[House Hearing, 109 Congress]
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                  WORLD CRUDE-OIL PRICING
_____________________________________________________________________

                     HEARING

                   BEFORE THE

          COMMITTEE ON ENERGY AND

                  COMMERCE

         HOUSE OF REPRESENTATIVES

        ONE HUNDRED NINTH CONGRESS

                SECOND SESSION

                    ________

                    MAY 4, 2006
                    ________

              Serial No. 109-96

                    ________

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                      COMMITTEE ON ENERGY AND COMMERCE
                         Joe Barton, Texas, Chairman                  
Ralph M. Hall, Texas                         John D. Dingell, Michigan
Michael Bilirakis, Florida                    Ranking Member
  Vice Chairman                              Henry A. Waxman, California
Fred Upton, Michigan                         Edward J. Markey, Massachusetts
Cliff Stearns, Florida                       Rick Boucher, Virginia
Paul E. Gillmor, Ohio                        Edolphus Towns, New York
Nathan Deal, Georgia                         Frank Pallone, Jr., New Jersey
Ed Whitfield, Kentucky                       Sherrod Brown, Ohio
Charlie Norwood, Georgia                     Bart Gordon, Tennessee
Barbara Cubin, Wyoming                       Bobby L. Rush, Illinois
John Shimkus, Illinois                       Anna G. Eshoo, California
Heather Wilson, New Mexico                   Bart Stupak, Michigan
John B. Shadegg, Arizona                     Eliot L. Engel, New York
Charles W. "Chip" Pickering,  Mississippi    Albert R. Wynn, Maryland
  Vice Chairman                              Gene Green, Texas
Vito Fossella, New York                      Ted Strickland, Ohio
Roy Blunt, Missouri                          Diana DeGette, Colorado
Steve Buyer, Indiana                         Lois Capps, California
George Radanovich, California                Mike Doyle, Pennsylvania
Charles F. Bass, New Hampshire               Tom Allen, Maine
Joseph R. Pitts, Pennsylvania                Jim Davis, Florida
Mary Bono, California                        Jan Schakowsky, Illinois
Greg Walden, Oregon                          Hilda L. Solis, California
Lee Terry, Nebraska                          Charles A. Gonzalez, Texas
Mike Ferguson, New Jersey                    Jay Inslee, Washington
Mike Rogers, Michigan                        Tammy Baldwin, Wisconsin
C.L. "Butch" Otter, Idaho                    Mike Ross, Arkansas
Sue Myrick, North Carolina
John Sullivan, Oklahoma
Tim Murphy, Pennsylvania
Michael C. Burgess, Texas
Marsha Blackburn, Tennessee
                         Bud Albright, Staff Director
                        David Cavicke, General Counsel
          Reid P. F. Stuntz, Minority Staff Director and Chief Counsel
                                     _________













                                            CONTENTS
                                                              Page
Testimony of:
   Curaso, Hon. Guy F., Administrator, Energy Information 
   Administration, U.S. Department of Energy................    32
   Yergin, Daniel, Chairman, Cambridge Energy Research 
   Associates...............................................    42
   Levin, Robert, Senior Vice President for Research, 
    New York Mercantile Exchange............................    78
    Williams, Orice, Director, Financial Markets and 
     Community Investment Team, Government Accountability 
     Office.................................................    88
Additional material submitted for the record:
   Yergin, Daniel, Chairman, Cambridge Energy Research 
    Associates, response for the record.....................   110













                          WORLD CRUDE-OIL PRICING
                             ____________
                           THURSDAY, MAY 4, 2006

                                House of Representatives,
                             Committee on Energy and Commerce,
                                                      Washington, DC.


The committee met, pursuant to notice, at 10:11 a.m., in Room 2123 of 
the Rayburn House Office Building, Hon. Joe Barton (chairman) presiding.
	Members present:  Representatives Hall, Stearns, Gillmor, Deal, 
	Whitfield, Norwood, Shimkus, Wilson, Buyer, Radanovich, Bass, 
	Bono, Terry, Otter, Myrick, Sullivan, Murphy, Burgess, 
	Blackburn, Markey, Pallone, Stupak, Engel, Wynn, Green, 
	Strickland, Allen, Schakowsky, Solis, Gonzalez, Inslee, Ross, 
	and Barton.
	Staff present:  Dave McCarthy, Chief Counsel for Energy and 
	Environment; Maryam Sabbaghian, Counsel; Peter Kielty, 
	Legislative Clerk, Sue Sheridan, Minority Senior Counsel; and 
	Bruce Harris, Minority Professional Staff Member.
Chairman Barton.  The committee will come to order.
	Today, we are going to have our hearing on world crude oil 
	pricing.  I want to thank our witnesses for testifying today.
	We have Mr. Caruso, who is the Administrator of the Energy 
	Information Administration.  He has been guiding and advising 
	the Energy and Commerce Committee for over 4 years now, and we 
	are always appreciative to have him before us.
	Dr. Daniel Yergin is recognized as one of the most highly 
	respected authorities on international politics and economics 
	in the energy field.  We welcome you back to the committee 
	again, Dr. Yergin.
	The U.S. Government does not control crude oil prices, and the 
	U.S. economy can�t either.  We are major players in the global 
	market as consumers and as producers, but we don�t control the 
	price of crude oil in this country.  Major developments in other 
	parts of the world have brought the price to as high as $76 a 
	barrel, and I think yesterday it closed at about $74 a barrel.
	Let us take a look at some of the facts that we know.
	As many months as it has been since the Katrina and Rita 
	hurricanes, we still have 300,000 barrels a day in oil 
	production in the Gulf of Mexico that is off line.
	Iraqi production is increasing from where it was right after 
	the war of liberation, but it is still below its pre-war peak 
	and it is well below its potential.
	There are many people that think Nigeria is becoming even more 
	unstable, and its production is horrible, and many traders are 
	taking account of that.
	I am not even going to begin to talk about the President of 
	Venezuela, Mr. Chavez, but there are many of us, including 
	myself, who consider him to be quite a wild card.
	And then we talk about Iran and their ability, or at least 
	expressed intention, to make nuclear weapons.  The response by 
	the West to this troublesome mission raises more questions about 
	stability of oil production in that nation.
	Then we have OPEC.  OPEC is the cartel that tries to set the 
	price for oil in the world market, but I think our two experts 
	before us today are going to indicate that, at least for the 
	short term, they have lost that ability.  Half of our imports 
	come from nations that are members of OPEC.
	Now let us look at the demand side.
	This is where it gets even more amazing.  In spite of the surge 
	in gasoline prices in the United States in the last year and a 
	half, demand for crude products or refined products made from 
	crude oil is going up in the United States, including gasoline, 
	although there have been some months recently that the demand 
	for gasoline has gone down.  
	If we will look at China, their demand increase is incredible: 
	up to half-a-million or more barrels per day in that one 
	nation alone.  Keep in mind that in a State like Texas where I 
	come from, you have got more cars and trucks than people, but 
	in China, there is only one car for every 200 people.  Just 
	think how their demand is going to grow as more and more 
	Chinese demand that they have the same mobility that we have 
	here in the United States.  China�s industrial sector is 
	growing, literally, on a daily basis, and their demand for 
	energy is increasing as their industrial sector grows.
	We could say the same things about India, just at a slightly 
	lesser degree than is going on in China.
	I expect to hear today more on these geopolitical issues 
	affecting crude oil prices and how much price they add to the 
	barrel of oil.  These oil prices and the geopolitical risks 
	surrounding these oil prices concern me, as they concern all 
	Americans.
	Crude oil accounts for more than half of the price of a gallon 
	of gasoline.  And I think everybody on this committee and 
	everybody in our country, including the suppliers of gasoline 
	and crude oil, want gasoline prices to go down.  In the United 
	States, whatever we can do, it is time for us to begin to do it.
	At over $70 a barrel, the price of crude oil is four times the 
	spot price on the day back in 1995, 11 years ago, when then-
	President Clinton vetoed drilling in ANWR.  They say there are 
	no short-term fixes, and I would agree with that, but if we had 
	authorized drilling in ANWR 10 years ago, crude oil prices would 
	not be, in my opinion, over $70 a barrel today.
	Let me take a point of personal privilege aside from my written 
	statement and just point out an amazing fact.  Texas began to 
	drill and produce oil on a large-scale basis in 1894 in 
	Corsicana, Texas, which happens to be in my Congressional 
	district.  Since that day in 1894, when what we would now call 
	the Chamber of Commerce of Corsicana decided to drill some 
	water wells and instead found this stuff called oil, the great 
	State of Texas has produced over 60 billion barrels of oil.  It 
	is currently producing a million barrels a day from over 200,000 
	wells.  It is estimated that in ANWR the reserve for that one 
	field is 10 billion barrels.  The one oil field in Alaska is 
	expected to have at least 10 billion barrels in the one 
	discovery well.  And in Texas, in 112 years, we have drilled 
	over two million wells.  We have produced over 60 billion 
	barrels of oil.  It defies rational explanation to me: drill 
	what would probably be the largest oil field on the North 
	American continent when we prove that we can do it in a safe 
	environmental way.
	The Energy Policy Act, which passed last year with bipartisan 
	support, the majority of the Members on both sides of the 
	aisle in this committee voted for it, included some provisions 
	increasing supply, promoting conservation, and pursuing 
	research into the next generation of alternative energy sources.  
	But it didn�t do as much as could be done because we didn�t 
	have the political consensus on issues like ANWR and drilling in 
	the OCS.
	I think that Congress can and should do more.  I think we should 
	do things like we did yesterday, once again passing refinery 
	reform legislation on the floor of the House.  I understand that 
	some people feel like that particular bill was made without the 
	proper vetting at the committee level, and I respect that, but 
	sometimes you have got to do things in a quicker way than a 
	normal legislative process.
	A Saudi energy official not too long ago told me, "It doesn�t 
	matter how much oil we send you, you can�t refine it, because you 
	haven�t built a refinery in this country in a generation." That 
	is, unfortunately, sad but true.
	Yesterday, we also had a hearing in this committee on reforming 
	the fuel efficiency standards for automobiles.  And maybe that 
	effort will have to proceed without a consensus, too, although 
	I hope not.
	America seems to keep praying that we can just buy a ticket in 
	the energy lottery and get the winning ticket without having to 
	do anything other than that.  Some people do win the lottery, 
	about one out of a million, but most people don�t.  I don�t 
	think that we should put our prayers on winning an energy 
	lottery.  I think we need to do responsible things that make 
	sense, like drilling in ANWR, like looking to the OCS and the 
	moratorium areas, like trying to do what we can to get the oil 
	shale that we have in the lower 48 into production.  In the 
	last 30 years in this country, because we have been unwilling, 
	in my opinion, to do some things domestically, we have almost 
	intentionally made ourselves dependent on the outcomes of 
	what�s going on in places like Nigeria, Iran, Venezuela, and 
	various OPEC nations as we refuse to use our own resources.
	North America has tremendous natural resources of all kind.  
	If you equate our coal resources and our hard-to-get oil 
	resources, we have more energy resources by a factor of three 
	than Saudi Arabia does.  It is time that we, in my opinion, 
	use the political process to try to at least begin to 
	rationalize and maximize the use of such resources before we 
	become even more dependent on foreign sources.
	America just is not likely to win the energy lottery by 
	praying for deliverance from other people outside of our 
	borders.
	[The prepared statement of Hon. Joe Barton follows:]

Prepared Statement of the Hon. Joe Barton, Chairman, Committee on 
Energy and Committee

Good morning.  I want to begin by thanking all of our witnesses for 
their time today.  In particular, I want to recognize the witnesses on 
our first panel.  
Mr. Guy Caruso, Administrator of the Energy Information Administration, 
has been guiding and advising the Energy and Commerce Committee since 
his appointment in 2002 and we are always very appreciative and 
grateful for his analysis and views.  
Dr. Daniel Yergin is one of the most highly respected authorities on 
international politics and economics in the energy field.  Dr. Yergin, 
we welcome you back to the Committee and look forward to your testimony.
The U.S. government cannot control crude oil prices, and the U.S. 
economy can�t either.  We are major players in a global market, but 
major developments in other parts of the world have brought us to $72 
dollar crude.  Let�s take a quick look at some of the factors:
300,000 barrels a day in oil production are still off-line today 
because of Hurricanes Katrina and Rita. 
Iraqi production is increasing but has not reached its potential yet.
Nigeria is increasingly unstable, and so is it�s production, and 
traders don�t know what to make of it.
We all know  how unpredictable President Chavez is in Venezuela.  He�s 
running for re-election there, but his interest in politics extends 
far beyond the borders of his country.  
And the great question about Iran�s ability to make a nuclear weapon, 
and the response by the West, raises even greater questions about 
global energy supply.
And there�s always OPEC.  While Canada is our top international 
supplier, half our imports are from the OPEC nations.
Now let�s turn to demand.  Sure, demand in the U.S. keeps increasing.  
But the grown in China�s demand is incredible.  China has one car for 
every 200 people.  Just think about how their demand will grow when 
more Chinese get cars.  And China�s industrial sector is much more 
energy intensive, and less efficient, than ours. 
India�s growth adds another huge pull on crude oil markets.
I expect to hear more today on these geopolitical issues affecting 
crude oil prices and how much price they add to the barrel.  These 
oil prices and the geopolitical risks surrounding these oil prices 
concern me as they concern all Americans.  Crude oil accounts for 
more than half of the price of a gallon of gasoline, and we want 
gasoline prices to go down.
Here in the United States, we need to do what we can.
The price of crude at $72 is nearly four times the spot price on the 
day in 1995 when President Clinton vetoed ANWR. .  They say there 
are no short-term fixes, and that�s true, but authorizing ANWR 
10 years ago would have dropped world crude oil prices today. 
The Energy Policy Act passed last year, with bipartisan support, 
includes some noteworthy provisions increasing supply, promoting 
conservation, and pursuing research into next-generation alternative 
energy sources.  
Congress can and should do more - like passing legislation on 
refinery permitting that was on the floor yesterday.  I leave it to 
those who voted against more gasoline at lower prices to explain 
themselves, but I think that�s going to be a tough vote to explain to 
America�s drivers.  People can�t fill their tanks with excuses or run 
their cars on politics.  
A Saudi energy official once told me "It doesn�t matter how much oil 
we send you - you can�t refine it because you haven�t built refineries 
in a generation! Yesterday we could not find consensus on putting 
teamwork and focus into the multi-agency process of permitting 
refineries, whether for gasoline, coal to liquid, or biofuels.
		We also had an historic hearing yesterday or reforming 
		the fuel efficiency standard for automobiles.  Maybe 
		that effort will have to proceed without a consensus, 
		too, if a bloc of Members has resolved to block all 
		progress everywhere.
America keeps praying to win the energy lottery.  But, we pray to win 
the energy lottery when night after night we rest on approximately 10 
billion barrels of oil resources in ANWR, at least 90 billion barrels 
of crude oil resources in the OCS and 2 trillion barrels of shale oil 
resource in our Western States. We have made ourselves dependent on the 
outcomes of situations in Nigeria, Iran, Venezuela and Chad and on OPEC 
disputes because we refuse to use our own resources.  North America has 
tremendous natural resources of all kinds, but the government policies 
restricting access to these supplies means we�re more dependent on 
foreign sources.  America won the energy lottery, the government just 
has to buy the ticket and open up the resources for domestic production.  
Many of us in the Republican party have pursued policies to expand our 
energy capacity.  These efforts have been blocked by politicians for 
whom America�s energy security is not a priority.  It is time for our 
energy policy to increase America�s energy supply through both 
traditional and alternative sources.  Let us act now to ensure that we 
have a plan for today and tomorrow. 
We invited today�s witnesses to help us understand world oil prices.  
With that understanding, consensus on action might materialize.  Again, 
I would like to thank the witnesses for coming.

