but
	instead harp on the need to open protected areas to new oil and
	gas development. Overseas, emerging countries such as China and
	India, appear to be less resistant to new options. For example,
	China and its Asian neighbors are responding to high global oil
	prices by accelerating their search for alternative power
	sources and encouraging energy conservation. Speaking at the
	annual Asian power conference in Singapore two weeks ago, Asian
	energy officials said their governments are increasingly
	diversifying their fuel mix to cut dependence on imported oil
	by developing other power sources such as natural gas,
	geothermal, hydro, liquefied, hydro liquefied natural gas and
	renewable fuels.
	In closing, let me say as we prepare to consider national
	energy legislation when we return from the Easter recess, we
	must recognize that there is no single solution to meeting the
	Nation's energy needs. We cannot simply drill our way out of
	high oil and gas prices nor can we drill our way to energy
	security. Ultimately, we as policymakers must develop a
	national energy plan that takes full advantage of both
	conventional and unconventional resources and encourages energy
	efficiency and new technologies. Thank you, Mr. Chairman.
	[The prepared statement of Mr. Grijalva follows:]

	Statement of The Honorable Raul M. Grijalva, Ranking Democrat,
	Subcommittee on Energy and Mineral Resources

	Thank you, Chairman Gibbons. I join you in welcoming our
	distinguished guests and look forward to an enlightening and
	informative hearing.
	Global energy supply and demand are becoming an increasingly
	important issue with the potential to adversely affect the United
	States as global demand for energy increases, particularly in the
	emerging powerhouse economies of China and India.
	As reported this month in The Asian Times, ``A notable feature of
	2004 was the volatility in oil prices--New York light sweet crude
	prices reached a peak of US$55.67 on October 25, ending the year up
	33.6% at $43.45 per barrel. While a number of supply-side and supply-
	chain factors have contributed to this situation, the most significant
	long-term factor contributing to rising oil prices is an increase in
	Asian demand, most notably from China. China's unprecedented growth not
	only makes it a driver of a long-term increase in energy prices, but
	also the most vulnerable to rising oil prices. ``
	In the United States, a key domestic fossil fuel that we have
	become so dependent upon--oil--is diminishing, though our appetite for
	it continues to grow. We have only 3% of the world's oil reserves, yet
	we consume 25% of the world's yearly production of oil.
	While we have known for years that conservation, energy
	efficiencies, alternative energy technologies are feasible and
	available, the U.S. has remained an economy overwhelmingly dependent on
	fossil fuels.
	As a Nation, we have resisted options to raise fuel mileage
	standards or to increase renewable portfolio standards, and instead
	harp on the need to open protected areas to new oil and gas
	development. Oversees, emerging countries, such as China and India,
	appear to be less resistant to new options.
	For example, China and its Asian neighbors are responding to high
	global oil prices by accelerating their search for alternative power
	sources and encouraging energy conservation. Speaking at the annual
	Asia Power Conference in Singapore 2 weeks ago, Asian energy officials
	said that their governments are increasingly diversifying their ``fuel
	mix'' to cut dependence on imported oil by developing other power
	sources such as natural gas, geothermal, hydro, liquefied natural gas
	and renewable fuels.
	In closing, let me say that as we prepare to consider national
	energy legislation when we return from the Easter recess, we must
	recognize that there is no single solution to meeting the Nation's
	energy needs. We cannot simply drill our way out high oil and gas
	prices. Nor can we drill our way to energy security. Ultimately, we, as
	policymakers, must develop a national energy plan that takes full
	advantage of both conventional and unconventional resources and
	encourages energy efficiency and new technologies.
	______

	Mr. Gibbons. Thank you very much. I would like to welcome
	to the Committee, the Chairman of the full Committee, Mr.
	Richard Pombo of California. And if he has any remarks, he is
	welcome to give them. And I would like to welcome Mr. Peterson
	of Pennsylvania, who is very interested in the issues of energy
	from his home State. There are no opening remarks other than
	those, so with that, we will turn to our witnesses today. I
	will introduce them. The Honorable Guy F. Caruso, who is the
	administrator of the--energy information administrator. Jeffrey
	Logan, China program manager, International Energy Agency. Dave
	Menzie, chief of the international minerals section of the
	USGS.
	Mr. Gibbons. Gentlemen, if you would please rise and raise
	your right hand, we swear in our witnesses.
	[Witnesses sworn.]
	Mr. Gibbons. Let the record reflect that each of the
	witnesses answered in the affirmative. We will begin by hearing
	from the honorable Guy Caruso. Mr. Caruso, welcome, the floor
	is yours.

	STATEMENT OF HON. GUY F. CARUSO, ADMINISTRATOR, ENERGY
	INFORMATION ADMINISTRATION

	Mr. Caruso. Thank you, Mr. Chairman. And Chairman of the
	full Committee, Mr. Pombo, and members of the Subcommittee. It
	is a pleasure to be here to present the Energy Information
	Administration's outlook for energy markets. As we meet this
	morning, global oil markets remain extremely tightly balanced.
	Strong economic growth and particularly the energy growth of
	2004, which put upward pressure on crude oil and natural gas
	prices continues in 2005 and we see a very strong growth again
	this year led by not only China, but the other developing Asian
	countries, as you mentioned, India. And the United States as
	well continues to have strong growth, particularly in the
	transportation fuels. What this has done is stretched the
	capacity to produce, store, refine and transport oil on a
	global basis, nearly to the limit, which means that there is
	little or no cushion to deal with unexpected changes in either
	supply or demand so that whenever one occurs, whether it be
	small or large, the only pressure relief valve is prices. And
	what we are seeing today with nearly $55 of WTI, West Texas
	Intermediate, and the high prices of natural gas is a
	manifestation of that tightness globally and in particularly
	north America.
	Over the long run, IEA does a long-term forecast based on
	existing policies and rules and regulations. And what it means
	is if we keep on the path we are on, we are going to see very
	strong growth in energy demand in this country, about a third
	increase in our demand over the next 20 years. But our domestic
	supply won't keep up with that demand, which means we'll become
	more increasingly dependent on imports of energy, both oil and
	natural gas. We see our import dependency going from 27 percent
	in 2003 to 38 percent in 2025. But we are using energy more
	efficiently. It's not all a negative story. Our economic growth
	has been averaging about 3 percent over the last 20 years, and
	we see that--we project forward about that level of growth.
	And our energy demand has been growing at 1.5 percent, so
	we are actually producing more GDP per unit of energy used, but
	we are becoming less flexible in dealing with this situation as
	we depend on oil more for transportation--about 70 percent of
	our oil is used in transportation. Our oil import dependency,
	you have several figures before you. The second one shows that
	oil import dependency will rise from about 57 percent on a net
	basis in 2003 to 68 percent in 2025. Most of that growth will
	be in the transportation sector, and therefore, there is little
	flexibility in terms of changing our demand and supply patterns
	with respect to transportation.
	Turning to natural gas, we see that import dependency
	growing as well from 15 percent to 28 percent over the next 20
	years because it has been the fuel of choice in the electric
	power sector and continues to be used heavily in the industrial
	sector. Our domestic supplies will not keep up with that
	demand, therefore we see imports from Canada and more
	particularly from LNG, liquefied natural gas, growing very
	sharply to over 6 trillion cubic feet by 2025. So we will
	become dependent not only on oil imports from foreign sources
	but as well, natural gas from outside of North America.
	On a global basis, world economic energy growth will
	increase by more than 50 percent over the next 20 years and
	that will be led by growth in developing countries. China and
	India will grow very fast, not only for oil, but natural gas.
	And coal will dominate in the electric power sector, which has
	implications of course for greenhouse gases. We expect about
	120 million barrels of day of oil demand by 2025. And we
	believe the resources are adequate to meet that kind of demand.
	Nevertheless, it will represent a significant investment
	challenge for our international oil companies, national oil
	companies. And as we have seen, political instability often
	inhibits the proper path of investment in many of these
	countries in the upstream.
	So in conclusion, the economic growth in populous countries
	of the world such as China, India and the United States will
	certainly increase energy demand sharply. Fossil fuels will
	remain a dominant source of energy. And the dependence on
	foreign sources of oil will increase significantly for not only
	the United States, but particularly those countries in
	developing Asia. Mr. Chairman, thank you very much again for
	this opportunity to present the IEA's outlook.
	[Charts used in Mr. Caruso's oral presentation follow:]

	[GRAPHIC] [TIFF OMITTED] T0126.006

	[GRAPHIC] [TIFF OMITTED] T0126.007


	[The prepared statement of Mr. Caruso follows:]

	Statement of Guy Caruso, Administrator, Energy Information
	Administration, U.S. Department of Energy

	Mr. Chairman and Members of the Committee:
	I appreciate the opportunity to appear before you today to discuss
	the impact of increases in global energy demand on U.S. energy needs,
	security, and policy, particularly the impact of sustained increases in
	emerging economies such as China and India.
	The Energy Information Administration (EIA) is an independent
	statistical and analytical agency within the Department of Energy. We
	are charged with providing objective, timely, and relevant data,
	analysis, and projections for the use of Congress, the Administration,
	and the public. We do not take positions on policy issues, but we do
	produce data, analysis, and forecasts that are meant to assist policy
	makers in their energy policy deliberations. Because we have an element
	of statutory independence with respect to the analyses, our views are
	strictly those of EIA and should not be construed as representing those
	of the Department of Energy or the Administration. However, EIA's
	baseline projections on energy trends are widely used by government
	agencies, the private sector, and academia for their own energy
	analyses.
	The Annual Energy Outlook provides projections and analysis of
	domestic energy consumption, supply, prices, and energy-related carbon
	dioxide emissions through 2025. Annual Energy Outlook 2005 (AEO2005) is
	based on Federal and State laws and regulations in effect on October
	31, 2004. The potential impacts of pending or proposed legislation,
	regulations, and standards--or of sections of legislation that have
	been enacted but that require funds or implementing regulations that
	have not been provided or specified--are not reflected in the
	projections.
	The U.S. projections in this testimony are based on the AEO2005,
	which was released on the EIA website on February 11, 2005. In addition
	to the long-term U.S. forecast of energy markets, EIA also prepares a
	long-term outlook for world energy markets, which is published annually
	in the International Energy Outlook (IEO). The latest edition of this
	report, the IEO2004, was published in April 2004. The projections in
	the AEO2005 and the IEO2004 are not meant to be exact predictions of
	the future but represent likely energy futures, given technological and
	demographic trends, current laws and regulations, and consumer behavior
	as derived from known data. EIA recognizes that projections of energy
	markets are highly uncertain and subject to many random events that
	cannot be foreseen such as weather, political disruptions, and
	technological breakthroughs. In addition to these phenomena, long-term
	trends in technology development, demographics, economic growth, and
	energy resources may evolve along a different path than expected in the
	projections. Both the AEO2005 and the IEO2004 include a large number of
	alternative cases intended to examine these uncertainties. The AEO2005
	and IEO2004 provide integrated projections of U.S. and world energy
	market trends for roughly the next two decades. The following
	discussion briefly summarizes the highlights from AEO2005 for U.S.
	energy demand and supply. It is followed by a discussion of the key
	trends in world energy markets projected in the IEO2004, with a focus
	on China and India.

	U.S. Energy Outlook

	U.S. Energy Prices
	In the AEO2005 reference case, the annual average world oil price
	<SUP>1</SUP> increases from $27.73 per barrel (2003 dollars) in 2003
	($4.64 per million Btu) to $35.00 per barrel in 2004 ($5.86 per million
	Btu) and then declines to $25.00 per barrel in 2010 ($4.18 per million
	Btu) as new supplies enter the market. It then rises slowly to $30.31
	per barrel in 2025 ($5.07 per million Btu) (Figure 1). In nominal
	dollars, the average world oil price is about $52 per barrel in 2025
	($8.70 per million Btu).
	---------------------------------------------------------------------------
	\1\ World oil prices in AEO2005 are defined based on the average
	refiner acquisition cost of imported oil to the United States (IRAC).
	The IRAC price tends to be a few dollars less than the widely-cited
	West Texas Intermediate (WTI) spot price and has been as much as six
	dollars per barrel lower than the WTI in recent months. For the first
	11 months of 2004, WTI averaged $41.31 per barrel ($7.12 per million
	Btu), while IRAC averaged $36.94 per barrel (nominal dollars) ($6.26
	per million Btu).
	---------------------------------------------------------------------------
	There is a great deal of uncertainty about the size and
	availability of crude oil resources, particularly conventional
	resources, the adequacy of investment capital, and geopolitical trends.
	For example, the AEO2005 reference case assumes that world crude oil
	prices will decline as growth in consumption slows and producers
	increase their productive capacity and output in response to current
	high prices; however, the October 2004 oil futures prices case for West
	Texas Intermediate crude oil (WTI) on the New York Mercantile Exchange
	(NYMEX) implies that the average annual oil price in 2005 will exceed
	its 2004 level before declining to levels that still would be above
	those projected in the reference case. While not discussed here, the
	AEO2005 includes other cases based on alternative world crude oil price
	paths to evaluate this uncertainty.
	In the AEO2005, average wellhead prices for natural gas in the
	United States are projected to decrease from $4.98 per thousand cubic
	feet (2003 dollars) in 2003 ($4.84 per million Btu) to $3.64 per
	thousand cubic feet in 2010 ($3.54 per million Btu) as the availability
	of new import sources and increased drilling expand available supply.
	After 2010, wellhead prices are projected to increase gradually,
	reaching $4.79 per thousand cubic feet in 2025 ($4.67 per million Btu)
	(about $8.20 per thousand cubic feet or $7.95 per million Btu in
	nominal dollars). Growth in liquefied natural gas (LNG) imports, Alaska
	production, and lower-48 production from nonconventional sources is not
	expected to increase sufficiently to offset the impacts of resource
	depletion and increased demand in the lower-48 States.
	In AEO2005, the combination of more moderate increases in coal
	production, expected improvements in mine productivity, and a
	continuing shift to low-cost coal from the Powder River Basin in
	Wyoming leads to a gradual decline in the average mine-mouth price, to
	approximately $17 per ton (2003 dollars) ($0.86 per million Btu)
	shortly after 2010. The price is projected to remain nearly constant
	between 2010 and 2020, increasing after 2020 as rising natural gas
	prices and the need for baseload generating capacity lead to the
	construction of many new coal-fired generating plants. By 2025, the
	average mine-mouth price is projected to be $18.26 per ton ($0.91 per
	million Btu). The AEO2005 projection is equivalent to an average mine-
	mouth coal price of $31.25 per ton in nominal dollars ($1.56 per
	million Btu) in 2025.
	Average delivered electricity prices are projected to decline from
	7.4 cents per kilowatthour (2003 dollars) ($21.68 per million Btu) in
	2003 to a low of 6.6 cents per kilowatthour ($19.34 per million Btu) in
	2011 as a result of an increasingly competitive generation market and a
	decline in natural gas prices. After 2011, average real electricity
	prices are projected to increase, reaching 7.3 cents per kilowatthour
	(2003 dollars) ($21.38 per million Btu) in 2025 (equivalent to 12.5
	cents per kilowatthour or $36.61 per million Btu in nominal dollars).

	U.S. Energy Consumption and Supply
	Total energy consumption is projected to grow at about one-half the
	rate (1.4 percent per year) of gross domestic product (GDP), with the
	strongest growth in energy consumption for electricity generation and
	commercial and transportation uses (Figure 2). Total energy consumption
	is expected to increase more rapidly than domestic energy supply
	through 2025. As a result, net imports of energy are projected to meet
	a growing share of energy demand. Net imports are expected to
	constitute 38 percent of total U.S. energy consumption in 2025, up from
	27 percent in 2003 (Figure 3).
	Total petroleum demand is projected to grow at an average annual
	rate of 1.5 percent in the AEO2005 reference case forecast, from 20.0
	million barrels per day in 2003 to 27.9 million barrels per day in 2025
	(Figure 4) led by growth in transportation uses, which account for 67
	percent of total petroleum demand in 2003, increasing to 71 percent in
	2025. Improvements in the efficiency of vehicles, planes, and ships are
	more than offset by growth in travel. In 2025, net petroleum imports,
	including both crude oil and refined products (on the basis of barrels
	per day), are expected to account for 68 percent of demand, up from 56
	percent in 2003.
	In the U.S. energy markets, the transportation sector consumes
	about two-thirds of all petroleum products and the industrial sector
	about one-quarter. The remaining 10 percent is divided among the
	residential, commercial, and electric power sectors. With limited
	opportunities for fuel switching in the transportation and industrial
	sectors, large price-induced changes in U.S. petroleum consumption are
	unlikely, unless changes in petroleum prices are very large or there
	are significant changes in the efficiencies of petroleum-using
	equipment.
	Total demand for natural gas is also projected to increase at an
	average annual rate of 1.5 percent from 2003 to 2025 (Figure 5). About
	75 percent of the growth in gas demand from 2003 to 2025 results from
	increased use in power generation and in industrial applications.
	Growth in U.S. natural gas supplies will depend on unconventional
	domestic production, natural gas from Alaska, and imports of LNG. Total
	nonassociated unconventional natural gas production is projected to
	grow from 6.6 trillion cubic feet in 2003 to 8.6 trillion cubic feet in
	2025. With completion of an Alaskan natural gas pipeline projected for
	2016, total Alaskan production is forecast to increase from 0.4
	trillion cubic feet in 2003 to 2.2 trillion cubic feet in 2025. Total
	net LNG imports in the United States and the Bahamas are projected to
	increase from 0.4 trillion cubic feet in 2003 to 6.4 trillion cubic
	feet in 2025.
	Total coal consumption is projected to increase from 1,095 million
	short tons in 2003 to 1,508 million short tons in 2025, growing by 1.5
	percent per year. About 90 percent of the coal is currently used for
	electricity generation. Coal remains the primary fuel for generation
	and its share of generation is expected to remain about 50 percent
	between 2003 and 2025. Total coal consumption for electricity
	generation is projected to increase by an average of 1.6 percent per
	year, from 1,004 million short tons in 2003 to 1,425 million short tons
	in 2025.
	Total electricity consumption, including both purchases from
	electric power producers and on-site generation, is projected to grow
	from 3,657 billion kilowatthours in 2003 to 5,467 billion kilowatthours
	in 2025, increasing at an average rate of 1.8 percent per year. Rapid
	growth in electricity use for computers, office equipment, and a
	variety of electrical appliances in the end-use sectors is partially
	offset in the AEO2005 forecast by improved efficiency in these and
	other, more traditional electrical applications and by slower growth in
	electricity demand in the industrial sector.
	Total marketed renewable fuel consumption, including ethanol for
	gasoline blending, is projected to grow by 1.5 percent per year in
	AEO2005, from 6.1 quadrillion Btu in 2003 to 8.5 quadrillion Btu in
	2025, largely as a result of State mandates for renewable electricity
	generation and the effect of production tax credits. About 60 percent
	of the projected demand for renewables in 2025 is for grid-related
	electricity generation (including combined heat and power), and the
	rest is for dispersed heating and cooling, industrial uses, and fuel
	blending.

	International Energy Outlook

	The IEO2004 includes projections of regional energy consumption,
	energy consumption by primary fuel, electricity consumption, carbon
	dioxide emissions, nuclear generating capacity, and international coal
	trade flows. World oil production and natural gas production forecasts
	are also included in the report. The IEO2004 projects strong growth for
	worldwide energy demand through 2025. Total world consumption of
	marketed energy is expected to increase by 54 percent, from 404
	quadrillion Btu in 2001 to 623 quadrillion Btu in 2025.