	Chairman Barton.  With that, I want to recognize one of my 
	senior Democrats for an opening statement.  Mr. Dingell is not 
	here.  Mr. Pallone seems to be the only man on the upper table, 
	so we will go to Mr. Pallone for a statement.
	Mr. Pallone.  Thank you, Mr. Chairman, and thank you for holding 
	this hearing.
	In the 6 years since the Bush Administration has been in office, 
	gas prices have gone from $1.65 per gallon to $3.03 per gallon, 
	and obviously, I would like to know why this happened.  And I 
	hope this hearing will go a long way towards furthering our 
	understanding of how crude oil moves around the world and how 
	that relates to gas prices.
	I am also interested to know what factors we might need to pay 
	closer attention to, including speculative and unregulated oil 
	trading that might be keeping the price of a barrel of oil 
	artificially high.
	But my chief concern here is the effect of demand on the world 
	price of crude oil.  Has that continued excessive demand for 
	oil kept prices high and led to price volatility?  In other 
	words, if we were to curtail our demand through efficiency, 
	would the market be less susceptible to price shocks due to 
	temporary supply disruptions?  Would this help cure the 
	situation in which prices would be more reliable, allowing 
	American consumers to better plan their household budgets?
	Mr. Chairman, I am also concerned about the impact of growing 
	demand from China and India, which you, in fact, have mentioned 
	in your opening statement.  While the rapid industrialization 
	of these countries does raise serious questions about world 
	energy supply, this sort of discussion often neglects to 
	mention that their combined demand pales in comparison with 
	America�s insatiable thirst for oil.
	And this, then, leads us into discussions like the one we had 
	yesterday in this committee when we considered CAFE standards, 
	how to curtail our demand to keep prices steady and reduce our 
	dependence on foreign oil.
	Of course no discussion of crude oil would be complete without 
	mentioning the fact that the global economy�s current reliance 
	on fossil fuels is causing another very serious problem that 
	we need to confront now, and that is global warming.
	Mr. Chairman, I look forward to hearing from our witnesses 
	today.  I want to sound a note of caution, however.  The 
	American people are not going to be impressed simply because 
	the Majority can cite however many hearings they have had on 
	gas prices or however many of the same tired ideas they have 
	passed on the House floor.  If we needed this many hearings 
	to understand oil and gas markets better, why didn�t we have 
	them before we passed last year�s energy bill?
	The truth of the matter is that years of inaction from this 
	Administration and this Congress have contributed to our present 
	crisis.  Rather than increasing fuel economy standards, this 
	Congress gave out SUV tax breaks for the biggest cars on the 
	road.  And instead of passing comprehensive energy policy 
	legislation focused on efficiency and conservation, the 
	Republican majority passed, and President Bush signed, a bill 
	chocked full of giveaways to the oil and gas companies.  And I 
	think it is time to get serious about putting off our addiction 
	to oil.
	Thank you, Mr. Chairman.
	Chairman Barton.  Thank you, Congressman.
	Does Mr. Hall, the Subcommittee Chairman, wish to make an 
	opening statement?
	Mr. Hall.  I do, Mr. Chairman.  Thank you.  And thank you for 
	holding this hearing.  It is very, of course, important in our 
	current situation with gas prices where as high as they are, 
	that we understand exactly why that is.
	We know that crude oil makes up about 59 percent of the price of 
	a gallon of gasoline, and therefore, the price of crude oil 
	significantly affects how much we pay for gas at the pump, so I 
	really look forward to hearing from our witnesses today as they 
	help us understand world oil prices, how they are established, 
	and why they are currently so high.
	I would especially like to welcome Dr. Daniel Yergin, Chairman 
	of the Cambridge Energy Research Associates, a Pulitzer Prize 
	winner, probably the most knowledgeable guy in the world about 
	what we are talking about today, and a highly respected 
	authority on energy policy and international politics and 
	economics.  He invited me to Houston one day to speak to a 
	group of about 300 people, and there wasn�t a person in the 
	audience that didn�t know ten times as much about what I was 
	talking about as I did.  So I felt pretty intimidated down there, 
	but I was honored to be in your company.  I have the honor of 
	working with you before, with both of you, and I would just 
	like to extend a warm welcome to you and to our witnesses.
	Thank you for what you have done, what you are doing, and 
	giving us your time today.  We appreciate it.
	Thank you, Mr. Chairman.
	Chairman Barton.  Thank you.
	Did Mr. Stupak wish to make an opening statement?
	Mr. Stupak.  Yes, Mr. Chairman.
	Chairman Barton.  The gentleman is recognized.
	Mr. Stupak.  Mr. Chairman, thank you for holding this hearing.
	I would like to welcome our witnesses.  I look forward to 
	hearing their views on crude oil markets and the effect on gas 
	prices.
	Gas prices are causing consumers significant financial 
	hardship. Many Americans are now paying over $3 a gallon for 
	gasoline.  This summer, Americans are expected to pay 
	significantly more at the pumps than last summer.  And crude 
	oil prices have exceeded the previous record, reaching over 
	$75 a barrel.
	As Ranking Member of the Energy and Commerce Subcommittee on 
	Oversight and Investigations, I have asked for the last eight 
	months for hearings on the cause of high gas prices.  I am 
	pleased that the Chairman has finally realized that these 
	hearings are needed.  They are long overdue, and I wish we 
	wouldn�t hold them all in one week.
	Many of my colleagues look at high gas prices and claim that 
	gas prices are dependent on world crude oil markets that are 
	out of control.  They say, "There is nothing we can do."  
	While some just chock up high gas prices to supply and demand, 
	the American people want their elected officials to act.
	Congress has a responsibility to make every possible effort to 
	ensure that the markets and pricing practices are fair.  
	Yesterday, the House approved legislation to give the Federal 
	Trade Commission the tools to prosecute price gouging.  I am 
	pleased that the Republicans finally realized this legislation 
	is necessary, and I look forward to working with them to 
	improve the bill.
	Just as we continue to work to protect consumers from gouging 
	and predatory pricing at the pump, we must also investigate the 
	effect that energy futures trading can have on gas prices.  
	Currently, energy commodities traded on NYMEX, the New York 
	Mercantile Exchange, receive significant oversight from the 
	Commodity Futures Trading Commission, CFTC.  However, energy 
	futures trading that occurs off the market, commonly referred to 
	as over-the-counter, OTC trading, does not enjoy the same 
	oversight and transparency.  Without effective oversight from 
	the CFTC, there is no way to know whether energy speculators are 
	basing their trades on market realities or are instead taking 
	advantage of the system to make money at the expense of 
	hardworking Americans.
	Last week, as Americans were hit the hardest by record crude oil 
	prices, the LA Times reported, in a piece entitled "Supply Fears, 
	Fuel Speculators Pumping up Oil Prices."  It goes on in the 
	article.  It says, "In an energy futures market wracked with 
	concern that oil demand might outstrip supplies, traders call it 
	petronoia, threats alone were enough to ignite prices."
	A vast majority of the energy derivatives trading that takes 
	place does not violate any laws and is actually helpful in 
	allowing energy companies to keep their costs down by providing 
	them with a reliable and consistent basis for doing business.  
	However, when oil trader speculators, motivated by greed, take 
	advantage of these market fears to drive up prices, the Federal 
	government must intervene to prevent this manipulation from 
	being passed on to the American consumer.
	Due to these concerns, I have introduced the Prevent Unfair 
	Manipulation of Prices Act, H.R. 5248, to bring over-the-counter 
	trading under the oversight of the CFTC.  As I am sure Mr. Levin, 
	our witness from NYMEX, will tell us, the oversight provided by 
	the CFTC to market trades on NYMEX has helped provide 
	transparency, stability, and confidence in these markets.  My 
	legislation would provide the same oversight and transparency 
	to over-the-counter trading.
	As Americans continue to face sky-rocketing prices at the pump, 
	our constituents are looking to their representatives to enact 
	policies that protect them from manipulation and other unfair 
	market prices.  Hopefully, today is the beginning of many 
	serious discussions about what Congress can do to ease prices 
	at the pump.
	I look forward to hearing from our witnesses.
	Thank you, Mr. Chairman.
	Chairman Barton.  Thank you, Mr. Stupak.
	Does Mr. Whitfield wish to make an opening statement?
	Mr. Whitfield.  Yes.
	Thank you, Mr. Chairman.  And thank you so much for holding 
	this hearing to look more closely at one of the most pressing 
	issues facing the country today, and that is gas prices, and 
	specifically how the supply and demand of crude oil factors 
	into the price paid at the pump.
	As you know, Mr. Chairman, you and I have sent letters to the 
	heads of five major oil companies in the last day or so, 
	ExxonMobil, Chevron, ConocoPhillips, Shell Oil, and BP America, 
	asking for detailed information about how those companies are 
	allocating their profits to improve domestic and international 
	oil refining efforts.  You know, the easiest thing for us to 
	do is to blame the oil companies for these price increases, 
	and I know that many States are looking at price gouging and 
	doing investigations right now.  The Federal Trade Commission 
	has been doing the same.  But I think we all recognize that 
	it is a lot more complicated than simply the oil price being 
	manipulated by the oil companies.
	We are consuming 85 million barrels of oil a day worldwide.  
	In the United States, we are consuming between 21 and 
	22 million barrels of oil a day.  We are the largest consuming 
	nation in the world.
	I would also point out that in the year 2000, ExxonMobil, as 
	an example, was producing 733,000 barrels of oil a day.  And 
	in 2004, that was down to 557,000 in the United States.
	I would also point out that during the years from 2000 to 
	2005, actual production declined in Saudi Arabia, Iran, Iraq, 
	Nigeria, Venezuela, and Indonesia.  And all of those countries 
	face potential political problems that could end their 
	production at any time.  So there are a lot of factors out 
	there that we cannot control.
	I am particularly pleased to hear today that we are going to 
	have testimony from the New York Mercantile Exchange, because 
	all of us here are about part of the speculators, part of the 
	marketplace, and I know their testimony will give the committee 
	a better understanding of how their marketplace functions on a 
	daily basis and what their platform means for energy prices.
	I am also specifically interested in hearing about other energy 
	markets and other trading platforms, which could have an impact 
	on energy prices.  More importantly, I think all of us are 
	concerned based on our understanding of these other platforms, 
	that the regulatory attention paid to them may be somewhat less 
	than that received by NYMEX.  If this is in fact the case, I 
	know we will all be interested in hearing testimony explaining 
	why that is the case.  And if the additional regulatory 
	oversight is necessary, especially given the importance of 
	these markets in establishing prices for commodities used by all 
	Americans and is impacting the price, then maybe we need to take 
	additional steps.
	Certainly, we look forward to hearing from the Energy 
	Information Administration and the Government Accountability 
	Office, and I yield back the balance of my time.
	Chairman Barton.  We thank the Chairman of the Oversight 
	Subcommittee.
	Mr. Engel.
	Mr. Engel.  Thank you very much, Mr. Chairman, for holding this 
	important hearing today on world crude oil pricing.
	As Americans continue to grapple with $75 barrels of oils and 
	$3-plus gallons of gas, it is obviously helpful for us to hear 
	from the experts on the current market forces that are 
	contributing to these escalating prices.  I share the 
	frustration of the American people with oil and gasoline 
	reaching $3-plus a gallon.  I think the President of the United 
	States, frankly, should call the oil executives into the White 
	House and bang their heads together.  The oil companies, 
	frankly, are making record profits with very little extra work, 
	doing nothing extra, but they are reaping these windfall 
	profits.  It angers me greatly when the CEO of ExxonMobil gets 
	a $400 million golden parachute to leave and the average 
	American can barely fill up his or her tank and has lots and 
	lots of hardships.  This is not something that should continue.  
	Oil companies are making record profits, obscene profits, and 
	frankly, as far as I am concerned, laughing all the way to the 
	bank.  And I am not against people making profits, but what is 
	going on with oil and gasoline in terms of the cost to fill up 
	your car going up and up is absolutely wrong.
	Our Chairman, my good friend, made a point to mention that oil 
	refineries have not been built in the country, and I think his 
	point is well taken.  I think everything ought to be on the 
	table.  However, I am angered by the fact that when the price of 
	a gallon of gasoline went up after Hurricane Katrina, we were 
	told that because of the hurricane, the oil refining facilities 
	in Louisiana were interrupted, and therefore, it sent the price 
	of a gallon of gasoline up, but once those oil refinery 
	capabilities were back in action, the price of gasoline would 
	go down.  And indeed, it went down for a few weeks, and now 
	it�s back up again to Katrina prices and even more.
	So I don�t really believe that the lack of building oil 
	refineries is a major reason why gasoline is going up.  I think 
	it is manipulation, and I think, frankly, greediness on the part 
	of the big oil companies.  Now we consume nearly 21 million 
	barrels of oil per day every day, and our appetite is 
	increasing.  We cannot be so completely dependent on a single, 
	finite, and pollution-causing fuel.  We need to change our 
	habits.  The President is right when he said we need to wean 
	ourselves off of our addiction to oil, but it has got to be more 
	than rhetoric.  He has got to really put his money where his 
	mouth is.
	Now Congressman Kingston and I have teamed together to introduce 
	the bipartisan Fuel Choices for American Security Act, H.R. 4409, 
	which enjoys wide bipartisan support in the House and Senate.  
	And very briefly, let me say, it encourages production and 
	consumer purchase of oil-saving technologies and fuels 
	nationwide without adversely impacting air quality.  And the 
	way we can do this is by providing incentives to encourage 
	manufacturers, distributors, and consumers to utilize 
	domestic resources to bring to the market a full range of 
	21st Century vehicles and fuels.  We can go to biofuels, and 
	we can get off our addiction of oil.  And we really need to 
	continue to do that.
	So I thank you, Mr. Chairman.  I look forward to the witnesses 
	today.
	Chairman Barton.  Thank you, Congressman Engel.
	Mr. Norwood.
	Mr. Norwood.  Thank you very much, Mr. Chairman, for holding 
	the hearing.  I will put my statement in the record so we can 
	get to the witnesses and have a little longer for questioning.
	Thank you.
	Chairman Barton.  Thank you.
	Mr. Shimkus.
	Mr. Shimkus.  I will waive, Mr. Chairman, for more time.
	Chairman Barton.  Mr. Buyer.
	Mr. Buyer.  I will waive.
	Chairman Barton.  Mr. Bass.
	Mr. Bass.  I will waive.
	Chairman Barton.  Mr. Murphy.
	Mr. Murphy.  Thank you, Mr. Chairman.
	I am reminded of a story of a man who had a few too many drinks, 
	and he was on his hands and knees on a street at the curb, at 
	a streetlight.  And a policeman came by and said, "What are 
	you doing?"  The man said, "I am looking for my car keys."  
	And the policeman said, "Where did you lose them?"  And he 
	said, "Down the end of that dark alley."  And the policeman 
	said, "Why aren�t you looking down there?"  And he says, "Well, 
	there is more light over here."  And the situation here, with 
	these oil issues, that I think is not much beyond what this man 
	was doing looking for his car keys.  We all know, we learned 
	this years ago, the issues of supply and demand.  In the summer 
	driving season, more drivers, with MTBEs and other fuel 
	additives, that adds to costs as well.  The many fuels.  That 
	adds to the cost.
	But we refuse to take care of the supply issues.  We sit here, 
	and we hear people blame the President for not doing anything, 
	but quite frankly, it is Congress that, for 30 years, hasn�t 
	done the things that we need to do.  For 30 years, we haven�t 
	built nuclear power plants.  For 30 years, we haven�t used 
	clean coal technology to take care of some of the energy 
	demands.  For 30 years, we haven�t built oil refineries.  And 
	for some reason, we don�t want to drill.  We don�t want to 
	explore.  We don�t want to survey.  We don�t even want to look 
	at maps of where the oil is on the Atlantic Coast, the Gulf 
	Coast, the Pacific Coast, and Alaska.
	People claim that they are upset that foreign nations have so 
	much money they are making on oil.  They get upset because so 
	much the executives are making on oil.  But still, the issue 
	is we have to find oil sources here or we are going to 
	continue to pay through the nose.  People don�t want to act.  
	We are willing to have oil shipped overseas to be refined 
	rather than coming back here.  That makes about as much sense 
	as saying, "I am going to go drive from Washington, DC to New 
	York City to pick up a pack of gum."  It is a waste of energy, 
	it is a waste of money, and those are some big reasons why we 
	continue to have huge oil prices.
	I applaud the Chairman for having these hearings on oil, and 
	I am hoping that as we look at this, not only will we shed 
	more light on the issues that we need to have more capacity in 
	this country to produce oil, to drill it, to explore it, to 
	survey it, to refine, but also work on some of the issues that 
	deal with conservation.  If every American who has a car saved 
	one gallon of gas per week, we wouldn�t have a shortage.  So 
	it is not just a matter of making sure that we reduce demand.  
	It is not just about fuel-efficient cars but fuel-efficient 
	drivers as well.
	There are a number of things this committee has addressed.  
	There are a number of bills that have come before the House.  
	But we have to stop trying to deal with this with politics and 
	start rolling up our sleeves and getting to policy.  I hope, 
	Mr. Chairman, that these hearings will continue to shed light 
	on the issue that we have oil in this country and we have 
	citizens who can come up with the ideas to reduce some of our 
	demand for oil, but by golly, we have got to start getting it 
	out of the ground and stop keeping it in there so we can use it 
	to push polling numbers in the next election cycle.
	Thank you, Mr. Chairman.
	Chairman Barton.  I thank the gentleman.
	Since I pointed it out, production started in Texas in 
	Corsicana.  Production in the United States started in 
	Pennsylvania.  Is it in your district?
	Mr. Murphy.  The Oil City is north of me, but it is a fine 
	State, nonetheless.
	Chairman Barton.  Okay.
	Mr. Green of Texas.
	Mr. Green.  Thank you, Mr. Chairman.
	I want to thank you for calling this.  I think it is a very 
	important hearing.
	In the Houston Chronicle, on the front page, it talks about 
	"Chavez Leads Energy Sector�s Paradigm Shift," and the first 
	line says, "With Bolivian troops marching into gas fields, 
	Venezuela seizing oil concessions, and Ecuador hiking energy 
	royalties, so-called resource nationalism is on the rise in 
	South America."  That is on the headline of the Houston 
	Chronicle, and I am sure it could be anywhere, but I don�t know 
	if it is on New York Times or the Washington Post, because I 
	come from an area where we produce, we pipeline, and we refine 
	crude oil.  We are producing less, as the Chairman talked 
	about, so we import it to our refineries, whether it be from 
	Venezuela or anywhere else in the world, primarily from Mexico 
	and Venezuela.  I have a blue-collar district, and our 
	blue-collar workers and retired folks are hit also by the high 
	cost of gas prices at the pump, because they are on fixed 
	incomes, and of course, we in Texas like to drive trucks and 
	SUVs, so we are feeling the pain even more.
	So many of my colleagues are getting letters and e-mails from 
	voters who are angry about high gas prices.  As elected 
	officials, we want to offer a solution.  In our responses to 
	constituents, we try to explain that the price of oil is 
	dictated by combined supply and demand of the world�s nations.  
	I don�t really know if Exxon can decide the world price of oil 
	any more than they walked out of Venezuela because of the price 
	increases from President Chavez.  Not many oil companies can 
	afford to do that.  So it is a real price.  Unfortunately, the 
	price of oil is at the most very unstable regions in the 
	world.  And we are not really talking about Venezuela or 
	Ecuador or Bolivia, we are talking about Nigeria, you know, the 
	war in Iraq.  They actually are producing less than Iraq did 
	before the invasion.  The instability is rather incredible, and 
	what we are seeing is that the traders in these oil futures 
	respond to every problem that you hear in these countries.  In 
	fact, I have been told that maybe 20 percent of the price of 
	crude is based on the speculation that we are going to have 
	less crude next week or next year than we do today, so the 
	price is going to go up.
	Most of U.S. oil is off limits by Congressionally mandated 
	moratorium.  However, still buying back productive leases in 
	California, which I know last year, in the energy bill, when 
	we passed it, that was one of the concerns.  Obviously, that 
	oil may not bring down the Government price, but when Iran 
	Decides to shut off exports, we are going to wish we had ANWR, 
	and we are going to be glad the President actually reduced 
	filling just last week simply because it was time for the 
	United States to get our market to quit buying $70-a-barrel 
	oil and let it go into the market to help lower the price.
	The price of oil is largely the component of gasoline.  We 
	have talked about that.  And it is great to point fingers at 
	refineries, but in all honesty, we haven�t built more 
	refineries.  Again, I had a district that refined lots of 
	product.  We have 12 refining companies in our country that 
	make over 500,000 barrels a day.  That is more competitive 
	than the software-operating industry, the airline industry, 
	the semiconductor industry, and many others.  So we do have a 
	competitive refining market.  The point that members on both 
	sides might keep about no new refineries in the last 25 years is 
	almost irrelevant.  Since 1994, existing refineries added 2.1 
	million barrels to capacity, the equivalent of adding a larger 
	than average refinery each year.  Over the next several years, 
	capacity will increase another 1.2 million barrels per day, 
	according to announced expansions.
	And the most popular blame everybody, even the environmentalists, 
	or whoever is your political opponent for the high gas prices, 
	but in reality, these prices are beyond any one group�s control. 
	The only way we can improve the situation is by bringing more 
	supply on the market as soon as possible.  And of course, our 
	Congress didn�t help last year with the energy bill. We removed 
	MTBE for reformulated gas, and so that cost 3 percent of our 
	gasoline capacity.  We are replacing with ethanol, but you do 
	not have the availability for ethanol.  And just yesterday, I 
	heard the President talk about removing the import controls on 
	ethanol so we can have it.  We don�t produce much ethanol in the 
	Houston ship channel, Mr. Chairman, but we do refine a lot of 
	gasoline, so I hope there are some new methods of ethanol 
	refineries next to all of these refineries that I represent. 
	And I would like the rest of my statement to be placed in the 
	record, Mr. Chairman.
	Chairman Barton.  Without objection.
	Mr. Green.  Thank you.
	Chairman Barton.  We will note the clock says that the gentleman 
	from Texas took almost 5 minutes, but in Texas, minutes are a 
	little bit longer.
	Mrs. Blackburn.
	Mrs. Blackburn.  Thank you, Mr. Chairman.
	I do want to thank you for the hearing today, and I want to thank 
	our witnesses for taking the time to come be with us and to work 
	with us through this situation.  I think it is important that we 
	put some focus on crude oil pricing, and it is essential to 
	understanding why gas prices are what they are today.
	And I hope this hearing does help everyone, my colleagues, the 
	American public, understand that ending supply with environmental 
	regulations during the period of the increasing demand causes 
	gas prices to rise.
	I also hope that this hearing helps my colleagues and the public 
	to understand that taxes do not grow oil.  Investments in 
	drilling and less regulation will increase the supply of oil.  
	We all know that.  Higher taxes are not going to give you one 
	more drop of oil.
	President Clinton vetoed drilling in ANWR in 1995, and the 
	environmentalists have continued the blockade ever since. China 
	and Venezuela are drilling in the outer continental shelf and we 
	are restricted.  Just yesterday, many of my friends from across 
	the aisle voted against and defeated the refinery permit process 
	schedule on the floor of the House.  The bill would have left 
	the environment regulations alone, but it would have streamlined 
	the permitting process of building a new refinery, something that 
	we really need.  A vote against that bill was a vote in favor of 
	bureaucracy and a vote against the supply of gas at the pump.
	I look forward to hearing the testimony that you have for us 
	today.  I look forward to continuing to work with the committee.
	Mr. Chairman, I thank you, and I yield back.
	Chairman Barton.  I thank the gentlelady.
	Mr. Strickland.
	Mr. Strickland.  I will pass.
	Chairman Barton.  I think Ms. Schakowsky was here before 
	Mr. Allen.
	Ms. Schakowsky.  Thank you, Mr. Chairman.
	Gasoline prices have sent this committee scurrying to analyze 
	every aspect of the domestic and world energy markets.  
	With no disrespect at all to our witnesses, I think this is a 
	poor substitute for action on sensible, ready-to-go proposals, 
	many of which have long been languishing for lack of interest 
	by the Republican leadership, proposals that would address 
	price increases, spur alternatives to oil, and increase 
	conservation.  For the commuter who must drive 90 minutes to 
	work, a senior living on a fixed income, or those who depend on 
	their cars to make deliveries, hearings are not sufficient.
	Chairman Barton.  Would Ms. Schakowsky yield just for a minute?
	Ms. Schakowsky.  I would.
	Chairman Barton.  We have been graced by the presence of one of 
	our former Full Committee Chairmen, Mr. Tauzin of Louisiana, 
	whose portrait hangs so proudly above my right shoulder.  We 
	welcome you back and are hoping you are here to say you are 
	going to announce to run for reelection to Congress for 
	Louisiana.
	Chairman Barton.    I am going to restart your clock so you can 
	start over because that did interrupt your train of thought.
	Ms. Schakowsky.  Okay.  Thank you.
	Chairman Barton.  I thank the gentlelady for yielding.
	Ms. Schakowsky.  The average household with children will spend 
	about $3,343 on transportation fuel costs this year, a 
	75-percent increase over 2001 costs.  Memorial Day and the 
	summer driving season are only days away.
	Let us be clear, this energy crisis was foreseeable.  This 
	committee passed an energy bill last year, which the Energy 
	Information Administration predicts they would raise prices, 
	and it has.  Republicans voted three times against giving the 
	Federal Trade Commission the authority to regulate and 
	prosecute our oil and gas companies that price gouge, once on 
	this committee and twice on the floor.  I and other Democrats 
	have written to President Bush and Vice President Cheney, both 
	oil men, many times and asked them to bring in the energy 
	executives to develop a plan to immediately bring prices down. 
	But not once have they stood up to their big oil comrades.  Not 
	once have they asked them for anything at all, instead 
	lavishing them with tax breaks and other favors.
	Gasoline prices have doubled under their watch, as the oil 
	companies reported their highest profits ever.  In fact, after 
	covering all of their costs last year, oil companies took 
	profits from consumers amounting to $1,000 from every household 
	in America.  And the golden parachute retirement package for 
	Exxon�s CEO cost every household in America the average of $3.
	The Bush Administration and Congress had the power.
	Well, let me back up.
	Prices at the pump in the United States have risen in part 
	because the United States has become more dependent on foreign 
	oil at an exponentially increasing rate.  Since the Bush 
	Administration took office, oil imports have increased over 14 
	percent, and now we import about 20 percent of our oil from the 
	Middle East.
	The President has again missed the urgency of this crisis.  His 
	budget only increases funding for renewable energy sources by 0.2 
	percent this year and cuts funding for critical efficiency 
	programs, like weatherization assistance, EnergyStar, and the 
	Clean Cities Program.  Democrats have a plan to make the United 
	States independent of Middle Eastern oil within the next 
	10 years.
	The Bush Administration and Congress have the power, but are not 
	demonstrating the will to limit escalating fuel prices.  We 
	should take action today to prevent energy companies from making 
	windfall profits off the backs of consumers, to provide Detroit 
	with the help it needs to make fuel-flexible cars, and to 
	increase the production of renewable fuels and use energy-
	efficient technology that will wean the United States off foreign 
	oil.
	Congressman Stupak has a bill that would regulate off-market 
	trading and increase penalties for market manipulation, which we 
	should quickly pass.  Consumer confidence in Congress and the 
	President is tanking.  Showing concern about the energy crisis is 
	simply not enough.  Consumers want action and relief at the pump.
	And I would like to deal with the refinery issue for just my 
	remaining moment.
	We have to acknowledge that oil companies have closed 178 
	refineries since 1980.  Only one new refinery permit has been 
	filed since that time.  The refinery bill rejected yesterday 
	would have given the Administration the authority to site 
	refineries and close military bases bating local control and 
	community right to know.  An ExxonMobil official told Congress 
	in January that flat North America demand for gasoline through 
	2030 means there is no need to build new U.S. refineries.  In 
	2005 testimony, the CEOs of Shell and ConocoPhillips said they 
	did not believe any Federal or State regulation had prevented 
	them from siting new refineries.  A 1995 American Petroleum 
	Institute letter told energy companies to limit refinery 
	capacity in order to boost their profits.
	There are many things that we could do right now.  We know 
	about them.  They have been proposed.  We have devoted time 
	to them in this committee.  Democrats have asked for hearings 
	for a long time, have asked to move these pieces of 
	legislation, and while I appreciate the expertise of the 
	witnesses, I look forward to their testimony, we need to move 
	beyond these hearings to real solutions that our constituents, 
	the Americans, are demanding.
	Thank you, Mr. Chairman.  I yield back.
	Mr. Deal.  [Presiding.]  Mr. Buyer is recognized for an 
	opening statement.  Mr. Burgess.
	Mr. Burgess.  Thank you, Mr. Chairman.
	I have a statement that I will submit for the record, but I 
	feel obligated to bring up a couple of points, because I have 
	been raised on the other side, talking about oil company 
	profits.  Shad Roe, Chairman of the Texas Pension Review Board, 
	stated that when you look at who really owns the big oil, it is 
	teachers, firefighters, police officers, and ordinary people 
	who hope to retire someday.  Their retirement plans have been 
	generally disappointing.  The only bright spot has been the 
	performance of energy stocks.
	The other issue before us, and we talked about it some 
	yesterday in talking about the demand side, and I do believe we 
	need to concentrate on the demand side as much as the supply 
	side.  James Smith from Southern Methodist University said that 
	cutting consumption may not be as painful as we believe.  If 
	every American motorist reduced consumption by one gallon a 
	week, the price of gasoline could fall by 60 cents a gallon. And 
	I will be interested to hear our panel�s take on that 
	observation.  But the problems are complex.  It is important 
	work that needs to be done for the country.
	And Mr. Chairman, I am grateful we are having these hearings 
	this week.  I don�t think we can do enough of them.
	With that, I will yield back.
	[The prepared statement of Hon. Michael Burgess follows:]

Prepared Statement of the Hon. Michael Burgess, a Representative in 
Congress from the State of Texas

Mr. Chairman, thank you for convening this hearing this morning.  
As we are hearing from our constituents on this topic, I think the 
information provided by the panelists today will help this committee 
get beyond the rhetoric to the facts. 
The geography of oil and gas has led our country to place our energy 
assurance in the hands of leaders such as Venezuelan President Hugo 
Chavez and inflexible or unstable dictators of the Middle East.  
There are ongoing concerns about the stability of supply from Russia 
and the Nigeria Delta Region.  
As we'll hear from our panelists today, these uncertainties, along 
with fears about Iran's nuclear program and the ongoing war on terror, 
increase the price of oil around the world.
All of these geopolitical uncertainties make foreign oil unpredictable 
and unaffordable.  As we heard from the panelists yesterday, the best 
way to bring down prices is to increase production in the United 
States. Today, we import nearly 60% of our oil, but we've prohibited 
exploration in the OCS, in ANWR, and on other federal land.  
I believe we should allow, and in fact encourage, exploration and 
production here at home.  A barrel of oil coming from the oil shale 
in Utah is significantly safer than a barrel of oil coming from Iran.  
I'd like to thank our panelists who are here this morning.  According 
to the most recent figures from EIA the price of crude accounts for 
between 55 and 60 percent of the price of gasoline, so I look forward 
to learning from our panelists about the market forces that influence 
the price of crude oil. 
Thank you, Mr. Chairman, I yield back.  