	World Energy Consumption by Region
	The IEO2004 reference case outlook shows the strongest growth in
	energy consumption in the developing nations of the world (Figure 6).
	The fastest growth is projected for the nations of developing Asia,
	including China and India, where robust economic growth accompanies the
	increase in energy consumption over the forecast period. GDP in
	developing Asia is expected to grow at an average annual rate of 5.1
	percent, compared with 3.0 percent per year for the world as a whole.
	With such strong growth in GDP, demand for energy in developing Asia is
	projected to double over the forecast period, accounting for 40 percent
	of the total projected increment in world energy consumption and 70
	percent of the increment for the developing world alone. Energy demand
	increases by 3.0 percent per year in developing Asia as a whole and by
	3.5 percent per year in China and 3.2 percent per year in India.
	Developing world energy demand is projected to rise strongly
	outside of Asia, as well. In the Middle East, energy use increases by
	an average of 2.1 percent per year between 2001 and 2025, 2.3 percent
	per year in Africa, and 2.4 percent per year in Central and South
	America.
	In contrast to the developing world, slower growth in energy demand
	is projected for the industrialized world, averaging 1.2 percent per
	year over the forecast period. Generally, the nations of the
	industrialized world can be characterized as mature energy consumers
	with comparatively slow population growth. Gains in energy efficiency
	and movement away from energy-intensive manufacturing to service
	industries result in the lower growth in energy consumption. In the
	transitional economies of Eastern Europe and the former Soviet Union
	(EE/FSU) energy demand is projected to grow by 1.5 percent per year in
	the IEO2004 reference case. Slow or declining population growth in this
	region, combined with strong projected gains in energy efficiency as
	old, inefficient equipment is replaced, leads to the projection of more
	modest growth in energy use than in the developing world.

	World Energy Consumption by Energy Source
	Oil will continue to be the world's dominant energy source. Oil's
	share of world energy remains unchanged at 39 percent over the forecast
	period. China, India, and the other countries of developing Asia
	account for much of the increase in oil use in the developing world
	and, indeed, in the world as a whole (Figure 7). Developing Asia oil
	consumption is expected to grow from 14.8 million barrels per day in
	2001 to 31.6 million barrels per day in 2025, an increase of 16.9
	million barrels per day. The developing Asian increase in oil use
	accounts for 39 percent of the total world increment in oil use over
	the forecast period. China and India alone account for one-fourth of
	the world oil increment between 2001 and 2025. In the industrialized
	world, increases in oil use are projected primarily in the
	transportation sector. In the developing world, demand for oil
	increases for all end uses, as countries replace non-marketed fuels
	used for home heating and cooking with diesel generators and for
	industrial petroleum feedstocks.
	The IEO2004 reference case shows supply able to keep up with demand
	over the next 20 years, with world oil consumption in the range of 120
	million barrels per day by 2025. EIA's view, which is based on
	information from the latest United States Geological Survey (USGS)
	World Petroleum Assessment on oil resources and reserves, is that
	potential supply concerns to 2025 arise primarily from obstacles to
	investment in capacity growth rather than resource adequacy. Our view
	in this regard is shared by many analysts, but differs from some
	analysts who are concerned about an imminent ``peak oil'' problem. In
	EIA's view, the ultimate size of an oil field is rarely known when it
	is discovered. Rather, with drilling and improved technology, the full
	extent of the recoverable resource typically increases over time. This
	process is demonstrated at the national level by the increase in U.S.
	proved reserves of oil in 5 of the last 7 years notwithstanding
	significant production and limited discoveries. Global proved reserves
	are also higher today than they were 30 years ago, despite
	substantially increased production.
	While we believe that sufficient oil resources are available to
	meet the projected growth in demand to 2025, substantial investment
	will be required to bring these resources into production. Although the
	IEO2004 reference case forecast assumes that the necessary investments
	will be made based on economic criteria, there are several important
	barriers to investment that could impede realization of this scenario.
	Some of the main challenges are: 1) international major producers lack
	access to resources in some key countries; 2) national oil companies
	are guided by governments and are not always motivated to expand
	capacity based on economic criteria; 3) political instability limits
	development in some regions; and 4) poor economic terms that slow
	investment.
	Natural gas demand is projected to show an average annual growth of
	2.2 percent over the forecast period. Gas is seen as a desirable option
	for electricity, given its efficiency relative to other energy sources
	and the fact that it burns more cleanly than either coal or oil. The
	most robust growth in gas demand is expected among the nations of the
	developing world, where overall demand is expected to grow by 2.9
	percent per year from 2001 to 2025 in the reference case (Figure 8). In
	the industrialized world, where natural gas markets are more mature,
	consumption of natural gas is expected to increase by an average of 1.8
	percent per year over that same time period, with the largest increment
	projected for North America at 12.9 trillion cubic feet. China, India,
	and the other nations of developing Asia are expected to experience
	among the fastest growth in gas use worldwide, increasing by 3.5
	percent per year between 2001 and 2025.
	Coal remains an important fuel in the world's electricity markets
	and is expected to continue to dominate fuel markets in developing
	Asia. Worldwide, coal use is expected to grow slowly, averaging 1.5
	percent per year between 2001 and 2025. In the developing world, coal
	increases by 2.5 percent per year and will surpass coal use in the rest
	of the world (the industrialized world and the EE/FSU combined) by
	2015. Coal continues to dominate energy markets in China and India,
	owing to those countries' large coal reserves and limited access to
	other sources of energy. China and India account for 67 percent of the
	total expected increase in coal use worldwide (on a Btu basis) (Figure
	9). Coal use is projected to increase in all regions of the world
	except for Western Europe and the EE/FSU (excluding Russia), where coal
	is projected to be displaced by natural gas and, in the case of France,
	by nuclear power for electric power generation.
	The largest increase in nuclear generation is expected for the
	developing world, where consumption of electricity from nuclear power
	is projected to increase by 4.1 percent per year between 2001 and 2025.
	Developing Asia, in particular, is expected to see the largest
	increment in installed nuclear generating capacity over the forecast,
	accounting for 96 percent of the total increase in nuclear power
	capacity for the developing world as a whole. Of the 44 gigawatts of
	additional installed nuclear generating capacity projected for
	developing Asia, 19 gigawatts are projected for China, 15 for South
	Korea, and 6 for India.
	Consumption of electricity from hydropower and other renewable
	energy sources is expected to grow by 1.9 percent per year over the
	projection period. Much of the growth in renewable energy use is
	expected to result from large-scale hydroelectric power facilities in
	the developing world, particularly among the nations of developing
	Asia. China, India, and other developing Asian countries are
	constructing or planning many new, large-scale hydroelectric projects
	over the forecast period, including China's 18.2-gigawatt Three Gorges
	Dam project which is scheduled to be fully operational by 2009. The
	Indian government has plans to add 50 gigawatts of hydroelectric
	generating capacity by 2012.

	Alternative International Forecasts
	As noted earlier, there is considerable uncertainty associated with
	any long-term forecast. Changes in key assumptions about economic
	growth and energy intensity lead to substantial differences in the
	projections for 2025. To quantify this uncertainty, IEO2004 includes
	high and low economic growth cases. The IEO2004 reference case shows
	total world energy consumption reaching 623 quadrillion Btu in 2025,
	but this varies substantially under different assumptions about
	economic growth, ranging from 542 quadrillion Btu (in the low economic
	growth case) to 710 quadrillion Btu (in the high economic growth case).
	Thus, there is a substantial range of 168 quadrillion Btu, or about
	one-fourth of the total consumption projected for 2025 in the reference
	case, between the projections in the high and low economic growth
	cases.
	While it is true that there is a great deal of uncertainty in long-
	term forecasts, it is equally true that EIA's forecast of worldwide
	energy use is largely in agreement with projections from other
	organizations that provide comparable forecasts. The International
	Energy Agency's (IEA) World Energy Outlook 2004 (October 2004),
	Petroleum Economics, Ltd's (PEL) World Long Term Oil and Energy Outlook
	(March 2004), and PIRA Energy Group's (PIRA) Retainer Client Seminar
	(October 2004) all produce forecasts that are comparable to the
	IEO2004. Three of the four forecasts expect worldwide energy use to
	expand by about 1.8 to 1.9 percent per year (IEO2004, IEA, and PEL)
	between 2000 and 2020 (Figure 10). PIRA proffers a more robust
	forecast, expecting energy use to expand by 2.4 percent per year, but
	the PIRA forecast only extends to 2015.
	The forecasts show some variation in expectations for the world's
	future fuel mix. The forecasts do have similar expectations about the
	growth of oil over the 2000 to 2020 time period (except for PIRA, which
	forecasts only to 2015), projecting average annual increases of between
	1.6 percent (PEL) and 1.9 percent (PIRA). They also generally agree
	that natural gas will be among the fastest growing energy sources in
	the forecast, although the increase in world natural gas demand in the
	IEO2004 at 2.1 percent per year is somewhat lower than the other
	forecasts, where the growth in natural gas use ranges from 2.6 percent
	per year to 2.8 percent per year. However, the PIRA forecast sees a
	much higher increase in coal use than do any of the other forecasts.
	IEO2004 expects higher growth for nuclear power than the other
	forecasts, and the IEA projects higher expected growth in renewables
	than the other forecasts.

	Conclusion

	Continuing economic growth in populous countries of the world, such
	as China, India, and the United States, is expected to stimulate more
	energy demand, with fossil fuels remaining the dominant source of
	energy. While our analysis suggests that world fossil energy resources
	are adequate to meet demand requirements, it also suggests that the
	countries accounting for most of the growth in fossil energy
	consumption will increasingly rely on imports. Dependence on foreign
	sources of oil is expected to increase significantly for China, India,
	and the United States. These three countries alone account for 45
	percent of the world increase in projected oil demand over the 2001 to
	2025 time frame. A key source of this oil is expected to be the Middle
	East.
	Furthermore, although natural gas production is expected to
	increase in all of these countries, natural gas imports are expected to
	grow faster. In 2001, India and China produced sufficient natural gas
	to meet domestic demand, but, by 2025, natural gas production in these
	two countries will only account for about 60 percent of demand. In the
	United States, reliance on domestic gas supply to meet demand falls
	from 86 percent to 72 percent over the projection period. The growing
	dependence on imports in these three countries occurs despite
	efficiency improvements in both the consumption and the production of
	natural gas.
	In this environment, the level of energy prices, particularly oil
	prices, is highly uncertain. It depends on the adequacy of investment
	in exploration and production efforts, technology, and infrastructure.
	It also depends on the actual rate of growth in demand, political
	stability around the world, and improvement in end-use technologies.
	Higher energy price trends can lead to major changes in the energy
	supply slate and, if energy prices are high enough, the level of
	demand. For example, in a high oil price case completed as part of
	AEO2005, gas-to-liquids and coal-to-liquids became important parts of
	total U.S. energy supply by 2025. Unconventional oil and natural gas
	resources can also play a much larger role.
	This concludes my testimony, Mr. Chairman and members of the
	Committee. I will be happy to answer any questions you may have.

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	______

	Mr. Gibbons. Thank you very much, Mr. Caruso. We appreciate
	your insight. And your testimony is always very helpful to us
	as we go forward in this discussion. And we turn now to Mr.
	Jeffrey Logan, who is the China program manager for the
	International Energy Agency. Mr. Logan, the floor is yours. And
	by the way, for each of our witnesses, we will, by unanimous
	consent, enter into the record your full and complete written
	statement. And of course, you're free to summarize, within a 5-
	minute timeframe, your remarks, if you wish.

	STATEMENT OF JEFFREY LOGAN, CHINA PROGRAM MANAGER,
	INTERNATIONAL ENERGY AGENCY

	Mr. Logan. Mr. Chairman, thank you very much, members of
	the Subcommittee and ladies and gentlemen. I'm very happy to be
	here this morning on behalf of the International Energy Agency
	to talk about China's energy sector. Although China is not a
	member of the International Energy Agency, we have clearly been
	engaging the country much more seriously to better understand
	its surging energy demand and take appropriate steps where
	possible. I'm here primarily to discuss the oil and gas sector
	in China, although I would like to start with a few general
	words about a trend in China in the energy sector that could
	have very important long-term implications and that trend has
	to do with the energy economic relationship in China.
	Until the late 1990s, China's average reported energy
	consumption grew only half as quickly as the economy. In other
	words, its energy elasticity was surprisingly low, 0.5. There
	are serious and well-known questions about the validity of
	official Chinese statistics, but energy use still grew more
	slowly than gross domestic product, even with these data
	problems in account. This was a remarkable achievement for a
	developing country and it resulted in significant savings in
	energy use and greenhouse gas emissions. But since the new
	millennium, energy consumption in China has surged.
	In 2004, the energy elasticity rose to over 1.5, meaning
	there is a 1.5 percent growth in energy use for every 1 percent
	growth in GDP. Energy experts in China and abroad have provided
	very little information that accurately describes why the
	economy has been using so much more energy over the past 5
	years. Indeed, the changing economic relationship caught
	Chinese planners themselves off guard and is largely
	responsible for the serious energy shortages that exist in
	China right now, especially in the electricity sector.
	Historically, China's economic growth has gone through
	cycles of rapid expansion followed by periods of slower growth.
	We believe that China is currently in the peak of one of its
	expansionary periods and is likely to grow less rapidly in the
	near future. But we need to understand more fully the apparent
	changes in China's economic and energy relationship as the
	impact of such a change over even just a few years can have a
	lasting impact on global markets, energy security and
	greenhouse gas emissions.
	Now on to the oil sector. China's opaque oil sector has
	attracted immense attention over the past few years. Oil demand
	in China grew by over 27 percent in the past 2 years, while
	domestic production has been largely stagnant. As a result,
	crude imports have climbed by 75 percent between 2002 and 2004.
	And China now relies on imported crude for 4 of every 10
	barrels that it consumes. Perhaps surprisingly, though, Chinese
	oil demand in 2004 equaled only one-third the level of the
	United States. IEA forecasts envision Chinese demand continuing
	to grow to the year of 2030 when it reaches nearly 14 million
	barrels per day. At that time, Chinese crude imports would
	roughly equal those of the United States today.
	Still, total Chinese demand then will be one-third less
	than what the United States consumes right now. Three drivers
	account for the most recent growth surge in China's oil demand.
	Increasing vehicle ownership, growing industrial demand for
	petrochemical feed stocks and perhaps most unusually the
	surging need for oil-fired backup power generation due to the
	severe electricity shortages there. The vehicle and
	petrochemical sectors are likely to continue to grow steadily
	in the future, but we anticipate a fall-off in the amount of
	oil that is used for backup power generation in the near future
	as more coal and hydroelectric plants come on-line. The timing
	of this falloff, however, is difficult to predict, but we
	anticipate it will start in the second half of 2005.
	Rising crude imports in China have alarmed government
	policymakers. They have developed a multi-pronged approach to
	help address the country's looming energy insecurity. The
	measures include promoting State-owned oil companies to
	purchase overseas equity oil, diversifying sources of oil
	supply, launching construction of strategic petroleum reserves,
	developing alternatives to oil and enacting demand side
	efficiency measures. I have outlined each of these measures in
	my written testimony.
	The IEA continues to believe that global oil reserves are
	sufficient to accommodate global demand through 2030 and
	beyond. More important uncertainties however, relate to
	maintaining stable output among major producers, dealing with
	environmental issues like climate change, and marshalling the
	necessary investment in each link of the oil supply chain.
	China has taken major steps to boost the use of natural gas
	primarily as a way to improve urban air quality.
	But China's natural gas policy is fragmentary and
	development occurs on a project-by-project basis rather than by
	focusing on the needs of the entire gas chain. Developments in
	China's gas sector have surprised many critics, though. The
	first gas pipeline to Beijing in the late 1990s was widely
	predicted to be an economic failure, the main criticism being
	that the government focused only on a supplied push strategy
	and seemed to ignore the needs of consumers. But gas demand has
	developed fairly quickly however, and a second pipeline to
	Beijing is now under development.
	The new cross country West-East Pipeline faces similar
	criticism. Potential users have little incentive to switch from
	coal. The pipeline started commercial operation in late 2004, a
	year ahead of schedule, and will slowly ramp up to a design
	capacity in the year 2007. The pipeline faces potential
	competition from imported LNG from Shanghai where several
	import terminals are under consideration. Promoting natural gas
	use in China as a substitute for coal and oil serves global
	interests in energy security, climate change and trade. Global
	gas supply for LNG production is expanding rapidly and rising
	Chinese imports are not likely to stress the international gas
	markets as they have in the oil sector. Although Chinese energy
	companies will face increasing challenges in global energy
	markets, they have demonstrated a growing capacity to compete.
	More than ever, U.S. policy should be focused on engaging China
	on energy issues because the security, commercial and
	environmental implications are too great to ignore. Thank you
	very much for your attention and I would be happy to answer any
	questions you might have.
	[The prepared statement of Mr. Logan follows:]

	Statement of Jeffrey Logan, Senior Energy Analyst and
	China Program Manager, International Energy Agency

	Summary
	Chinese energy demand has grown robustly over the past three years
	and is likely to remain intimately tied to future economic performance.
	The average Chinese citizen consumed only one-fourteenth as much oil as
	the average American in 2004, but China will play an increasingly
	important role in all aspects of the global petroleum market. The
	current frenzy to purchase overseas oil assets by Chinese state-owned
	oil companies is likely to slow in the near term as policymakers
	realize more effective ways to boost energy security. China does not
	currently import natural gas, but that will change by next year and 5-
	10 LNG terminals are possible by 2015. Global economic, environmental,
	and security interests related to China's energy sector are best served
	through an active program of collaboration to promote energy
	efficiency, natural gas utilization, and coordinated use of strategic
	petroleum reserves.

	Overview
	China has charted a bold course of economic reforms over the past
	25 years, achieving mixed, but often remarkable results given the
	development challenges it faces. Reported average annual GDP growth of
	over nine percent has improved living standards for hundreds of
	millions of Chinese people to a level unmatched in any point of Chinese
	history. China now plays a key role in the supply and demand of many
	global commodity markets including steel, cement, and oil. (See Figure
	1.) If sustained, China's development will likely create the world's
	largest economy, as measured in purchasing power parity, in about two
	or three decades. Per capita wealth, however, will remain far below
	OECD levels. Enormous opportunities and challenges await commercial,
	governmental and social interests across the globe in parallel with
	China's development.
	This document provides an update on current oil and natural gas
	trends in China, and looks at future growth projections. Where
	possible, it describes potential impacts on U.S. interests and
	recommends ways for U.S. policy to help overcome negative impacts. It
	is based largely on the International Energy Agency's dialogue and
	collaboration with China as a Non-Member Country participant. It begins
	with an overview of recent changes in the Chinese energy-economy
	relationship.

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	A Changing Energy-Economic Relationship
	Chinese energy demand has surged since the arrival of the new
	millennium, when a new round of investment-driven economic growth
	began. Preliminary Chinese data indicate that the energy elasticity of
	demand (the growth rate of energy consumption divided by that of GDP)
	surpassed 1.5 in 2004. In other words, for every one percent increase
	in GDP, energy demand grew by over 1.5 percent. The shift reverses
	China's recent historical trend of maintaining energy elasticity below
	1.0. (See Figure 2.) For most developing countries, including India,
	Brazil, and Indonesia, energy elasticities greater than 1.0 are normal,
	but for China it is a groundbreaking change.

	[GRAPHIC] [TIFF OMITTED] T0126.009


	Many analysts rightly question the validity of Chinese economic and
	energy statistics; GDP is likely underreported right now, although from
	the late 1970s until the end of the 1990s, it was considered
	overstated. Likewise, Chinese energy consumption, coal in particular,
	is tracked poorly. Coal use from 1996-1999 is now regarded as massively
	underestimated by analysts both inside and outside of China due to
	untracked output from small coal mines. One of the contributing factors
	behind China's current energy crunch is indeed these poorly tracked
	energy statistics: good energy policy and energy planning require
	accurate data.
	Despite the problems with data quality, the general trend raises
	concern. Is this new energy-economy relationship in China temporary or
	does it indicate a deeper structural change within the economy? The
	difference could have a profound impact on future global energy
	markets, energy security, and environmental quality. Almost no
	authoritative research has been published to explain the surging
	elasticity. A clearer understanding of what is happening in Chinese
	energy markets may never be uncovered, but more research into the new
	energy-economic relationship would benefit the international community
	and China. More importantly, greater Sino-international collaboration
	on energy efficiency would serve global trade, environmental, and
	security interests.

	Oil Sector: The Search for Security
	China surpassed Japan in late 2003 to become the world's second
	largest petroleum consumer. <SUP>1</SUP> In 2004, Chinese demand
	expanded nearly 16 percent to 6.38 million barrels per day (b/d), about
	one-third the level in the United States. (See Table 1.) Domestic crude
	output in China has grown only very slowly over the past five years. At
	the same time, oil demand has surged, fueled by rapid
	industrialization. Imports of crude oil grew alarmingly in 2003 and
	2004 to meet demand, increasing nearly 75 percent from 1.38 million
	barrels per day (b/d) in 2002 to 2.42 million
	b/d in 2004. Imports now account for 40 percent of Chinese oil demand.
	---------------------------------------------------------------------------
	\1\ Contrary to many press reports, China is not the second largest
	importer of crude oil. That distinction still belongs to Japan, which
	imported more than twice as much oil as China in 2004.

	[GRAPHIC] [TIFF OMITTED] T0126.010


	As described in the IEA's March 2005 Oil Market Report, a
	significant driver of recent oil demand growth in China--perhaps on the
	order of 250-350 thousand barrels per day--has been the need for oil-
	fired back-up power generation in the face of serious electricity
	shortages. Other contributing factors are the rise in personal car
	ownership and growing industrial petrochemical needs, which are likely
	to continue growing fairly steadily. However, the amount of fuel oil
	and diesel used for back-up power generation will likely decline, as
	China closes the generation shortage by installing new coal, natural
	gas, hydro, and nuclear power plants. It has also promised to institute
	tougher new demand-side efficiency measures.
	Chinese policymakers and state-owned oil companies have embarked on
	a multi-pronged approach to improve oil security by diversifying
	suppliers, building strategic oil reserves, purchasing equity oil
	stakes abroad, and enacting new policies to lower demand.

	Diversifying Global Oil Purchases
	Over the past decade, Chinese crude imports have come from a much
	wider and more diverse set of suppliers. In 1996, most of China's crude
	imports came from Indonesia, Oman, and Yemen. By 2004, Saudi Arabia was
	China's largest supplier accounting for 14 percent of imports, with
	Oman, Angola, Iran, Russia, Vietnam, and Yemen together supplying
	another 60 percent, and the remainder which came from a long list of
	other suppliers. (See Figure 3.) By diversifying crude suppliers, China
	has lowered the risk of a damaging supply disruption.

	[GRAPHIC] [TIFF OMITTED] T0126.011


	Establishing Strategic Oil Reserves
	China's 10th Five-Year Plan (2001-2005) called for the construction
	and use of strategic petroleum reserves by 2005. Construction has begun
	at one of four sites slated to store government-owned supplies. Chinese
	officials plan to gradually fill up to 100 million barrels of storage
	by 2008 (equivalent to 35 days of imports then). Original plans called
	for boosting stocks to 50 days imports in 2010, but this may be
	slightly delayed. On the other hand, the recent surge in imports has
	led Chinese policymakers to consider an even more aggressive long-term
	plan for 90 days of stocks, perhaps by 2020.
	The IEA has shared experiences with China on member country
	stockpiling practices since 2001. Chinese officials have stated their
	intent to slowly fill their new stocks depending on global conditions.
	They have demonstrated less concern, however, in coordinating release
	of their future stocks as part of a larger global system. In other
	words, China may be more inclined to use strategic stocks to influence
	prices even without the threat of severe supply disruptions. We are
	exploring this.

	Overseas Equity Oil
	Chinese national oil companies (NOCs) have been active abroad for
	over a decade, but their hunt for overseas oil assets has accelerated
	in the past few years. This drive to buy overseas assets is a
	policymaking reaction to the rapidly growing need to import crude oil,
	and is an attempt to boost energy security. Most outside analysts
	question the efficiency and effectiveness of this policy; the act of
	owning resources, especially ones purchased recently at relatively high
	prices, does not significantly improve oil security because the risk of
	supply disruptions is largely ignored.
	Chinese oil companies are not alone in overseas investment. The
	country's ``going out'' strategy is an attempt to create stronger
	Chinese companies, effectively use surplus foreign exchange reserves,
	and deal with over-invested domestic sectors. While a significant
	number of oil-related announcements have been made in the press since
	2001, much of this activity is still waiting to be finalized. The lack
	of transparency over investment amounts, production sharing contract
	details, and proven petroleum reserves may create a more successful
	image of Chinese companies than is actually the case.
	Until recently, Chinese companies seemed most comfortable operating
	in locations not dominated by the oil majors. This meant countries like
	Sudan, Angola, and Iran. For example, over half of Chinese overseas oil
	production currently comes from Sudan. Activity has picked up in other
	areas recently, however, including Russia, Kazakhstan, Ecuador,
	Australia, Indonesia, and Saudi Arabia to name just a few. Chinese
	companies appear to be improving their ability to purchase assets
	without overpaying, as earlier reports suggested, but this conclusion
	is only supported with anecdotal information. (See Text Box 1.)

	[GRAPHIC] [TIFF OMITTED] T0126.012


	A key strength of Chinese NOC activity abroad is their ability to
	package complete investment deals in producing countries. In exchange
	for ownership of oil resources there, they can offer associated
	economic development projects (hospital and school construction, for
	example), investment opportunities in the lucrative Chinese market, and
	potential military transactions. International oil companies often
	complain that they cannot compete against these packaged Chinese deals.
	But Chinese NOCs are also limited in what they can accomplish due to
	technology shortcomings and lack of experience.
	In 2003, Chinese state-owned oil companies pumped about 0.4 million
	b/d of equity oil. The figure is projected to rise by 8 percent
	annually thru 2020 when it hits 1.4 million b/d. At that time, this
	would amount to approximately 1.5 percent of global petroleum output,
	indicating that Chinese companies would have little influence on
	overall market trends.
	Leading the drive among Chinese state-owned companies, China
	National Petroleum and Gas Company (CNPC) claims to have petroleum
	assets in 30 countries. It plans to spend $18 billion in overseas oil
	and gas development between now and 2020. Most of CNPC's overseas
	production currently comes from Sudan, Kazakhstan, and Indonesia. Many
	speculated that CNPC would take a share in the restructured assets of
	Yukos, but a $6 billion ``loan'' to Rosneft was used only for long-term
	oil purchases.
	A disappointment for China during the year included the Russian
	decision to build an oil pipeline to Nakhodka with Japanese
	contributions, rather than to Daqing in northeast China with CNPC's
	participation. Discussions are still ongoing regarding a potential spur
	line that would feed China's northeast. Russian oil sales from Siberia
	to China would serve U.S. interests in general as they would offset
	long-distance demand from the Middle East. China and Kazakhstan have
	made rapid progress in negotiating and starting construction on a
	cross-border pipeline that will initially deliver 0.2 million b/d of
	crude and products to Xinjiang province, and possibly later doubling to
	0.4 million b/d. China appears to have made a geopolitical decision to
	secure its oil supplies with this line as costs would probably not pass
	a commercial test. Initial petroleum for this pipeline will likely be
	supplied by Russia and not Kazakhstan. Generally, more pipelines
	evacuating landlocked resources is a good thing.
	China Petroleum Company (SINOPEC) is newer to the international
	game than CNPC and hopes to start pumping smaller quantities of equity
	oil in 2005 from activities in Yemen, Iran, and Azerbaijan. Perhaps the
	largest story in 2004 was SINOPEC's agreement in Iran to spend $70
	billion over 25 years to purchase LNG cargoes and participate in
	upstream oil activities there. The vast majority of this investment
	will be used to purchase long-term LNG supplies; the depth of the
	economic ties linking Iran and China in this deal should not be
	overstated.
	China National Overseas Oil Company (CNOOC), the most progressive
	and outwardly-oriented of the Chinese state-owned oil companies, has
	been very active in Australia and Indonesia. In 2004, it succeeded in
	securing significant natural gas stakes in both countries. CNOOC
	surprised the global community in early 2005 when it was rumored to
	want to purchase Unocal for roughly $13 billion. Many analysts believe
	that CNOOC would ultimately be only interested in keeping the Asian oil
	and gas assets of Unocal.
	In summary, Chinese companies are increasingly active abroad and
	appear to be improving their business skills. They are unlikely to be
	able to purchase enough assets through over the coming decades to
	greatly influence the availability or pricing of global oil supplies.
	Furthermore, owning overseas assets does little to improve physical
	energy security without the capability to project strong military
	power. Anecdotal reports already indicate that some Chinese
	policymakers are beginning to question the wisdom of trying to boost
	energy security by purchasing overseas equity assets. Other Asian
	countries have realized it is more efficient to rely on global markets,
	strategic reserves, and demand-side efficiency measures. It seems
	likely, therefore, that the overseas purchasing binge will soon slow.

	Demand-Side Measures
	Per capita oil consumption in China is only one-fourteenth the
	level in the United States, indicating that strong growth could
	continue for many years. The transport sector in China will likely
	experience the strongest demand for oil over the mid- to long-term.
	Currently, there are roughly 24 million vehicles in China, with
	projections anticipating 90-140 million by 2020. This would push
	transport demand from 33 percent of total Chinese petroleum demand to
	about 57 percent (from 1.6 million b/d in 2004 to roughly 5.0 million
	b/d in 2020).
	To partially address this problem, China enacted new automobile
	efficiency standards in late 2004. In Phase I, running from mid-2005
	until January 2008, no increase in fleet fuel consumption will be
	allowed without penalties. Phase II would then begin and require a 10
	percent reduction in fleet fuel consumption.
	Another measure that has gained renewed attention is the imposition
	of a vehicle fuel tax. This policy would ban all road use fees
	instituted at the local level and replace them with a nationwide tax
	ranging from 30-100 percent of the current price of vehicle fuel.
	Gasoline prices in most Chinese cities, for example, are currently the
	equivalent of about $1.60 per gallon. The fuel tax, if enacted, would
	raise gasoline prices to $2-$3 per gallon. The initiative has been
	discussed for years but lacked uniform support from policymakers. It
	has gained new steam over the past year with the surge in imported
	crude volumes.

	[GRAPHIC] [TIFF OMITTED] T0126.013


	The Long-Term View
	Without measures to limit demand or create alternative fuels,
	Chinese oil consumption appears set to grow rapidly for the foreseeable
	future. The World Energy Outlook 2004 forecasts Chinese petroleum
	demand in 2030 at just under 14 million bpd, about one-third less than
	current demand in the United States. (See Figure 3.) China's import
	dependency will continue to grow, however, reaching 75 percent. In
	2030, China would be importing as much oil as the United States did in
	2004.
	The IEA believes there are enough worldwide petroleum reserves to
	meet global demand through 2030 and beyond. More important uncertainty
	relates to marshalling the necessary upstream investments, maintaining
	stable petroleum output in major producer countries, building mid- and
	downstream infrastructure in consuming countries, and dealing with
	environmental issues like climate change. Furthermore, competition
	between China and India to purchase overseas oil assets is raising the
	stakes in upstream oil markets, but it is premature to say how this
	will evolve and impact long-term U.S. interests.

	The Promise of Natural Gas in China: Whither Policy?
	China has taken major steps since 1997 to boost natural gas use,
	mainly as a way to improve urban air quality. But gas was largely
	ignored for most of China's modern history and new market-oriented
	measures are needed to fully encourage natural gas use.
	Domestic gas production currently stands at 40 billion cubic meters
	(BCM) and accounts for roughly 3 percent of the country's total energy
	demand. Chinese policymakers envision gas use rising substantially
	through 2020, when demand would reach 200 BCM and account for 10
	percent of total energy demand. Baseline IEA estimates are currently
	less optimistic of future gas markets in China <SUP>2</SUP>, but the
	potential for dramatic change cannot be discounted. With the right
	policy framework, gas use could be significantly higher than even
	Chinese government forecasts.
	---------------------------------------------------------------------------
	\2\ The World Energy Outlook 2004 forecasts natural gas accounting
	for 6 percent of China's total final energy consumption in 2030.
	---------------------------------------------------------------------------
	Chinese policymakers increasingly view natural gas as the fuel of
	choice for its environmental, security, and industrial advantages. But
	the gas industry is in its infancy and many barriers must be overcome
	before this relatively clean energy source can make a significant
	impact. The International Energy Agency recently completed a detailed
	study of China's gas sector and delivered important recommendations to
	the Chinese government. <SUP>3</SUP> Provided below is a summary of why
	China is promoting development of the gas sector, the challenges it
	faces, and how some of these barriers could be addressed.
	---------------------------------------------------------------------------
	\3\ Interested readers should consult this IEA publication for more
	complete information: ``Developing China's Natural Gas Market: Policy
	Framework and Investment Conditions,'' International Energy Agency,
	Paris, 2002.
	---------------------------------------------------------------------------
	Drivers for Natural Gas
	China is taking new measures to promote the use of natural gas for
	three reasons. First, natural gas used in place of coal can help China
	address environmental problems that have become urgent economic and
	social issues. Replacing coal with natural gas basically eliminates
	emissions of sulphur oxides and particulates, the two most serious
	local and regional pollutants. Gas also offers steep reductions in
	nitrogen oxide and greenhouse gas emissions.
	Second, natural gas can help China diversify its energy resources
	and address growing concerns over energy security. Imported crude oil
	now accounts for 40 percent of annual demand and will likely continue
	to grow rapidly. Additionally, coal demand has soared since 2002,
	resulting in localized transportation bottlenecks. China could help
	alleviate these energy security concerns by increasing reliance on
	natural gas. International gas markets are better able to supply China
	over the coming decades without jeopardizing overall energy security
	compared to oil because many new producers are ramping up their output.
	Finally, natural gas has the potential to accelerate modernization
	of the country's industrial facilities. Most of China's industry is
	based on coal-burning technology, which is inherently less efficient
	than gas-fired equipment. Modern natural gas boilers, for example,
	convert about 92 percent of the energy contained in natural gas to
	useable heat. Coal boilers on the other hand, waste 20 percent or more
	of the input energy in the process. Similarly, advanced combined-cycle
	gas turbines used to generate electricity are nearly 60 percent
	efficient, while coal-fired steam turbines convert only about 40
	percent of the energy in coal into useful electricity. Greater use of
	natural gas would also free up China's rail system to transport higher-
	value goods.

	Developments and Hurdles
	Important gas projects have been launched to support China's
	ambitious development targets for natural gas. A 3,900 kilometre, $24
	billion West-East Pipeline started commercial operation in late 2004.
	(See Figure 4.) Throughput will slowly ramp up to 12 BCM in 2007 as
	downstream projects and distribution networks are completed. The fact
	that CNPC completed the pipeline one year ahead of schedule, and
	without participation from its planned investment partners (Shell,
	Exxon-Mobil, and Gazprom), is testament to the drive and ability of
	Chinese energy companies. Although many outside observers question the
	economics of the pipeline, similar doubts were raised when China built
	its first gas pipeline to Beijing. The economics were shaky at the
	time, but that line is now oversubscribed and a second line will begin
	delivering gas to the capital in 2006.

	[GRAPHIC] [TIFF OMITTED] T0126.014


	Two LNG terminals are also under construction in southeastern
	China, with perhaps a dozen more under discussion and consideration.
	LNG imports in China became an extremely hot topic in 2004 as coal
	prices rose substantially, along with incomes and air pollution. If
	even half of the LNG terminals currently under discussion are built,
	China could be importing 15-30 BCM of natural gas by 2015.
	Talks continue on international natural gas pipelines with Russia
	and Kazakhstan as well, but progress has been slow. A joint feasibility
	study funded by Russia, China, and South Korea that would deliver 20
	BCM of Russian gas to China and 10 BCM to South Korea is currently
	under evaluation. This pipeline may also have been ahead of its time,
	but Russia's Gazprom blocked any further discussion of the deal.
	Important hurdles exist for natural gas market development, including:
	<bullet> Natural gas is expensive compared to coal if
	environmental costs are not included;
	<bullet> China is not believed to be endowed with abundant and
	cheap gas reserves, and known supplies are often located far from the
	main centers of demand;
	<bullet> Gas supply infrastructure is fragmented and huge
	investment is needed to finance its expansion;
	<bullet> China lacks a legal and policy framework to encourage
	investment in the gas sector; and
	<bullet> There is a lack of knowledge over how to best develop
	natural gas technology and markets.
	Perhaps the weakest link in China's current natural gas chain is
	the perception of high costs that results in weak demand for gas.
	Without stronger market pull for gas, the entire natural gas chain will
	remain weak, no matter how much the government tries to development the
	market by administrative dictate.
	To realize the ambitious target for gas market development in
	China, there is a need for the government to go beyond the ``project-
	by-project'' approach by publishing a comprehensive national natural
	gas policy. Such a policy could address issues of gas exploration,
	development, distribution, pricing, marketing as well as imports. It
	should be part of a coherent national energy policy, as China's gas
	industry is intertwined with the coal and the electrical power
	industry, and with environmental policy.
	Preparation of a national natural gas law is also an urgent
	priority. Such a framework would provide a clear legal expression of
	the government's policy and strategy for gas industry development and
	the ground rules for operation of the gas industry. Almost every
	country where a natural gas industry has been established, whether
	based on indigenous resources or imports, has adopted a gas law in the
	early stages of market development. Adopting such a law would help
	create a more stable environment for investment and operation, reduce
	uncertainty and investment risk, and consequently lower the cost of
	capital.
	Theoretically, environmental protection, in particular the
	reduction of local atmospheric pollution, is the key driving force for
	increased gas use in China. However, important challenges remain in
	turning this theoretical driver into a real market mover. China has put
	in place a whole set of environmental laws and regulations on air
	pollution, but a lack of adequate means for enforcing implementation
	makes most of them ineffective.
	China lacks a central body to address coordination the country's
	overall energy strategy. Although an ``Energy Bureau'' was established
	several years ago, it does not have the capacity to implement effective
	and sufficient policy measures. There are roughly 30 employees at the
	Energy Bureau in China, while most OECD countries would have hundreds,
	if not thousands, of employees to create the policy framework and
	oversight needed to steer a modern energy industry. Given the current
	shortages of electricity and coal, Chinese planners announced the
	formation of an Energy Task Force in early March 2005 to further
	strengthen overall energy policy development. This step, however, is a
	disappointment to some who called for the creation of an energy
	ministry.

	Synopsis
	China's rapid economic growth has had a mixed impact on global
	markets. While China must take some of the blame for rising global
	commodity prices recently, it rarely receives recognition for helping
	keep the price of manufactured products low. China's rapid growth over
	the past few years should also be kept in perspective: China's 1.3
	billion people currently consume only one-half the energy as the 290
	million citizens in the United States, and Chinese oil demand is only
	one-third as large. Chinese policymakers have done a laudable job of
	steering economic reform, but a huge number of challenges--from
	population imbalances and environmental pollution to political reform
	and AIDS--await solutions before the country can raise individual
	standards of living to anywhere near current OECD levels. The
	international community must engage China in order to minimize the
	challenges and maximize the opportunities that lie ahead.
	Chinese NOCs have become much more active abroad, especially in
	regions not dominated by the major international oil companies. They
	have strategic advantages that can help them open doors in some
	producing countries, but their standards for safety, governance, and
	transparency remain an issue for all stakeholders. Most importantly,
	the purchase of overseas assets by Chinese NOCs is not likely to boost
	the country's energy security in a cost-effective manner since this act
	does not address potential supply and transit disruptions. The dash for
	overseas assets is likely to begin slowing in the near-term as
	policymakers digest this reality and weigh the high prices that NOCs
	are paying for sometimes questionable assets. Current estimates do not
	foresee Chinese companies playing a big enough role abroad to skew
	overall long-term oil market pricing or security, although rising
	domestic demand is clearly one reason for the current high global oil
	price. Chinese companies may also catalyze the development of more
	global resources than would have been case without their presence.
	______

	Mr. Gibbons. Thank you very much, Mr. Logan. Again, this
	panel certainly appreciates your insight on these issues and
	your testimony has been helpful to us. We will turn now to Dave
	Menzie, chief of International Minerals Section from the USGS.
	Mr. Menzie, welcome, the floor is yours. We look forward to
	your testimony.