	Mr. Deal.  I thank the gentleman.
	Mr. Gonzalez is recognized for an opening statement.
	Mr. Gonzalez.  Thank you very much, Mr. Chairman.
	I want to welcome this opportunity to have the witnesses that 
	we have today.  I do want to start with an observation and 
	that is that ANWR has been brought up, and I have been voting 
	against ANWR for some time.  Even though I am from the State of 
	Texas, I believe in exploration and production, but the reason 
	is I believe ANWR may be a prime example of what is wrong with 
	our energy policy.  There is no counterbalance to it.  There is 
	no balance.  And that is, yes, exploration, quota, production, 
	and such, but there has to be something out there when it comes 
	to efficiencies, conservation, and alternative fuels.  It is 
	very hard to entertain the ANWR position.  I am willing to bet 
	that there are many Members that have been voting against ANWR 
	if we had a balanced energy policy, their no vote would be 
	translated into a yes vote.  And that is what negotiation is 
	all about, which there is very little of that here in Congress 
	in today�s environment.
	Yesterday, we had a hearing regarding one part of the equation 
	when it comes to oil and our need for it, and that was demand.  
	We can do much about demand.  We have greater control over 
	demand, yet if you listened to the testimony yesterday, we are 
	probably in some sort of a gridlock.  Today, we are talking 
	about supply, that which we have less control over.  But yet we 
	can still be masters of our own destinies.
	And what I am hoping is that the witnesses, and especially one 
	of the witnesses, I think, will be able to point out how 
	certain policies, foreign energy considerations, are 
	inexplicably intertwined, as we used to say in the practice of 
	law, and that is foreign policy and such, which definitely 
	impacts different conditions and dynamics out there that have 
	a direct correlation to the price and supply of oil in this 
	Nation and the consequences to our consumers and our 
	constituents.
	And with that, again, I just want to say thank you to the 
	witnesses for their patience, and I yield back the balance of 
	my time.
	Chairman Barton.  We thank the gentleman.
	Has Dr. Burgess been given a chance?  Has Mr. Terry?  
	Mr. Terry.  Waive.
	Chairman Barton.  Mr. Terry waives.  Mr. Otter?
	Mr. Otter.  Waive.
	Chairman Barton.  He waives.  Okay.  It looks like Mr. Allen.
	Mr. Allen.  All right.  Thank you, Mr. Chairman, for holding 
	this hearing, and I thank the witnesses for being here today.
	Really, crude oil prices today are high for several reasons.  
	Global demand is rising faster than global supply.  Instability 
	in oil-producing nations is a significant factor as well, and 
	there are certainly others.  But it is not enough for us to say, 
	"Crude oil prices are high due to factors beyond our control.  
	Sorry."  Maybe we need to look in the mirror.  Much of the 
	instability that we find today in the world market is due to 
	our inept foreign policy.  It wasn�t global oil markets that 
	suggested that the Venezuelan government should be destabilized 
	and overthrown.  It wasn�t global oil markets that have 
	neglected West Africa, especially Nigeria, when it needed help.  
	And it wasn�t global markets that launched an ill-advised 
	invasion of Iraq, fumbled the reconstruction, and failed to 
	protect the oil-producing infrastructure.
	Last week, Iraqi oil exports slipped to their lowest level since 
	the invasion, and they still haven�t recovered to the sanctioned 
	levels of the 1990s.  American taxpayers are paying billions of 
	dollars for reconstruction of Iraq and also paying swelling 
	energy prices here at home.  We cannot know, and maybe you will 
	enlighten us, how much of the spike in global oil markets is due 
	to our inept foreign policy, how much to greed and speculation, 
	and how much to rising global demand with uncertain supplies.  
	I do believe that is why we need to pass Mr. Stupak�s PUMP Act, 
	which would shine some light into the off-market trading of 
	energy commodities and allow the CFTC to monitor the activities 
	of traders in the NYMEX and other commodity exchanges.  This 
	bill should attract bipartisan support, because it can have a 
	significant impact on the market and on the price of oil.
	I know this is a complex issue, and I very much look forward 
	to the testimony of the witnesses.  Thank you for being here.
	Chairman Barton.  Thank you, Mr. Allen.
	Mr. Wynn.  Oh, no.  I am sorry.  Mr. Inslee was here before 
	Mr. Wynn.  I apologize.
	Mr. Inslee.  Thank you.
	I just want to followup Mr. Allen�s comment about the fact the 
	Federal government�s actions had compounded the misery that 
	Americans are having right now.  I recall, a few years back, I 
	was in a meeting just a couple doors down from the room we are 
	in now, and Paul Wolfowitz was telling us about how this 
	invasion of Iraq was going to be totally financed by the oil 
	exports.  The American taxpayer would not have to pay a dime for 
	the war in Iraq.  Well, now, we are how many hundreds of 
	billions of dollars in it?  And, as a bonus, this was not in 
	that particular meeting, but in other meetings, Iraq would 
	increase dramatically its exports and help lessen the cost of 
	oil.  That was a heck of a job done by our Administration on 
	energy policy in Iraq, a brilliant move.
	And our $3-plus a gallon is tied in part because of the 
	incompetence, the ineffectual, and I have other adjectives I 
	won�t use, outright mistakes made by this Administration in 
	Iraq.  And now to further that failure of acts of commission, 
	we now have acts of omission.  And I appreciate the Chairman 
	having this hearing, but we need a lot more hearings, and we 
	need some action.  We need Mr. Stupak�s bill to bring the 
	trading system under the Commodity Futures Trading Commission.  
	Literally, before I came to this meeting, I had a group of oil 
	marketers.  These are businessmen who sell oil and gas mostly 
	to farmers in the State of Washington.  And normally, the 
	business community doesn�t rush to endorse new regulatory 
	schemes proposed by Congress, but these gentlemen said, "Look, 
	you have got to have some transparency in the trading system 
	of oil and gas because there has been such huge volatility in 
	these areas in part because of the unregulated nature and 
	non-transparent nature of these trades."  And we have enormous 
	capital rushing into these trading systems, increasing 
	speculation, and increase in volatility in these markets.  So 
	this is something that if you do it for soybeans, you certainly 
	ought to be doing it for oil and gas.  And we hope that we can 
	have some action from this Committee on that bill, as we will, 
	I hope, on some of the bipartisan efforts.  Mr. Kingston and 
	Mr. Engel have a bill to inspire flex-fuel vehicles so we can 
	get biofuels to be a competitor to oil and gas.  We need some 
	action in addition to these hearings.
	Thank you.
	Chairman Barton.  Thank you, Mr. Inslee.
	Mrs. Wilson.
	Mrs. Wilson.  Thank you, Mr. Chairman.
	I apologize for getting here a little bit late, and I 
	appreciate your holding this hearing.
	I understand that there appears from the materials that you have 
	given us anyway to be some disagreement as to the multiple 
	causes of high prices for a barrel of oil.  But one of the 
	things that surprises me is that for the last four weeks, the 
	average daily gasoline demand in the United States was a little 
	over nine million barrels per day, which was barely higher 
	than it was a year ago, and yet oil prices remain 36 percent 
	higher than they were a year ago.
	I recognize that oil is a worldwide commodity and there are a 
	lot of things that affect this market, but I would like a 
	little further explanation here of why there is this great 
	disparity.  And I have read some of the material you had given 
	us, but there is some of it that, for people who are just 
	trying to fill up their cars, really doesn�t make a lot of 
	sense.
	Chairman Barton.  Is that the end of your statement?
	Mrs. Wilson.  It is a question.  I would like to hear why--
	Chairman Barton.  We are still on the opening statements.
	Mrs. Wilson.  Oh, I am sorry, Mr. Chairman.  I apologize.  I 
	look forward to the hearing.
	Chairman Barton.  I thought that was a very dramatic way to end 
	your opening statement.
	Mrs. Wilson.  I look forward to hearing why this is dramatic, 
	and it just doesn�t make sense to people.
	Thank you, Mr. Chairman.
	Chairman Barton.  Thank you.
	You are still on after that after your victory on the price 
	gouging bill on the floor yesterday, so there you go.
	Let us see.  Now it is Mr. Wynn�s turn.
	Mr. Wynn.  Thank you, Mr. Chairman.  I certainly appreciate you 
	calling this very important hearing to get a better 
	understanding of the global energy picture.
	Let me begin by actually complimenting my colleague, Mr. Allen, 
	because I think he very astutely and effectively outlined the 
	phase and foreign policy of this Administration with respect to 
	energy in Venezuela, Nigeria, and Iraq, and I certainly agree 
	with his sentiments in that regard.
	Presumably, I am hopeful that in this hearing that we will hear 
	somewhat extended discussion about the impact of energy policies 
	in China and India and the largely state-controlled, state-
	influenced systems that seem to be contributing significantly 
	to the shortage by virtue of their expanding demand.  The 
	information that I have received would indicate that they have 
	a policy, certainly China, of purchasing long-term contracts, 
	significantly reducing the long-term availability of oil on the 
	world market.  If, in fact, that is the case, and I certainly 
	could stand to be corrected, then I would be very anxious to 
	hear what the United States� response to this is, because we 
	may have very effective conservation policy in this country, 
	but the demand in China continues to consume at the rate it is 
	consuming and if that expands and if, in fact, they are using 
	this strategy of long-term contracts and, in my opinion, 
	questionable foreign policy in places, such as Sudan, in order 
	to obtain oil, we will need to have an adequate response, 
	because our conservation will not impact the world oil market, 
	and thus we will continue to experience significantly high 
	prices at the pump.  So I am hopeful the witnesses can comment 
	on these, among other, issues.
	But again, Mr. Chairman, thank you for calling the hearing. 
	I look forward to hearing from the witnesses.
	[The prepared statement of Hon. Albert R. Wynn follows:]

Prepared Statement of the Hon. Albert R. Wynn, a Representative in 
Congress from the State of Maryland

Chairman Barton and Ranking Member Dingell, most of us understand that 
today�s excessively high crude oil prices reflect the global market 
for oil.  For instance, Iran continues to defy world pressure to halt 
its nuclear program.  Recently, Iran threatened to cut off oil 
production in response to possible U.N. sanctions - illustrating the 
devastating impact oil producing regimes exert on world markets. The 
mere threat of disruption has contributed to the volatility of world 
oil prices, thus locally impacting national gas prices.  In Africa, 
25% of Nigeria�s oil output has been stalled due to rebel attacks, 
leaving about 530,000 barrels per day are offline.  
Contrary to the Administration�s pre-war claims, ongoing security 
concerns in Iraq have suppressed pre-war output by about 900,000 
barrels per day.  In our own hemisphere, partially in response to 
our own ham-fisted foreign policy, Venezuela has reasserted its 
intention to exert greater control over foreign-owned oil companies, 
reducing production by 400,000 barrels below its 2002 pre-strike 
levels.  Additionally, China's demand for oil is expected to continue 
to increase by five to seven per cent per year, and over the last two 
years, Asia has consumed more oil than North America.  This trend is 
expected to continue.
These are all factors that contribute to the world price of oil on the 
New York Mercantile Exchange (NYMX), which recently hit a record high 
of $75 per barrel.  Speculative buying and selling also impact the 
price of oil as traders update their portfolios to reflect anticipated 
market conditions.  According to a recent New York Times Article, until 
more investments are completed in oil production and refining, markets 
will remain on edge and the slightest bit of bad news will likely 
increase prices.  Because the U.S. is reliant on 60% of imported oil 
from foreign sources, we will be forever tied to the world oil market 
and be vulnerable to that market --- unless we can become self-
sustaining and self-sufficient.
Today�s global conditions lead us towards two ultimate conclusions.  
First, we must wean ourselves off of foreign sources of oil from 
politically unstable nations and fast track alternative forms of energy. 
For instance, hydrogen is the energy of the future - anything from 
nuclear to solar has the potential to produce hydrogen, and since its 
only byproduct is water, the energy source is emissions free.  Second, 
in the interim, we must evaluate the nature of US foreign relations 
with oil seeking countries.  In today�s resource competitive 
environment, it may be extremely difficult to change the face of US 
foreign policy to promote better relations with oil producing and 
consuming nations alike, but we must act quickly.  
Presumably, I am hopeful that this hearing will address the impact of 
energy policies in China and India, which are significantly 
contributing to the shortage of oil by virtue of their expanding demand. 
Data indicate that China, in particular, purchases long-term contracts, 
that will significantly reduce the availability of oil on the world 
market over the long haul.  I would be interested in learning how the 
US intends to address this concern.
Mr. Chairman, hopefully, the testimony delivered today will do more 
than serve as a primer in energy prices, but as a wake up call to the 
American people about the severity of today�s energy crisis - which 
goes beyond $3 gasoline.   Thank you, and I look forward to today�s 
testimony.

Chairman Barton.  I thank the gentleman.
	Mr. Stearns from Florida.
	Mr. Stearns.  Thank you, Mr. Chairman.
	And I submit that we hear from different Members talking about 
	criticizing the Administration or criticizing Congress.  You 
	know, there are just supply and demand fundamentals involved, 
	and they play a critical role in world oil prices.  Obviously, 
	there are geopolitical concerns, too.
	With respect to the supply estimate, there are two million-
	plus barrels per day, BPD, of aggregate disruption in the 
	world supply.  We know that China, in 2004, increased demand 
	16 percent.  India almost the same thing.  That sent shockwaves 
	through the market.  On May 2, 2006, the spot price for crude 
	oil closed at $74.78 per barrel, approximately a $25-increase 
	over the spot price just a year ago, and nearly four times the 
	spot price of crude oil a decade ago.  You don�t have to go 
	far.  You can even look in Nigeria to see there are 530,000 BPD 
	shut off by the insurgents.  Venezuela has a large amount. Even 
	in Iraq, the pre-war levels were low.  The U.S. Gulf of Mexico, 
	obviously, with Katrina.  So disruptions in these countries has 
	created this increase in oil prices.  And so really that is 
	beyond the Administration, and beyond the Congress at this 
	point, so a lot of us should realize that a lot of this is 
	geopolitical and there is nothing you can do unless you are 
	going to approach it from a political standpoint.  So this 
	hearing, I think, should bring out some of the things I 
	mentioned, these countries and all of these supply disruptions 
	and the global crude oil inventories, the different size of 
	these and how they have affected the supply and demand.
	So Mr. Chairman, I think in a larger sense, many members should 
	realize it is supply and demand, and that is what we are facing.
	Thank you.
	[The prepared statement of Hon. Cliff Stearns follows:]

Prepared Statement of the Hon. Cliff Stearns, a Representative in 
Congress from the State of Florida

Mr. Chairman, thank you for convening today�s hearing on global oil 
markets. This Committee, through the Energy Policy Act and the GAS Act, 
has dedicated a lot of time and energy to removing the regulatory 
barriers to increased oil supply and to encouraging greater efficiencies 
in the use of energy and limiting its consumption.  While we have worked 
diligently on domestic problems within the realm of our jurisdiction, I 
hope that today�s witnesses will enlighten us as to the impact of 
international events on the supply of and demand for oil as a commodity. 
With skyrocketing demand in China and India, a bubbling insurgency in 
Nigeria, continuing instability in Iraq, potential war with Iran, and 
a growing trend of nationalization and seizure of private companies� 
operations in South America, it is no wonder that the price of a 
barrel of oil is nearly $75 -- a nearly 25% increase from a year ago. 
Disruptions in South America have received the least amount of 
attention in the popular press.  Just last month, Venezuelan strongman 
Hugo Chavez cancelled contracts with foreign oil companies, demanding 
that the government oil company be given majority ownership and 
operational charge of oil fields.  Potential new contracts are offering 
little to no profit.  Companies that refused to bolt the country 
outright have found their operations seized.  Mr. Chavez has a copycat 
in Bolivia�s new President, Evo Morales, who nationalized his energy 
sector this past Monday.
These moves will prove detrimental to both the Bolivian and Venezuelan 
economies, and to the world economy.  Venezuela is already suffering 
from insufficient investment in energy production.  Rampant corruption, 
and the use of energy profits to prop up socialist rule at home and 
insurgency abroad, have left Venezuela�s oil fields depleting at a rate 
of 25% a year.
However, in the end, none of these global disruptions perfectly explain 
the price of a barrel of oil. Only the market concepts of insufficient 
supply and growing demand can do that.  The low cost of oil in the 
nineties discouraged exploration for new sources while encouraging 
greater consumption.  That is why incidents in oil-producing countries, 
as well as freakish weather like Hurricane Katrina, can drive up prices 
so sharply.

	Chairman Barton.  Let us see.  Ms. Solis.
	Ms. Solis.  Thank you, Mr. Chairman.
	Mr. Chairman, thank you for having this hearing today, and I am 
	glad that we are discussing the global price of oil, and I am 
	pleased that our witnesses today will help us better understand 
	how oil is priced.
	And oil, as I know it, is a global commodity in the global 
	marketplace.  Its price is seemingly driven only by the premise 
	that there is never enough being produced.  This is true in the 
	United States, which has one of the largest demands for oil. We 
	import nearly 60 percent of our oil, more than the total oil 
	consumption of any other country in the world and have less than 
	3 percent of reserves.  Because of our dependency on oil and 
	the lack of reserves, we are extremely vulnerable to variations 
	in international pricing.  
	And also complicating the factor is that the U.S. dollar is 
	weak.  The United States is borrowing from foreign countries to 
	pay for its war in Iraq, imports of raw and manufactured 
	materials.  Our current account deficit is 7 percent of the 
	economic production and is not decreasing.  And our largest 
	trade deficit is with China, which is increasingly competing 
	for supplies of oil.
	What this means is that we are highly integrating the global 
	marketplace and are affected by what happens in the 
	international market.  Some would argue that the solution is to 
	dig and drill here in the United States.  Some would argue that 
	the solution also is that we open up ANWR.  However, the United 
	States has less than 3 percent of proven reserves.  This does 
	not begin to touch the growing demand of U.S. consumers.  No 
	matter how much we dig and drill at home, we will always be 
	vulnerable to changes in the world market.  That is, unless we 
	take steps to become more independent of oil, not just foreign 
	oil but all oil.
	And I strongly support diversifying our energy supply, funding 
	alternative supplies and conservation.  Unfortunately, renewable 
	energy programs are being funded at less than 20 percent of what 
	was authorized, and funding for clean energy research is less 
	than 7 percent of the profits made by ExxonMobil in the last 
	quarter of 2005 and less than that amount included in the 
	President�s budget energy bill for fossil fuels.
	Our Nation�s budget, in my opinion, must reflect the urgency of 
	reducing our dependency on all oil, not just foreign.  Perhaps, 
	we will finally learn from our discussions today where we need 
	to go, and I hope that we can ascertain some of these answers.
	I yield back the balance of my time.
	Chairman Barton.  I thank the gentlelady.
	Mr. Ross.
	Mr. Ross.  Thank you, Mr. Chairman.
	I would like to thank you for holding this important hearing 
	regarding record crude oil prices and the adverse impact they 
	are having on Americans.  Americans are being forced to change 
	their way of life, being forced to choose between paying bills, 
	buying prescription drugs, or putting gasoline in their vehicles.
	Mr. Chairman, I represent a large and rural district in the 
	State of Arkansas, about half the State.  My district includes 
	21,000 square miles and 150 towns and 29 counties.  About half 
	of the folks don�t even live in those 150 towns.  They live in 
	what we call the country.  It is not uncommon for my 
	constituents to drive 50 or 75 miles each way to and from work.  
	And in most cases, they commute these distances for a job that 
	pays well below the national average.  Mass transit is not an 
	option for them.  Hardworking Americans who are trying to do 
	the right thing by working to put food on the table, to keep the 
	lights on, and to provide for their families are being devastated 
	by these record gas prices.
	In order to see true reductions in prices, we would have to 
	either increase supply or decrease demand or, ideally, both.  
	I strongly support the continued development and use of ethanol 
	and biodiesel as a way to reduce the demand on costly fossil 
	fuels.  And as we continue working to increase the use of 
	biofuels, we must make the necessary investments to develop our 
	Nation�s infrastructure to support increased use of ethanol and 
	biodiesel.
	Mr. Chairman, I am committed to working with my colleagues on 
	both sides of the aisle to make these investments to advance 
	alternative fuels, which will provide Americans with a choice 
	when they go to the pump.
	Now Mr. Chairman, the reality is this.  In the energy bill that 
	I voted for and we passed earlier this year, there is about 
	$150 million in that bill for grants for alternative renewable 
	fuels.  That is authorized, but not yet appropriated.  And yet 
	we send some $279 million every day to Iraq.  So I want to make 
	sure the American people understand that while there is a lot of 
	talk these days about alternative renewable fuels, we are going 
	to invest about half as much money in grants for alternative 
	renewable fuels in these United States of America as what we 
	will spend in Iraq in the next 24 hours.
	And I say these things because I recognize that as we develop 
	alternative fuels and flex-fuel vehicles, our Nation will 
	continue to rely on fossil fuels as our primary source of 
	energy. Therefore, I believe we must promote further 
	exploration and development of domestic oil and gas 
	production.  I submit that addressing our Nation�s energy crisis 
	will take a multi-faceted approach consisting of increased 
	domestic production, conservation, the use of alternative and 
	renewable energy sources, utilizing energy-efficient 
	technologies, and end-user participation.
	And with that, Mr. Chairman, I yield back the balance of my 
	time.
	Chairman Barton.  I thank the gentleman.
	I would like to add my support for what he said in his 
	statement. I am working with Mr. Dingell right now on a 
	bipartisan letter to send to the appropriators, outlining my 
	concerns about some of the programs that we have authorized 
	that haven�t been funded and also some of the programs that 
	have not been authorized that are being funded.  Those 
	discussions are ongoing with myself and Mr. Dingell.  So we are 
	trying to track some of the things that you have said in your 
	statement.
	The Chairman of the Veterans� Committee is with us.  Does 
	Mr. Buyer wish to make an opening statement?
	Okay.  Seeing no other Members present who have not yet had a 
	chance to make an opening statement, the Chair would ask 
	unanimous consent that all Members not present have the 
	requisite number of days to put their statement in the record 
	at the appropriate time.  Without objection, so ordered.
	[Additional statements submitted for the record follows:]

Prepared Statement of the Hon. Mary Bono, a Representative in Congress 
from the State of California

	Mr. Chairman, thank you for holding this hearing today.
	I believe that almost everyone here realizes that we are far 
	too dependent on foreign oil. So price fluctuations abroad 
	have a great impact at home.
	I also realize that countries like China increase the overall 
	worldwide demand on this resource. China is a country hungry 
	for oil and natural gas and it now has the resources to bid 
		in this marketplace.
	But if our witnesses do not comment on this, I would like to 
	ask them how Russia will impact the future price of world oil. 
	Mr. Frederick Kempe in a May 2, 2006 Wall Street Journal piece 
	discusses how Russia has "reinvented itself as an �energy 
	superpower�" and "is moving quickly to consolidate and expand 
	its virtual gas monopoly in many parts of Europe...."
	While our European allies are more directly impacted by this, 
	the fact that our world economy is so tied together and also 
	the fact that Europe could also be shopping elsewhere is 
	certainly a concern, never mind the geopolitical implications 
	of Russia�s rise to power in this field.
	Of course, I also realize the impact Iran has on the price of 
	world oil.  The instability within the region itself is a huge 
	concern of ours not just because its impact on energy but 
	because the shadow of Iran�s threat is cast beyond the sole 
	concerns of our access to oil.
	Finally, I wanted to take a moment to discuss another 
	potential impact on the price of foreign crude. If you talk to 
	many domestic producers, they might comment on how the prices 
	they are getting for their oil is too low and how that 
	threatens to put them out of business. We are not talking 
	about $70 a barrel but rather, $22 to $35 dollars a barrel for 
	domestic oil.  Imagine the impact of losing our domestic 
	producers and how that would impact the price we pay at the 
	pump.
	Again, Mr. Chairman, thank you for holding this hearing today.  
	I look forward to hearing from the witnesses.

Prepared Statement of the Hon. Charles W. "Chip" Pickering, a 
Representative in Congress from the State of Mississippi

Energy prices are on the minds of all Americans these days, given high 
gas prices.� As Members of Congress, we are charged with taking the 
necessary steps to ensure that appropriate safeguards exist that will 
protect against unfair pricing of energy commodities, including crude 
oil.� Therefore, our series of hearing on these issues is extremely 
important and timely.� If we find evidence of lapses in oversight of 
our energy markets, we will take necessary actions to correct the 
problems.� I understand that the New York Mercantile Exchange provides 
an important�platform for the trading of these energy commodities and 
I�look forward to�hearing testimony today from NYMEX which will give 
the committee a better understanding of how their marketplace 
functions on a daily basis and what their platform means for energy 
prices.� I understand that NYMEX is regulated by the U.S. Commodity 
Futures Trading Commission and look forward to hearing more about 
how the oversight regime works.� 
�	I am also interested in hearing about other energy markets 
�	and other platforms which could have an impact on energy 
�	prices.� More importantly, I am concerned based on my 
�	understanding of these other platforms, that the regulatory�
�	attention paid to them may be somewhat less than that 
�	received by�NYMEX.� If this is in fact the case, I will be 
�	interested in hearing testimony�explaining why this is the 
�	case and if the additional regulatory oversight is necessary, 
�	especially given the important of these markets�in 
�	establishing prices for commodities used by all Americans.� 
�	If�the evidence suggests insufficient oversight, which could 
�	be contributing to higher prices or even market manipulation, 
�	it is my hope that our committee will move to fix�the problem

	Chairman Barton.  We now welcome our first two witnesses.  We 
	are going to start with you, Mr. Caruso, and then we will let 
	Dr. Yergin be the clean-up.
	Normally we do 5 minute summaries, but because of the importance 
	of this issue, we will recognize you for 10 minutes each, and if 
	you need a little bit more time, we are not going to be too 
	picky about that.
	So welcome to the committee, and we would like to hear your 
	statement.