	STATEMENT OF DAVE MENZIE, CHIEF, INTERNATIONAL MINERALS
	SECTION, U.S. GEOLOGICAL SURVEY

	Mr. Menzie. Good morning, Mr. Chairman. Thank you for the
	opportunity to discuss the effects of rapid economic growth in
	developing countries on global mineral markets and on the U.S.
	economy, national security and global environment. This
	statement describes the link between mineral consumption and
	economic development, outlines how China's development is
	affecting mineral markets and examines some implications of
	this development.
	Since the late 1980s, economic growth in China has been
	between 7 and 9 percent per year, doubling the economy every 8
	to 10 years. China has been undergoing industrialization moving
	through a series of stages that include development of
	infrastructure, followed by development of light manufacture,
	followed by development of heavy manufacture, with increased--
	and then increased consumption of consumer goods and finally
	development of a service economy. Changes in these stages come
	roughly at 5-year intervals, with each stage taking about 20
	years to complete and with the stages overlapping. During each
	stage of the economic development, consumption of particular
	mineral commodities rises dramatically by an order of
	magnitude.
	How is China's economy affecting growth in the mineral
	markets? First of all, China's rising consumption of mineral
	commodities has resulted in higher prices, lower stock levels
	of mineral commodities such as aluminum, copper, gold, iron
	ore, nickel platinum group metals and tin. And another result
	has been high levels of use of world productive capacity. As a
	result, this has left little excess capacity to handle supply
	disruptions, and there have been shortages of mineral
	commodities that have caused manufacturers to limit production
	of finished goods. USGS has received numerous contacts recently
	from companies trying to find sources of iron ore and steel
	including the types of steel used in the manufacture of
	automobile axles and in defense applications.
	China is the leading producer of a number of minerals,
	including aluminum, antimony, cement, fluorspar, coking coal,
	magnesium, rare earths, steel, tin, tungsten and zinc. However,
	because of the demand of its economy Chinese exports for
	mineral commodities such as rare earths, silver, tin and
	tungsten are declining. China controls export of some of its
	mineral commodities by requiring export permits and it has
	export duties on other commodities. There are a significant
	source of a number of mineral commodities for which the U.S. is
	dependent for imports of its supplies, and these include things
	like antimony, barite, fluorspar, magnesium and there are
	things that are used in batteries, ceramics, electronic
	components, flame retardants, metallurgical processing and
	petroleum drilling.
	In order to meet the needs of its growing economy, China
	has had to increase both its production and import of mineral
	commodities. China's large aluminum, copper and steel
	industries are dependent upon imports of raw materials, and
	there has been increasing interest by China in owning the
	sources of the raw materials for these industries and in
	purchasing companies overseas.
	What are some of the implications of these trends? First of
	all, China and other developing countries are likely to
	continue to follow a general pattern of growth. For example, if
	Chinese consumers follow the example of their Japanese, Korean,
	Malaysian and Taiwanese neighbors, their auto ownership could
	rise from about 10 per thousand to 100 cars per 1,000 in about
	10 years. Increased environmental residuals from developing
	countries will become a major source of both domestic and
	international issues, especially looking at transnational
	flows. Increased competition could take place among countries
	seeking sources of mineral commodities to supply their
	industrial production.
	National policies regarding both the domestic and
	international resource ownership and policies concerning
	mineral exports are examples of ways that governments could
	attempt to secure advantage for domestic industries. As
	developing countries increase their per capita income
	consumption, several changes are likely. Higher national
	incomes are likely to lead to increased consumption of mineral
	commodities, but at the same time, the higher incomes lead to
	increased resistance to mineral production. This could create
	difficulties for companies that are seeking to increase
	exploration for new mineral deposits. Increased volatility in
	mineral prices could result from slowdowns in developing
	economies. During a downturn, developing economies could turn
	up their new production capacity to produce mineral commodities
	to an export toward developed countries and resulting in
	significant trade disputes.
	An example of this was the cement exports to the United
	States that took place from Asia in 1997. In developing
	countries, high prices and increased competition for mineral
	commodities could bring additional economic pressure on our
	manufacturers. New strategies could be developed that would use
	information technology to increase recycling, reuse and
	remanufacture and would help to alleviate this trend. There has
	been increasing calls from reliable information on both energy
	and mineral consumption in the press in recent months. And
	finally, the continued growth in the economies of China and
	other large developing countries could result in a period of
	real rising prices for mineral commodities such as occurred
	following World War II. Thank you, Mr. Chairman.
	[The prepared statement of Mr. Menzie follows:]

	Statement of W. David Menzie, Geologist, U.S. Geological Survey

	Good morning, Mr. Chairman. Thank you for the opportunity to
	discuss the effects of rapid economic growth in developing countries on
	global mineral markets and on the United States economy, national
	security, and the global environment. This statement describes the link
	between mineral consumption and economic development; outlines, in
	particular, how China's development is affecting mineral markets; and,
	examines some implications of this development. This information is
	based upon a recently released U.S. Geological Survey (USGS) Open-File
	Report 2004-1374, ``China's growing appetite for minerals.''
	The USGS, through its Mineral Resources Program, is the primary
	Federal provider of scientific and economic information for objective
	resource assessments and unbiased research results on national and
	international mineral potential, production, trade, consumption, and
	environmental effects. This USGS role is clearly defined and unique
	from other Federal, State, local or private entities. These USGS
	activities provide information ranging from that required for land
	planning decisions on specific management units to that required for
	national and international economic, foreign policy and national
	security decisions.
	One of the major international news stories of 2004 was the rapid
	growth of the Chinese economy. China's growth earned headline status
	because China is consuming large amounts of raw materials and is
	becoming a more important factor in global trade and economic growth in
	other countries. Development on the scale that is now occurring is
	greatly increasing world consumption of minerals and will affect
	patterns of mineral production, trade, and consumption.
	The Connection Between Minerals and Economic Development
	For many developing countries, economic growth has just begun;
	however, China's economic growth is not new. Since the late 1980s,
	economic growth in China has been between 7 and 9 percent annually,
	doubling the economy every 8 to 10 years. China has been undergoing
	industrialization, moving through a series of stages that include
	development of infrastructure, followed by development of light
	manufacture, development of heavy manufacture, increased consumption of
	consumer goods, and finally, by the development of a service economy.
	Based upon the experiences of the Federal Republic of Germany and Japan
	during the post-World War II period, and of the Republic of Korea in
	the period 1970-95, changes begin at roughly 5-year intervals and each
	of the stages takes about 20 years to complete- with stages
	overlapping. During each stage of economic development, consumption of
	particular mineral commodities rises dramatically.
	For example, the first or infrastructure stage is characterized by
	large increases in consumption of cement, crushed stone, and sand and
	gravel; cement consumption may rise from a few tens of kilograms per
	person per year to 0.5 to 1 ton of cement per person per year. During
	the second or light manufacturing stage, consumption of copper may
	increase from less than a kilogram per person per year to around 10
	kilograms per person per year. In the third or heavy manufacturing
	stage, consumption of aluminum, iron ore, and steel rises. For example,
	aluminum consumption typically increases from less than a kilogram per
	person per year to 10 to 30 kilograms per person per year. The consumer
	goods stage of development is characterized by increased consumption of
	durable goods such as automobiles. Increases in the consumption of
	metals with specialty applications such as nickel, which is used in
	stainless steel, industrial minerals, and fuels are characteristic of
	the fourth or consumer goods stage. Finally, high but static rates of
	per capita consumption of minerals in finished goods are characteristic
	of the ultimate services stage.
	China's per capita consumption of copper (about 2.5 kg in 2004)
	suggests that it is about 20 to 30 percent of the way through the light
	manufacturing stage of development.

	How Chinese Economic Growth is Affecting World Mineral Markets
	USGS analysis indicates that China's rising consumption of mineral
	commodities has resulted in higher prices and lower stocks of mineral
	commodities such as aluminum, copper, gold, iron ore, nickel, platinum-
	group metals, and tin. Another result has been high levels of use of
	world production capacity for many commodities. This has left little
	excess capacity to handle supply disruptions. In some cases, shortages
	of mineral commodities have caused manufacturers to limit their
	production of goods. World demand for iron ore, iron and steel scrap,
	blast furnace coke and steel has been especially strong. This contrasts
	strongly with the situation of 2001 when analysts argued that 10 to 20
	percent of steel capacity was unneeded. As with other mineral
	commodities, most of the increase in steel demand has come from China.
	The USGS has received numerous contacts recently from companies trying
	to find sources of iron ore and steel, including those used in the
	manufacture of automobile axles and in defense applications.
	China is the leading producer of a number of minerals including
	aluminum, antimony, cement, fluorspar, coking coal, magnesium, rare
	earths, steel, tin, tungsten, and zinc. However, because of the demands
	of its economy, Chinese exports of mineral commodities such as rare-
	earth elements, silver, tin, and tungsten, are declining. China
	controls exports of some mineral commodities such as antimony, coking
	coal, and tungsten by requiring an export permit. China also maintains
	duties on exports of some mineral commodities. China is a significant
	source for a number of mineral commodities for which the United States
	is dependent upon imports for most of its supply. These include
	antimony (79 percent of imports), barite (90 percent), fluorspar (65
	percent), indium (49 percent), magnesium compounds (68 percent), rare
	earths (67 percent), tungsten (47 percent), and yttrium (88 percent).
	These mineral commodities have important uses in applications such as
	batteries, ceramics, electronic equipment, flame resistant materials,
	metallurgical processing, and petroleum drilling.
	In order to meet the needs of its rapidly growing economy, China
	has had to increase both its production and imports of minerals
	commodities. China's large aluminum, copper, and steel industries are
	dependent upon imports of raw materials. As a result, China has made
	significant foreign investment in bauxite and alumina, copper, iron
	ore, and nickel production facilities. Last fall, state-owned China
	Minmetals Corporation entered into discussions to purchase the Canadian
	company Noranda, Inc. Although those negotiations have not resulted in
	an agreement to date, they are indicative of interest by China in
	owning sources of the mineral commodities that its industries rely
	upon. China's rapid economic development and increased consumption of
	mineral commodities are also increasing environmental residuals
	released into the environment.

	Some Possible Implications of the Rapid Economic Growth in Developing
	Countries
	USGS analysis of mineral consumption patterns shows that continued
	strong economic growth in China and other developing countries with
	large populations has some important implications.
	1. China and other developing countries are likely to follow
	general patterns of development. China is now well along in its light
	manufacturing stage and has begun to develop its heavy industry and
	even to consume durable goods such as automobiles. If Chinese consumers
	follow the example of their Japanese, Korean, Malaysian, and Taiwanese
	neighbors, Chinese auto ownership could rise from about 10 to 100 autos
	per thousand people within the next 7 to 10 years. Unless there is a
	significant improvement in automobile engines, this could create a
	significant increase in environmental residuals.
	2. Increased environmental residuals from developing countries
	will become a major issue both domestically in the developing countries
	and internationally. Transnational flows of environmental residuals
	could increase disputes between nations.
	3. Increased competition could take place among countries seeking
	sources of mineral commodities to supply industrial production.
	National policies regarding domestic and international resource
	ownership and policies concerning mineral exports are examples of ways
	that governments could attempt to secure advantages for domestic
	industries.
	4. As the developing countries increase their per capita income,
	several changes are likely. Higher national incomes are likely to lead
	to increased consumption of mineral commodities. At the same time,
	higher national incomes are likely to increase resistance to mineral
	production because preferences for environmental goods and services
	increase with income. This could create difficulties for companies
	seeking to increase exploration for new mineral deposits and to extend
	lives for some deposits that were thought to be reaching the end of
	their production.
	5. Increased volatility in mineral prices could result from
	slowdowns in developing economies, which are producing and consuming
	very large quantities of mineral commodities. If during such a
	downturn, developing countries turn their growing capacity to produce
	mineral commodities to exports to developed countries, significant
	trade disputes could take place. The rapid increase in imports of
	cement from Asia into the United States following the downturn of Asian
	economies in 1997 is a small example of what could happen.
	6. In developed countries, high prices and increased competition
	for mineral commodities could bring additional economic pressure on
	manufacturers. New strategies could be developed that would use
	information technologies together with innovations in product design to
	reduce the costs of disassembling durable goods at the end of life of
	products and of sorting materials. This could increase reuse,
	remanufacture, and recycling of components and help manufacturers to
	avoid high cost new materials.
	7. Rapid changes in mineral consumption are creating conditions
	where reliable information for economic and national security planning
	and developing public policies will be increasingly important.
	8. Continued growth of the economies of China and other large
	developing countries could result in a period of rising real prices for
	mineral commodities. This would be in contrast to the last 30 years,
	during which real prices of many minerals have declined. Over the next
	20 years, mineral commodity price trends may more closely resemble the
	period from 1950 to 1970 than the last 30 years because of the
	proportion of the world's economies undergoing development.
	The rapid economic growth in developing countries is greatly
	increasing global mineral consumption, changing global patterns of
	mineral production, trade, and increasing releases to the environment.
	These changes have important implications for the economy and national
	security of the United States.
	Thank you, Mr. Chairman, for the opportunity to discuss this
	important matter, and in so doing, to showcase the significant
	information gathering and analytical capabilities resident in the USGS.
	______

	Mr. Gibbons. Thank you very much, Mr. Menzie, you have
	added a perspective on the mineral picture here that is very
	important and critical to this panel's understanding. We
	appreciate your testimony. To each of our witnesses now, I want
	to explain that we will be going into a 5-minute questioning
	period where members will have an opportunity to address
	specific questions to you. We will try to limit those to 5
	minutes each depending upon the schedule here.
	Let me begin by asking, perhaps, Mr. Caruso, when we look
	at oil today at $55 a barrel, what is driving up the price of
	oil? Is it something other than demand, which doesn't seem to
	be rising as quickly as the price of a per barrel cost? What is
	driving oil to $55?
	Mr. Caruso. Mr. Chairman, the main factor driving up the
	price of oil is the not only the increase in demand, which was
	very robust in 2004, 2.7 million barrels a day, but the fact
	that it used up almost all of the productive capacity in the
	world. So that we have an extremely tight situation, not only
	in the production side, but in the refining industry and in
	transportation. And so that any small change, whether it be a
	strike of workers in Nigeria or a problem in Iraq, the only
	safety relief valve is price. So the price in economic terms
	has become very inelastic in the short run, goes up much faster
	than the percentage increase in demand.
	Mr. Gibbons. You raise the issue of productive capacity. Is
	that at the well that we are talking about or is that in the
	refined product productive capacity?
	Mr. Caruso. Currently, it's in both. During October of 2004
	when Hurricane Ivan shut in about 500,000 barrels a day of U.S.
	capacity in the Gulf of Mexico, the world was essentially
	operating at 100 percent of capacity. With that capacity being
	back on stream, maybe we are up to about 98 utilization on a
	global basis out of 84.5 million barrels a day. Any industry
	operating that close to the margin spread out over many
	thousands of miles means this enormous inflexibility to deal
	with problems.
	And second, because of the increase in demand for
	transportation fuels, gasoline and diesel, the ability of
	refiners not only in the U.S. but in Europe and even in Asia is
	now also being stretched very thin. It is not only productive
	capacity at the wellhead, but the ability to convert that crude
	oil into that mix of products that is currently being demanded.
	And China is a big part of that, because as Jeff pointed out, a
	big part of their incremental demand is in increased use of
	passenger cars and trucks.
	Mr. Gibbons. Are we increasing our capacity to refine fuels
	in this country?
	Mr. Caruso. We are, but only at existing facilities. We
	have not built a new refinery since the late 1980s. All of the
	incremental capacity to refine has been added at the
	bottlenecking at existing refineries or some additional
	capacity, but at existing sites. So we have had added capacity,
	but relatively slowly. And we are increasingly dependent on
	imports of products, particularly from Europe and the Caribbean
	export refineries, which we expect to continue over the next 2
	decades.
	Mr. Gibbons. Very briefly for my education and those of
	members of the Committee, can you tell me exactly where the
	United States imports its oil from?
	Mr. Caruso. Sure. The main suppliers are Canada, number
	one.
	Mr. Gibbons. How much do they provide us?
	Mr. Caruso. They are providing about 1.8 million barrels a
	day out of 12, so about one-sixth of our imports in 2004. Saudi
	Arabia is slightly behind, a couple hundred thousand barrels a
	day less, maybe at 15 percent. And then Mexico, maybe just a
	little bit less than that, 14 percent. And then fourthly
	Venezuela. So those top four, Canada, Saudi Arabia, Mexico and
	Venezuela account for almost 70 percent of our imports. The
	rest come from a large number of countries like Nigeria and
	others from--much less from Norway, UK. But the others are much
	smaller. The key, the other key to that question is in the
	future, we expect most of the incremental supplies--I mentioned
	we are going to need 8 million barrels a day of more demand and
	it will be in the form of imports. Most of that will be coming
	from, we believe, Persian Gulf OPEC countries.
	Mr. Gibbons. My time has expired.
	Mr. Grijalva.
	Mr. Grijalva. Thank you, Mr. Chairman. Let me begin, Mr.
	Menzie, if I may, and I appreciate the data you have given on
	behalf of USGS with regard to the global mineral market and
	China's effect on it. Let me ask you a question. The
	Administration has proposed that program be reduced by 28.5
	million in the 2006 budget. So how will the international
	minerals program accommodate this loss? And will you be able to
	produce and present to Congress the kind of data and
	information that you have to date?
	Mr. Menzie. Sir, the cuts, as I understand them, would
	eliminate international mineral reporting and the work on
	minerals internationally through our global assessment program.
	So those would not be available in the future.
	Mr. Grijalva. The primary focus then for USGS then will be
	to look at domestic minerals, Federal lands primarily?
	Mr. Menzie. As I understand it, that's correct, sir.
	Mr. Grijalva. Mr. Logan, in your discussion with the
	Committee, as you were talking, you said that--let me see if
	I'm quoting you correctly, the environmental issues are too
	great to ignore. Can you outline some of the environmental
	implications of the situation in China as a consequence of the
	statement you made that those issues are too hard to ignore?
	Mr. Logan. China currently consumes about 2 billion tons of
	coal each year and a lot of that consumption happens in
	outdated and very inefficient technologies, old boilers or
	furnaces. Power plants, emit huge quantities of sulfur dioxide
	and other harmful pollutants. We see increasing amounts of air
	pollution from China traveling across the Pacific ocean and
	even reaching U.S. territory. But from a global perspective,
	probably more important is the rise in greenhouse gas emissions
	in China. And since coal is by far the most carbon intensive
	fuel, the intensity of the carbon emissions in China are very
	high. They have taken a lot of steps to try to rationalize
	energy use in China. But as I mentioned, the last few years, we
	have seen a very disturbing trend where the economy is using
	much more energy to produce a unit of economic growth than it
	had in the past. So we believe that China's energy development
	plans are intimately tied to global and environmental quality
	and global and environmental issues. And that's why we believe
	it is too important to ignore.
	Mr. Grijalva. And my last question, Mr. Chairman, Mr.
	Caruso, the Asian Times reported that China has joined the
	United States and Japan in developing strategic petroleum
	reserves and the 75-day period of emergency reserves in four
	locations. I want to ask how is that development--how will that
	affect the energy prices both in the long-term and the short-
	term, the development of both reserves?
	Mr. Caruso. Yes, indeed that's correct. China has started a
	program to develop strategic petroleum reserves at a relatively
	low level of fill for 2005. Jeff might have more detail, but I
	think it's less than 100,000 barrels a day for 2005. And so I
	don't think it will have a large impact, but certainly as I
	mentioned, when the market is tight as it is, it certainly
	will--there will be some small impact, I believe, this year in
	the short term. In the long term, I think it is probably a net
	benefit to have China in the position where it has strategic
	reserves so that we will be able to rely on those in the case
	of some sort of a disruption. To the extent that other
	countries develop this kind of a cushion in terms of strategic
	reserves as we have done in this country and in other IEA
	countries, I think it is a net plus for global market
	stability.
	Mr. Grijalva. In that same equation, how would our reserve,
	given the competition for fossil fuels between the United
	States, China and India--and I can only describe it as
	competition--how does the Nation's strategic petroleum reserve
	factor into that competitive equation?
	Mr. Caruso. Well, our fill rate is also relatively low at
	roughly 100,000 barrels a day this year. And we are approaching
	the full capacity, design capacity of 700 million barrels. So I
	would not expect there to be much of a market impact in terms
	of competition for oil to fill China's reserve compared with
	filling ours. I think it's such a small part of the 84.5
	million barrel a day global market that I don't think that will
	be a major factor in the oil market.
	Mr. Gibbons. Thank you, Mr. Grijalva. We will turn to Mr.
	Peterson now.
	Mr. Peterson. Thank you, Mr. Chairman, I want to thank the
	panel for very interesting testimony. Mr. Caruso, I was reading
	from some information that was a part of your--it said total
	demand for natural gas is also projected to increase at an
	average annual rate of 1.5 percent from 2003 to 25. 75 percent
	of the growth in gas demand from 2003 to 2005 results from
	increased use of power generation and industrial applications.
	Is the bulk of that power generation?
	Mr. Caruso. Yes, Congressman Peterson. The amount of
	increment in gas will be about 50 percent of our growth. I will
	make sure that's accurate for the record, but that's my
	recollection. But by far, the largest increment of growth will
	be in electric power.
	Mr. Peterson. I don't think it was wise when we went there,
	but that's another issue, because what we are not talking about
	is the homeowner. I mean today, gas--the price, the continued
	price increase of gas and the projected price increase of gas
	is going to put the American homeowner in a very difficult
	strait, especially older people with large homes. Much of
	America depends on natural gas to heat their homes and
	commercial application, the cost to heat commercial
	establishments and those who use natural gas as a heavy use to
	make, bake or cook, to make their product. I have my dry kilns
	that in my district that dry wood and use natural gas. They
	have shut down. They no longer can dry wood competitively with
	natural gas. I don't think we have any idea how much of this is
	going on around the country if people are moving away from
	natural gas, which they ought to be moving toward in my view.
	I guess what scares me about your testimony or stuns me is
	we are saying we're going to double the importation of gas in
	the next 15 years. And it's almost all through LNG, from your
	charts. You're going to increase LNG use in this country by 16
	times. Do you really think that is doable? You have to build
	the most expensive ships the most controversial ports and you
	buy from unstable countries who will double or triple the price
	when we increase the volume. And can we even get there? Can we
	increase LNG by 16 times?
	Mr. Caruso. I think we can. The investment patterns that we
	see going on overseas to develop liquefaction capacity are
	moving forward at a reasonably good pace. And the
	regasification proposals currently at FERC are more than 20 to
	build regasification terminals. We don't think that 20 will be
	built, but that's how many are being proposed or have been
	submitted to FERC, the Federal Energy Regulatory Commission.
	So we think the gas is there. There appears to be
	investment willingness to build the liquefaction capacity. And
	based on our projections, we certainly believe the demand will
	be there.
	Mr. Peterson. I know the gas is there. I mean, that's not
	the issue. But is it wise for us to become importers of natural
	gas? Now what you didn't mention is can you build a port, but
	now you have to build a pipeline to connect it to the current
	system. I don't know of only one gas company that is even
	talking about that. Is there much of that going on?
	Mr. Caruso. There is some going on, but there is more to
	the story than just the liquefaction and regasification. There
	is hooking up with the existing distribution system. And that
	will also represent significant investments as well. Certainly,
	I know there is debate going on in this Chamber as well as the
	Senate as we speak on the wisdom of our energy policy, but
	clearly, you know, what can I say from the IEA point of view,
	our projections indicate that the demand will be there largely
	in electric power and industrial applications. And as you point
	out, 60 percent plus of our homes in this country are heated by
	natural gas. So I think the wisdom--I, of course, rely on the
	decisionmakers and policymakers to debate that.
	Mr. Peterson. Well, you are the agency that reports the
	data. So I am not picking on you. You are not the policymaker.
	But your data you are giving us assumes that is the only option
	we have is LNG.
	Mr. Caruso. In fact, Chairman Pombo and others have asked
	what would happen if this--we did not indeed meet this type of
	demand, whether it be for reasons of the inability to site the
	regasification terminals or the investment wasn't made. And
	clearly what our studies have shown is that if supply is not
	available or the infrastructure is not built, as I mentioned
	with oil, there's only one pressure relief valve. If the demand
	is there and supply is not forthcoming, that means higher
	prices.
	Mr. Peterson. And I think we are at the busting--we are at
	the wall already. I don't think homeowners, commercial and
	industrial in this country continue to pay the highest natural
	gas prices in the world, which we have. Oil prices, everybody
	pays the same. But the natural gas prices, they go from $0.80
	to $7 and something. You can't compete with 80 cent gas, which
	many countries have. A lot of countries have gas for less than
	a buck. We are really putting ourselves in a terrible
	competitive--but the assumption that we have to double our
	importation and it's all on the back of LNG is a dangerous,
	flawed strategy, because--and I know my time is up, but be
	prepared for the next round, because I am not done. I am just
	getting started.
	Mr. Caruso. I am well aware of it.
	Mr. Gibbons. We will turn to someone who understands the
	importation of energy in this part of America that is unique to
	most others, Mr. Faleomavaega from American Samoa.
	Mr. Faleomavaega. Thank you, Mr. Chairman. Just on a
	follow-up question that Mr. Peterson is trying to pursue here.
	Maybe gentlemen, you can help me. It is my understanding that
	the state of Qatar currently largest reserves of natural gas in
	the world. Am I correct in this?
	Mr. Caruso. They are in the top three. There is Russia,
	Iran and Qatar. They are all very close. The three of them
	together have about 70 percent of the world's natural gas
	reserves.
	Mr. Faleomavaega. My understanding, Bolivia has made
	findings of natural gas and very pretty much in abundance. How
	does this compare then to us as to what Mr. Peterson is trying
	to pursue here? Over the years--and I will follow up with a
	question. This has always been the issue for how many years now
	we keep talking about more and more our country has to input
	our fuel resources, especially oil and fossil fuel. And somehow
	we seem to be spinning our wheels. Every year we go through
	this round talking about limited energy resources and what are
	we doing about it and bringing up this issue as Mr. Peterson
	reiterated about the supply of gas alone, what is the option
	there available because of our dependence on this resource from
	other countries? Are we doing enough R&D?.
	This is another point of my question. It has always been a
	touch and go when we talk about alternative energy resources
	but it always comes back to fossil fuel. Doesn't seem to be any
	real seriousness maybe perhaps in part of our government and
	maybe the energy companies. What are some of the alternative
	resources that we could really do serious R&D so we don't have
	to be so dependent on these other countries for these
	resources? I am asking all three of you gentlemen.
	Mr. Caruso. You are absolutely right. Certainly technology
	and R&D are the answer for the long term, and I think there has
	been a significant amount and continues to be. There can always
	be more. And one cannot overlook technology that has been done
	over the last several decades that has led to substantial
	improvements in the way we use--as I mentioned, we are using
	about half the amount of energy per unit of GDP than we were
	using 30 years ago.
	So there has been improvement and certainly some of the oil
	and gas that's being produced today wouldn't have been produced
	under the technology of 30 years ago. There are developments,
	deep water drilling. There is a lot that has been happening.
	But in terms of alternative energy supplies, there is a
	long lead time when it comes to thing like hydrogen, fuel cell
	development and others. So until then, what we have been doing
	is importing oil and now more and more natural gas, because
	that's the available supplies at a reasonable cost.
	And indeed, you mentioned Qatar, our estimates is that
	Qatar LNG, when it's up and running and deliverable to the U.S.
	would probably come into the east coast at about $3.60 a
	thousand cubic feet which is about half of today's spot price.
	So economics will drive this. Very pertinent question that
	Congressman Peterson raised about strategic and whether this is
	the path we should be on or not. This is worth anticipating.
	Mr. Faleomavaega. The three most populous countries in the
	world, China, India and the United States, even though we
	consume over 30 percent of the world's energy resources with a
	population of only 486 million people, do you get the
	impression that there is such an evil thing on the part on
	China and India that they have to look for energy resources. I
	mean 2 billion people combined population, the demand for the
	consumption is there. I notice that India wanted to do a $4
	billion pipeline contract with Iran going through Pakistan, and
	we are placing very serious objections to this. What is your
	take on this?
	I notice that China is going to central and South America
	shopping for more oil supplies because of this demand. Is it
	bad for these two nations to be seeking other oil resources,
	just like we are trying to do in other parts of the world?
	Mr. Logan. I can try to say a few words about that. I think
	when we look at the development of China's economy and we see
	that how immensely people's lives have changed in the last 30
	or 40 years, it is truly remarkable. Literally hundreds of
	millions of people have been lifted out of dire poverty and a
	lot of that has been associated with rising energy consumption.
	So, no, I don't think we can consider that China and India and
	other large developing economies don't have a right to improve
	their standards of living by using more energy. It's
	inevitable, it's going to happen and I think we have to prepare
	for it.
	In terms of Chinese and Indian and some other large state-
	owned companies, energy companies investing abroad, there's a
	mixed picture, I think. We see some benefit when state-owned
	companies from China and India invest in resources that other
	international energy companies ignore for political or economic
	reasons. They are making it possible to bring on some
	incremental supply to the global market, because no one else
	will touch those resources.
	Mr. Faleomavaega. I know my time is up. Just a quick
	observation, my understanding, Kazakhstan has the third largest
	oil reserves potentially in the world. Something also to
	consider. But one thing I wanted to note as a matter of
	observation, if we have really been serious about refinement.
	My understanding is we have enough coal supply. And Mr.
	Peterson probably knows more about coal more than I do. And how
	much R&D is going into refining coal as an energy resource and
	I'm curious about that. Every time I hear about coal, it is an
	environmentally dangerous resource for fuel. My question is how
	much R&D have we put in there, if this is good for the next
	1,000 years, to provide the energy needs for country? Why
	aren't we doing enough research to make coal as a better
	resource, environmentally safe? And just a matter of
	observation. Mr. Chairman, I know my time is up.
	Mr. Gibbons. Thank you very much.
	Let me just say that each year we do add money into a Clean
	Coal Technology Program in this country that helps with that
	research and development.
	One of the observations I want to make before turning it
	over to Mr. Peterson is a concern that some of us have is a
	monopolization of the oil production and the products that come
	from that by a country with its demand tying up those
	international sources, so whether it be the United States,
	whether it be China, whether it be India, whether it be any
	other country going out there and acquiring the only or
	remaining productive capacity, that monopolizes that whole
	issue, which then puts a tremendous variability and instability
	into the whole program for what we do in terms of our growth.
	And I will come back to my question.
	I want to go to Mr. Peterson. We probably each have time
	for one more additional question before we go to go do two
	votes, at which time we will come back and hear our second
	panel.
	Mr. Peterson.
	Mr. Peterson. Yes. I wanted to mention the coal thing, but
	I guess I don't have time.
	We do have a clean coal technology fluidized bed boiler; we
	use it for our dirtiest lowest BTU that's on top of the ground
	that was put there as waist coal years ago. We're burning it
	cleanly, but we have chosen not to use it in this country, even
	though, in my view, it takes the particulate out of the air and
	puts it in the fuel waste that does not go in there, but we
	just closed the door on coal, unfortunately. But I am going to
	go back to natural gas.
	I think natural gas is the one fuel that can bridge us
	through these difficult times, but I guess I'm stunned that
	we're listening to Greenspan--who I don't think knows crap
	about energy--because he said we should do LNG. He's the guy
	who has raised the LNG issue in every hearing in the last year
	and a half. He's the one that put natural gas in the hearing
	process when he asked to come to the Commerce Committee and
	talk about it. And he has given the LNG solution, which, in my
	view, is the worst potential solution we have.
	This country has adequate reserves to drill its way out of
	the natural gas problem and be competitive with the rest of the
	world. We have huge reserves in natural gas. But if the
	government-imposed moratoriums on all the areas where gas is
	readily available continue, and have been supported by three
	presidents--I think erroneously, including this one--I think
	that's a mistake in this country.
	Natural gas is going to be the bridge to hydrogen. All the
	hydrogen makers tell you we're going to make hydrogen out of
	natural gas before we make it out of water and other things
	because that's the easiest, simplest way to do it.
	I have an all natural gas bus company at State College
	that's going to start enhancing with hydrogen with the hopes
	down the road on running them on hydrogen, but it will be
	hydrogen made from natural gas.
	Now we're using natural gas unlimitedly for power
	generation, which I think is a waste. What we ought to have is
	a no-growth-in-oil-use policy in this country. We have three
	percent of the world's oil, we have almost unlimited natural
	gas in this country that we can drill for. And I guess I would
	like to make the statement for the press and everybody else, a
	gas well is not an oil well, and nobody wants to talk about
	that. I think it's time for this country to decouple oil and
	gas leasing. A gas well is a 6-inch hole in the ground with a
	steel casing, cement at the bottom, cement at the top, and we
	let gas out. That's not a huge environmental hazard, but we
	have been conditioned as a public to think it is.
	Many of our gas fields are dry gas, you don't even have
	fluids hardly. So I think, I mean, I think it's ludicrous that
	we don't have a policy about opening up our rich fields to
	drill for natural gas in lots of very safe places. I'm told
	there's--I forgot how many trillion feet off of the shore of
	New Jersey 80 miles out.
	This summer my staff visited Canadian drilling rigs on the
	Great Lakes--I didn't go, I wished I had have. And Canada
	drills in our Great Lakes, sells us the gas. And I have never
	heard a complaint on the shores of Lake Erie about that
	drilling. If they hit an oil well, the cement truck is ready
	and it plugs it, they don't use it. But the natural gas is
	piped underground, undershore, nobody even knows it's there, it
	lets gas out.
	I mean, natural gas is not an environmental hazard. You
	have a two-acre lot, if you're doing it on land, that you have
	to clear to produce the well, and once it's over, there's a
	tank and a couple of pipes there. I mean, it's not an
	environmental--why this country thinks drilling for natural gas
	is a hazard, it's the clean burning fuel. We should be fueling
	all public transportation with natural gas, taking relief of
	oil. We should be fueling taxicabs, delivery trucks, service
	trucks that go short distances. They have a new engine that
	uses natural gas for diesel where you can go back to 15 percent
	diesel and 85 percent natural gas. Think how much cleaner that
	would be with diesel trucks on the highways. There is an engine
	being worked on, and it's pretty close to being available. I
	mean, I think for us to have a natural gas policy that our only
	answer is to import LNG--and there is no way, in my view, that
	you can increase the LNG into this country by 16 times in the
	period of time this mentioned, I think that's a very flawed
	policy.
	Mr. Gibbons. Mr. Peterson, thank you very much for the
	discussion on natural gas. And you can tell he's not sitting on
	the fence on this issue.
	We did have a signal, as you heard from the buzzers, there
	are 2 votes going to take place. We anticipate that this will
	take about 30 minutes for the next 2 votes, so we're going to
	adjourn this hearing for 30 minutes.
	Before I do, and before I release this panel, I want to
	thank all of you three for coming here today. We will call up
	our next panel at the beginning when we return. But there are
	going to be a number of written questions that we will submit
	to the members of the panels; we would like those to be
	answered and submitted back to us within a week, if we could
	possibly do that, no longer than 10 days, of course, after
	that.
	With that in mind, I will tell the members that we have
	about 5 minutes to run vote, and we're going to adjourn this
	hearing--or recess this hearing, not adjourn, we will recess
	for about 30 minutes.
	[Recess.]
	Mr. Gibbons. The Subcommittee on Energy and Mineral
	Resources will come back to order. We will call up our second
	panel now, and before I make those names known, I want to
	apologize to everybody. You've just now experienced
	Congressional time, what we call 30 minutes turns into an hour,
	of course. So with that, I want to call up our second panel,
	which will be Milt Copulos, President National Defense Council
	Foundation, and Alan S. Hegburg, Senior Fellow, CSIS Energy
	Program, the Scowcroft Group.
	Mr. Gibbons. Gentlemen, welcome. We will turn now to Mr.
	Copulos. Welcome, the floor is yours. We look forward to your
	testimony.

	STATEMENT OF MILTON COPULOS, PRESIDENT,
	NATIONAL DEFENSE COUNCIL FOUNDATION

	Mr. Copulos. Thank you, Mr. Chairman. I would like to thank
	you for the opportunity to testify.
	Mr. Chairman, America is heading headlong into disaster, a
	disaster of our own making. Three decades ago, the Arab Oil
	Embargo made clear that our Nation's dependence on import oil
	was reaching dangerous levels and threatened to jeopardize our
	military and economic security, but that warning went unheeded.
	Today, despite all of the rhetoric and posturing and
	lamentations about energy, our security situation is far worse
	than it was in 1973. In fact, on a volumetric basis, oil
	imports today are more than double the level they were then.
	We are also becoming increasingly dependent on imports of
	important non-fuel minerals. We are 100 percent dependent on
	imports for 17 important non-fuel minerals ranging from
	graphite to gallium, and 80 or more percent dependent on
	another dozen.
	Under any circumstances, our reliance on transoceanic
	imports for key commodities would be a cause for concern, but a
	confluence of factors has heightened the threat that they pose
	to a critical level. These factors have a growing competition
	for resources from emerging economies, particularly that of
	China, and to a lesser degree India, and the inherent
	instability of the nations that constitute our most important
	sources of transoceanic supplies.
	For two decades, China's economy has grown between 7 and 9
	percent annually, the highest rate of any nation on earth. To
	fuel this growth the PRC has developed a ravenous appetite for
	natural resources. Indeed, China counts for 40 percent of the
	total growth of oil demand in the past 4 years. Similarly,
	China's frenetic economic expansion is also credited as being a
	major factor driving the recent increases in nonfuel mineral
	prices. India, too, while not equalling China, still has an
	economy growing at around 6-1/2 percent a year, with the
	accompanying increases in the need for both energy and nonfuel
	minerals.
	But the stunning economic growth of emerging Asian
	economies is not the only concern in regard to transoceanic
	imports. Six nations, Canada, Mexico, Saudi Arabia, Venezuela,
	Nigeria and Iraq, provided 66.9 percent of U.S. Oil imports
	last year, accounting for 42 percent of our total supply. Of
	these 4, Saudi Arabia, Venezuela, Nigeria and Iraq furnished
	37.7 percent of our imports, equalling 23.7 percent of total
	supply. And that's where the danger lies.
	In December of last year, al-Qaeda issued a statement that
	said, in part, we call on Mujahadin in the Arabian Peninsula to
	unify their ranks and target the oil supplies that do not serve
	the Islamic nation, but the enemies of that nation. There is
	little doubt that terrorists are trying to make good on the
	threat. Since May of 2003, 90 people have died in terrorist
	incidents in Saudi Arabia, and there have been dozens of
	attacks on oil-related facilities in Iraq. Although these
	incidents have not seriously disrupted supplies as yet, sooner
	or later they will.
	Even without a major supply disruption, however, they have
	been a principle factor in the huge oil price increases since
	in the past year. Nigeria is plagued with ethnic violence and
	banditry in its oil-producing regions, losing an estimated
	145,000 barrels a day to theft.
	In Venezuela, President Chavez, a close confident of Fidel
	Castro, with suspected ties to insurgents in Colombia and al-
	Qaeda, has threatened to cutoff oil shipments to the United
	States. In short, we face a new reality of increased
	competition from emerging nations of Asia, and critical
	instability among our principle transoceanic sources of supply.
	It is a reality that makes our continued dependence on imports
	an unacceptable risk, but it's a risk we need not take.
	The simple truth is that our Nation does not have an energy
	shortage. All we need to do is find the political will to take
	advantage of our incredible energy endowment. Consider this,
	there are 104 trillion cubic feet of so-called stranded gas in
	Alaska. Utilizing well-proven gas-to-liquids technologies would
	permit us to convert the stranded resource into clean burning
	fuels that could be shipped to the lower 48 States by the
	trans-Alaska Pipeline System. And that's just the tip of the
	iceberg.
	The U.S. holds 62.5 percent of the world's oil shale
	deposits, the equivalent of 530 billion barrels of oil. That's
	more than twice the proved reserves of Saudi Arabia. The U.S.
	Also holds 25 percent of the world's coal reserves, 275.1
	billion tons, or enough to maintain current production levels
	for 2 centuries.
	There also remain huge untapped resources of conventional
	oil and gas resources in areas offshore that are currently
	closed to development.
	One of the most exciting prospects is methane hydrates,
	known as the water that burns. U.S. methane hydrate resources
	are estimated to hold 320,222 trillion cubic feet of natural
	gas; that is the equivalent of 51.1 trillion barrels of oil.
	One, just one, onshore methane hydrate deposit in Alaska is
	estimated to hold 519 trillion cubic feet of natural gas, the
	equivalent of 82.9 billion barrels of oil.
	We also have emerging technologies that can help us use the
	energy resources we have more efficiently, and provide
	alternative sources of fuel. Hybrid electric vehicles, for
	example, can substantially improve automotive mileage.
	The choice is really very simple; we can act now to do
	something to use our domestic resources, or stand idly by and
	allow us to be overwhelmed by events. If we fail to act, we
	will have no one to blame but ourselves.
	[The prepared statement of Mr. Copulos follows:]