STATEMENTS OF GUY CARUSO, ADMINISTRATOR, ENERGY INFORMATION 
ADMINISTRATION, U.S. DEPARTMENT OF ENERGY; AND DANIEL YERGIN, CHAIRMAN, 
CAMBRIDGE ENERGY RESEARCH ASSOCIATES

Mr. Caruso.  Thank you very much, Mr. Chairman, members of the 
committee.  I appreciate this opportunity to present the Energy 
Information Administration�s views and analysis on the world oil market 
situation.
	As we often hear in the real estate market, the three key 
	factors are location, location, and location.  In the global 
	oil market, the three key factors are capacity, capacity, and 
	capacity.  And that is capacity from the upstream sector of the 
	industry to explore, develop, and produce through the midstream 
	transporting that crude oil to the downstream of refining, 
	distribution, and marketing.  And as we sit here today, in an 
	85-million-barrel-a-day world oil industry, all of those 
	capacities, from the upstream through the downstream, are 
	stretched very thin.
	During the 1990s, these capacities were looser and the price, 
	for example, of West Texas Intermediate crude averaged about 
	$20 a barrel.  It even fell to $10 a barrel in 1998.  OPEC 
	managed the market.  After that price collapse, prices were 
	coming back and value increased to about $30 in 2003.  The 
	main reason was world demand was growing, and prices doubled 
	to an average of almost $60 in 2005, and, as we know, today, 
	they are above $70 a barrel.
	Crude oil prices are set in international markets based on 
	world supply and demand.  These higher prices should reduce 
	demand and increase supply, however, we must recognize that 
	there are considerable time lags in responses to the higher 
	prices on both the demand and the supply side.  Changing 
	consumer behavior, investment responses all take time, and 
	investment in new oil production and refining projects take 
	time for a variety of reasons.
	In the short term, crude oil end-product inventories, surplus 
	production capacity, and international trade all serve as 
	cushions for unexpected shifts in demand or supply of 
	petroleum products.  Today, the cushions just aren�t available 
	to make an effect on this market.  As a result of that, the 
	only pressure relief valve is price, and that is what we have 
	been witnessing really beginning in 2004, and it continues as 
	we speak.
	The robust global economic growth has been a key factor, and 
	it has pushed the demand for crude oil up significantly in 
	recent years.  After slow growth in the 1990s, oil demand 
	grew significantly beginning in 2003 and, in 2004, it grew by 
	2.5 million barrels a day, the largest rate of growth in 30 
	years, and this was particularly stimulated by very robust 
	growth in China, other emerging Asian economies, in the 
	Middle East itself, and in the United States.  Now we are 
	seeing a little bit of an effect of the higher oil prices 
	as U.S. demand was relatively flat last year, and thus, by 
	this year, is only up slightly.
	Turning to supply, non-OPEC producers, who tend to further 
	utilize their available crude production capacity for 
	economic reasons, produce about 60 percent of the world�s 
	oil supply.  In 2005, there was essentially no growth in 
	non-OPEC supply due to natural declines in the mature fields, 
	project delays, and most importantly, the U.S. hurricanes, 
	which continue to affect the U.S. production today.
	The nations in OPEC produce about 40 percent of the world�s 
	oil, and its members in the Middle East hold the bulk of the 
	world�s oil reserves.  For most of the time since the early 
	1980s, OPEC members held sizable surplus production capacity.  
	However, that margin has sharply narrowed as world demand has 
	grown.  World surplus productive capacity now totals only 
	about one to, at most, 1.5 million barrels a day out of an 
	85-million-barrel-a-day world, about 98 percent of capacity.
	The uncertainties that we have heard a number of committee 
	members mention this morning about supply in Iraq, in Nigeria, 
	in Venezuela, and in Russia, all are certainly adding to the 
	psychological pressures in this marketplace and to concerns 
	that future supply disruptions may occur.
	Oil markets, of course, are not just about crude oil supply 
	but also refining.  Excess refining capacity has also been 
	shrinking, not only in the United States but globally, in 
	the primary distillation facilities and, most importantly, 
	in conversion capacity to turn sulfurous crude into gasoline, 
	diesel fuel, and jet fuel, which account for about 70 percent 
	of our oil demand in this country.
	We estimate that refinery utilization worldwide is at about 
	90 percent in 2006, up from 85 percent as recently as 2002.  
	Although refining margins have increased with these higher 
	product prices, there also has been considerable volatility, 
	which tends to effect companies� willingness to invest in 
	what oftentimes is a multi-year development project which 
	must pay off over decades.
	With this virtual disappearance of U.S. excess refining 
	capacity, we are now seeing a number of firms, as has been 
	mentioned by Mr. Green, that have announced expansion plans 
	at existing facilities.  New grassroots refineries are under 
	construction at this time.
	Another factor affecting refineries is crude oil quality.  
	The limited amount of surplus capacity that exists today is 
	in Saudi Arabia, and it is relatively high sulfur, or sour 
	crude.  This puts a strain on refineries around the world to 
	process the lower-quality oil.  The trends in crude and product 
	slates plus frightening product specifications have increased 
	the need for refineries to invest in upgrades to their 
	existing equipment.
	In tight markets without surplus capacity, inventories also 
	play an important role as a buffer against supply problems. We 
	currently are witnessing a futures market, which is in 
	contango, meaning that the future prices are actually higher 
	than the current price in the physical market.  This puts 
	another incentive for companies to add to inventories, and the 
	desire to increase inventories adds to current demand, putting 
	additional pressure on prices.
	Some analysts, as has been mentioned this morning, suggest that 
	the current prices reflect a "fear" premium, a "risk" premium.  
	In our view, supply and demand factors can explain most of the 
	price increases seen over the last few years, particularly when 
	it is recognized that demand for high inventories is rational 
	under conditions of tight surplus capacity and particularly 
	supply uncertainty.  Unless surplus capacity increases 
	significantly, or many of the supply uncertainties are 
	resolved, we could see high inventories and high prices, 
	reflecting a shift from the traditional paradigm that 
	associates high inventories with low prices.
	Now let me briefly turn to the current EIA short-term outlook.
	We have been saying for some months that the world oil market 
	is tight and that prices are likely to remain high over the 
	next two years.  Our most recent short-term energy outlook 
	released April 11 projected crude oil prices averaging $65 for 
	WTI in 2006 and $61 in 2007.  Based on developments just in 
	the last several weeks, there is likely to be some upward 
	adjustment in these projections when our May outlook is issued 
	next week.  We project continued growth in world oil demand of 
	about 1.5 million barrels per day in 2006 and a similar 
	increase in 2007.  Non-OPEC production growth is expected to 
	run behind global demand growth in 2006, increasing the call 
	on OPEC�s oil, but still allowing for a small increase in 
	OPEC�s surplus production capacity.
	Based on projects already in the pipeline, it is likely that 
	growth in OPEC and non-OPEC capacity will exceed demand growth 
	between 2007 and 2010, possibly pushing surplus production 
	capacity to three to five million barrels per day by 2010.
	High crude oil prices, growing demand, and changing fuel 
	specifications are expected to keep U.S. product prices high 
	in 2006.  High gasoline margins are expected due to demand 
	increases, sulfur reductions, the phase-out of MTBE, and the 
	unusually high level of refinery outages recently, partly due 
	to deferred maintenance from the Katrina and Rita aftermaths, 
	and to some capacity actually still off-line due to those 
	hurricanes.
	So in summary, Mr. Chairman and members of the committee, we 
	see oil markets over the next two years characterized by strong 
	demand growth, tight global capacity for both crude production 
	and refining, and continued supply uncertainty in a number of 
	key producing countries.
	And with that, Mr. Chairman, I would be pleased to answer 
	questions at the appropriate time.
	[The prepared statement of Hon. Guy F. Caruso follows:]

Prepared Statement of the Hon. Guy F. 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 
world oil market situation.
The Energy Information Administration (EIA) is the 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 the Congress, the 
Administration, and the public. We do not take positions on policy 
issues.  We do produce data, analysis, and forecasts that are meant to 
assist policymakers in their energy policy deliberations. Because we 
have an element of statutory independence with respect to this work, 
our views are strictly those of EIA and should not be construed as 
representing those of the Department of Energy or the Administration.
Oil market developments are a matter of vital interest to all 
Americans. During most of the 1990s, the West Texas Intermediate (WTI) 
crude oil price averaged close to $20 per barrel, but plunged to 
almost $10 per barrel in late 1998 as a result of the Asian financial 
crisis slowing demand growth while extra supply from Iraq was entering 
the market for the first time since the Gulf War. During that time, 
the Organization of Petroleum Exporting Countries (OPEC) producers 
adhered to a coordinated production quota and reduced output. Crude 
oil prices not only recovered, but increased to about $30 per barrel 
as demand grew. The recent increase in crude oil prices began in 2004, 
when crude oil prices almost doubled from 2003 levels, rising from 
about $30 per barrel at the end of 2003 to peak at $56.37 on 
October 26, 2004. After falling back briefly, prices then continued 
to rise in 2005 and in the early months of 2006. Just recently, we 
have seen WTI prices rise above $70 per barrel. This is a significant 
change from what we experienced during the latter half of the 1980s 
and the 1990s. As requested in your invitation, my testimony focuses 
on the major forces at work in today�s oil market and then briefly 
reviews EIA�s current assessment.

Major Forces Affecting World Oil Markets
Crude oil prices are determined in international markets. All else 
being equal, higher prices should tend to reduce oil demand and 
increase supply. However, oil demand is also strongly influenced 
by economic growth, weather patterns, and the availability and price 
of other fuels. Moreover, oil supply can be significantly affected 
by weather-related disruptions, instability, impediments to investment 
in key oil producing areas, and, under certain market conditions, 
decisions by producers to withhold supplies. Because there are 
considerable lags in the investment and behavioral responses to 
changing oil prices, recent price increases have had only a very 
small immediate impact on the amount of oil consumed or produced. 
For this reason, changes in the key non-price factors that can shift 
demand and supply at any point in time can result in significant price 
swings, particularly when oil markets are tight. Given the inherent 
uncertainty in oil markets, commercial inventories of crude oil and 
products and surplus oil production and refining capacity serve as 
cushions to absorb the impacts of unexpected shifts in oil supply or 
demand. International arbitrage in products, such as the movement of 
gasoline from Europe to the United States, is yet another form of 
cushioning. All of these factors are interrelated, as will be 
discussed in more detail below.
Demand.  Recent years have seen a significant acceleration in oil 
consumption growth, largely driven by strong global economic growth. 
As illustrated in Figure 1, oil consumption, which grew at a rate, 
on average, of roughly 1 million barrels per day throughout the 1990s, 
accelerated sharply in 2003 and especially in 2004, when global oil 
demand grew by 2.5 million barrels per day. Demand growth has been 
particularly strong in China, other emerging economies in Asia, and 
the United States. In 2005, although available data to date indicate 
that U.S. oil consumption was essentially flat at the 2004 level, 
world consumption grew by well over 1 million barrels per day despite 
rising prices. In addition to demand for consumption, there is also a 
demand for commercial (non-strategic) stocks of crude oil and products. 
Commercial oil stocks have recently been growing, as discussed below.

Supply.  Growth in production and productive capacity is shaped by 
geological, economic, and political factors. Production in countries 
that are not members of OPEC accounts for about 60 percent of total 
crude oil supply. Crude oil suppliers outside of OPEC generally 
produce at maximum rates (i.e., no surplus production capacity) for 
economic reasons.
Although they provide only about 40 percent of the world�s oil supply, 
capacity, and production, statements by the member countries of OPEC 
are closely watched. Unlike other producers, OPEC and its members 
explicitly seek to influence world prices by varying production 
levels relative to available capacity. Middle East countries that are 
members of OPEC also hold the bulk of the world�s proved reserves of 
oil.
For most of the time since the early 1980s, OPEC members, primarily 
Saudi Arabia, have maintained a considerable margin of surplus crude 
oil production capacity. The large growth in non-OPEC capacity and 
production in areas like the North Sea, Russia, and Alaskan North 
Slope, along with softening demand in response to the substantial 
increase in oil prices following the two oil price shocks of the 
1970s, led to major cuts in OPEC production in the 1980s, creating 
large capacity surpluses. As oil demand grew through the 1990s, OPEC 
production increased without a corresponding increase in capacity, 
and the margin of surplus capacity generally narrowed. However, while 
short-term imbalances between supply and demand resulted in some price 
swings during the 1990s, those imbalances did not last long, as 
capacity generally existed to remedy the situation within a year.
Even as demand growth slowed somewhat in 2005 compared to 2004, 2005 
witnessed no real growth in non-OPEC supply, in part because of the 
U.S. hurricanes, but also because of other factors such as project 
delays and significant natural decline in mature producing areas. 
Hence, instead of 2005 giving the market time to breathe after the 
rapid demand growth in 2004, market conditions in 2005 only grew 
tighter.
Ongoing supply uncertainties associated with Iraq and Nigeria and 
investment uncertainties in Russia and Venezuela have added to market 
concerns over the availability of crude oil, and prices have continued 
to rise. In 2005, Iran and Ecuador added new uncertainties. So far in 
2006, we have seen continued, if not growing, geopolitical risks, with 
Chad most recently added to the list of potential concerns.
Refining (Downstream) Capacity Constraints.  In the past few years, 
even as crude oil prices rose sharply, a great deal of attention has 
been turned toward the importance of the refining sector, especially 
following the hurricanes last fall. The storm-related shutdown of many 
Gulf Coast refineries highlighted a situation that had been developing 
for some time. Excess capacity in the refining industry, like that for 
crude oil production, has been shrinking as demand has grown, leaving 
less of a buffer for emergencies or any periods when the balance 
between supply and demand becomes unusually tight. The reduction in 
excess refining capacity is a global phenomenon. EIA estimates that 
global refinery utilization has grown to about 90 percent of capacity, 
up from 85 percent as recently as 2002, as the overall growth in demand 
for petroleum products has outpaced refinery additions.
Historically, price differentials between crude oil and petroleum 
products have varied significantly over time due to a number of 
influences, the greatest of which is seasonality. Even in the absence 
of changes in the underlying cost of the crude oil from which they are 
refined, gasoline and distillates (including heating oil, diesel fuel, 
and jet fuel) exhibit seasonal pricing cycles over the course of the 
year. Gasoline prices (and differentials from crude oil) tend to rise 
before and during the summer, when demand for it is greater, and decline 
in the winter. Distillate prices and differentials, on the other hand, 
tend to increase over the fall and early winter, as space-heating 
demand increases, then to drop in the spring.
This underlying seasonal pattern has always been subject to distortion 
under unusual situations, such as supply interruptions or severe 
weather, which can affect both supply and demand. But by and large, 
the seasonal shifts in differentials between crude oil and petroleum 
product prices were relatively consistent, and thus predictable. In 
recent years, however, as excess refinery capacity has dwindled, these 
price spreads have become subject to much wider swings, both seasonally 
and under unusual supply or demand conditions. For example, through the 
1990s, the average spread between U.S. spot gasoline and WTI crude oil 
prices generally swung from a low of less than 10 cents per gallon 
during the winter months to a high of around 20 cents in the summer. 
Since 2000, the corresponding range has been from a winter low of 
about 10 cents to a summer high of 30 to 40 cents, with last year 
featuring an all-time monthly average high of 67 cents in September, 
following Hurricane Katrina.
Much has been made of these higher differentials and the accompanying 
higher profits to refiners. Clearly, when refinery utilization rates 
were below today�s high level, margins were generally lower but so was 
refining profitability, providing little incentive for the building of 
new refining capacity. As a result, as product demand caught up to 
existing refinery capacity, capacity that was not fully utilized has 
effectively disappeared in the United States, and consequently 
refining margins have grown. A number of U.S. refiners have 
announced major refinery expansion projects to be completed in the 
next few years.
Commercial Inventories of Crude Oil and Products.  When the lack of 
surplus capacity along the entire supply chain is put in context of 
an oil market where uncertainties about future supply abound (e.g., 
Iran, Nigeria, Iraq, and Venezuela), market participants are concerned 
about being able to get needed supplies should something cause a drop 
in supply.
As a result, many of them have stored additional inventories as a 
buffer should there be a supply problem at some point in the future. 
In other words, whereas markets have traditionally relied on available 
surplus capacity to provide a part of the response to any unexpected 
supply problems, under current tight capacity conditions, inventories 
must play a relatively larger role in buffering the market, and the 
demand for inventories has increased, putting upward pressure on 
prices.
Additionally, until the most recent surge in crude oil prices, oil 
market futures prices were in contango, i.e., a market in which prices 
for commodities delivered in future months are higher than for those 
delivered in months closer to the present. This provides economic 
incentive for suppliers to build inventories as they can buy physical 
barrels at current prices, but hedge against any drop in prices by 
selling contracts at higher prices on the futures market. Of course, 
one of the reasons oil markets were in contango is concern about the 
potential of a disruption in supplies in the future, either from 
events overseas or from hurricanes, for example.
Thus, until either surplus capacity increases significantly or many of 
the perceived uncertainties in the market are removed, oil markets 
could see high inventories coexist with high prices for the foreseeable 
future. Oil market analysts used to the old, inverse relationship 
between inventories and prices need to understand that new market 
dynamics (lack of surplus capacity and contango) have significantly 
altered this linkage. This perception that high oil prices may continue 
for some time encourages non-physical traders to buy up contracts, 
adding further support to high prices on commodity markets. In 
addition, the volume of non-physical traders has increased in recent 
years, meaning that speculative investors have a somewhat greater effect 
on price than in the past. Nevertheless, such speculation is more an 
effect of real market conditions than a cause, in and of itself, of 
high prices.
Crude Oil Price Differentials.  As global oil demand growth has 
outpaced supply, shrinking available surplus crude oil production and 
refining capacity, another factor has become increasingly important - 
the quality of the crude oil streams available. The very limited amount 
of surplus oil production capacity is increasingly concentrated in heavy, 
sour (high-sulfur) crude, at a time when demand growth for "light" 
products such as gasoline, diesel fuel, and jet fuel has been 
particularly strong. The decline in average crude quality has put even 
more strain on a global refining system that is already running at 
unprecedented utilization rates to turn available feedstocks into the 
desired product slate.
The combination of higher demand for "clean" and "light" products and 
tighter supply of light, sweet crude oils has resulted in wider price 
differentials between crude types. Thus, in addition to higher average 
world crude oil prices, the prices of high-quality crude oils, which 
can yield the highest percentages of gasoline and other light products, 
have grown even faster than the average, placing an even greater price 
premium on "clean" products such as reformulated gasoline and low-sulfur 
diesel fuel. The price differential between crude oil types also places 
a greater premium on high-upgrading refinery capacity, including 
facilities able to remove more sulfur and produce higher yields of light 
products from heavier crude streams. Along with tightening product 
specifications and other environmental constraints, these trends have 
forced refiners to spend more capital on upgrading existing refinery 
equipment, at the expense of greater capacity growth.
Is There an Additional "Fear" Premium?  Some analysts, noting that oil 
markets have recently shown price changes that they deem to be 
"unwarranted" in response to seemingly innocuous news, have argued that 
prices are high due to speculation or a "fear" or "risk" premium. What 
is missing from this argument is recognition that under the current 
tight oil market conditions described above, there is very little 
flexibility in the global production or refining system to react to 
potential supply shortfalls or demand surges. EIA currently estimates 
that global surplus crude oil production capacity is only about 1.0-1.5 
million barrels per day. The relationship between surplus OPEC capacity 
and prices is depicted in Figure 2. As many as 20 different countries 
currently produce at least 1 million barrels per day.
Flexibility in oil markets is currently very limited in the capacity 
to produce significant incremental volumes of crude oil or light 
products. Under these conditions, it is not too surprising that 
traders would bid prices up and down substantially on what may, on the 
surface, appear to be insignificant news, but what can, nevertheless, 
change expectations about what the future may hold. This is why oil 
prices can increase as fears about the damage a hurricane might 
inflict arise as the hurricane approaches, only to see them fall as 
the hurricane turns away from the oil facilities in the Gulf of Mexico 
region, or as concerns about having enough oil on hand when world total 
product demand peaks in the winter cause prices to go up in the summer. 
When oil markets are as tight as they are, relatively small changes in 
the actual or perceived supply and demand picture, which may result 
from seemingly innocuous news items, can have a magnified impact on 
oil prices. Simply put, any "fear" or "risk" premium would be hard to 
sustain without the fundamentals of supply and demand already being 
tight. EIA believes that supply and demand factors can explain almost 
all of the price increases seen over the last few years, particularly 
when it is recognized that demand for high inventories is rational 
under conditions of tight surplus capacity and supply uncertainty.

The Outlook for Oil Markets
EIA�s monthly Short-Term Energy Outlook is fairly representative with 
regards to projections of world oil prices and world oil market trends. 
However, for the reasons discussed above, it should be noted that 
energy price projections are particularly uncertain, because small 
shifts in either supply or demand can necessitate large short-term 
price movements to restore balance under current tight oil market 
conditions.
EIA has been saying for many months that the world oil market is tight, 
and that world oil prices are likely to remain high over the next 
2 years. Most analysts now agree with this assessment, and last week 
the International Energy Agency (which does not make short-term price 
projections) went on record with this viewpoint as well. This is in 
contrast to the diversity of views expressed just last year, when many 
other analysts believed that prices were out of line with market 
fundamentals and would not remain high for an extended time.
In addition, EIA�s assessment of world oil demand growth is similar to 
those of other analysts. EIA currently projects demand growth of 
1.5 million barrels per day in 2006, within the 1.2 to 1.7 million 
barrels-per-day range of other forecasters. Analysts are more divided 
over the prospects for growth in non-OPEC total liquids production, 
with EIA�s projections of 0.8 million barrels per day growth in 2006 
on the low end. Most projections range between 0.9 and 1.4 million 
barrels per day, although several other forecasters have an even 
lower estimate of 0.5 million barrels per day.
According to EIA�s most recent Short-Term Energy Outlook, released 
April 11, 2006, continued steady world oil demand growth, only modest 
increases in world surplus oil production capacity, and the continuing 
risks of geopolitical instability and weather are expected to keep 
crude oil prices high through 2006. The price of WTI crude oil is 
projected to average $65 per barrel in 2006 and $61 in 2007. We are 
currently in the process of compiling our May Outlook for release on 
May 9, which will likely incorporate some upward adjustment to 
projected prices in light of recent market developments.
World oil market conditions, growth in U.S. demand, and ongoing 
implementation of domestic fuel quality requirements are all expected 
to keep consumer prices for motor fuels and other petroleum products 
high in 2006. Higher crude oil costs together with higher margins 
(retail price minus crude oil cost and taxes, per gallon) are also 
expected to contribute to increases at the pump. Higher gasoline 
margins are likely because: 1) gasoline consumption is expected to 
grow solidly following weak growth in 2005; 2) Tier 2 gasoline 
requirements mandate further reduction in sulfur content this year; 
3) phase-out of methyl tertiary butyl ether (MTBE) from the 
gasoline pool is likely to put significant pressure on ethanol and 
gasoline prices; and 4) there has been an unusual level of refinery 
outages due in part to hurricane-related deferred maintenance. 
Higher diesel fuel margins are expected because of the additional 
cost of producing ultra-low-sulfur diesel fuel later this year.
EIA View of Capacity Additions.   In OPEC, surplus production 
capacity will remain tight in 2006, but EIA expects around 600 
thousand barrels per day of surplus crude oil production capacity 
growth and 600 thousand barrels per day of non-crude production 
growth. Specifically, the UAE could add 200 thousand barrels per 
day from de-bottlenecking the Zakum and Umm Shaif fields. New 
crude oil production capacity at the Bonga and Erha fields in 
Nigeria has been offset by disruptions to Shell-owned, offshore 
oil production, and these recent disruptions could have longer-
term implications for net supply growth from Nigeria. Algeria�s 
production is expected to increase by 100 thousand barrels per 
day from increased oil and condensate production. Libya could also 
add 100 thousand barrels per day, primarily from enhanced recovery 
from existing fields. Iran and Indonesia are projected to lose 
capacity by 2007. This year, EIA expects non-OPEC total liquids 
supply growth of up to 800 thousand barrels per day, and we expect 
an additional 1.5 million barrels per day in 2007. One major portion 
of the increases in non-OPEC supply in 2006 is simply recovery from 
the Gulf of Mexico hurricanes. Improvements to oil supply recovery 
technology in the Gulf of Mexico, recovery of the Mars production 
platform, and the beginning of production from the Thunderhorse and 
Atlantis fields account for a large portion of growth from the United 
States. By the fourth quarter of 2007, oil production from these 
fields is expected to account for about 10 percent of the lower-48 
oil production. Outside of the United States, major supply additions 
in the Caspian, Brazil, and West Africa stem the decline in mature 
field production in the North Sea, Russia, the Middle East, and 
Mexico.
Major projects in Angola include the Chevron-led Benguela Belize 
project, of 200 thousand barrels per day, and the ExxonMobil-led 
Kizomba B and C projects, of 250 thousand and 240 thousand barrels 
per day, respectively. By the time these projects are all producing 
at their maximum rates in 2007 and 2008, they will have added almost 
700 thousand barrels per day to Angola�s existing production. In the 
Caspian, the BP-led consortium that is developing the Azeri-Chirag-
Guneshli (ACG) project will increase production by around 400 thousand 
barrels per day between 2005 and 2007. The project operators maintain 
that they will be able to double Azerbaijan�s existing production to 
around 1 million barrels per day by 2010. Finally, in Canada, 
conventional oil production in the Western Canada Sedimentary Basin 
will continue to decline at around 3 percent per year. Taking into 
account nonconventional growth from oil sands, EIA still expects 400 
thousand barrels per day of net growth from Canada between 2005 and 
2007.
Based on projects that are already in the pipeline, there is a strong 
likelihood that additions in OPEC and non-OPEC capacity will exceed 
demand growth between 2008 and 2010. World surplus production capacity 
could grow to 3 to 5 million barrels per day by 2010, substantially 
thickening the surplus capacity cushion, if demand projections prove 
accurate. A larger surplus capacity cushion would undoubtedly be 
beneficial. Based on recent experience, it is clear that geopolitical 
developments in oil-producing areas will also be important to the 
future supply situation, but EIA has no basis for projecting whether 
the overall stability of these areas will improve or deteriorate.
This concludes my testimony, Mr. Chairman and members of the Committee. 
I will be happy to answer any questions you may have.