	Statement of Milton R. Copulos, President,
	National Defense Council Foundation

	My name is Milton R. Copulos and I am President of the National
	Defense Council Foundation.
	I would like to thank Chairman Gibbons and the Members of the
	Subcommittee for the opportunity to testify today.
	America is rushing headlong into disaster. What is worse, however,
	is that it is a disaster of our own design.
	Three decades ago, the Arab Oil Embargo made it clear that the
	nation's growing dependence on imported oil was reaching dangerous
	levels and threatened to jeopardize our economic and military security.
	Despite that dramatic demonstration of our vulnerability nothing has
	been done to address the problem.
	At the time of the Arab Oil Embargo in 1973, we imported 34.8% of
	our oil. In 2004, imports averaged 62.9%, and on a volumetric basis
	were more than twice the level they were 30 years ago.
	We may soon come to regret our complacency.
	A confluence of factors has occurred that heightens the jeopardy we
	face from our profligate import dependence.
	THE FIRST FACTOR: EMERGING ECONOMIES
	On one front, we have skyrocketing demand, driven in large part by
	the frenetic pace of economic growth in nations such as China and
	India. Indeed, for the past decade China has experienced a growth rate
	of between 7% and 9%, with a phenomenal rate of 9.5% in 2004. India's
	GDP has grown at an average of 6% for the same period, hitting 8.2% in
	the first quarter of 2004. In contrast, U.S. GDP grew at 5.6% for the
	same period, and Japan at 5%.
	Fueling this economic growth will require oil in increasing
	amounts. So much oil in fact, that the ability of current suppliers to
	produce it may be stretched to the breaking point.
	To illustrate, oil consumption in developing countries is expected
	to rise by 3% annually over the next 20 years. This means it will
	increase from 14.5 million barrels per day in 2000 to 29.8 million
	barrels per day by 2025. Within this total Chinese oil consumption,
	which accounted for fully 40% of the growth in world oil demand over
	the past four years, is expected to rise from the 5.56 million barrels
	per day recorded in 2003 to 12.8 million barrels in 2025. Of this
	total, 9.4 million barrels per day are expected to be accounted for by
	imports.
	India, too, is expected to see a dramatic rise in its oil
	consumption with a 28% increase projected for just the next five years.
	Under the best circumstances, the competition for oil generated by
	the explosive economic growth of Asia will serve to put a tremendous
	upward pressure on prices, driving them well above the current $50 plus
	per barrel average. OPEC officials have said oil prices could rise to
	as much as $80 a barrel and they may well be correct. In fact, under
	the right circumstances the price could be even higher.
	Under the worst circumstances, as our organization warned in a Los
	Angeles Times article five years ago, the competition for oil could
	lead to armed conflict--particularly with China. Lest this statement
	seem alarmist or far-fetched, I would note that the Chinese are, for
	the first time in their history, developing a ``blue water'' navy
	capable of operating beyond their shores, and their naval doctrine has
	been revised to provide for the projection of force in an arc running
	roughly 800 miles from their shoreline.
	But, I said there was a confluence of factors, and the growth of
	global demand is just one of them. The other, equally important factor
	is the growing instability of the nations on which we rely for the bulk
	of our imports.

	THE SECOND ELEMENT: UNSTABLE SUPPLIERS
	Six nations, Canada, Mexico, Saudi Arabia, Venezuela, Nigeria and
	Iraq, contribute 66.9% of all U.S. oil imports, equaling 42% of our
	total consumption. Of these, four, Saudi Arabia, Venezuela, Nigeria and
	Iraq account for 37.7% of our imports or 23.7% of the oil we use.
	And that's where the danger lies.
	September 11th 2001 changed forever the way we must view resource
	dependency. We must never allow ourselves to forget that one of al-
	Qaeda's principal objectives is to destroy the U.S. economy. Indeed,
	that is the reason the World Trade Center was selected as a target--it
	was a symbol of America's remarkable economic strength.
	More important, al-Qaeda and its affiliates understand all too well
	that one way to bring about their goal of economic disruption is to
	disrupt our supplies of imported oil. If anyone harbors doubts that
	this is true, they need only look to al-Qaeda's December 11th 2004
	statement which made the threat explicit stating:
	``We call on the mujahideen in the Arabian Peninsula to unify
	their ranks and target the oil supplies that do not serve the
	Islamic nation but the enemies of this nation.''
	Continuing the statement also urged that al-Qaeda followers:
	``Be active and prevent them from getting hold of our oil and
	concentrate on it in particular in Iraq and the Gulf.''
	As dramatic as the December 18th statement was, however, what it
	actually did was to officially sanction what was already going on.
	For the past several years, America's transoceanic oil supplies
	have been under growing assault.
	In October of 2001, Sri Lankan Tamil Tiger terrorists conducted a
	coordinated suicide attack on an oil tanker involving five small boats.
	Seven people were killed.
	Eleven months later, al-Qaeda affiliated suicide bombers attacked
	and holed the French oil tanker Limberg in Yemen killing one crewman
	and causing a 90,000 barrel oil spill.
	In the summer of 2002, Saudi Interior Ministry forces thwarted an
	al-Qaeda plot to attack and cripple the loading dock at Ras Tanura
	which handles 10% of the world's oil supplies.
	A report by the Institute for the Analysis of Global Security
	documented over 100 attacks on oil pipelines between April of 2003 and
	April of 2004.
	Last July gunmen stormed an oil tanker at anchor in Indonesia.
	The list goes on and on, but the point is simple: if oil must cross
	an ocean to get here, it is not secure.
	But external terrorists are not the only threat.
	The facts show that three of our most important sources of oil
	imports are so insecure that relying on them is tantamount to playing
	Russian Roulette with all the chambers in the gun loaded. Together
	these nations account for over one-quarter of our transoceanic oil
	imports.
	Let's take them in order of importance.
	PLAYING RUSSIAN ROULETTE WITH OIL SUPPLIES
	Saudi Arabia, the world's largest oil producer and location of one-
	fourth of the world's proved conventional oil supplies accounts for
	12.1% of U.S. oil imports or roughly 7.6% of the oil we use.
	With almost 40% of its population under the age of 15 and declining
	fortunes that have seen Saudi Arabia's per capita income drop by 80%
	adjusted for inflation since its peak a quarter century ago, the Desert
	Kingdom is rife with unrest--much of it directed at the West. Indeed,
	since May of 2003 90 people have been killed in terrorist incidents and
	foreign nationals have been urged to leave. It is true that the Saudi
	Interior Ministry is attempting to combat the terrorist threat to their
	country, and has arrested hundreds of al-Qaeda suspects, but the threat
	continues to grow. Moreover, over the past year, al-Qaeda cells
	operating in Saudi Arabia have increasingly targeted oil-related
	facilities for attack.
	But even if terrorists do not disrupt the flow of Saudi oil,
	another concern has recently surfaced: the ability of the Desert
	Kingdom to maintain its production levels. Matthew Simmons of the
	Houston-based Simmons Company International set off a firestorm of
	controversy in petroleum industry circles with his analysis of Saudi
	Arabia's oil production capability. It is his contention that the
	failure of the Saudis to invest in maintaining its huge Ghawar oil
	field has undermined that nation's ability to ``surge'' production in
	response to market needs. The Saudis have always been viewed the
	supplier of last resort. If Simmons is correct, the prospect of global
	shortage is far greater than previously believed.
	Venezuela provides 12.1% of U.S. oil imports equaling 7.4% of
	domestic consumption. With the election of Hugo Rafael Chavez Frias as
	President, relations between the U.S. and its fourth largest oil
	supplier entered a new era of hostility. A self-styled populist with
	close ties to Fidel Castro and terrorist groups operating both in Latin
	America and around the globe, he recently threatened to cut off oil
	shipments to the United States. Chavez is openly sympathetic to al-
	Qaeda. Moreover, he is cited in the latest edition of the State
	Department's ``Patterns of Global Terrorism'' report as having ``an
	ideological affinity'' with Colombia's FARC and ELN terrorist groups.
	The State Department also says that weapons and ammunition captured
	from FARC rebels have been traced to official Venezuelan stocks and
	facilities. The situation in Venezuela is further complicated by
	internal strife that was manifest in a general strike that shut down
	that nation's oil industry for several months beginning in December of
	2002.
	Nigeria, which supplies 8.7% of U.S. oil imports accounting for
	5.5% of our consumption, has been plagued with ethnic and political
	turmoil in the Niger Delta, its principal oil producing region. In
	2004, an average of 145,000 barrels of oil per day was lost to theft
	and vandalism. Moreover, foreign oil workers and facilities have been a
	frequent target of violence. For example, in April of 2004 two
	Americans working for Chevron were attacked and killed, and in January
	of 2005, 300 armed villagers from the village of Owaza attacked two
	Royal Dutch Shell flow stations forcing the evacuation of 18 staff
	members.
	In addition to security issues, serious questions have also been
	raised concerning Nigeria's reserve estimates with Royal Dutch Shell
	recently reducing the reserve estimates of its holdings their by 67%,
	or almost 1.5 billion barrels. Moreover, even if reserve estimates are
	accurate, Nigeria suffers from a lack of investment funds to maintain
	and expand its oil and gas production. This fact raises further
	question about Nigeria's ability to maintain current production levels
	in the years ahead.
	OTHER OIL SUPPLY ISSUES
	While terrorism and political instability are major sources of
	concern regarding transoceanic U.S. oil imports, they are not the only
	factors threats to transoceanic oil imports. Another important concern
	are the efforts by the emerging Asian economies to become major
	participants in the development of global oil resources, and especially
	such efforts directed at traditional U.S. suppliers.
	On January 20th, the Chinese government signed agreements with
	Canada to help develop Canadian uranium mines and oil reserves. Among
	the areas of greatest interest to the Chinese are the Canadian tar
	sands deposits in Alberta province. The 175 billion barrels of
	recoverable oil trapped in Canadian tar sands represent a resource base
	two-thirds the size of Saudi Arabia's. In addition, China has expressed
	interest in investing $2 billion to purchase a 49% interest in a
	pipeline to carry oil 720 miles from Alberta to the northwest coast of
	British Colombia.
	China's move to enter into oil production and development
	agreements with traditional U.S. suppliers is not limited to Canada.
	China already operates two oil fields in Venezuela and has signed an
	agreement to develop 15 declining fields in Zumano in eastern
	Venezuela. The Venezuelan government has also invited China to
	participate in exploration projects in the Orinoco belt, one of the
	world's richest oil deposits. China has also made overtures concerning
	oil exports to Mexico's national oil company, PEMEX.
	It is not just the Chinese, however, that are fishing for oil in
	traditional U.S. waters. India recently signed an oil cooperation
	agreement with Venezuela. The agreement is the most recent in a series
	of overseas oil development projects initiated by India's state-owned
	Oil and Natural Gas Corporation (ONGC). They also have projects
	underway in Russia, Vietnam, Sudan, Myanmar and Australia.
	Clearly, competition for the world's oil resources will become
	increasingly strong in the years ahead. But oil is not the only natural
	resource which poses an import vulnerability danger to the United
	States. Nonfuel mineral imports, too, create an unacceptable economic
	and military vulnerability.

	THE IMPORTANCE OF NONFUEL MINERALS
	Few Americans give much thought to the important role nonfuel
	minerals play in our nation's economy. Yet, while it is not commonly
	understood, they are as essential to a modern industrial state as
	energy. In fact, 16.8% of U.S. GDP is a direct product of minerals and
	materials mining and processing.
	To illustrate, in 2004, the value of nonfuel minerals produced in
	the United States totaled $44 billion. But that was just the tip of the
	iceberg. These raw minerals, along with minerals imports generated $418
	billion in processed mineral materials. These processed minerals, in
	turn, added $1.97 Trillion in value to U.S. manufactured goods. All
	told, some $16.8% of U.S. GDP is directly linked to minerals and
	materials processing. As a result, one out of every six jobs in our
	economy is directly or indirectly tied to mineral production.
	Yet as important as these commodities are to America's economic
	success, their supply is not assured.

	TENUOUS SUPPLIES
	We currently rely on foreign sources for 100% of seventeen
	important minerals. These range from gallium, which is used in such
	critical applications as the manufacture of semiconductors, computer
	chips and transistors to graphite, which is used for such high-tech
	products as fuel cells, and so-called ``nano-flakes,'' 20 micron thick
	graphite particles that have a broad range of applications from
	advanced computer technology to aerospace.
	We are also dependent on foreign sources for 80% or more of another
	dozen key nonfuel minerals including titanium sponge, which has a wide
	range of important defense applications, including providing upgraded
	armor for the Abrams M1A2 tank; palladium, which is essential to
	catalytic chemistry, and tantalum which is essential to the manufacture
	of corrosion-resistant chemical equipment and microcircuitry.
	Overall, the value of U.S. imports of raw and processed materials
	increased 30% between 2003 and 2004. More important, though, this
	increase occurred even though the tonnage of materials imported
	declined. The reason for the price increase in the face of decreasing
	imports was simple: market competition.
	As with oil, the competition for nonfuel minerals is intensifying,
	and as with oil, the primary reason for this intensification is the
	stunning increase in China's appetite for these commodities.

	THE ROLE OF CHINA
	As noted, China's GDP has been growing at an accelerated pace for
	two decades--in fact doubling in size every eight to ten years. An
	important aspect of this growth is that it has been largely the result
	of spending on capital goods and construction projects which are by
	their nature both energy and mineral intensive. The effect of the
	demand created by this spending has been to spark skyrocketing demand
	for nonfuel minerals and strain production and processing capabilities
	to the limit.
	The extent of the current global shortage of some nonfuel minerals
	and materials is illustrated by the situation in regard to steel. In
	2001, it was estimated that there was somewhere between 10% and 20%
	excess steel processing capacity around the globe. But in 2004, demand
	for steel was so strong that France petitioned the European Mining
	Commission to suspend antidumping duties.
	Although Chinese officials indicate they plan to restrict their
	country's growth rate to around 8%, even that level of expansion will
	place a strain on world mineral markets. Therefore, as with oil,
	competition for nonfuel minerals between China and the industrialized
	nations of the world will remain a permanent fixture of the global
	economy.

	ADDRESSING THE OIL IMPORT PROBLEM
	Given that the perils of America's import dependence are a reality,
	the question is, how can the nation's vulnerability be reduced?
	Perhaps the greatest irony arising from our current energy and
	minerals dilemma is that the answer has been at hand all along: make
	better use of what we have.
	In saying this, I am not advocating some draconian plan that relies
	on effectively hamstringing the economy in the name of reduced energy
	use. Rather, I am saying that America does not suffer from a shortage
	of energy. The simple truth is that America's energy endowment is more
	than sufficient to provide for all of our needs, both today and in the
	future. The only real shortfall that we have is a shortfall of the
	political will to find innovative ways to fully utilize the resources
	we are blessed with.
	For example, there currently are some 104 Trillion cubic feet of
	``stranded'' natural gas resources in Alaska--gas than currently cannot
	reach market due to an inability to transport it. Alaska's natural gas
	could help reduce our dependence on imported oil, if only we were able
	to find a way to get it where it is needed. In the long run, a gas
	pipeline could provide the means for transporting Alaskan gas to
	market, but it will take time to accomplish its construction, and time
	is a luxury we do not have.
	Fortunately, there is another way to take advantage of this
	resource.

	GAS TO LIQUIDS
	The Fischer-Tropsch technology to convert natural gas to liquid
	fuels has existed since the 1920s. It is currently in use in South
	Africa to produce approximately 200,000 barrels of liquid fuel per day.
	It would be possible to build a mobile Fischer-Tropsch processing plant
	on Alaska's North Slope near Prudhoe Bay to convert the stranded gas to
	liquid fuels that could be transported by the Trans-Alaska Pipeline
	System.
	In addition to helping reduce oil imports the project would have
	several added benefits.
	First, the fuel produced in this manner would be extremely clean,
	and would thereby benefit the environment.
	Secondly, as oil production at Prudhoe Bay continues to decline, it
	will, in the near future, fall to a level insufficient to sustain flow
	through the TAPS system. Therefore, a substantial amount of recoverable
	oil might be left behind because it could not be transported. The added
	volume of throughput generated by a gas-to-liquids plant would help
	sustain the levels needed to maintain TAPS operations and thereby
	significantly extend ultimate recovery from the Prudhoe Bay field.
	A third benefit would be the ability to demonstrate the
	practicality of building mobile gas-to-liquids plants for use by the
	Armed Forces as a means of providing fuel in the field.
	Perhaps the most important benefit, however, would be that in
	demonstrating the practicality of converting natural gas to liquids in
	the harsh Alaskan climate, the project would open the door to
	exploiting the vast methane hydrate resources that exist in Alaska.

	METHANE HYDRATES
	Methane Hydrates provide another potentially huge source of energy.
	They were discovered in the 1960s. They consist of methane gas trapped
	in a lattice-like ice and are found largely in ocean bottom sediments
	lying below 450 meters and in permafrost. The Energy Information
	Administration estimates that the United States methane hydrate
	resources in place hold 320,222 Trillion cubic feet of natural gas.
	This is the equivalent of 51.1 Trillion barrels of oil. More important,
	onshore methane hydrate deposits in Alaska are estimated to hold 519
	Trillion cubic feet of natural gas, the equivalent of 82.9 billion
	barrels of oil.
	What makes methane hydrates so promising is the fact that in
	December of 2003, a joint U.S., Japanese and Canadian research program
	to determine if methane hydrates could be produced reported their
	results. The answer was affirmative. According to officials involved in
	the project, it will be possible to produce these resources
	economically within a few years. Alaska's onshore methane hydrates, by
	themselves, would be sufficient to eliminate the need to import oil
	entirely.
	But methane hydrates are not the only option.

	OIL SHALE
	The United States also holds 62.5% of the world's oil shale
	deposits. The oil shale reserves found in the Green River formation
	that extends through Wyoming, Colorado and Utah is estimated to hold
	some 130 billion barrels of recoverable oil. The Eastern Marine
	formation may hold as much as 400 billion barrels.
	The earliest recorded production of oil shale occurred in Autun,
	France in 1929. Even as the first oil well was being drilled in the
	United States in 1859, the first commercial oil shale industry was
	beginning in Scotland. Production there ranged between 1 million and 4
	million tons annually between 1881 and 1955. After 1955, competition
	from cheap oil imports caused production to gradually decline until
	1962 when it ceased.
	While interest in producing U.S. oil shale resources has surfaced
	whenever oil prices rose sharply in response to tight supplies, new oil
	discoveries would drive prices down and make oil shale an uneconomic
	alternative. Oil shale was in effect always a bridesmaid but never a
	bride. The need to be concerned over energy security coupled with
	rising prices may finally provide an incentive to take advantage of
	this prolific resource.

	COAL
	The United States is also richly endowed with coal resources. In
	fact, the U.S. is the ``Saudi Arabia'' of coal holding 25% of the
	world's recoverable coal reserves. Totaling 275.1 billion tons, U.S.
	coal resources are sufficient to meet current production levels for 200
	years. Like natural gas, the technology to convert coal to liquid fuels
	has been long known. Also, new advances in Clean Coal Technology have
	addressed many of the environmental concerns that previously caused
	objections to coal liquefaction and gasification. Moreover, as with oil
	shale, the concern over energy security coupled with the anticipated
	sustained high prices for oil may combine to make synthetic fuels
	produced from coal an economically viable alternative.
	While alternatives like methane hydrates, oil shale and synthetic
	fuels from coal all provide options that could and should be pursued,
	there is another source of fuel to offset oil imports that warrants
	consideration: making full use of our domestic oil and gas resources.

	CONVENTIONAL RESOURCES
	Vast, undeveloped deposits of oil and natural gas lie in areas
	foreclosed to exploration. The Arctic National Wildlife Refuge, for
	example, holds what may be the last onshore ``Super Giant'' oilfield in
	North America. Further, the experience of developing the vast Prudhoe
	Bay oilfield has demonstrated that oil and gas exploration and
	production can be conducted in sensitive environments without causing
	irreparable harm.
	Similarly, there are huge potential deposits of both oil and
	natural gas in offshore areas currently foreclosed to exploitation. As
	with the Arctic, much experience has been gained in developing offshore
	hydrocarbon deposits that shows such resources can be produced in an
	environmentally sound manner.

	NEW TECHNOLOGIES AND ALTERNATIVE FUELS
	In addition to developing our rich domestic energy endowment, it
	also makes sense to encourage both efficiency and non-hydrocarbon
	alternatives. One of the most promising new technologies is the hybrid
	electric vehicle. Although automobile manufacturers may well have
	initially introduced hybrids as a response to pressure from
	environmental interest groups, their public acceptance has far exceeded
	anything that could have been anticipated. As a consequence all of the
	major auto manufactures are seeking to expand their hybrid lines. A
	particularly interesting new development is the so-called ``plug-in''
	hybrid electric which can achieve a fuel efficiency level of several
	hundred miles per gallon.
	Alcohol fuels and other bio-based fuels also can help to offset
	some portion of oil imports. But in the end, it is also important to
	recognize that there are roughly 220 million privately owned cars and
	light trucks in the United States that will continue to require
	conventional fuels to operate. Since their average lifespan is 16.8
	years, the need for conventional fuels will remain with us for decades
	to come. Therefore, options like gas-to-liquids, methane hydrates, oil
	shale and synthetic fuels as well as expanded production of
	conventional oil and gas resources will be necessary if import levels
	are to be reduced.
	What is perhaps most critical in developing a plan to reduce
	America's oil import burden is to recognize that there is no single
	solution. Rather the answer is to do everything. We must take full
	advantage of both conventional and unconventional resources and
	encourage efficiency and new technologies.

	ADDRESSING THE NONFUEL MINERALS PROBLEM
	The problem of nonfuel minerals imports is somewhat more difficult
	to address than that of oil import dependence. The reason for this is
	that there are some mineral commodities that are not found within our
	borders. Therefore, any program to address nonfuel mineral imports must
	take a two-part approach.
	As with domestic energy resources, our dependence on imports for
	some nonfuel minerals is the product of government restrictions. While
	it was the policy of the U.S. government to encourage domestic mineral
	development through the middle of the 20th century, a variety of laws
	and regulations were imposed beginning in 1964 that increasingly
	discouraged domestic mineral development.
	Over the succeeding decades, more and more restrictive regulations
	have been added to the mix with the end result being the decline of our
	extractive industries. The impact of these rules is most dramatically
	illustrated by the fact that North American mineral firms only allocate
	between 7% and 10% of their exploration budgets to the search for
	domestic minerals.
	Clearly, removing unreasonable or excessively restrictive
	regulations will go a long way towards reviving the domestic mineral
	industry and reducing the need to import those minerals that can be
	produced from domestic sources. There still remains, however, the
	problem of meeting the need for minerals that cannot be found at home.
	There are three ways in which this problem can be addressed.
	The first step is to ensure that the government maintains adequate
	stockpiles of those strategic and critical materials we cannot produce
	for ourselves. History has demonstrated that no matter what the cost of
	maintaining a strategic stockpile may be, it is still cheaper than
	attempting to acquire critical materials in a time of crisis through
	the marketplace.
	A second step is to encourage the recycling of those minerals that
	can be retrieved from abandoned equipment. For example, millions of
	automobiles are scrapped each year, and all of them have catalysts that
	contain platinum group metals. Many of these catalysts are retrieved so
	that the platinum group metals they contain can be recovered. We should
	ensure that they all are.
	A third step is to aggressively research alternatives to those
	nonfuel mineral commodities we cannot produce for ourselves. In this
	way the need for imports can be permanently ended.

	CONCLUSION
	I began my testimony by saying that America was rushing headlong
	into disaster. I stand by that statement. Our transoceanic energy
	resources are already under assault and it is just a matter of time
	before forces hostile to our nation and what it stands for succeed in
	causing a major disruption of supplies. Whether it is the result of a
	terrorist act or an intentional embargo as occurred in 1973 is of
	little consequence. What is important is to understand that it is
	coming and coming soon--probably within the next two years. When it
	does happen we should not again find ourselves asking why nothing was
	done to prevent it.
	Even if there is no supply disruption, however, there remains the
	fact that increasing competition for energy resources will continue to
	exert an upwards pressure on prices. This holds out the prospect of
	high energy prices reducing economic growth, fueling inflation and
	further aggravating our balance of trade.
	Most important, it also means that we will continue to export jobs
	abroad.
	And also bear in mind that some portion of every dollar we spend to
	purchase transoceanic oil finds its way into the hands of people who
	intend to do us harm.
	I also repeat that the disaster we are facing is of our own making.
	The United States is endowed with a resource base more than adequate to
	meet its needs--if only we are able to make full use of it.
	The choice we face is simple. We can either find the political will
	to do those things necessary to break the shackles of oil and nonfuel
	mineral imports, or we can continue to stand idly by and allow events
	to overwhelm us. If we fail to find the courage to do what is right, we
	will have no one to blame but ourselves when the next crisis wreaks
	havoc throughout our economy.
	______

	Mr. Gibbons. Thank you very much. We appreciate, certainly,
	your testimony. It's very helpful, as I said about the other
	testimony before the Committee as well. And we will turn now to
	Mr. Hegburg for your comments. Welcome, the floor is yours, and
	I look forward to your testimony as well.

	STATEMENT OF ALAN S. HEGBURG, SENIOR FELLOW,
	CSIS ENERGY PROGRAM, THE SCOWCROFT GROUP

	Mr. Hegburg. Thank you, Mr. Chairman. And thank you very
	much for the invitation to appear before you.
	If I could, I would just like the record to show that I'm
	here on behalf of the CSIS Energy Program, and solely on their
	behalf, and I don't speak for anyone else.
	Mr. Gibbons. Certainly.
	Mr. Hegburg. I would like to just pick up on something that
	was mentioned this morning, which is the nature of the oil
	market as it is, and how you look at it, and what that means
	going forward for the United States.
	There are several interpretations as to what's going on in
	the market, but two of them are quite important for the next
	round of investment in the oil and gas business, particularly
	in the oil business. One is that this is a bubble market, this
	is a very high-priced market, and it's an analysis that's held
	mostly by energy economists that because it's an energy market,
	it will decline rapidly, and then we will come back again. And
	the cycle of going up and coming down is very short.
	Now, if you're an investor as an oil company, that means
	that you're looking at a very short term where you're going to
	be at high prices, and then all of a sudden very quickly, you
	are at low prices. So I think there is a logical explanation
	for why companies are not investing.
	Not investing anywhere in the oil sector--although
	investment is taking place, but not at the rates that are
	needed--comes at a time when the entire surplus of this sector
	has been worked off. Earlier we discussed the surplus on the
	oil-producing side and surge capacity and how that has come
	down to essentially a million barrels a day for an 80-million-
	barrel-a-day demand. The surplus in refining capacity. The
	surplus in the service sector and probably in pipelines too,
	not just in the United States, but worldwide; pipelines are
	being built elsewhere, but, in fact, a lot of investment needs
	to come into this infrastructure to meet the demand numbers
	that are out there.
	The second interpretation, which is a longer
	interpretation, is that we are at a structural change in the
	oil market in that we're at higher price levels, and we're
	going to see these levels for some amount of time. So the
	investment cycle is longer, it's not shorter, it's not 3 years,
	it may be 10 years; it may be longer than that, which means you
	should invest because you can get your money back relatively
	quickly, and then if the prices are going to stay high, you can
	generally make money, as a private investor, over a fair amount
	of years.
	Those are really two fundamentally different views of what
	the future holds, but they have obviously severe implications
	for the structure and the ability to supply the demand which we
	see in the short term. And I think Guy Caruso talked a bit
	about that in terms of the period after 2025, but, in fact, the
	period of 2010 to 2015 actually is quite important. And I think
	in the short term, as was mentioned, it's particularly
	important in the refining sector since the capacity in the
	refining sector is very high and it's being used very much.
	That means unless there is investment in the refining sector of
	the United States, we will see a fair amount of product
	imports.
	Now product imports have historically come from the
	Caribbean and from the Atlantic basin. The Atlantic basin
	product import supply is coming down, and that suggests that
	we're going to have to rely more and more on the Caribbean. And
	there is very few refinery positions left in the Caribbean,
	which means you have to import product from a longer distance,
	which means they're more expensive. So the refining sector,
	given the nature of it on a worldwide basis, is an equally
	important need in this society, as the producing sector is.
	And it seems to me for Congress, in its deliberations and
	looking forward, one of the issues--and I don't do policy
	issues for Congress, I'm not a lobbyist, but one of the issues
	is how do you encourage the financial markets and the capital
	markets to invest at a time when they're hesitant to invest
	because their market outlook is too short?
	Thank you very much, Mr. Chairman.
	[The prepared statement of Mr. Hegburg follows:]

	Statement of Alan Hegburg, Senior Fellow, Energy Program,
	Center for Strategic and International Studies, Washington, D.C.

	Mr. Chairman, Members of the committee, I appreciate the
	opportunity to appear before you today to discuss recent global oil
	developments and their implications for U.S. energy requirements and
	commercial markets.
	I am appearing on behalf of the Center for Strategic and
	International Studies where I am a Senior Fellow with the Energy
	Program. The remarks are drawn from some recent CSIS analysis as well
	as from my own personal observations and experience, including policy
	positions in the U.S. government and almost 20 years in the energy
	industry.
	Recent Developments.
	Over the past 18 months there have been three significant
	developments which have prompted serious assessment of the implications
	for U.S. energy supply for the immediate period as well as for the long
	term.
	They are:
	<bullet> Forecasts from the EIA predict a 50 percent increase in
	worldwide oil demand over the next two decades. These demand forecasts
	take place at a time when the surplus in oil surge capacity is at its
	lowest level in 30 years.
	<bullet> Unexpected high oil prices in 2004. Prices increased
	rapidly, similar to the increases in the 1970s, suggesting a structural
	shift in oil prices to a higher level. Surprisingly, this occurred
	without prompting a major public outcry and with little impact on
	short-term world economic growth.
	<bullet> The emergence of new competitors in the international
	market place determined to secure short term oil imports as well as
	longer term oil investments.
	These and related developments have prompted a reassessment of the
	implication for U.S. energy policy as it seeks to adjust and manage a
	changed international energy market.
	Demand forecasts.
	EIA's long-term forecast for oil demand is similar to that of the
	International Energy Agency. Behind the 50 percent increase in oil
	demand to 2025 is a short-term demand forecast reflecting a continuing
	dramatic increase in the growth of oil demand.
	Historically, short-term demand has grown only slowly. For example,
	it took 18 years for oil demand to grow from 60 to 70 mmb/d. However
	the increase from 70 to 80 mmb/d took only 8 years. Now, the IEA
	forecasts oil demand to exceed 90 mmb/d in 2010, only five years from
	now.
	This pace of increase will require dramatic increases in investment
	and infrastructure all along the oil supply chain.
	Even if continued high prices reduce this rate of growth, and
	absent a major economic or financial change, oil demand is expected to
	remain on an upward trajectory for the foreseeable future.
	Given the long lead times in the oil investment cycle, the
	increased supply to meet this demand will have to come from areas with
	some surplus capacity, primarily the Middle East, as well as from new
	production in the Caspian, Latin America, Africa, West Africa, and the
	U.S. offshore Gulf of Mexico.
	Beyond 2010-2015, production from the Arabian Gulf will account for
	the major share of incremental supply to the world market.
	With U.S. oil production flattening increases in U.S. domestic
	consumption will be met increasingly from imports. This increased
	dependency will include both crude oil and, absent significant
	investment in domestic refining capacity, refined petroleum products.
	Oil Prices
	The period 2003-2004 witnessed a wide variety of supply
	developments contributing to the rapid increase in prices. These
	included: declines in Venezuelan production; domestic strife in Nigeria
	leading to reduced crude exports; strikes in Norway; concern over
	Russia's ability to sustain production and exports as a result of the
	Yukos affair and pipeline capacity concerns; sabotage and security
	concerns in Iraq; and, the sustained loss of U.S. production in the
	Gulf of Mexico resulting from Hurricane Ivan.
	Oil prices remained high in spite of increases in production from
	OPEC member countries. The quality of the OPEC crudes being offered to
	the market was less attractive to refiners who were competing for the
	higher quality crude oil leading to price discounting for the surge
	capacity offered to the markets.
	The most significant cause of higher oil prices was higher demand,
	however. Growth in Chinese and U.S. oil demand accounted for the
	majority of the worldwide increase.
	With supply continuing to be stretched and demand forecasts
	continuing to be bullish, most analysts expect oil prices to remain at
	or near current levels for the next year or two. Whether these prices
	demonstrate a cyclical or a structural change in oil prices is a major
	question.
	For many of us the change appears structural as industry and
	consumers adjust to the higher price levels. At the same time, there is
	also likely to be a correction in response to market developments.
	New Competitors in the Market Place
	The emergence of China in both the trading and investment markets
	has prompted speculation if not concern. In the trading market, China
	has emerged as a new competitor for worldwide crude oil in response to
	its increasing demand and short term peaking of domestic production.
	Of equal importance is the emergence of Chinese investment in both
	OPEC and non-OPEC countries. Chinese companies have aggressively
	pursued oil investment opportunities in, inter alia, Kazakhstan, Sudan
	and Australia, and is considering deals in Venezuela, Canada, Russia
	and Iran. China, as a matter of strategic importance, appears
	determined to lock up long-term supplies in expectation of continuing
	tight markets.
	Private companies complain that the ability of the Chinese to
	outbid them for attractive prospects reflects their lower cost of
	capital and ability to offer political sweeteners and perhaps guarantee
	better prices. At the same time, there is at least one example of China
	winning a closed auction indicating that the record of Chinese
	investment practices is mixed.
	The practice of tying commercial investment to politics and finance
	to acquire oil supplies is not new. The French government pursued a
	similar strategy in the late 1970s rather than join the International
	Energy Agency with its reliance on multilateral cooperation and market-
	based strategies.
	Whatever the nature of the deals, Chinese oil trading and
	investment strategies carry the potential to lock up attractive
	additional opportunities at the expense of private investors and, of
	equal importance, reduce the liquidity in the trading market as the
	crude it obtains is likely to be dedicated solely for use in the
	Chinese market.
	Bilateral oil deals involving consuming governments are a two edged
	sword for a producing country. On the one hand they appear to offer a
	guaranteed and growing market for incremental production, something
	producers have sought for years. However such access may come at the
	expense of price, as Chinese investors and buyers try to leverage
	guaranteed access to the market in exchange for lower prices.

	Implications for U.S. policy
	U.S. policy since the Carter Administration has been to rely on
	private investment, international commercial decisions on investment
	and trading activities, and access to a generally fungible
	international market to supply the United States. The United States has
	been able to leverage access to an attractive domestic market in which
	to invest and sell under commercial terms to encourage sales and
	investment. This strategy has worked.
	The question is whether this strategy can continue to assure
	supplies at the levels required and at acceptable prices.
	Worldwide investment over the past year in the oil sector has
	reportedly been below levels needed to effectively meet increasing
	short-term demand. In addition, and in spite of higher prices, private
	companies appear to have had difficulty replacing oil reserves over the
	past year. The reasons appear to be numerous and involve a failure to
	obtain access to promising opportunities, delays in bringing new
	production on stream, and changes in investment terms.
	Several producing governments have radically changed investment
	terms by increasing the government share of the investment,
	unilaterally changing investment laws, and increasing the government
	financial take.
	These developments can have serious consequences. They can reduce
	the attractiveness of international investment particularly in those
	countries expected to provide incremental production. Abrupt government
	decisions to abrogate the financial terms of the investment contract
	can, at a minimum, reduce the reinvestment opportunities needed to
	continue to increase production. Such action also reduces the amount of
	money available to private investors for investment. And, most
	importantly, these practices tend to have a dampening affect on the
	addition of new short term oil production to meet the expected demand
	growth, helping to maintain high prices if not increase them while
	doing little to improve the supply demand balance over the mid to
	longer term.
	It is in this context in which the debate over the future of U.S.
	energy policy is being framed.
	______