	Chairman Barton.  We thank you, Mr. Administrator.
	We now want to hear from Dr. Daniel Yergin, who is recognized 
	as one of the leading experts and consultants on the energy 
	sector in the world today.  We appreciate you being here.
Dr. Yergin.  Thank you, Mr. Chairman.
	And it is really an honor and a privilege to be able to join 
	you, Mr. Chairman and members of the committee, as you conduct 
	this timely set of hearings on America�s energy situation.
	As we all know, the deep concerns and the financial pressures 
	that the American public are experiencing are what prompted 
	this hearing, and I hope in the course of our discussions to 
	be able to contribute a little bit to understanding the context.
	There are many issues here at home to address, but I think if 
	there is a single message I can leave you all with today, it 
	is that we cannot begin to understand what is happening at the 
	gasoline pump today unless we see it in the global context 
	involving both crude supply, refining, and indeed foreign 
	policy and geopolitics.  So I am pleased to be here, and I am 
	very happy to be with the Administrator of the EIA, Guy Caruso, 
	for whom I have great respect.
	I want to try and answer four questions and maybe set them out 
	as a framework for discussions.
	First, the question on everybody�s mind, we heard it today, 
	why have prices doubled in the last two years.  And as I say, 
	you need to see it in a global context.  There is not, today, 
	a global shortage, but the oil market is very tight, pointing 
	to rising demand and now, to what we can see, is this kind of 
	slow-motion energy shock.  We have developed the concept of an 
	aggregate disruption to try and bring it together.  We put that 
	number at 2.2 million barrels a day, based upon Venezuela, 
	Iraq, the Gulf of Mexico, and Nigeria.
	Guy Caruso spoke about the risk premium, or the "fear" premium, 
	or some call it a "security" premium.  And we share the view 
	that it really does derive from people looking at the 
	fundamentals in the market.  And at least our estimate right 
	now is that it will be somewhere between $10 and $15 a barrel.
	The second question is what are these high prices telling us 
	about the futures world oil supply?  Are we, indeed, running 
	out, as some say?  And to that, I answer the question: yes, 
	indeed, we are running out, and indeed, this is the fifth time 
	that we have run out of oil.  The first time was in the 1880s.  
	The last time, before this time, was in the 1970s, and since 
	then, world oil production has increased by 60 percent.
	In other words, what I want to suggest to you all today is that 
	the prime risks are not the resources underground, but what is 
	happening above ground: politics, geopolitics, policies, and a 
	rebirth in some parts of the world of what sure looks like a 
	1970s-style resource nationalism, which is riding on this crest 
	of high energy prices.  We saw it unfolding there past few days 
	in Bolivia, and it reminds us that, indeed, the broader context 
	of geopolitics and foreign policy is very important to the whole 
	energy picture.
	There is, understandably, and we hear it all of the time, much 
	focus on energy security.  It will be the number one issue on 
	the agenda when the G-8 nations meet in St. Petersburg in July.  
	But one of the things that strikes me is that everybody is in 
	favor of energy security, but there is not a lot of clarity on 
	what do we mean by energy security.
	So for this hearing, I wanted to offer a set of principles, 
	which I will just do in shorthand, and though not offer them as 
	a definitive list, but really as a process of dialogue or 
	consideration.  And there are ten of them.
	One is diversification of supply.  That is the starting point.
	The second is the importance of a resilient security margin.  
	The type of issue is capacity that Guy Caruso was talking about 
	that gives us a buffer.
	Three, and this is something that we forget a lot, is really 
	the reality of integration.  There is, at the end of the day, 
	only one global oil market.  There are not four or five 
	different ones.
	Fourth, and we see it whenever emotions get hot, the importance 
	of quality information.
	Fifth, and this is in response to some of the issues that have 
	been raised, the need to engage countries, such as China, 
	India, and Brazil, in the energy security system and to use 
	the sort of idiomatic parliaments to understand where they 
	are coming from on energy issues.
	Sixth, something that I think is complicated, but very 
	important, is extending the energy security concept to include 
	the infrastructure and the entire supply chain.  The hurricanes 
	emphasized that.
	Seventh is something that, frankly, I think is probably 
	counterintuitive for these circumstances, recognizing that 
	flexible markets are actually a source of security rather than 
	insecurity.  And I think we saw that in the response to the 
	hurricanes last autumn.
	Certainly, as we have heard, renewing the commitment to energy 
	efficiency and conservation, strengthening the investment 
	climate, which is an international issue, and the development 
	and deployment of new technologies.  So I offer those as ten 
	elements about energy security.
	The final overall point that I develop in my testimony is an 
	urgent need to update the SEC-mandated system for defining 
	proved oil reserves, because it is still done on the basis of 
	technology from the late 1970s.  It is this 1978 system.  It 
	provides a distorted view of our reserve base.  It is as though 
	saying that when you submit financial information to the SEC, 
	you should use only typewriters and carbon paper.  That is, 
	more or less, what it is like.  And this serves neither the 
	interest of consumers, nor investors, nor that of energy 
	security.
	As I think Guy emphasized, we are really at a historic 
	juncture right now.  After a quarter century, this great 
	cushion of surplus production capacity that was created by 
	the energy turbulence of the 1970s and the early 1980s has 
	been largely spent.  It is gone, at least for the time being. 
	And it is on that relatively narrow band of "spare capacity" 
	that so much of the drama in the world oil market, and indeed 
	at the gasoline pump, now plays out.
	We all know, and it is a question for this hearing, why people 
	are paying $3 a gallon or more today.  But as I said, we won�t 
	find the answer if we only look inside the United States.  
	Sometimes, as I hear the debate about energy, it seems to 
	assume that we are an island; the United States is an island, 
	albeit a very large continental island.
	That is not the case, as we have already heard.  We imported 
	a third of our oil in the 1970s.  Today, we import 60 percent.  
	What this means is that we are highly integrated into the 
	global marketplace, and we are surely affected by what happens 
	in that marketplace.
	We have to remind ourselves of scale.  U.S. oil companies, for 
	instance, produce less than 10 percent of the total oil that 
	is produced in the world today.  Sixty-five percent is produced 
	by State-owned companies.  They have over 80 percent of the 
	reserves.
	Today, that balance between supply and demand is very tight.  
	As we have heard, part of the reason is the surge in economic 
	growth in developing countries.  China and India are the most 
	noteworthy examples, although China grew by 16 percent in 2004.  
	That caught everybody�s attention.  In 2005, China�s demand 
	grew by only 2 percent.  And the data is still preliminary, but 
	we will look to EIA for what is happening in data.
	On refining, and I hear the numbers about all of the refineries 
	that have disappeared.  I think it is true, but an awful lot of 
	those were the "teakettles" that were created in the 1970s to 
	take advantage of what was called the "small refiner bias."  
	These were very inefficient refineries.  And I think we have to 
	look at the overall aggregate refining capacity.  That number 
	went down until about 1993 or 1994.  It has grown by about 15 
	percent since then, which is as though we have built ten new 
	refineries in the United States, but we built them by expanding 
	existing capacity.  And part of the discussion, of course, is 
	what we need to do to expand our capacity looking to the future.
	But there, too, we have to look in a global context, because 
	there is a global shortage of what is called "complex refining 
	capacity," which is necessary to reflect the fact that European 
	motorists love diesel cars.  Over half of them buy diesel cars.  
	Asia depends upon diesel fuel.  We have complex refining 
	capacity, but Europe and Asia don�t have enough.
	I think we can say that the focus of the market, which was on 
	demand, has really now shifted to supply, and that we are 
	experiencing, as I said, that slow motion supply shock.  But 
	what explains the rapid rise over the last eight weeks?  There 
	are three things that really stand out.
	Number one is Nigeria, and I think there is an underestimation 
	in the discussion about the significance of what has happened 
	in Nigeria, the loss of that high-quality oil--which is so 
	essential for making gasoline--and the uncertainty about 
	whether we are going to lose more from Nigeria.  Five hundred 
	and fifty thousand barrels a day is missing from Nigeria.  The 
	last time there was a disruption like this a few years ago, it 
	was like 800,000 barrels a day.  That is one reason the market 
	is nervous.
	The second is the ratcheting up of tensions over Iran�s nuclear 
	program.  We all know what has happened over the last month, 
	and the fear of disruption in one way or another of Iran�s 
	2.5 million barrels a day of exports.  Some Iranian spokesmen 
	threatened to unleash an oil crisis while others seek to 
	separate oil from atoms.  But in this market, the threat of 
	risk escalation is enough to send crude oil prices up.  And 
	sometimes, I think the chief speculator in the oil market today 
	is the President of Iran.
	The third factor that I want to just say, and you all know it 
	very well, is clearly this rapid switchover from MTBE to ethanol.  
	It has added to the pressures in the market.  It comes at a 
	difficult time.  The spring is really when you see the pressure 
	of the summer driving season, the additional pressures of the 
	hurricanes.  I think when the energy legislation was passed, no 
	one knew that these hurricanes would, of course, follow, but it 
	is very well to remember when we have these changes, doing it in 
	compressed time is very difficult when we think in another few 
	weeks we will be through it, but it is certainly something that 
	should work now.  So as I said, we think this transition, MTBE 
	to ethanol, will be over by the time Americans begin their 
	serious driving this summer.  But there is little reason to 
	think that the tension over Iran�s nuclear program will abate, 
	and much uncertainty about what will happen in Nigeria.  And 
	as we have heard, in terms of foreign policy, elsewhere in the 
	world as well.
	So, in terms of dealing with the situation that we now see, 
	the $3 at the pump, the pain it is causing for American 
	consumers, I think we have to look for the impact of 
	fundamentals for price moderation.  We need to look for the 
	build-up of supplies from elsewhere.  We need to look at the 
	level of crude oil inventories.  And we need to look to the 
	response to higher prices on the part of consumers, on the 
	part of investors, and indeed on the part of people in the 
	Congress and other parts of the U.S. government who are 
	entrusted with making wise decisions about our energy 
	future.
	Thank you.
	[The prepared statement of Daniel Yergin follows:]

Prepared Statement of Daniel Yergin, Chairman, Cambridge Energy 
Research Associates

It is an honor and privilege to be invited to address this Committee 
as it begins its important and timely set of hearings on America�s 
energy position. The deep concerns among the American public that 
are prompting this hearing are evident, and I appreciate the 
opportunity to contribute to understanding the context.  I hope that 
I can provide a framework for your consideration.  If there is a 
single message, it is that we cannot begin to understand what is 
happening at the gasoline pump unless we see it in the global context -- 
involving both crude supply and refining worldwide.
I hope in this hearing to answer four questions:


Why have oil prices nearly doubled during the past two years?  What are 
the risks going forward?  I would like to present what is happening at 
the pump in a global context.  Although there is no actual supply 
shortage, the world oil market is very tight, owing not only to rising 
demand, but also to a "slow motion supply shock" -- what we have called 
an "aggregate disruption" in excess of two million barrels per day.
What are current prices telling us about the world�s future oil supply?  
Oil is a non-renewable resource, but we do not believe the world is 
imminently facing the specter of running out.  Or, to put it differently, 
this current period is the fifth time the world has run out of oil.  The 
first time was in the 1880s and the last time before this time, in the 
1970s - since which world oil production has increased 60 percent. The 
prime risks today are not lack of resources underground, but what is 
happening above ground - politics, geopolitics, and a rebirth in some 
parts of the world of 1970s style resource nationalism that is riding 
on the crest of high prices.
There is, understandably, much focus on energy security today.  But 
what does the concept mean for the 21st century and how does it need 
to be updated from traditional definitions?  I would like to offer 
these principles:
Diversification of supply is the starting point
Resilience, a "security margin" in the energy supply system that 
provides a buffer against shocks and facilitates recovery after 
disruptions.
Recognizing the reality of integration - there is only one global 
oil market
The importance of quality information
The need to engage such countries as China, India, and Brazil in the 
energy security system  
Expanding energy security to the include the infrastructure and the 
entire energy supply chain 
Recognizing flexible markets as a source of security 
Renewing the commitment to energy efficiency and conservation
Strengthening the investment climate itself 
j)     Development and deployment of new technologies
Finally, I want to comment about the urgent need to update the 
SEC-mandated definition of proved reserves, which are still based on 
the technology of the late 1970s and, as a result, provides a 
distorted view of our reserve base. That serves neither the interests 
of consumers, nor investors, nor that of energy security.

II	Prices and the Security Premium
As the sense of these hearings indicates, we are at a historic 
juncture.  After a quarter century, the great cushion of surplus oil 
production capacity  that was created by the energy turbulence of the 
1970s and early 1980s has been largely spent - at least for the time 
being.  It is on that relatively narrow band of "spare capacity" that 
so much of the drama in world oil markets is playing out.
The American people clearly want to know why they are paying about 
$3 -- or more --  at the pump.  But we will not find the answer if we 
only look inside the United States.  Sometimes, the debate about 
energy prices seems to assume that the United States is an island - 
albeit a very large continental island.
That, of course, is not the case.  In the 1970s we imported a third of 
our oil; today, it is on the order of 60 percent.  Our oil imports are 
larger than the total oil consumption of any other country in the 
world.  What this means is that we are highly integrated into the 
global marketplace - and are affected by what happens in the market.
Today, the balance between supply and demand in the world oil market 
is very tight.  Part of the reason is the surge in economic growth in 
both developed and developing countries - of which the growth of China 
and, to a lesser regard, India provide the most noteworthy examples. 
But the demand surge turned into slower growth in 2005 and the data is 
still preliminary for 2006. 
Meanwhile,  the focus of the market has shifted from demand to supply. 
We are currently experiencing that slow motion supply shock, the 
aggregate disruption of more than two million barrels per day, to 
which I referred before.
What explains the sharp rise in oil prices over the past eight weeks?
The first is the real disruption of a significant part of Nigeria�s 
oil production owing to an insurgency in Nigeria�s Delta region.  
Workers have been evacuated, and the local insurgents are threatening 
further attacks.  This means the loss of a high quality light sweet 
oil particularly well-suited for making gasoline.
2.    The second is the ratcheting up of tensions over Iran�s nuclear 
program with a fear of a disruption of Iran�s 2.5 mbd of exports.  
Some Iranian spokesmen threaten to unleash an "oil crisis" while 
others seek to separate oil from atoms.  But in a market this tight, 
the risk of escalation is enough to send crude oil prices up.
3.	The third factor is at home - the rapid switch over from MTBE 
to ethanol on the East Coast and in Texas has added pressure to what 
has been for a number of years the most difficult period in the 
gasoline market - the spring  makeover of gasoline from winter to 
summer blends.  This year�s switchover has been made more arduous by 
the consequences of last year�s hurricanes.  Refineries need downtime 
for maintenance and to prepare for the switch to ultra-low sulfur 
diesel in the summer.  The shifting from MTBE to ethanol has required 
changes all along the supply chain - different suppliers, different 
transportation  (trucks and rail cars instead of pipelines) and 
different locations for blending (terminals instead of refineries.)  
Normally a change over like this would be done in a couple of years.  
As it turned out, 270 days a very compressed time for conversion in 
the face of other challenges, including the unexpected fury of the 
hurricanes that occurred after the passage of the energy bill. 
We would expect that the transition will be complete by the time most 
Americans begin their serious summer driving.  But there is little 
reason to think that the tension over Iran�s nuclear program will 
abate, and much uncertainty remains over what will happen in Nigeria.  
So we must look to the impact of fundamentals for  price moderation --  
in the build-up of supplies from elsewhere, the relatively high level 
of crude oil inventories, and the demand response to higher prices.

The Demand Surge
The last decade has witnessed a substantial increase in the world�s 
demand for oil, primarily because of the dramatic economic growth in 
developing countries, in particular China and India. As late as 1993, 
China was self-sufficient in oil. Since then, its GDP has almost 
tripled and its demand for oil has more than doubled. Today, China 
imports 3 million barrels of oil per day, which accounts for almost 
half of its total consumption. China�s share of the world oil market 
is about 8 percent, but its share of total growth in demand since 
2000 has been 30 percent. 
The impact of growth in China, India, and elsewhere on the global 
demand for energy has been far-reaching. In the 1970s, North America 
consumed twice as much oil as Asia. In 2004 and 2005, for the first 
time ever, Asia�s oil consumption exceeded North America�s. The trend 
will continue: half of the total growth in oil consumption in the next 
15 years will come from Asia, according to CERA�s projections.
However, Asia�s growing impact became widely apparent only in 2004, 
when the best global economic performance in a generation translated 
into a "demand shock"-that is, unexpected surge in petroleum 
consumption that was more than double the annual average growth rates 
of the preceding decade. China�s demand in 2004 rose by an 
extraordinary 16 per-cent compared to 2003, driven partly by 
electricity bottlenecks that led to a sharp rise in oil use for 
improvised electric generation. US consumption also grew strongly in 
2004, as did that of other countries. The result was the tightest oil 
market in three decades (except for the first couple of months after 
Saddam�s invasion of Kuwait in 1990). 
The torrid pace of demand in 2004 did not continue into 2005. Last 
year China�s demand grew by 1.7  percent - compared to the 16 percent 
in 2004 - and world demand grew just 1 percent.  

Refining Capacity
Refining capacity is a major constraint on supply, because there is a 
significant mismatch between the refined product requirements of the 
world�s consumers and refineries� capabilities. Although often 
presented solely as a US problem, inadequate refining capacity is in 
fact a global phenomenon. The biggest growth in demand worldwide has 
been for what are called "middle distillates": diesel, jet fuel, and 
heating oil. Diesel is a favorite fuel of European motorists, half of 
whom now buy diesel cars, and it is increasingly used to power economic 
growth in Asia, where it is utilized not just for transportation but 
also to generate electricity. But the global refining system does not 
have enough so-called deep conversion capacity to turn heavier crudes 
into middle distillates. This shortfall in capacity has created 
additional demand for the lighter grades of crude.  
Nevertheless, refining is a high-focus issue in the United States.  
The number of U.S. refineries has gone down by about half since the 
1970s.  Many of these were the small "tea kettle" refineries that were 
intended to take advantage of the "small refiner bias" under the 1970s 
control system.   
Yet what truly counts is not the number of refineries but the capacity 
- the number of barrels that can be produced.  Here we see a different 
trend.  Overall, capacity went down until the early 1990s and then 
began to increase again with larger, more efficient refineries.  This 
does not reflect the building of new refineries, which has been 
hampered by costs, siting, and permitting.  Rather it is expansion 
and  upgrading of existing refineries and what is called "refinery 
creep"-which when added up has taken some big steps. Capacity is up 
15 percent - 2.2 mbd - since then.   This 2.2 mbd expansion in 
capacity is the equivalent of adding 10 new good-sized refineries 
over the last dozen years.
There is unease, of course, about dependence on imported refined 
products and possible threats to the supply chain.  At this point, 
half of total refined products imports come from Western Europe, 
Canada, and the Caribbean (excluding Venezuela).  Western Europe has 
been the largest source because it has excess gasoline production.  

Slow Motion Supply Shock: the Aggregate Disruption
But what has now become clear in 2006 is that we are experiencing a 
slow motion supply shock - an aggregate disruption that, at present, 
we would put at 2.2 million barrels per day.

Nigeria		550,000 bd 
Venezuela	400,000 bd
Iraq			900,000 bd
US Gulf		324,000 bd	

A good part of Gulf of Mexico production is slated to soon start up 
again (as is hurricane season.)  In the meantime, other transitory 
interruptions elsewhere in the world can, at least for short periods, 
take additional oil off the market.
These disruptions have, with the strength of demand, resulted in a 
very tight oil market and one that is more vulnerable to any further 
problems.  Market psychology - anticipation of risk - becomes more 
powerful, translating into a scarcity or risk premium.  We currently 
estimate that premium at $10 -15 a barrel.  At the present time, the 
most important contributors to the premium are the unrest in Nigeria, 
and uncertainty about what will happen there, and the ratcheting up of 
tension over Iran�s nuclear progress and the fear that in one way or 
another, Iran�s 2.5 mbd of exports may be disrupted, with additional 
collateral effects.    Without these circumstance, we would not be 
seeing oil over $70 per barrel.


IV 	Growing Resource Base - and the "Undulating Plateau"
As always happens when prices are high and supplies are uncertain, 
there is much discussion about whether the world is going to run out of 
oil.  In the 1970s, the term was "the oil mountain," as in  "the world 
was about to fall off the oil mountain."  The geographic imagery has 
gotten higher -- today it is "peak."  Our research leads us to conclude 
that "peak" is a misleading image.  Based upon our analysis of oil 
fields and investment programs , and drawing on the databases of our 
parent company IHS, which has the largest collection of data on world 
production, we see a substantial buildup in world oil production 
capacity for a number of years. A more relevant description is 
"plateau" in production capacity that might be reached closer to the 
middle of the century.
We currently project worldwide liquids production capacity (not actual 
production) to grow from 88.7 mbd in 2006 to 105.3 mbd in 2015.  This  
involves a growing role for non-traditional liquids - oil sands, gas-to-
liquids, ultra deep water. This represents a widening of the definition 
of oil.  Such a development and accords with the history of the industry, 
in which non-conventional technologies are introduced and, over time 
become conventional.
The risks are not below ground, in terms of shortage of resources, but 
above ground - political decisions by governments, conflict, natural 
disaster, or price volatility.  Rising costs and shortage of people are 
also of concern.  Our CERA Capital Costs Index indicates that offshore 
costs are up 42 % since 2000 - and 14% just in the last half-year.
After 2010, growth in capacity will be concentrated in what we call the 
"0il 15" - which will likely cause increased foreign policy concern.
I want to emphasize that this outlook does not detract, at all,  from 
the need to develop new technologies, new energy options, alternatives, 
and new unconventional production.  It does argue strongly for a need 
to integrate energy and foreign policy in a considered way - a point 
I will develop later.

Modernizing Reserve Disclosure
I have spoken about the need to understand future resources and to 
expand our concepts of energy security. Let me mention one area in 
which the US government could address both.  The system for reserves 
disclosure mandated by the Securities and Exchange Commission was 
established by the US Congress in the mid-1970s, after the first Oil 
Shock, for reasons of energy security - to answer the questions "how 
much oil is actually there?"
The "1978 System," as put in place reflects the best practices of the 
time.  It was based upon the 1965 definition of The Society of 
Petroleum Engineers (SPE) and discussions in the 1970s.  Since then, 
the SPE has revised its definition three times and is in the process 
of doing so again.  However, the SEC�s system still relies on the 
definition of 1965 and the practices of the 1970s.  Thus registrants 
are basically restricted to the technology of those years in reporting 
reserves - which has led to a growing divergence between what is 
reported under the SEC�s 1978 system and how companies, using more 
modern technologies and tools, assess their own reserve position, on 
which they base investments of hundreds of million of dollars - and, 
now more frequently, several billion dollars.
The changes have been enormous since the 1970s. Back then there was no 
digital revolution, and the frontier for offshore developments was 600 
feet of water; today it is 12,000 feet.  The rules do not recognize 
the vast technical progress over the last 30 years, and as a result, 
standard techniques used today by companies to set multibillion 
investment programs are not approved, or only partly approved, for 
use in describing proved reserves for disclosure purposes to investors.
In addition, the rules simply have not kept up with the globalization 
of the industry.  They were devised for onshore operations in 
"Texlahoma," the "oil patch" of Texas, Louisiana and Oklahoma that 
was the center of industry activity in the �50s and �60s.  Today more 
than 80% of the total of companies� proved reserves are outside the US; 
and the differences among the fiscal regimes in several countries make 
it harder, not easier, to compare domestic and international reserves.  
As perverse as it may sound, under the "production sharing agreements" 
that are common in many oil-producing countries, when the price goes 
up, the proved reserves go down.
Major projects today dwarf those in the past, both in size and 
complexity.  "Non-traditional projects: are drawing on increasing 
share of capital, but they are not adequately accommodated under the 
"1978 system."  This includes a significant part of Canadian oil sands, 
gas-to-liquids and projects in what�s called the "ultra-deep-water."  
And yet these "non-traditional-liquids will account for as much as 
45% of oil production capacity in North America by 2010.  Nor does the 
current system fully account for larger, commodity-driven liquefied 
natural gas business that will be critical to the future US natural 
gas supplies.
But the industry is still required to report using the technology of 
the 1970s -- when no one had a cell phone or a personal computer, let 
alone access to the Internet.  It is as though companies preparing 
financial reports to the SEC in 2006 could do so only use typewriters 
and carbon paper.  Modernizing the reserves disclosure would clearly 
improve understanding of the resource base and its potential and 
provide clarification for purposes of energy security.