	Mr. Gibbons. Thank you very much, Mr. Hegburg. And I
	appreciate your testimony, too, because yours is the economics
	of investment, which is very important.
	I always want to ask a few questions, if I may, and
	beginning with you, Mr. Hegburg, because what I see is a
	difference between large national oil companies and small
	private oil companies and the way that they're able to--small
	companies aren't able, I should say, as readily or with the
	same economic efficiency as national oil companies--to attract
	capital. Why--how do you explain that? I mean, they're all
	dealing with the same commodity at the end, but we've got a
	lower rate or a lower or a better--or sweeter, I should say--
	capital infusion with national oil companies than with the
	smaller private oil companies. Why is that?
	Mr. Hegburg. Mr. Chairman, can I just make sure we're
	talking about the same thing?
	Mr. Gibbons. You must, because you're talking to a
	geologist here that doesn't know what he's saying. Go ahead.
	Mr. Hegburg. National oil companies, to my mind, is a State
	oil company, such as Saudi or Amoco or Kuwait Petroleum
	Company. Then there's the international majors, which are
	privately owned-- ExxonMobil, BP, Shell. Then there are the
	smaller, independent companies which are the companies that
	vary greatly in size in the United States. Also, there are a
	number of independents overseas in other countries.
	If the question is can the smaller companies attract
	capital? Some of the larger independent companies can, and they
	are in the international marketplace, and you will see them in
	Egypt and Algeria. Some of them are very interested in Libya
	and have actually obtained acreage. Their strategies vary in
	terms of investment. They will sometimes try to get a position
	and then farm out that position to a larger, better financed
	company to help them pay for it and take a smaller share,
	depending on what they've found.
	Also, they may be in consortia. International companies,
	both the independents as well as the large international
	majors, normally bid in consortia, as opposed to individually.
	And that means smaller companies can come in and take in 5 or
	10 percent, which reflects their position. And it happened in
	Azerbaijan; for example, there were a number of smaller
	companies that came into consortia in the early days of
	Azerbaijan.
	The very small independents in the United States obviously
	have a problem making--having enough money to play in the big
	areas, so unless they consolidate or find something else, they
	are essentially excluded from the international marketplace.
	Now, they can go to Canada, which is relatively simple for them
	to invest, but getting into a larger play somewhere
	internationally is partly a function of capital, partly a
	function of human resources. And just from my own experience,
	at least one large company I'm aware of, when Russia opened up,
	decided not to go into Russia because it would have tied up its
	human resource capacity in the company, which meant it would
	have committed, its geologists and financial people and lawyers
	and production engineers would have been committed to Russia,
	and the payouts in Russia look very long.
	So it was not an economic decision to go into Russia, in
	spite of the high degree of probability that they could find
	reserves.
	Mr. Gibbons. So really the difference between large
	international companies and the smaller private companies in
	terms of the cost of capital required to produce the same
	product or the same oil from the same oil field is basically
	due to, in terms of what I understood, the risk involved with a
	smaller company versus a larger company?
	Mr. Hegburg. I think that's it. There is a number of risk
	factors that a smaller company is not willing to take on. Large
	companies will take on a substantial amount of risk as long as
	their portfolio is diversified, and that they have some very
	high-risk properties and some very low-risk properties; so
	they're not all in one place and their risk is very high. And
	they have decided on their capital budgets that that's where
	they are going to put their investment.
	And you will hear anecdotally in the industry now among the
	very large companies that they have a lot of cash, their
	capital budgets are large, but they're not being spent because
	they have decided to focus their efforts in 1, 2, or 3
	countries. And this is a change because in the old days, if you
	look back since 1979, companies invested throughout the world
	in a variety of places and brought a number of new areas to the
	floor, Angola was one, Azerbaijan is one, Kazakhstan is one.
	These are all new producers in the marketplace. Azerbaijan was
	an old producer in the Russia system, but it's a new producer
	in the international marketplace. And that was largely because
	companies went out and invested in a wide range of places, in
	part because they did not find the U.S. Market attractive for
	investment for a variety of reasons, or in part because new
	areas were opened up, or in part because some of the OPEC
	countries did not allow them to invest, and of course that was
	Iran--because of U.S. sanctions--Saudi Arabia, Kuwait and the
	non-OPEC Mexico, which you couldn't invest.
	So you went and looked at those places you think you could
	find oil. And of course that's what brought a huge amount of
	investment to China, a lot of oil investment went into China.
	And they've had relatively good success, particularly in the
	Bohai and down in the South China Sea finding oil, but it was
	driven, in part, by opening up to foreign investment.
	Mr. Gibbons. Mr. Copulos, we heard testimony from the IEA
	representatives that were here talking about the 2020 timeframe
	for China and the increase of about 1.4-million-barrels-per-day
	consumption, which I was somewhat surprised, in reading through
	the testimony, that they say that that sort of change in the
	economic picture for China will have very little influence--or
	not very little influence on overall market trends. Do you
	agree with that or do you disagree with that?
	Mr. Copulos. No, I think it's utter nonsense. China and
	India together, particular--Asia in general, but China and
	India in particular are going to be driving the world oil
	market for decades to come. They said that you could see--for
	example, at the same time they said you could see China
	automobile ownership increase from one in 1,000 to one in 100.
	Well, if you do the math, that's 120 million automobiles that
	suddenly are on the road. Now that's going to be a major
	factor.
	Also, at the same time that you're seeing this growth of
	Chinese and Indian and probably Philippine and Indonesian
	consumption, you're also going to see a decline in a lot of the
	world's older oil fields unless a lot more is found, and
	certainly in terms of the U.S. So it means, among other things,
	that we're going to be competing much more vigorously with the
	Chinese for overseas supplies if we don't do something more to
	develop what we have here at home.
	Mr. Gibbons. Well, can we make up our own energy shortfalls
	by depending upon increases in efficiency and renewal of energy
	sources in this country?
	Mr. Copulos. No. When people talk about, for example, the
	CAFE standard automobile mileage, if today you wanted to offset
	our imports using CAFE, you would have to average 420 miles to
	the gallon. Now, my car doesn't quite do that, but the trouble
	is that's a moving target, because as we add more automobiles
	and domestic production were to decline, you would have to be
	running ever faster to stay in place. So it's one of those
	things designed by the left.
	Mr. Gibbons. So if we do nothing, in other words, if we
	keep status quo on our domestic production in this country,
	we're going to ultimately end up with an enormous trade deficit
	by the imported energy alone. What do we need to do in this
	country, in the United States, to increase domestic production
	or domestic--from domestic supplies of oil and gas?
	Mr. Copulos. Well, let me begin by saying there is no need
	for us to be importing any oil whatsoever, we can do it
	domestically. And what we need to do first and foremost is to
	open up those areas to development that are most evident where
	we know we can do things. For example, if we went into Alaska,
	we've got 104 trillion cubic feet of stranded gas up in Alaska.
	If you were to build a gas-to-liquids plant up there, convert
	that, that's 16.6 billion barrels oil equivalent. If you went
	into ANWR next door, the U.S. Geological Survey estimates that
	at 10 billion barrels--of course they've never been right on an
	estimate, in my recollection, they tend to be very low, but
	let's take their number, 10 billion barrels, then there's an
	onshore deposit of methane hydrates, which is equivalent to 519
	trillion cubic feet of gas, or about 82.9 billion barrels of
	oil converted from gas to liquids to fuel. So right there you
	have 4 times our current proved reserves in just those 3 items.
	Then we have our offshore oil and gas, which is an enormous
	resource we've barely tapped. We have 500--and I'm using the
	low USGS estimates on this by the way--530 billion barrels of
	oil equivalent in oil shales, that's twice Saudi Arabia's prove
	reserves. We've got 275.1 million tons of coal which can be
	converted using clean coal technology, and that doesn't even
	begin to get the real foreign burner, which is methane hydrate.
	So as I said, we've got 320,222 trillion cubic feet of natural
	gas, 51.1 trillion barrels of oil. So we can do it.
	What has been lacking is not the resources, what has been
	lacking is not the technology--and I should also add, we do
	have a lot of alternatives that have value--what has been
	lacking is a political will, and until such time as we find the
	political will, we're going to stumble along.
	I was telling one of the staff people here I ran across a
	piece I wrote in 1978 that said that by the year 2010, we would
	be importing 70 percent of our oil, and we would be paying $65
	a barrel if we did nothing to resolve the issue. Well, 5 years
	from now--I may have been a tad high on the percentage and a
	tad low on the price, but we're pretty much in that ballpark.
	And I didn't come to that conclusion because I'm some kind of a
	genius, it's because I could add and subtract and look at
	decline rates, and increases in consumption. It's not rocket
	science to figure it out. It's also not rocket science to
	figure out the solution, which is to use what we have, use it
	efficiently, use it cleanly, but use it.
	Mr. Gibbons. What will it take to move the political
	pendulum, in your opinion, in a direction which will allow for
	decisions to be made, policy decisions to be made in this
	country to promote, for example, the utilization of oil shale
	methane hydrates, additional oil fields that we now know are
	out there, ANWR, et cetera; what is it going to take?
	Mr. Copulos. Well, I have seen it twice in my lifetime--
	I've been doing this about 31 years--and the first time was the
	construction of the Trans-Alaska Pipeline System, which had
	enormous opposition until the 1973 embargo, and all of a sudden
	prices went through the roof, supplies were short. The second
	time was during the Iranian oil boycott war, about three things
	mixed in altogether there, when again, prices went up real
	high, supplies were short. And we made so much progress on
	that, few people know this, that by October of 1985, Saudi
	Arabian exports to the United States had fallen to 27,000
	barrels a day. It panicked them. They entered into force
	measure provisions in their contract to cut oil prices in half.
	By April Fools Day, 1986, the spa price was actually $9.99, but
	the result was they went from 27,000 barrels a day of exports
	to the U.S. To over 800,000 in a very short period of time. And
	in the process, by cutting the price, destroyed much of the
	U.S. Independent oil industry and caused a huge number of
	stripper walls to be shut in, losing an enormous amount of
	domestic production. Had they not done that, I don't think we
	would be sitting here today talking about this issue.
	So it's two things, it's price and supply; and frankly,
	supply more than price. People will find a way to pay for
	energy no matter what it costs, but when there are gasoline
	lines out there they start shooting each other.
	Mr. Gibbons. Mr. Hegburg, you wanted to make a statement.
	Mr. Hegburg. Thank you, Mr. Chairman.
	Could I just make a couple of observations? I don't want to
	get into the debate about ANWR and CAFE standards, but it seems
	to me there's a couple of things to look for. One is, in the
	transportation fuels market today in this country, we're seeing
	alternative fuel penetrate the market, so the market may be
	driving us somewhere to reduce our reliance on pure gasoline;
	that is possible, and that will actually have an impact on our
	transportation fuel demand, which is the core of the import
	problem for the United States. I'm not saying it's going to be
	within a couple of years, but in fact it is happening.
	And it may take a different form, but the fact that we do
	see alternative fuels emerging in the marketplace--and not just
	what CNG and others suggest, but there is an opportunity out
	there to reduce the demand that we have and the growth in
	demand for gasoline in this country.
	Mr. Gibbons. Let me follow that up because I think that
	leads to a very important part of this question, part of the
	equation, and that is that would require a dramatic increase,
	as you stated, in investment in infrastructure because
	alternative fuels are going to require, as Mr. Peterson said,
	construction of new highly complex, very technical shipping
	requirements, ports for LNG, but if you've got some of these
	alternative fuels, you're going to require a new infrastructure
	to replace current and existing infrastructure.
	Where do we go to get that level of international or
	national investment that's going to be required for this?
	Mr. Hegburg. Thank you, Mr. Chairman. I was keeping metric
	gas outside the issue of transportation fuel and focusing on
	the oil alternatives to oil transportation and better use of
	transportation fuels in the oil sector. There is no question
	infrastructure investments will have to be made, we're going to
	have to make them anyway. I mean, the point is, as I was saying
	earlier, we need more infrastructure investment in the United
	States, whether it's in imports, whether it's in refining, and
	everything else. And it happens when returns attract the
	capital. And if you anecdotally talk to refiners today and ask
	them why are they not investing in refining capacity at
	adequate levels, you think, well, it's the environmental
	question, it's the permitting question, and it's generally the
	return question. They are very hesitant in refining sector to
	make huge amounts of investment which is what the refining
	sector requires because they are very uncertain, particularly
	if they have a 3-year time horizon, that they could actually
	end up with very high-cost investment and very, very low or
	negative returns. So the markets have to sort of pick up on
	that.
	Mr. Gibbons. Very briefly. What does the government need to
	do to ensure or to encourage that kind of investment at this
	point, then?
	Mr. Hegburg. I hate to speak for the industry, because I
	have no idea what they would like from the government. In some
	places they would like better depreciation rates, they would
	like--some companies would like, in the case of Alaska, as you
	know, guaranteed rates at the well head for natural gas, and I
	think that is to protect from the down price pressures on
	natural gas, because I think as we have discussed earlier, LNG
	is likely to drive prices down in the United States, not up,
	and if that's the case, then the Alaskan gas is going to be
	very much like long-hall Russian gas in the 1970s, it was very
	expensive, and the net backs at the well head were very, very
	low. So there will be pressures for that; obviously there would
	be pressures for some kinds of fiscal incentives. I'm sure that
	you've all heard this from companies, but those are the kinds
	of things I can imagine that would be on the table for them
	when they start going down this road before they go to the
	investment decision.
	Mr. Gibbons. Well, it seems to me, then, it's going to take
	almost a crisis of some sort before government reacts then to
	some pressure from an industry to get them to move; because
	normally government doesn't move voluntarily in any direction
	unless there is external pressure of a magnitude which would
	justify, you know, changes to our policy at this point in time.
	So are we going to have to reach a crisis before we get
	government to act to do these things that should be done in a
	long-term anticipation of where this country's energy needs are
	going to be?
	Mr. Hegburg. Thank you, Mr. Chairman. I agree with you. A
	number of us have been surprised when prices went up over the
	last year or so that there was no huge reaction of the public
	at large. It did have a demand impact, obviously, not very
	great, unlike 1979 when people were lined up around the block
	to get oil.
	What will it take? It may take a crisis, that's
	historically how we actually do public policy often. It also
	may just take, as I mentioned earlier, market changes,
	fundamental market changes which sort of occur in the current
	situation without a great deal of crisis when companies decide
	there is something to this, this market has legs, we need to be
	in this market, we will be late to the market, but we need to
	be in the market.
	And it's conceivable that in the industry itself--and I
	think over the past month or so I have noticed a couple of CEOs
	are talking about energy policy and the need for energy policy
	and the need for changes in energy policy. Now they're not
	specific, but when the industry participants start talking
	about the need for changes, that suggests to me that they are
	willing to be public and say things that they otherwise
	wouldn't say in a marketplace where they were perfectly
	satisfied with what was going on.
	Mr. Gibbons. Before I release you gentlemen from this
	panel, I want to go back to Mr. Copulos, who talked a little
	bit about the increase in our dependency on 17 commodities,
	commodities that I think we're 100 percent dependent upon in
	this country. And you know that the value of imported raw and
	processed mineral commodities has increased, even though the
	volume of imports has declined.
	Do you believe that we have a sound policy today regarding
	this problem; or do we need to have a new policy, an Interior
	Department policy for not only recognizing, but collecting the
	information for this, that we're now seeing being stripped from
	our inventory of information that we collect all this?
	So I guess two parts of that question: One, the economics
	of 100 percent dependence on 17 commodities. And second, the
	removal of information from our ability to collect that data
	and know where that data is leading us.
	Mr. Copulos. Well, to answer your first part, I come at
	this from a perspective of having been the author of the one
	and only Strategic Minerals Report done by the National
	Strategic Minerals Council in the White House--it was abolished
	right after that--and one of the things we learned at that
	time--
	Mr. Gibbons. When was that produced?
	Mr. Copulos. 1988. I actually have a copy somewhere in my
	files.
	What we saw then was there was a lot of pressure to get rid
	of stockpiles, strategic stockpiles for budgetary reasons, one
	would be to sell it to help alleviate the deficit. The only
	trouble with that strategy is, as we learned in World War II
	and during the Korean War and many other times in our history,
	was that no matter what the stockpile costs--and we're only
	talking about minerals we can't produce ourselves and don't
	have a substitute for--it's a fraction of what it's going to
	cost you to--stockpiling is going to be a fraction of what it's
	going to cost you if you have to buy it in times of crisis.
	We allowed our World War II stockpiles to be sold off and
	decline immediately after--in the immediate post-war period,
	Korea came along and we paid 8 to 10 times their value to
	replace them in a very short period of time under crisis
	conditions, which caused all sorts of other problems. When the
	Korean War broke out and during the Vietnam War, we had been
	dumping some of our nickel stockpiles, there was a Canadian
	nickel strike, and all of a sudden we wound up short of
	nickels. These things happen.
	And so we have to hold ourselves harmless against them,
	especially when you're talking about, for example, gallium;
	gallium arsenide is fundamental to the manufacture of computer
	chips. And I don't think there is anyone who would argue that
	today the computer is not an essential element of our society,
	it also happens to be an essential element of our national
	defense with the new electronic battlefield that we've seen
	operate so effectively.
	Graphite, which we tend to think of as pencils, is also
	what is being used to manufacture microchips. So we need a
	stockpile. Where we can develop substitutes through R&D we
	should. And we should also look into recycling. There are a lot
	of things like millable metals, and so on that you can recover
	from through recycling. And a lot of that's done, perhaps we
	need to make sure it's done to the maximum degree possible.
	Now in terms of information, one of the reasons we were
	able to do the report that we did in 1988 is we did have access
	to that information, We had good information. You can't make
	good decisions without good information. I'm always in favor of
	having as much information available to our legislators as
	possible because the decisions they make are far too important
	to be made in the absence.
	And if I might, I do want to add one brief thing that gets
	us back to energy a little bit. Talking about alternatives,
	because I think one thing we need to really get into the record
	and start understanding is to start being honest about what
	alternative energy is and is not doing in our economy.
	On the transportation sector, if you factor out alcohol
	fuels that are used as an octane booster and inoxygenate an
	extender. There are about 175,000 alternative fuel vehicles on
	the road today, the bulk of which you're seeing is your natural
	gas. So let's not argue that they are making a lot of inroads,
	it's simply not true, and we're fooling ourselves if we say
	they are.
	The other thing is, in many cases the alternative fuel
	vehicles that are out there are dual-fueled, and they're using
	gasoline instead, and I can give you a longer list of examples.
	That's not to say they can't be used, shouldn't be used, or we
	shouldn't encourage them, but I think one of the things we need
	to do is start making sure that when people do acquire an
	alternative fuel vehicle, they actually use the fuel.
	The second thing is we have to bear in mind that there are
	220 million cars and light trucks that are currently in the
	United States today; they need conventional fuels, you're not
	going to go back and retrofit them, they've got an average life
	span of 16.8 years. And as long as they're on the road we're
	going to need--we looked at this in our 2003 report, and it was
	our estimate that it would take 25 years to make a transition
	from our current fuel mix to alternatives. I think that figure
	is still valid. It can be done, but we need to first make a
	decision that we want to do it.
	Mr. Gibbons. Thank you both very much. We're, of course,
	running out of time here for our panels, and I just wanted to
	sum up--first of all, I would like to show a slide if I could,
	if we could bring it up on the screen there for not just the
	panel, but for the audience as well.
	As you look at that graphic up there, it's pretty much of a
	statement of the balance between the economic and environmental
	progress we've made between 1970 and the year 2000. And as you
	can see, since 1970, there have been emissions of six criteria
	pollutants that have dropped between 28 and 98 percent. And
	while in America we saw 164 percent increase in the GDP, a 37
	percent increase in population, a 42 percent increase in energy
	consumption, and a 140 percent increase in vehicle miles
	driven.
	Now, what this says is that we have significantly increased
	our gross domestic product in this country by vehicle miles
	driven, while at the same time reducing pollutants in six
	important criteria for air pollution.
	I don't think we could achieve the reduction in our
	pollutants or the increase in the economic standard of this
	country without the state-of-the-art pollution controls and
	energy efficiencies from our factories, from manufacturing, in
	vehicles, and offices in homes throughout. So I think what the
	point of this slide is that it's clear the United States has
	the technology to both improve its economic base, as well as
	address air quality standards and reduce the pollutants in the
	air as well. So to me it's a very important indicator of the
	American ingenuity, the entrepreneurial skills in this country
	in order to balance out the economy that we have in this
	country.
	And if we can go to slide 2, I think this is what we're
	faced with now as we look over there. We're looking at the
	problem of having areas of this country which are known sources
	of--known areas where there are resources for this country to
	develop, but they are off limits. When you look at that area
	for California, the east coast, the Florida coast and the Gulf
	of Mexico, the center part of the Rockies, all of that's
	literally off limits to oil and gas exploration and
	development. And as this country moves forward with its
	economic expansion, the population expansion, the demand for
	energy in this country can only increase if we expect to
	maintain our economic advantage in the world, and I think it's
	very clear to everybody and anyone who looks at this photograph
	that we've got to address some of the problems we have with the
	restrictions on our exploration for oil and gas if we're going
	to be able to supply the demand, supply the needs of this
	country. Even in, as many of you have said, the face of
	alternative fuels which are out there--which are necessary,
	they're needed, they're a critical component to the energy and
	economic picture of this country, but we've got to start
	looking at where we can produce these fuels, and what are our
	restrictions and why are we restricting ourselves from that.
	That, I think, was the fact and the issue that Mr. Peterson was
	talking about.
	We have created our own binding restriction on this country
	by ourselves by refusing to allow oil and gas exploration--for
	whatever reason, whether it's aesthetic purposes, NIMBY
	purposes, whatever you want to call it, the not-in-by-back-
	yard-issue, which I think hurts us, harms us economically
	tremendously in our ability to get over the importation of
	foreign sources of energy for this country.
	With that said, let me wrap this up because many of you
	have been here longer than had anticipated for this hearing. I
	do want to thank you gentlemen, and as I said to the previous
	panel, we will submit written questions to you, we would ask
	that you look at those questions, and of course respond to us
	in writing for additional questions that me or members or staff
	of this Committee may have. With that, I want to thank both of
	you very much for sticking around that extra time,
	understanding the Congressional schedule being part of our
	Committee, giving us what I think is probably some of the most
	insightful testimony and interesting facts with regard to where
	this country is going regarding our energy portfolios, where
	we're going economically. Where we need to be going in the
	future is a very critical policy decision that we in Congress
	have to make. And your assistance, your help, your insight and
	guidance is a big part of that overall picture.
	So with that I want to thank you both. I want to release
	the second panel, and with that, in addition, this Subcommittee
	hearing is adjourned.
	[Whereupon, at 12:40 p.m., the Subcommittee was adjourned.]

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