Energy Security in the 21st Century
What has been the paradigm of energy security for the past three 
decades is too limited and must be expanded to include many new 
factors. Moreover, it must be recognized that energy security does not 
stand by itself but is lodged in the larger relations among nations 
and how they interact with one another. Energy security will be the 
number one topic on the agenda when the group of eight highly 
industrialized countries (G8) meets in St. Petersburg in July. The 
renewed focus on energy security is driven in part by an exceedingly 
tight oil market and by high oil prices, which have doubled over the 
past three years. But it is also fueled by the threat of terrorism, 
instability in some exporting nations, a nationalist backlash, fears 
of a scramble for supplies, geopolitical rivalries, and countries� 
fundamental need for energy to power their economic growth. 
Concerns over energy security are not limited to oil. When it comes 
to natural gas, rising demand and constrained supplies mean that North 
America can no longer be self-reliant, and so the United States is 
joining the new global market in natural gas that will link countries, 
continents, and prices together in an unprecedented way. 
At the same time, a new range of vulnerabilities has become more 
evident. Al Qaeda has threatened to attack what Osama bin Laden calls 
the "hinges" of the world�s economy, that is, its critical 
infrastructure-of which energy is among the most crucial elements. The 
world will increasingly depend on new sources of supply from places 
where security systems are still being developed.  And the 
vulnerabilities are not limited to threats of terrorism, political 
turmoil, armed conflict, and piracy. In August and September 2005, 
Hurricanes Katrina and Rita delivered the world�s first integrated 
energy shock, simultaneously disrupting flows of oil, natural gas, 
and electric power. 
The key to energy security has been diversification. This remains 
true, but a wider approach is now required that takes into account the 
rapid evolution of the global energy trade, supply-chain 
vulnerabilities, terrorism, and the integration of major new economies 
into the world market. 
The current energy security system was created in response to the 1973 
Arab oil embargo to ensure coordination among the industrialized 
countries in the event of a disruption in supply, encourage 
collaboration on energy policies, avoid bruising scrambles for 
supplies, and deter any future use of an "oil weapon" by exporters. Its 
key elements are the Paris-based International Energy Agency (IEA), 
whose members are the industrialized countries; strategic stockpiles of 
oil, including the US Strategic Petroleum Reserve; continued monitoring 
and analysis of energy markets and policies; and energy conservation 
and coordinated emergency sharing of supplies in the event of a 
disruption. 
Experience has shown that to maintain energy security countries need to 
recognize several key principles. 
The first is diversification of supply. Multiplying one�s supply 
sources reduces the impact of a disruption in supply from one source by 
providing alternatives, serving the interests of both consumers and 
producers, for whom stable markets are a prime concern. But 
diversification is not enough. 
A second principle is resilience, a "security margin" in the energy 
supply system that provides a buffer against shocks and facilitates 
recovery after disruptions. Resilience can come from many factors, 
including sufficient spare production capacity, strategic reserves, 
backup supplies of equipment, adequate storage capacity along the 
supply chain, and the stockpiling of critical parts for electric 
power production and distribution, as well as carefully conceived 
plans for responding to disruptions that may affect large regions. 
Hence the third principle: recognizing the reality of integration. 
There is only one oil market, a complex and worldwide system that moves 
and consumes about 86 million barrels of oil every day. For all 
consumers, security resides in the stability of this market. Secession 
is not an option. 
A fourth principle is the importance of information. High-quality 
information underpins well-functioning markets. Information is crucial 
in a crisis, when consumer panics can be instigated by a mixture of 
actual disruptions, rumors, and fear. Reality can be obscured by 
accusations, acrimony, outrage, transforming a difficult situation 
into something much worse. In such situations, governments and the 
private sector should collaborate to counter panics with high-quality, 
timely information. 
As important as these principles are, the past several years have 
highlighted the need to expand the concept of energy security in two 
critical dimensions: 
the recognition of the globalization of the energy security system, 
which can be achieved especially by engaging China and India, and  
the acknowledgment of the fact that the entire energy supply chain 
needs to be protected. 
It is important to get China�s situation into perspective.  Despite 
all the attention being paid to China�s efforts to secure international 
petroleum reserves, for example, the entire amount that China currently 
produces per day outside of its own borders is equivalent to just 
10 percent of the daily production of one of the supermajor oil 
companies. If there were a serious controversy between the United 
States and China involving oil or gas, it would likely arise not 
because of a competition in a well-functioning global market for the 
resources themselves, but rather because they had become enmeshed in  
larger foreign policy controversies (such as a clash over a specific 
regime or over how to respond to Iran�s nuclear program). Indeed, from 
the viewpoint of consumers in North America, Europe, and Japan, Chinese 
and Indian investment in the development of new energy supplies around 
the world is not a threat but something to be desired, because it means 
there will be more energy available for everyone in the years ahead as 
India�s and China�s demand grows. 
It would be wiser-and indeed it is urgent-to engage these two giants in 
the global network of trade and investment rather than see them tilt 
toward a mercantilist, state-to-state approach. Engaging India and China 
will require understanding what energy security means for them. Both 
countries are rapidly moving from self-sufficiency to integration into 
the world economy, which means they will grow increasingly dependent on 
global markets even as they are under tremendous pressure to deliver 
economic growth for their huge populations, which cope with energy 
shortages and blackouts on a daily basis. Thus, the primary concern for 
both China and India is to ensure that they have sufficient energy to 
support economic growth and prevent debilitating energy shortfalls that 
could trigger social and political turbulence. 
The concept of energy security needs to be expanded to include the 
protection of the entire energy supply chain and infrastructure. None 
of the world�s complex, integrated supply chains were built with 
security, defined in this broad way, in mind. Hurricanes Katrina and 
Rita brought a new perspective to the security question by demonstrating 
how fundamental the electric grid is to everything else.
Energy interdependence and the growing scale of energy trade require 
continuing collaboration among both producers and consumers to ensure the 
security of the entire supply chain. Long-distance, cross-border pipelines 
are becoming an ever-larger fixture in the global energy trade. There are 
also many chokepoints along the transportation routes of seaborne oil and, 
in many cases, liquefied natural gas (LNG) that create particular 
vulnerabilities.  
The challenge of energy security will grow more urgent in the years 
ahead, because the scale of the global trade in energy will grow 
substantially as world markets become more integrated. Currently, every 
day some 40 million barrels of oil cross oceans on tankers; by 2020, 
that number could jump to 67 million. By then, without major technical 
changes, the United States could be importing 70 percent of its oil 
(compared to 58 percent today and 33 percent in 1973), and so could 
China.
 	But in the United States, as in other countries, the lines of 
 	responsibility-and the sources of funding-for protecting 
 	critical infrastructures, such as energy, are far from clear. 
 	The private sector, the federal government, and state and local 
 	agencies need to take steps to better coordinate their 
 	activities. 
7.  	Markets need to be recognized as a source of security in 
themselves. The energy security system was created when energy prices 
were regulated in the United States, energy trading was only just 
beginning, and futures markets were several years away. 
Today, large, flexible, and well-functioning energy markets provide 
security by absorbing shocks and allowing supply and demand to respond 
more quickly and with greater ingenuity than a controlled system could. 
Such markets will guarantee security for the growing LNG market and 
thereby boost the confidence of the countries that import it. There is 
much to be said in terms of resisting the temptation to intervene and 
micromanage markets. . Intervention and controls, however well meaning, 
can backfire, slowing and even preventing the movement of supplies to 
respond to disruptions. At least in the United States, any price spike 
or disruption evokes the memory of the infamous gas lines of the 1970s. 
Yet those lines were to a considerable degree self-inflicted-the 
consequence of price controls and a heavy-handed allocation system that 
sent gasoline where it was not needed and denied its being sent where 
it was. 
Contrast that to what happened immediately after Hurricane Katrina. A 
major disruption to the US oil supply was compounded by reports of 
price spiking and of stations running out of gasoline, which together 
could have created new gas lines along the East Coast. Yet the markets 
were back in balance sooner and prices came down more quickly than 
almost anyone had expected. Emergency supplies from the US Strategic 
Petroleum Reserve and other IEA reserves were released, sending a "do 
not panic" message to the market. At the same time, two critical 
regulatory restrictions were eased. One was the Jones Act (which bars 
non-US-flagged ships from carrying cargo between US ports), which was 
waived to allow non-US tankers to ship supplies bottlenecked on the 
Gulf Coast around Florida to the East Coast, where they were needed. 
The other was the set of "boutique gasoline" regulations that require 
different qualities of gasoline for different cities, which were 
temporarily lifted to permit supplies from other parts of the country 
to move into the Southeast. The experience highlights the need to 
incorporate regulatory and environmental flexibility-and a clear 
understanding of the impediments to adjustment-into the energy 
security machinery in order to cope as effectively as possible with 
disruptions and emergencies. 
The US government and the private sector should also make a renewed 
commitment to energy efficiency and conservation. Although often 
underrated, the impact of conservation on the economy has been 
enormous over the past several decades. Over the past 30 years, US 
GDP has grown by 150 percent, while US energy consumption has grown 
by only 25 percent. In the 1970s and 1980s, many considered that 
kind of decoupling impossible, or at least certain to be 
economically ruinous. Current and future advances in technology 
could permit very large additional gains, which would be highly 
beneficial not only for advanced economies such as that of the United 
States, but also for the economies of countries such as India and 
China (in fact, China has recently made conservation a priority). 
The investment climate itself must become a key concern in energy 
security. There needs to be a continual flow of investment and 
technology in order for new resources to be developed. The IEA 
recently estimated that as much as $16 trillion will be required 
for new energy development over the next 25 years. These capital 
flows will not materialize without reasonable and stable investment 
frame-works, timely decision making by governments, and open 
markets. 

New Technologies
Development of new technologies will remain the fundamental 
starting principle of energy security for both oil and gas. This 
will require new generation of nuclear power and "clean coal" 
technologies and encouraging a growing role for a variety of renewable 
energy sources as they become more competitive. It will also require 
investing in new technologies, ranging from near-term ones, such as 
the conversion of natural gas into a liquid fuel, to ones that are 
still in the lab, such as the biological engineering of energy 
supplies. Investment in technology all along the energy spectrum is 
surging today, and this will have a positive effect not only on the 
future energy picture but also on the environment. 
We talked earlier of the widening definition of oil.  We will also 
see the widening definition of gasoline with what has recently 
become a broad commitment to introducing ethanol into the gasoline 
pool.  Undoubtedly we will see a substantial growth of ethanol and 
the infrastructure to support it.  But we have to remember the 
overall scale of the target envisioned in the 2005 legislation would 
be about five percent of total supply.  Given the current incentive 
to step up in investment, the number could be somewhat higher. 
Achieving much larger objectives depends on substantial advances in 
the science of cellulosic ethanol.  Certainly this will be a major 
focus of effort in the years ahead.  
Finally, we must return to the larger context. Energy security indeed 
exists in a larger context. In a world of increasing interdependence, 
energy security will depend much on how countries manage their 
relations with one another, whether bilaterally or within 
multilateral frameworks. That is why energy security will be one of 
the main challenges for US foreign policy in the years ahead. Part 
of that challenge will be anticipating and assessing the "what ifs." 
And that requires looking not only around the corner, but also beyond 
the ups and downs of cycles to both the reality of an ever more 
complex and integrated global energy system and the relations among 
the countries that participate in it.

	Chairman Barton.  Thank you, Dr. Yergin.
	The Chair is going to recognize himself for the first round of 
	questioning.
	I want to thank each of you for your testimony.  It is 
	refreshing to have a discussion that it is non-demagogic, about 
	the oil industry.  I want to start with a general question that 
	each of you may want to address.
	Each of you has indicated that the cushion between production 
	and reserve capacity is almost non-existent, that we produce 
	about 85 million barrels of oil worldwide, and we are using 
	about 85 million, maybe 84 million.  What were the events, say, 
	10 years ago, and what would it be helpful if they were today, 
	i.e., if we had a 5 million barrel reserve margin or a 
	10 million barrel reserve margin.  What would that do to the 
	price structure?
	Mr. Caruso.  About 10 years ago, world surplus capacity was 
	between three and four million barrels a day.  And in the 
	mid-1980s, when prices collapsed, those of you who remember in 
	1986, world excess capacity actually reached 11 million barrels 
	a day.  Then prices were averaging about $12 a barrel that 
	year.  So we are talking about if you had to pick one key 
	factor, surplus productive capacity, there is a chart in my 
	testimony, shows how critical that is, that as you move 
	towards the 5-million-barrel-a-day mark and higher, then you 
	get back to what we have observed as a historical average of 
	around $20 a barrel in the world oil market.
	Chairman Barton.  Is 5 million barrels kind of the minimum?
	Mr. Caruso.  It is very difficult, because it is not only the 
	absolute number but, as has been eloquently pointed out, in 
	the context of what kind of geopolitical environment are you 
	in.  I think we are not only right now in the worst of both 
	worlds, we have 1 or 1.5 million barrels a day of surplus--
	Chairman Barton.  Well, could you postulate a theory that you 
	need enough reserve capacity to take the expected increase 
	this year and next year with, then, maybe another million 
	barrels on top or something like that?  If you had a "world 
	energy czar" and they adopted that as a strategy, would that 
	alleviate some of the price pressure that we have today at 
	retail?
	Mr. Caruso.  In my view, it would.
	Chairman Barton.  Because that would take some of the 
	speculative pressures off.
	Well, the question I would ask you, Dr. Yergin, given this 
	tightness of the supply reserve margin cushion and these high 
	prices we have had, why has there not been more of a response 
	on the production side in these countries that have large 
	proven reserves?
	Dr. Yergin.  Right.  I think you have to look at each country. 
	Venezuela has had a 400,000 barrel-a-day decline in production 
	capacity since the turmoil there in 2002 and 2003.  I think 
	Russia was on a very strong up growth, but changes there and 
	the shift there has meant that Russian growth is much lower. 
	I think that when prices are high, governments don�t feel the 
	pressure or the need for revenues, and so they put a lot less 
	focus on--
	Chairman Barton.  Take a country like Mexico, if there is ever 
	a country that has a revenue pressure on it because of its 
	economy and the growth of its population, why would they not 
	significantly expand production on their proven reserve base, 
	given these prices?
	Dr. Yergin.  Well, I think Mexico is constrained by the nature 
	of its political system from responding, and it needs more 
	investments in its sector.  They don�t have the capital to do 
	it.  It needs technology to go out into deep waters and so 
	forth, and it is not doing that.  And I think if you look at 
	the battles over the last 6 years, 5 years, and Mexico�s 
	political system, an awful lot of it has been do you open up 
	their sector to international investment, which would 
	certainly lead to higher production and ultimately would lead 
	to higher government revenues.
	Chairman Barton.  Well, is there any evidence, either one of 
	you gentlemen, that the current price level is encouraging 
	proven reserves coming on line in some of the nations that 
	actually have large reserve bases?
	Dr. Yergin.  Well, I think the country where you can see and 
	it is pretty clear a substantial increase is coming, of course, 
	is Saudi Arabia, which has a $50 billion program to increase 
	capacity.  The other thing is you can see that the spending, 
	where you can see it by companies around the world, is 
	increasing very substantially to invest, but it is also coming 
	at a time that costs are going up pretty rapidly in the 
	industry.  Our cost index shows the costs of developing, let us 
	say, an offshore field in the Gulf of Mexico, doing it today 
	would be 42 percent more expensive than it would have been 
	5 years ago.  So people are increasing investment, but it is 
	also up against an industry that is very short of people. 
	There is another capacity to add to Guy�s capacity, the 
	shortage of people, equipment, and skills.
	Chairman Barton.  Okay.  My time has expired.  I want to ask 
	one more question.  And I could ask questions for the next 
	hour, but obviously, with all of the Members here, that is 
	not fair.
	I want each of you to speculate a little bit on what is 
	happening in the futures market by speculators, and what 
	would the reaction be if we raised the margin requirement 
	on the energy futures market from the current requirement, 
	2 or 3 percent, to 35 percent or 50 percent, something like 
	it is in the stock market.  Dr. Yergin, in your testimony, 
	said that the estimates are that speculation adds $10 to 
	$15 a barrel or maybe 10 to 15 percent.
	Dr. Yergin.  Ten to 15 dollars a barrel.
	Chairman Barton.  So what would happen, because that is 
	something this Congress could do.
	Dr. Yergin.  Yes.
	Chairman Barton.  We could have a margin requirement increase 
	on the floor two weeks from now, maybe even next week.  What 
	would that do to drive the speculators out of the market and 
	bring the price down?  And what would that do for the people, 
	the hedgers and the traders who actually use the futures 
	market in their daily business regime?
	Dr. Yergin.  I think that, obviously, that is really getting 
	to the next panel, but I would say that one of the new things 
	in the market is that it is not only the traditional traders 
	and hedgers and so forth, but also you have an awful lot of 
	pension fund money, endowment money, and so forth, that is 
	going into the oil market, seeing oil as a financial 
	instrument, and that is long-term passive money.
	Chairman Barton.  They are in the futures market?
	Dr. Yergin.  Yes, they are buying the commodity.
	Chairman Barton.  A pension fund is buying a futures fund?
	Dr. Yergin.  Yes, pension funds now believe that they need to 
	diversify into their asset classes, and one of their asset 
	classes is commodities.  And what commodity looms larger than 
	oil?  None.  So that is part of their diversification.  So 
	that is part of it.  As to what the right percentage for the 
	margin requirements is, that is not something that I have 
	studied so that I could give you an answer for that.
	Chairman Barton.  Well, make a guess.
	Dr. Yergin.  Well, I think if you raise the margin 
	requirements, would it reduce the volatility?  I don�t know. 
	Guy, what do you think?
	Mr. Caruso.  I am not sure, probably a bit less.  Our analysis, 
	what should I say, we don�t think the speculative part of the 
	price is quite as high as $10 to $15, but there is clearly an 
	upside bias to this market.  It is because most people 
	perceive the risk to be on the upside.  Now by raising the 
	margin requirements, it certainly would make the cost of 
	business for legitimate speculators on the market more 
	expensive, but I think, my understanding is the CFTC now has 
	very tight regulations on NYMEX, for example.  So I am not so 
	clear it would really achieve the stability that you are 
	looking for.  And I think volatility plays a role in the 
	marketplace.  It reflects the uncertainty that is out there. 
	And ultimately, the physical market brings the futures and 
	the paper market back down.  It can�t get too far out of line 
	because of the arbitrage and the normal hedging that takes 
	place.  So my own view is it probably wouldn�t reduce 
	volatility that much.
	Dr. Yergin.  Mr. Chairman, if I could add one other thing. 
	I think when I assumed that $10 to $15, I think we wouldn�t 
	say it is a speculative premium so much as a "security" or a 
	"fear" premium, because the President of Iran makes a very 
	apocalyptic statement, and I think that participants in the 
	market, whether they are traders, whether they are people 
	worrying about long-term supplies, what they are looking at 
	is it reflects the fear that maybe there will be a disruption, 
	and it may be more of a shortage.  So I just wanted to 
	separate out the speculative from what is really driven by, 
	ultimately, a concern about the fundamental.
	Chairman Barton.  I understand that, but there is a 
	difference when an airline is using the futures market to 
	try to hedge the price of fuel or a producer who wants to 
	make sure they lock in a certain price for their product 
	than somebody who is just literally, "Well, I think the 
	price is going to go up.  I think the price is going to go 
	down."  And buying a futures contract purely on speculation. 
	They have no intention to use the contract for anything other 
	than to make or lose money.  There is nothing wrong with 
	playing the markets to make or lose money, but this particular 
	commodity, at this particular time, if those participants in 
	the market are a larger percentage than normal, I think it is 
	a legitimate government function to consider raising the 
	margin requirement to make it more difficult to just purely 
	be speculative in the market.
	Let us see.  Mr. Gonzalez would be the senior Member here who 
	was here at the start of the bell.
	Mr. Gonzalez.  Thank you very much, Mr. Chairman.
	And I share with you the concerns regarding the investments by 
	pension funds and such and highly speculative investments, but 
	I do believe, and I will have to look at it, one of my 
	concerns was actually included in the Republican Pension 
	Reform Bill out of the House, which actually lowered the 
	threshold to allow these pension funds to get into the hedge 
	markets and investments.  And so maybe we ought to have that 
	discussion on another day, but it is out there, and it is very 
	real.  And I share your concerns.
	My question.  Mr. Caruso, when was the last time you testified 
	here?  It wasn�t that long ago.  A few months ago?
	Mr. Caruso.  Well, after the Katrina.
	Mr. Gonzalez.  And at that time, I think, you had some 
	projections or predictions on the price of gasoline.  And I 
	believe you were right on until very recently.  Do you remember 
	what your predictions were?  I don�t have my notes.  I just 
	remember you--
	Mr. Caruso.  I think last fall, we were looking at an average 
	gasoline price for the United States this year would be around 
	about $2.40.  So we were lower than the way they are going 
	right now, largely because I think our crude price projection 
	was around $60, and now we are probably looking at $66 or $67.
	Mr. Gonzalez.  So a lot of what we do, government agencies, 
	departments, Members of Congress, when we look to the future, 
	this is something that really is not that predictable 
	depending on all of these other conditions?
	Mr. Caruso.  Correct.
	Mr. Gonzalez.  Yes.  Because I mean, when we went back to our 
	district, we were telling them that basically government 
	officials were telling us, and you were actually right. I mean, 
	I was really surprised that you were that accurate at that 
	point in time.  I hate to say that, you know, now your batting 
	average in the past couple of weeks is really bad.
	Mr. Yergin, this is really amazing. You know, I come from 
	Texas, Mexican-American descent and such, and it is a 
	heartbreaker to think that PEMEX is not more than it can be.  
	Are there any estimate studies out there showing what the 
	potential output would be of Mexico and, of course, the Gulf 
	Coast?  What would they be adding as far as the output?  What 
	is the potential out there that is untapped, and for whatever 
	reason, may remain untapped?
	Dr. Yergin.  Well, the Mexican Oil Minister came to our 
	conference in Houston in February, and he presented this map of 
	the U.S. Gulf of Mexico, which showed lots of black points in 
	the U.S. sector of the Gulf of Mexico and almost none in the 
	Mexican sector.  And yet, you can�t really believe that those 
	oil and gas resources just end at the boundary line, because 
	they were there a long time before the boundaries came in, so 
	I can�t put a number on it, but I think that Mexico could be 
	a substantially larger producer, which would be good for 
	Mexico, and it would be good for Mexico�s neighbors.
	Mr. Gonzalez.  The other thing is, as I think you pointed out, 
	the importance of our international policy and what we do 
	here domestically and how it impacts our relationships with 
	these particular oil-producing countries.  We are involved in 
	a highly contentious immigration proposed legislation that 
	demonizes, in essence, the undocumented worker and the family 
	coming from Mexico and parts of Latin America.  Do you see a 
	downside?  Do you see any implication?  Do you see any 
	consequences of that policy and its potential impact on our 
	relationship with any oil-producing country in that area?
	Dr. Yergin.  Well, I don�t know how this whole issue is 
	playing in Mexican politics.  I think the issues over Mexico�s 
	oil, whether they open up their system or not, goes back to 
	the Mexican Revolution and to the nationalization of 1938, 
	which is one of the most important political events in 
	Mexico�s history.  And I think that a lot will depend upon 
	who is elected this year in Mexico.  As I think several 
	Members have remarked, there are a lot of adverse 
	geopolitical trends in the world, and certainly we have 
	seen a kind of clash now, or a conflict, in Latin America 
	between what you might call the hard left, return to 
	socialism, and the sort of center left as to how engaged 
	or not engaged to be with the world economy.  And I think 
	how that plays out is something we haven�t been, as a 
	country, giving that much attention, except sporadically.  
	I think that, over the next few years, is something that 
	will loom more significantly.
	Mr. Gonzalez.  And one last question.  First of all, and of 
	course, part of the House bill has a 700 mile-long wall 
	being built along the Mexican border.  Should we be 
	considering an exception for pipelines just in case?
	Dr. Yergin.  That is--
	Mr. Gonzalez.  I am making jest, but this is--
	Dr. Yergin.  Mexico actually--
	Ms. Bono.  Would the gentleman yield for one second?
	Mr. Gonzalez.  No, I am actually going to be--
	Ms. Bono.  Oh, excuse me.
	Mr. Gonzalez.  But I do have a question.
	If we send back $100 to all of the consumers out there, if 
	we have a windfall profit tax and we suspend the Federal 
	gasoline tax, and some States suspend it, what is the 
	implication?  What is the real consequence to the consumer 
	out there when they are paying $3 for a gallon of gas?  How 
	temporary is this fix?  Is it really long term?  What I 
	want to know is, is it practical and of any real 
	significance.
	Dr. Yergin.  I think the number one factor, there are other 
	domestic factors we have talked about, how specifications 
	come in, fuel changes, and the others like refining capacity. 
	But at the end of the day, it is the crude oil and the price 
	of crude oil that is really the largest determinant, and that 
	is determined in the world.
	Mr. Whitfield.  [Presiding.]  The gentleman�s time has 
	expired. Thank you.
	I will recognize myself now.
	I was reading an article the other day, and it was talking 
	about that over the last year, Saudi Arabia had increased its 
	drilling rig count from 38 to 42.  And it says that all four 
	of these have been contracted for offshore work, two for 
	work-overs and two for exploration.  And it went on to say 
	that Saudi Arabia has been trying to get rigs from all over 
	the world and has not been successful, which raises this 
	question.  One of you mentioned that in the 1980s, with 
	prices going down to $10 a barrel, and it is my understanding 
	that in the 1980s, although I was not particularly focused on 
	the oil business at that time, that big companies went out of 
	business, particularly oil and gas service companies that 
	failed to service, and that as a result of that, we lost a 
	lot of technical knowledge because a lot of people did not 
	go to engineering school for oil exploration and service, 
	and that there is a real lack of supply in that whole area 
	right now.  And I would ask you all, would you agree with 
	that analysis?  And if so, what kind of impact does that 
	have on prices?
	Mr. Caruso.  Well, I would absolutely agree with that.  We 
	lost about two decades of supply of engineers and other 
	petroleum-skilled workers.  And now, there is a shortage 
	everywhere you go, whether you are in Canada, in Saudi 
	Arabia, or in Texas.  There is a real lack of skilled workers 
	in the petroleum industry, and that is definitely part of 
	this story in addition to the infrastructure that you 
	mentioned.  The rigs availability are very tight.  Steel is 
	very tight. Even cement for drilling.  So the resource, 
	concerns in that story from chief executive officers, whether 
	it be a national oil company or an international oil company. 
	So it is absolutely a factor.
	Mr. Whitfield.  It seems like if you had the adequate reserves, 
	it would be very difficult, I mean, that the new market is just 
	so tight on this supply and the training personnel.  It is a 
	significant issue.
	Dr. Yergin.  Yes.  And it takes time to gear up.  Academic 
	programs that crunched in and then collapsed are now expanding 
	again, but it takes time to put them back.
	Mr. Whitfield.  Right.
	Dr. Yergin.  So right now, you see very active hiring campaigns 
	in the industry, but it is a lot of hiring from each other as 
	they try and bring in more people and more equipment.
	Mr. Whitfield.  Right.  Now my recollection was that during 
	Katrina, the United States lost, what, about 15 percent of its 
	refinery capacity.  Is that the right number?  Is it 10 to 15 
	percent?
	Mr. Caruso.  Yes.  At one point, it was even higher than that, 
	but the sustained reduction in capacity was about 15 percent.
	Mr. Whitfield.  And on the production side, it was about one 
	million barrels a day.  Is that corrected?
	Mr. Caruso.  Initially, 1.5 million, and even now, it is still 
	300,000 barrels a day.
	Mr. Whitfield.  Okay.  And it is my understanding that also in 
	the spring is when refineries normally do their maintenance. 
	Is that correct or is that not correct?
	Mr. Caruso.  Well, there are different schedules.  Sometimes 
	they are done in the fall or in the spring.  What happened 
	this last six months is that many of the refineries deferred 
	the fall maintenance because of the amount of refineries 
	still down.  They kept running and oftentimes pushing 
	capacity probably very hard, and therefore, there was a 
	large amount of deferred maintenance this spring that is 
	contributing to the current gasoline situation.
	Mr. Whitfield.  So that is definitely having an effect 
	because this spring, they are having to do more because 
	of the push in the fall?
	Mr. Caruso.  Yes.
	Mr. Whitfield.  Okay.  Now it is my understanding that in 
	order to refine heavy, sour crude, it is much more 
	difficult than it is light, sweet crude.  That is correct, 
	isn�t it?
	Mr. Caruso.  Yes.
	Mr. Whitfield.  And I have heard that in order to do heavy, 
	sour crude, that you have to have retooling of the U.S. 
	refineries.  What does that refer to?  Retooling?  What 
	does that mean?
	Mr. Caruso.  Well, the U.S. refineries are among the most 
	sophisticated in the world, so we have more ability to 
	convert heavy, sour crude into the product slates we need.  
	It is not enough.  We need more.  We are probably importing 
	about 1.5 million barrels a day of gasoline this summer.  
	So we need more conversion capacity to deal with this heavier, 
	sour crude slate.  But it is critically important in places 
	like China where they have been relying on their own 
	domestic crudes for so many years, and those were lighter 
	and sweeter.  Now they are having to input heavier, sour 
	crude, and they don�t have the capability to turn it into 
	diesel fuel and gasoline, and that is what is putting a lot 
	of pressure on light crudes and is why Nigeria is so 
	important. Nigeria produces light, sweet crude.  A lot of 
	it was going to China.  And the diminution of Nigerian 
	production is really affecting this factor.
	Mr. Whitfield.  One last question.
	Which country is producing the most heavy, sour crude?
	Mr. Caruso.  I would say Saudi Arabia.
	Mr. Whitfield.  Saudi Arabia?
	Mr. Caruso.  Yes.
	Dr. Yergin.  Some of the Mexican grades are also at that 
	quality, some of the Venezuelan, then Saudi, and some of 
	the other Middle Easterns.  So they have a range of 
	grades, but the spare capacity that does exist in Saudi 
	Arabia is primarily this heavier, sour crude for which 
	there is not the refining capacity around the world, not 
	just in the United States, to convert it into gasoline or 
	diesel.
	Mr. Whitfield.  Yes.  Okay.  Thank you very much.
	My time has expired.  I will recognize Mr. Green from 
	Texas.
	Mr. Green.  Thank you, Mr. Chairman, Mr. Caruso, and 
	Mr. Yergin.  And I apologize for not being here.  This is 
	the biggest issue we are getting calls on, more than 
	immigration and the other issue.
	I note in your opening statement you talked about, 
	Mr. Caruso, the loss of the gasoline supply and the impact 
	it will have in the ethanol we need to replace it, 
	particularly in areas like Houston.  It is a non-attainment 
	area, and it has cleaned up our air since 1991 and 1992 
	when we first started using it.  And again, I just heard 
	yesterday that the President was talking about relieving 
	the imports that our ethanol market production can ramp up. 
	My concern is that I want to make sure we produce, in our 
	own country, whether it is oil or not.  I would love to 
	drill for oil and then refine it in our own country 
	instead of again depending on other parts of the world 
	where stability is always in question.
	For both of you on the change from MTBE to ethanol, and 
	I know, Mr. Yergin, I heard you say something about that 
	you thought that the change would not have any impact 
	some time during the summer.  That may be a bit optimistic, 
	but I would like you to say it again.
	Dr. Yergin.  Right.  Well, I think that you did see that the 
	refining industry has a lot of resilience, too.  It is a tough 
	transition because you needed to change the suppliers; you 
	weren�t using chemical companies anymore.  You were getting 
	ethanol from corn.  You couldn�t ship it in pipelines, so you 
	had to ship it in trucks and railway cars.  And then you don�t 
	blend it at the refinery.  You blended it at the terminal.  So 
	you get all of those things.  You are basically changing your 
	whole, what they call, the supply chain, and you are doing it 
	when you have all of these other problems.  But it looks like 
	maybe a little optimistic, but I would think in 4 or 5 weeks 
	before people really hit the roads, that changeover will be 
	complete.
	Mr. Green.  You do think we need to delay or eliminate the 
	import fees for ethanol from other countries?
	Dr. Yergin.  Well, I know the Brazilians feel passionately on 
	that subject, since there is a 54 cent-a-gallon import fee on 
	it.  And it would be interesting to see, as we get up against 
	the limits of domestic with conventional ethanol production, 
	whether there will be a drive to allow some more ethanol into 
	the country, if that is the objective.  And, you know, we 
	never thought of Brazil before as an energy power, but it is 
	on the basis of ethanol.  It has the leadership.
	Mr. Green.  Again, on the import, as long as we need it, until 
	we ramp up, because like I said earlier, I would like to have 
	an ethanol refinery somewhere, which we don�t have on the 
	Texas Gulf Coast, but we do refine a lot of gasoline.  But we 
	also need that reformulated gas in the Houston market.  So we 
	will have to have it somewhere there.  And of course, we could 
	import it on the short term, but I would much rather produce 
	it there, because that is what we do historically is produce 
	energy.
	How does the instability in oil-producing nations today 
	compare with some of the worst times in history, such as the 
	Arab oil boycott?  And what are some of the major 
	international developments that could bring down or further 
	increase the price of oil, one way or the other?  I mean, 
	obvious ones are continued problems in Nigeria and, of course, 
	Iran, even though we don�t import it from Iran.  It still 
	affects the price.
	Dr. Yergin.  You know, people note that 25 years ago the oil 
	and gold prices were both the highest they have been for 
	25 years, and you say, "Oh, what was happening 25 years ago?  
	Oh, it was Iran."  And you know, here we are again.  So my 
	sense is that how this confrontation between Iran and the 
	international community is going to play out, no one has a 
	very good handle on it at all, so I think that shadow is 
	going to be over the oil market for some time.
	Nigeria, I think, and this goes back to the question that was 
	asked of Guy about his forecast, I don�t think anybody really 
	saw, including the Nigerian government, this insurgency in the 
	delta, which had its big impact.  It sort of just started 
	sporadically in January or February and suddenly went up in 
	scale.  And after the workers were taken hostage and threatened 
	and people killed, people withdrew their workers in that area, 
	and we are seeing the impact of that.  You look around the 
	world and those are two things we are focused on.  And looking 
	around the world, where else are there issues that maybe won�t 
	have the same scale of importance, but could add to the pressure 
	right now?  So on the one hand, you see maybe we are seeing a 
	demand response, which takes the pressure off, but on the other 
	hand, where is the next problem going to come from that might 
	take out another couple hundred thousand barrels a day.  And I 
	think the other thing that, of course, everybody is worried 
	about, is hurricane season begins in a month.
	Mr. Green.  That is right.
	Thank you, Mr. Chairman.
	Mr. Hall.  [Presiding.]  Thank you.
	And they tell me I am next for questions.  Since I have the 
	gavel, I will take their word for it.
	Mr. Yergin, in your testimony, you discussed the peak oil 
	theory, but you didn�t subscribe to that theory.  You site 
	unconventional resources as part of the reason why.  Can you 
	give some examples historically of technologies that were 
	considered non-conventional?  And the one I am really kind of 
	leaning toward is the ultra deep amendment that is in the 
	energy bill that this Chairman passed really after 10 years 
	of trial by Chairman in this committee to write an energy 
	bill.  We finally wrote one that is accepted and the President 
	signed.  And now, there is some movement away from some parts 
	of that, the ultra deep being part of it that I think is a 
	major part of that bill and a major answer to some of our 
	needs for gas in the future from the depths of the Gulf and 
	shut-in places.  But your ideas on R&D programs for oil and 
	gas, how shortsighted it would be to cut funding to such 
	research, I would just like to hear your opinion on that.
	Dr. Yergin.  Sure.  Well, I think on resources, as you were 
	asking the question, I was thinking about coal bed methane, 
	which about 15 years ago was considered something really 
	exotic and now, Guy, you might know what the percentage is--
	Mr. Caruso.  Ten percent.
	Dr. Yergin.  It is now 10 percent of our natural gas supply.  
	So that is an example of something that has moved into the 
	mainstream.  And people often forget that the oil industry is 
	really a gas industry, a pretty high-tech industry.  Actually, 
	a good example, I mentioned the SEC reserves disclosures.  
	When those were put into effect at the end of the 1970s, the 
	deep water frontier was all of 600 feet.  Today it is 12,000 
	feet.  It is remarkable to think of drilling through 12,000 
	feet of water and another 12,000 feet underground.  And I 
	think there is now growing excitement about exploration going 
	on in the ultra deep water and that it might be a very 
	significant contribution, and not just in the United States, 
	but around the world.
	Mr. Hall.  And the technology is there for the asking, but it 
	is expensive and it takes some supporting.  And it is doubtful 
	that the big oil companies are going to do it.  They haven�t.  
	I think in the ultra deep amendment, we provided, I think, 
	$100 million a year for 10 years on it, and then we got that 
	cut in two, but it was still $50 million.  That is not anything 
	to turn down, if you don�t say $100 million or not, which they 
	probably could get.  But that is now being looked at very 
	closely by the Secretary as maybe whiting that out from the 
	bill.  And although he signed the bill less than, I don�t know 
	how long ago, just several months ago.  So we are talking to 
	him and urging him, friendly persuasion to look that over 
	really carefully, because research and development, that is 
	more an R&D bill, actually, than it is an energy bill, because 
	it allows us to go to the depths.  As you say, there are depths 
	that we can know, and we know it is there.  Known reserves are 
	there.  We don�t have the ability today to get them, but 
	cooperating with universities and others who do have that 
	knowledge and input, we can get them and pay for the program 
	with what we get, and if we don�t get it, it is going to stay 
	in the Gulf, and we are not going to get it.  So it doesn�t 
	cost the taxpayers anything.  And that is the beauty of it. 
	And I have passed that last 4 years as a Democrat four times 
	and a Republican the last time.  And you have seen the bill, 
	and I am hoping that will stay in there.  But that is part of 
	what you alluded to, is it not?
	Dr. Yergin.  Well, I think in general we need a constancy and 
	consistency on research and development.  And some years ago, 
	I chaired a task force for the Energy Department on Energy 
	Research and Development, and I came to the obvious conclusion 
	the reason you call it research and development is because you 
	don�t know.  And if you knew, it wouldn�t be R&D.  And a large, 
	wide portfolio and constancy is a really important part of it.
	Mr. Hall.  And your reference to Nigeria is very timely, as a 
	matter of fact, though it is not new.  The problems in Nigeria 
	that American businesses have had with Nigeria in the 1960s.  
	And you know, they had a way of raiding.  They would give you 
	all of the political help and the bank would be guaranteed on 
	a percentage basis.  And always Nigeria had the worst percent, 
	because you could send the press over there.  If you sent it 
	FOB, they would learn to unload it.  So we got to where we had 
	to put it in the channel in Houston to get our money.  Nigeria 
	is just not a country that you really want to deal with, but               
	they are so rich in so many things that we need.  And you know 
	of the unrest there and the recent militant group that seized 
	hostages and I think you said 550,000 barrels per day.
	Dr. Yergin.  Yes.
	Mr. Hall.  What is the United States to do to relieve the 
	tensions in Nigeria?  If the instability continues, is it going 
	to lead to further losses?  I guess that is pretty obvious, but 
	let me hear your thoughts on that.
	Dr. Yergin.  Guy, do you--
	Mr. Hall.  Or Mr. Caruso.  When I said you were so intelligent, 
	I didn�t mean to exclude Mr. Caruso.  I just don�t know him as 
	well as I know you.
	Dr. Yergin.  As you say, the problems in Nigeria have been 
	endemic in that country: the regional conflict, the poverty, 
	the ethnic conflict, and the poverty in the delta region.  
	There has been, in the last several years, an effort to really 
	reduce corruption, which was quite sensitive, and that has 
	been, I think, part of where this conflict is coming from.  And 
	now, at least part of the conflict seems to be also about 
	whether President Obasanjo is going to run for a third term or 
	not.  And that is something that will ultimately be decided in 
	Nigeria.
	I think there is a role, as we think about energy security, 
	the supply chain, the infrastructure and working with countries 
	as we are with countries in the Cascan Sea.  We could be working 
	with them in the Gulf of Guinea to help with issues of physical 
	security, given the kind of volatilities that are so evident.
	Mr. Hall.  I think my time has expired, and I thank both of you 
	men for your input.
	Mr. Stupak is next for 5 minutes.
	Mr. Stupak.  Thank you.
	Dr. Yergin, some of your answers bring up the possibility that 
	current price changes can be attributed to speculation on the 
	potential for global instability rather than actual supply 
	changes.  In his written testimony, Mr. Caruso, and we have 
	talked about it before, refers to this as the "fear" or "risk" 
	premium.  While Mr. Caruso seems to discount this argument, I 
	am curious to hear your opinion on this issue.  Are energy 
	speculators, causing high prices at the pump by taking 
	advantage of the fears, as we mentioned Iran, Nigeria, and 
	Bolivia here this morning?  But how does that affect the 
	future of gas supplies?
	Dr. Yergin.  Well, as I said, I think the leading speculator 
	on oil prices today is probably the President of Iran.  If you 
	plot the statements by the Iranian officials over the last 
	month and the reaction in the oil prices, you see that people 
	are worried and they are taking them seriously.  What I wanted 
	to say, and I think Guy Caruso made the point, is that there is 
	an underestimation of the significance of the loss of Nigeria 
	and what a big impact that is having at this particular time 
	because the market is so tight.  And I think that I have 
	trouble differentiating between what are called speculators and 
	the kind of general pervasive fear and anxiety in the market 
	about whether there is going to be more serious disruption.  
	The issue of Iran�s nuclear program is, I think, both very 
	serious and very perplexing.
	Mr. Stupak.  So even the real fear that we may have, which is, 
	again, speculation, if you will, and Nigeria might be a little 
	bit more of a concrete example, but there is a "speculative" 
	or a "fear" premium?
	Dr. Yergin.  I would call it a "fear" or a "risk."  As I think 
	I said in my remarks, Nigeria, currently, is down 550,000 
	barrels a day.
	Mr. Stupak.  Right.
	Dr. Yergin.  In 2003, it was down over 800,000 barrels a day.  
	So those who are experienced and knowledgeable are going to say, 
	"Is this going to spread the threats to other companies?"  Some 
	bombs have been set off and so forth.  If we were to lose 
	another 300,000 barrels a day without some corresponding give 
	somewhere else in terms of additional supplies or demand 
	response, I think we would see prices higher than what they are 
	today.  It is a very tricky situation. 
	Going back to spare capacity, we think that the spare capacity 
	situation will improve over the next year or two, but right 
	now, we are still in a very narrow band.
	Mr. Stupak.  Okay.  Mr. Caruso, as I continue to learn more 
	about this OTC, over-the-counter trading of energy derivatives, 
	I haven�t been able to find anyone who can tell me exactly how 
	much of this trading is going on.  Does the EIA, or any other 
	Federal agency, have any way of knowing how to calculate how 
	big these markets are, the OTC market?
	Mr. Caruso.  If there was, it would probably be the Commodities 
	Futures Trading Commission.
	Mr. Stupak.  Okay.  And I know they are up next.
	Mr. Caruso.  And I think Mr. Levin may be able to answer that 
	question.  They certainly track the regulated markets very 
	closely, every week, you know, what the long positions are and 
	how much were by speculators versus non-speculators.  But the 
	OTC, I am not familiar with.
	Mr. Stupak.  Okay.  Mr. Yergin, it seems like once a month we 
	get some kind of reason for these prices going up.  And we made 
	mention here this morning, even the hurricane season is going to 
	be starting now, so that is another fear factor, which, again, 
	can drive up the price of oil, at least a barrel of oil, correct?
	Dr. Yergin.  Yes.  I think that what we will probably see is any 
	time a hurricane starts building up, and particularly if the 
	weather reports say it is going to bypass Florida and hit in 
	this central area of the Gulf, before anything happens, you will 
	see people, particularly if it is towards the end of the week, 
	putting up the price.  And then when we see where it goes and 
	what the impact is, the price comes off.  But I think it will 
	really register in a way that it really hasn�t registered before.
	Mr. Stupak.  Sure.  Mr. Caruso.
	Mr. Caruso.  There is a linkage between fear and the physical 
	market and that is what we are seeing now--crude oil 
	inventories being built up, because companies are worried that 
	if there is a disruption, they want to have enough physical 
	supply, so there is a linkage between the physical and the 
	futures.
	Mr. Stupak.  We are going to live through a hurricane season 
	every year and go through a summer driving season every year. 
	We go through Iran�s instability every 10 years.  There are all 
	of these others.  I would think by now the market would figure 
	this out and be a little bit more stable when it comes to this, 
	but it is really not in their best interest, in a way, as long 
	as you have speculators who will use this risk factor or fear 
	factor to drive up the price.
	Dr. Yergin.  Well, let me say, I think what has happened the 
	last 2 years with hurricanes has made a change in psychology 
	that was not anticipated.  We created, in the 1970s, this 
	energy security machinery to deal with a disruption in the 
	Middle East, and we ended up having to deal with a disruption 
	in the Gulf of Mexico.  And I think that we entered a new 
	period with the election of the new Iranian President last June, 
	and Iran going from sort of finessing and being ambiguous about 
	what it is doing, if anything to being over-explicit and 
	threatening and the type of statements that are being made. So 
	I think people have trouble seeing how this is actually going to 
	play out.
	Mr. Stupak.  Okay.
	Dr. Yergin.  I mean, what kind of resolution is there going to 
	be?
	Mr. Caruso.  Yes.  I think you hit, really, the crux of what is 
	going on here and that is why do we really have such volatility. 
	And the reason I think you have that volatility is it takes only 
	small changes in either supply or demand, regardless of the 
	reason, in a market that is so finely balanced to lead to large 
	changes in price.  And once, somehow, we relieve that tightness, 
	whether it is on the demand side or the supply side, and you, 
	certainly have been debating that, that is the only way we are 
	going to change this point you just made.
	Mr. Stupak.  Thank you.
	Mr. Shimkus.  [Presiding.]  The gentleman�s time has expired.
	And I will recognize myself for 8 minutes.
	And it has really been a great hearing, and I appreciate your 
	time and effort on this debate.  I have been taking notes and 
	listening, and the thing that frustrates me about the energy 
	debate is we departmentalize energy.  Here is an example. My 
	first trip to Iraq, I visited their power plant there in 
	Baghdad.  It is called Al Durra, and it burns crude oil.  High 
	sulfur crude oil is what they used.  I am assuming they still 
	do.  And it is dirty.  And it is probably very inefficient.  
	But in the public�s debate of energy, we like to 
	compartmentalize it to electricity generation or we like to 
	compartmentalize it to fuel.  And it is not always the case 
	where if they had nuclear power abilities or coal generation or 
	solar generation they could decrease that reliance on the crude 
	oil, and maybe that could be used in the world market.  I was 
	interested in, Mr. Yergin, your analysis, and you were very 
	diplomatic.  Can it be said that the exchanges in these foreign 
	countries and governments, Venezuela, Russia, even in Mexico, a 
	movement to the hard left or the populist arena already 
	threatens the ability for the world crude oil markets, is that 
	correct?
	Dr. Yergin.  Well, it may not threaten to disrupt, but it 
	changes the balance in the world crude oil market.  It adds to 
		the tension in the market.  And unbalanced, it 
		constrains supply.
	Mr. Shimkus.  What does it do to the investment and development?
	Dr. Yergin.  Well, I think that the Russian government has $200 
	billion in reserves now when it had almost none in 1998.  And I 
	think they are not feeling the pressure for revenues and are 
	very focused on consolidating control of its energy sector.  
	Certainly, what an international company is going to go and do 
	investment into--
	Mr. Shimkus.  Eight minutes is a lot of time, but it is not 
	going to be very long.  What do we expect to happen to the 
	Bolivian natural gas fields?  Do we expect more efficient 
	production or do we expect less efficient production and, in 
	essence, no future development?
	Dr. Yergin.  Well, I think the southern part of Latin America is 
	suffering from gas shortage.  This would aggravate the gas 
	shortage.  There would be less investment.  It will operate 
	less efficiently.  The gas, which could be monetized and 
	provide revenues for the Bolivian people, to help the poorest 
	nation in Latin America be less poor, will not be forthcoming 
	to the same degree.  And I think Brazil is going to be looking 
	for alternatives to Bolivia unless there is some resolution of 
	this.
	Mr. Shimkus.  And I really appreciate your ten points.  And I 
	scribbled them down.  I said, "Well, I haven�t looked at your 
	statement and your testimony."  You are saying those who fail 
	to plan, plan to fail.  And I think it pretty safe to say that 
	those of us who are market-based individuals, the Government 
	does incentivize or not and a lot of us come to a lot of 
	reasons.  We have, in the energy sector, and I am saying that 
	as a broad term, not just to crude oil, but we have not 
	incentivized the development of energy opportunities.
	You know, your first point is diversification of supply.  And 
	so I am looking at what we have done recently to try to do 
	diversification of supplies.  And renewables come to mind.  I 
	have been talking extensively on coal-to-liquid development.  
	I don�t think we mentioned that at all in any of the comments 
	I have heard so far.  Over to technology, level of applications, 
	South Africa doing it, and no looking at locations in the United 
	States to provide that, taking conversion.  You all know all of 
	this debate.  But that has an opportunity to positively affect 
	additional supply, at the United States� internal security 
	applications.  Also, the President�s initiative FutureGen, 
	which is again using coal, near-zero emissions, addressing some 
	of the environmental concerns.  As you put in other points in 
	your testimony, the energy markets are international markets. 
	FutureGen realizes this, and that is why FutureGen is not only a 
	U.S. Government operation, but it is private sector with our 
	major energy companies like Southern Company, Console Energy, 
	Peabody, along with companies from the international arena in 
	Australia and China.  Because as you have stated, they are 
	going to be consumers.  They are going to be using coal.  Now 
	we are united in this search.  The President�s initiative on 
	GNEP is another proposal to start addressing the electricity 
	future demands and how we, as an international community, can 
	address the nuclear fuel issue, the reprocessing issue, the 
	storage issue, and get as an international organization.  I 
	mean, I have scribbled notes all over this place about 
	coal-to-liquid and how some of the plans that we have in place 
	could affect this whole international debate.  But the 
	difficulty is in politics 101, all politics being local, high 
	gas prices, politicians are scared, and because of that, we 
	have to do something and hence we have these hearings and we 
	try to find some culprit.  Our job is, really, to look over 
	the horizon so that we are not identified as folks that don�t 
	plan for the future.
	Having said that, to look over the horizon, you offer a very 
	clear, 10-point agenda.  And I would encourage my colleagues 
	to help look at that as a way and slip in some of the proposals 
	that we have right now, like GNEP, FutureGen, coal-to-liquid 
	development in that equation and look at legislative responses 
	to help bring those to fruition.
	Dr. Yergin, can you comment on any of that?
	Dr. Yergin.  I realize that you all are engaged in this enormous 
	pressure from constituents, very justifiably so.  But standing 
	back one step from it, I am struck by some larger elements of 
	consensus that I think I see, although maybe you all don�t feel 
	it on the floor.  One is of an embrace of energy efficiency 
	across the spectrum.  The second, a recognition that we really 
	do need to widen our options and choices.  And I think, as you 
	say, basically widening the definition of what we mean by oil 
	or liquids is really whether it is gas to liquids, whether it 
	is oil sand or it is ultra-deep water, whether it is coal to 
	liquids, which we note the increased interest.  Those are all 
	counterbalances to the instability and the pressures in the 
	international market.  They are not going to provide answers 
	quickly.  And of course, with gas prices, the pressures are 
	very difficult.  And it does require keeping one�s balance.  
	Probably half of the people in this room remember the gas 
	lines, and the other half think they remember gas lines 
	because they have seen the photographs.  But in fact, those 
	gas lines in the 1970s were self-inflicted because of 
	regulations and controls.  And we should keep in mind the value 
	of the flexibility of our system and that things will change.  
	I would just say the first Congressional hearing I could find 
	for high gasoline prices when I was researching "the prize" was 
	in 1923, when it was going to go to $1 a gallon and within 
	4 years, it went from $1 a gallon to 10 cents a gallon.  So I 
	suspect that in a couple of years, the picture, just as it 
	looks very different now than it did 2 years ago, will look 
	different again.  And I think if we can keep the consistency of 
	the view about widening that diversification, that is something 
	that is an essential goal work of security for our country.
	Mr. Shimkus.  Thank you.
	I am going to end, but Mr. Caruso, I am just going to throw this 
	out.  If you could get back to me, because of time.  I don�t 
	really need you to answer it now.
	But can you tell me if you have done analysis of the available 
	coal reserves in the United States, and what would that 
	translate into barrels of crude oil and the lifetime of that if 
	we really effectively moved to coal-to-liquid technologies and 
	helped incentivize that?  And having those numbers could help 
	me in my crusade here to encourage my colleagues to really look 
	at that as an assistance, not total salvation, but obviously an 
	assistance in this debate.
	Now I would like to turn my colleague from Maine, Mr. Allen, for
	5 minutes.
	Mr. Allen.  We will get it right.  Thank you.  Thank you, 
	Mr. Chairman.
	Mr. Caruso, you are the Administrator of the world�s most 
	advanced energy data system.  The EIA sets the standard for 
	global efforts to improve the understanding of our complex, 
	evolving global oil market.  In fact, the International Energy 
	Agency depends on EIA�s data on imported oil prices.  They have 
	recently been warning of a looming crisis in the compilation of 
	energy data, which, they feel, could sway world oil and natural 
	gas prices and affect the planning of the bigger energy 
	producers.
	Oil companies have posted record profits.  The public is out 
	there saying maybe these oil markets aren�t working.  And there 
	are concerns about the ability of oil-producing nations to 
	respond to the demand that is increasing here and in China and 
	India.  So the information is very important.  And that is why 
	I am puzzled by your decision to suspend collecting domestic 
	and foreign crude oil price surveys, at least certain of those.  
	These surveys collect information used both domestically and 
	internationally to track and inform oil markets.  The Federal 
	government relies on this data for a variety of purposes, 
	including Federal land leasing evaluations, tax assessments, 
	and the evaluation of current and future policies, such as 
	royalty payments.  With crude oil prices reaching $75 a barrel 
	and growing public demand for increased transparency in oil 
	markets, it seems to me we are in no position to eliminate this 
	vital government data collection and market analysis.
	So I wonder if you could explain to the committee precisely why 
	you decided to discontinue the domestic and imported crude oil 
	price surveys.  And the ones I am talking about, EIA-182, 
	domestic crude oil first purchase report, and the EIA-856, the 
	monthly foreign crude oil acquisition report.
	Mr. Caruso.  Thank you.
	Yes, those two surveys are among the 30 surveys that we do for 
	oil and gas weekly, monthly, and annually.  And it was a tough 
	decision, largely based on the budgetary resources available, 
	and that was in our submission to the Appropriations Committee 
	in February of 2005 that, given the budgetary appropriation that 
	was being requested, it would mean that we would have to take a 
	hard look at everything we do in order to maintain total 
	quality of all of EIA�s data collection.  And those two surveys 
	were a lesser priority than the other surveys that are being 
	done.  So we said in our budget submission that if we got a 
	certain amount of money, we would have to drop those two 
	surveys.  And we just felt they were less important than other 
	things we are doing.  And we are continuing to collect price 
	data.  So those aren�t the only surveys for collecting that data.
	Now I realize that some of the users that you mentioned would 
	suffer from the lack of that data, and we are certainly willing 
	to look into seeing whether there is any way to meet the 
	requirements.
	Mr. Allen.  You are not saying that those two surveys are 
	unimportant, I take it?
	Mr. Caruso.  They are not unimportant, at all.
	Mr. Allen.  They would be useful in trying to understand the 
	global oil markets?
	` Mr. Caruso.  That is correct.  And it was a reluctant but 
	tough budgetary decision.
	Mr. Allen.  Well, I am not on the Appropriations Committee, 
	Mr. Caruso, but to me, I would say that in this kind of climate, 
	when the Government stops producing data that would be helpful 
	to people trying to understand these markets, it seems to me to 
	be a mistake, and I hope you do better this year before the 
	Appropriations Committee.
	But in the time I have got left, very quickly, I think you 
	said, and correct me if I am wrong, Mr. Caruso, between 2007 
	and 2010, demand will exceed the excess production capacity in 
	the world?
	Mr. Caruso.  What I said was that we do see productive capacity 
	growing to the point where we might have three to five million 
	barrels a day of spare capacity by 2010.
	Mr. Allen.  Okay.  So the productive capacity is growing at a 
	rate of--
	Mr. Caruso.  Yes.
	Mr. Allen.  And that is the capacity.  There are some big 
	questions, as I understand, about reserves, global reserves.  
	We also have some issues about whether or not the authorities 
	are reporting and giving us accurate information.
	Mr. Caruso.  Yes, there are a lot of issues, but the biggest one 
	is converting those reserves into productive capacity.
	Mr. Allen.  Right.  Thank you.  With that, I will yield back.
	Mr. Shimkus.  I thank my colleague for being very punctual.
	And I would like to recognize now my friend from Tennessee, 
	Mrs. Blackburn, for 5 minutes.
	Mrs. Blackburn.  Thank you, Mr. Chairman.
	And thank you all for being so patient with us this morning.
	I would like to stay on the capacity issue, Mr. Caruso.  In 
	your testimony and a couple of times in answering questions, you 
	talked about world refining capacity and the utilization rate 
	being at 90 percent compared to 85 percent in 2002.  And you 
	have also touched a little bit on the margin of the error and 
	the gas prices can be affected a little bit by an outage.  And 
	we have had some debates.  We had a bill on the floor yesterday 
	that would have streamlined some of the issues dealing with 
	refineries and getting them on the books and then in the ground 
	and up and running.  And Mr. Bass has been very involved in 
	this issue, so I am asking this question for myself and for 
	Mr. Bass, because he had to go to the floor and handle our 
	amendment.
	Now the U.S. capacity, are we higher or lower than the 
	worldwide number?
	Mr. Caruso.  Our utilization rate is higher than the world.  We 
	will probably average about 95 or maybe 96 percent this summer.
	Mrs. Blackburn.  Ninety-five to 96?
	Mr. Caruso.  Yes.  Compared to a world of about 90.
	Mrs. Blackburn.  Okay.  Then considering that we have that 
	higher utilization number, is there not an economic incentive 
	for more companies to either build new refineries or expand 
	their current capacity?
	Mr. Caruso.  Yes, I think we have now seen 3 years in a row 
	where we have had very good margins of profitability, and 
	this is definitely having an impact on investment plans.  And 
	a number of companies have announced plans for expansion of 
	capacity at existing plants.  And we think that could be as 
	much as 1.5 million barrels a day.
	Mrs. Blackburn.  One and a half million barrels a day?
	Mr. Caruso.  Yes.
	Mrs. Blackburn.  Okay.  And then specifically to one of 
	Mr. Bass�s concerns, if we speed that capacity up, how quickly 
	do you think we could fill that?  I mean, is it going to be 
	filled as soon as we can get something in the ground and 
	operating?  Or Dr. Yergin, you may have an estimate on that, 
	also.  Either of you.
	Mr. Caruso.  Well, I guess it goes back to how long it takes to 
	put a project together and get a permit.  It depends.  We are 
	talking about additions to existing capacity, right?
	Mrs. Blackburn.  That is correct.
	Mr. Caruso.  So what is that?  A 2 or 3 year process?
	Dr. Yergin.  Minimum.
	Mrs. Blackburn.  And we are trying to streamline that. 
	Yesterday, we had a bill on the floor that did not pass that 
	would have streamlined that permitting process, and we are 
	looking at the availability of the product at the retail level 
	and having it available to consumers for usage and the refinery 
	capacity and the way it plays into that.  So any time that we are 
	looking at 95 to 96 capacity, I think your points are well taken, 
	because as you have previously said, as you take places down for 
	maintenance, for routine maintenance, for scheduled maintenance, 
	to go in and change the equipment so that it is more 
	environmentally-friendly.  And as I mentioned in my opening 
	statement, environmental goals were set in place in the 
	permitting bill we had on the floor yesterday.  It would have 
	sped the process.  And from what I am hearing you say, speeding 
	that process would yield us the results that we need, which is 
	a greater supply.
	Mr. Caruso.  I would agree: the speedier the better.
	Mrs. Blackburn.  Okay.  All right.  Well, I know we have 
	another panel.  We want to get to them, and we are going to have 
	votes, so I will stop with that one question.  I have three 
	others for you, Dr. Yergin, and four for you, Mr. Caruso, and I 
	will submit those to you.  But thank you for your patience 
	today. We appreciate it.
	Mr. Caruso.  Thank you.
	Mr. Shimkus.  Thank you.
	And for the record, my colleague is correct.  The vote did not 
	pass on a super majority basis, but it did receive a vote of 
	237 to 188, and we expect to bring that permitting bill back to 
	the floor under a rule and pass it with a simple majority.
	So with that, I turn to my colleague from the State of 
	Washington, Mr. Inslee, for 5 minutes.
	Mr. Inslee.  Thank you.
	It is my understanding that production of oil in Iraq has been 
	down in the magnitude of 900,000 barrels per day.  This follows 
	the invasion of Iraq decision by the President.  The question 
	is, did the President�s decision to invade Iraq contribute in 
	some way to the increase in fuel prices that Americans are now 
	experiencing by disrupting Iraqi oil production and decreasing 
	the supply?
	Mr. Caruso.  The Iraqi production, as we have it right now, is 
	about 1.9 million barrels a day.
	Mr. Inslee.  I think it was about 2.6 million prior to the 
	invasion.  So my question is it reduced oil production.  It did 
	not achieve the foretold result of actually deadening oil 
	production, what we were told that is a possibility with Iraq, 
	after the invasion.  Did the invasion of Iraq, at the request 
	of President George Bush, reduce oil supplies, whereby, in some 
	fashion, contributing to the increase of oil prices and gas 
	prices that Americans are now experiencing?  I think a yes or 
	no could work pretty well.
	Mr. Caruso.  Well, there are a lot of factors that have 
	contributed to the oil price, and that is one of them.
	Mr. Inslee.  Okay.  So the answer is yes.  And on the supply 
	side, one of the President�s big decisions, reduced supply and 
	increased the costs that my constituents are now paying.
	Now I am going to ask you about the demand side.  When I got my 
	degree in economics, supply and demand was a big deal for 
	4 years of my life.  And both are important.
	So on the demand side, for the 5 years of this President�s 
	presidency, there have been efforts in the U.S. Congress to 
	decrease demand by increasing the efficiency of the passenger 
	cars that we drive.  And in fact, the efficiency of the cars we 
	drive have actually reduced since the time President Bush took 
	the oath of office.  And I will add, that has been the case for 
	several situations, several terms.  But the President has 
	resisted to improving mileage for passenger cars, which he has 
	the statutory authority to do to improve the mileage of our 
	cars, something that was very successful in the late 1970s and 
	early 1980s where we increased our mileage by at least 
	60 percent, and had we continue increasing our mileage, we 
	would actually be free of the Persian Gulf oil today.
	So the President has not used the authority he has had, and 
	has resisted efforts, in this Congress, to improve the mileage 
	of the cars we drive.  Is it fair to say that the President�s 
	resistance, to date, to improving the efficiency of our cars, 
	thereby decreasing demand, has also contributed to the increase 
	in costs that Americans are paying today for the price of a 
	gallon of gasoline?
	Mr. Caruso.  Well, I think there are a lot of factors in the 
	gasoline demand increase.  I am not a policymaker, so I 
	wouldn�t want to comment.
	Mr. Inslee.  Well, let me stretch your job classification just 
	a little bit.  And there are a lot of factors in this.  I am 
	just asking about a couple of them.  If you believe, as I do, 
	that auto efficiency will, to some degree, reduce demands, 
	driving the same amount of miles for less gasoline, and a 
	safe and handy way to do it, and I drive a car that gets 50 
	miles to the gallon.  If you make that assumption, how has 
	the President�s decision failed to help at all increase the 
	efficiency of our passenger cars, has that contributed in 
	some way to the price of gasoline?
	Dr. Yergin.  Did you say you drive a car that gets 50 miles 
	to the gallon?
	Mr. Inslee.  Right.
	Mr. Caruso.  What are you driving?
	Mr. Inslee.  A Prius.  And I am looking forward to some of our 
	domestic folks getting involved.  And by the way, there is 
	some good news on that.  I read that GM is now looking at a 
	dual drivetrain for a hybrid that could be a great entry in 
	this.
	So let me still ask this question.  Just, you know, simple.  
	Has it contributed, the President�s failure to move on 
	efficiency?  Has it contributed, at least some way, to the 
	increase in the price of gasoline?  Give it your best shot.
	Mr. Caruso.  Well, I think the President has done a number of 
	other things to deal with the efficiency side of things.
	Dr. Yergin.  Let me say that the two most important things we 
	did in energy policy in the 1970s that had an immediate effect, 
	one was the fuel efficiency standards on the demand side, and 
	the other was the building of the Alaska oil pipeline.  They 
	each contributed about the equivalent of two million barrels 
	a day.  And I think I hear when gas was cheap, there was not 
	much of a drive to change the fuel efficiency.  People bought 
	SUVs and didn�t think about it.  That is obviously very 
	different now.  And high prices have sent a very powerful and 
	painful message to American automobile makers, among others.  
	And I think, one way or the other, we are going to get a more 
	efficient automobile fleet.  It may not get up to your 50 miles 
	per gallon for everybody, but I think we will get to more 
	efficient cars.  And when you look not just at the United 
	States, but if you look at China and you look at India and 
	other countries, you see that a greater efficiency in 
	transportation is really a global priority.
	Mr. Inslee.  I have a lot of questions, but thank you.
	Thank you, Mr. Chairman.
	Mr. Shimkus.  I thank my colleague.
	Now I would like to recognize the gentleman from Massachusetts, 
	Mr. Markey, for 5 minutes.
	Mr. Markey.  Thank you, Mr. Chairman.
	Mr. Yergin, reading through your testimony, I was struck by the 
	fact that the United States has actually added 2.2 million 
	barrels a day in refinery capacity over the last dozen years, 
	which, as you note, is the equivalent of adding ten new good-
	sized refineries.  Now it has been suggested by some in the 
	Administration and in the Majority that U.S. environmental 
	and permitting laws are somehow an obstacle to refinery 
	capacity expansion.  But your testimony suggests that the oil 
	companies have been able to build the equivalent of ten large 
	refineries over the last dozen years without overriding 
	environmental or local zoning permitting requirements.
	So would you agree that we don�t need to change our 
	environmental laws or override State and local land use rules 
	in order to expand refinery capacity?
	Dr. Yergin.  Congressman Markey, I don�t know.  I didn�t read 
	the legislation that was voted upon yesterday, so I can�t 
	address that specifically.  The increase in capacity, what 
	I am struck by, is focusing on the number of refineries rather 
	than capacity.  And in terms of capacity, that is a substantial 
	increase.  It is, of course, not building new refineries, but 
	is the expansion and deep bottlenecking and so forth on 
	existing sites.  And there are plans to continue to add 
	increasing capacity to existing sites.  A critical question is, 
	at some point, where will new refineries be built?  Will they 
	be built here in the United States, or will we be importing 
	more product from other countries?
	Mr. Markey.  I also see that on page nine of your testimony, 
	although often presented solely as a U.S. problem, inadequate 
	refining capacity is, in fact, a global phenomenon.  What are 
	the factors that have led to this global refinery capacity 
	problem so that we can get it out of the context of just U.S. 
	environmental laws and the committee can understand this 
	situation?
	Dr. Yergin.  I think there are two big things.  One, the 
	European prices for motor fuels have been biased in favor of 
	diesel over gasoline, and so there has been this 
	extraordinary explosion in diesel cars.  Half of the new cars 
	in Europe, 70 percent of the new cars in continental Europe 
	are diesel, and the refining system does not support that.  
	The second thing is that because of the Asian financial 
	crisis, refinery developments in Asia were held up.  And so 
	Asia is short of refining capacity.  In both cases, it is 
	short of the complex refinery, what Mr. Caruso called the 
	sophisticated refining capacity to turn out diesel.  This is 
	adding to the picture on making things like Nigerian oil more 
	valuable in the marketplace.  And if we look on a global 
	basis, diesel demand is growing more rapidly than gasoline.  
	So that is the global context, and the United States is part of 
	this global market.
	Mr. Markey.  Which, of course, has nothing to do with the U.S. 
	environmental laws?
	Dr. Yergin.  That is right.  It has to do with what is 
	happening there.
	Mr. Markey.  Across the board.  Thank you.
	And, as you know, Newt Gingrich and the Republican Congress, 
	beginning in 1995, prohibited the Department of Transportation 
	and their part in promulgating new fuel economy standards, and 
	for the last 6 years, they have sat on their hands and refused 
	to promulgate new fuel economy standards that could have 
	dramatically increased the overall fleet average, including 
	SUVs and light trucks.  What kind of a difference would it have 
	made if the same kind of progress that we have made from 1975 
	to 1986 had been made over the last 12 years in terms of 
	increasing the fuel economy standards?
	Dr. Yergin.  Well, I haven�t calculated that.  Certainly, one 
	reason we went from a very tight oil market in the early 1970s, 
	which I should say that the oil market today is even tighter 
	than it was then, but a very tight oil market to that huge 
	surplus that Mr. Caruso described was, among other things, not 
	only the switching from oil and electric generation, but the 
	fuel efficiency standards.  I think fuel efficiency standards 
	in the United States and around the world would have a big 
	impact.  I think it is always a question whether you do it 
	through regulation, whether you do it through, I hate to use 
	that word, a gasoline tax, or some other way, or some mixture
	of them, but one way or the other, it certainly seems this 
	country is going to move towards greater efficiency in our 
	transportation.
	Mr. Markey.  You said that we saved about two million barrels 
	of oil.
	Dr. Yergin.  Yes, in 1973 and sort of the early 1980s.
	Mr. Markey.  Would that have been possible again if we had made 
	the same progress on fuel economy standards in the past 
	12 years?  Or would that have been possible?
	Dr. Yergin.  Well, I think I would have to calculate it out.  
	The other thing that has happened, of course, particularly when 
	gasoline prices were low, and it is quite striking, and I think 
	Mr. Caruso could say, the number of miles that Americans drive 
	has increased quite substantially over the 5 or 6 years, and so 
	that is a factor there, too.  But I think that greater 
	efficiency, if you are talking about greater efficiency being 
	important, there is no place where it has a bigger immediate 
	impact than in transportation.
	Mr. Markey.  Okay.  Thank you.
	Mr. Shimkus.  I thank my colleague.
	I want to thank the panel for their long testimony and 
	questions and answers.  We really do appreciate it.  It is a 
	very complicated issue, and you have helped, hopefully, 
	enlighten us a little bit to make strong public policy 
	decisions.
	So with that, I would like to excuse you and welcome the second 
	panel.
	The Chairman is on his way back, but because I like to be in the 
	chair, the sooner we get started, the better for me.
	I am going to start with some initial introductions.
	On the second panel, we have Mr. Robert, is it Levin?
	Mr. Levin.  Levin, yes.
	Mr. Shimkus.  Senior Vice President for Research at the New York 
	Mercantile Exchange.  And we appreciate your attendance.
	We are also being joined by Ms. Orice Williams.
	Ms. Williams.  Orice.
	Mr. Shimkus.  Orice.  Okay.  Orice.  No one else can make that 
	mistake now.  Director of Financial Markets and Community 
	Investment Team with the Government Accountability Office.
	And we are glad to have you.  Your full statements are submitted 
	for the record.  If you could summarize that statement in 
	5 minutes, we will be very grateful, because I know there is a 
	lot to talk about.
	We would like to begin with Mr. Levin.  Welcome.

STATEMENTS OF ROBERT LEVIN, SENIOR VICE PRESIDENT FOR RESEARCH, NEW 
YORK MERCANTILE EXCHANGE; AND ORICE WILLIAMS, DIRECTOR, FINANCIAL 
MARKET AND COMMUNITY INVESTMENT TEAM, GOVERNMENT ACCOUNTABILITY 
OFFICE

Mr. Levin.  Thank you very much, Mr. Chairman.  On behalf of New York 
Mercantile Exchange and myself, thank you for the opportunity to be 
here today.  I am going to briefly go over my written testimony and 
then just briefly describe the New York Mercantile Exchange.
	To refresh everyone�s memories, we are a regulated public 
	marketplace.  We offer trading in many different products, a 
	concentration in many of the metals and energy.  And of 
	course, energy futures products is, I think, the reason that 
	I am here today.
	The trading in our exchange is competitive.  We offer what 
	we consider a level playing field.  We believe trading is 
	fair.  We publicly disseminate all of our prices.  Market 
	prices and the process of price determination is transparent.  
	We would refer to that as price discovery.  We consider most 
	of what goes on at the Exchange to be very transparent.  
	NYMEX itself, as an institution, is neutral regarding what 
	happens in the market.  We don�t have a view on price.  The 
	staff, for instance, is prohibited from trading.
	Regarding world energy markets, much has been discussed 
	previously, and I think I will just try to touch on some 
	types of that.  But I want to emphasize that NYMEX, 
	especially as a staff member, we do not take views on the 
	price, and regarding specific questions, though, I will 
	try to answer any question that comes up as well as I can 
	under that circumstance.
	The many markets in energy are highly regionalized and, to a 
	large degree, they are independent.  As a matter of fact, 
	natural gas, in some sense, is on the verge of becoming an 
	international market, but it has not quite arrived there yet. 
	Electricity, certainly in North America, is still more 
	regionalized than oil, as has been already expressed by the 
	previous panel that is absolutely a predominantly 
	international market.
	In the crude oil market, there are hundreds of different streams. 
	There are dozens of locations where these streams are produced. 
	There are probably hundreds of locations where it is refined.  
	And all of this oil physically trades.
	Commercial trends and conditions regarding the trade of that 
	oil have developed over the years, and we have, as we make 
	distinctions to cash in the physical market, transactions 
	there. And sometimes, we even call the cash or the physical 
	market the OTC market, but the over-the-counter market, these 
	days, in those transactions, typically refers to financially-
	settled derivatives.  And then we have the futures market, 
	which is the most transparent of all of these markets.  In all 
	fairness, there is a degree of transparency in the other 
	markets as well, but not all of those markets are transparent, 
	and not all parts of them, and admittedly, we do note that for 
	some participants in the market, lack of transparency is seen 
	as a commercial advantage.  However, we do see the transparence 
	and liquidity that currently exist in crude oil markets, 
	especially futures markets, and especially the NYMEX futures 
	markets, has an unambiguous public benefit at all times.
	There has been a great deal of standardization in the cash and 
	physical market, the OTC market, over a time, and terms and 
	conditions, there are many sort of standard transactions, and 
	one can follow the trading of those.  And there is reporting of 
	trading and prices in those markets.  These terms and conditions 
	govern not only the trading but the delivery and the title 
	transfer.
	Between those markets and the futures markets, which is also, of 
	course, standardized, and in our market, delivery is called for 
	in our basic crude oil product.  There is a substantial 
	interaction between transactions in all of these different 
	markets.  What we find happens is there is arbitrage, there is 
	competition, and there is a significant degree, as I said, of 
	transparency in cash and OTC, and there is complete 
	transparency in the futures markets.
	Transactions in all of these markets are constantly taking 
	place. Oil is an international market.  It is a 24-hour market 
	that tends to be a 7 day market.  And consequently, there are 
	prices that result from all of these transactions.  And they 
	take place and they emerge all of the time.  In a very real 
	sense, prices are determined simultaneously as well as 
	reactively between all of these markets.  To say one market 
	leads another market could be very misleading.
	In terms of geopolitical impacts, I think some things have 
	already been mentioned.  I can certainly agree that there is a 
	coincidence in some news reports and changes of prices in our 
	markets and other markets.  For example, on April 10, our price 
	increased $1.35 a barrel, so there were headlines about Iran and 
	potential military response.
	In addition to other important factors that influence, 
	ultimately, gasoline prices, crude oil is very major.  We have 
	had some discussion of some of the others.  You talked about 
	refinery utilization, and of course the transition from MTBE to 
	an ethanol-based gasoline, and none of this is to say that we 
	have a negative view, or any view, on environmental impact, 
	because coincided, perhaps not the best timing, all other 
	things considered as far as price impacts, but it does have an 
	adjustment factor on the market.  And we have recently 
	incorporated and are making a change from the MTBE-based 
	reformulated to the gasoline reformulated and probably have 
	other plans to offer other types of products as well.
	That concludes my oral testimony, and I look forward to your 
	questions.
	[The prepared statement of Robert Levin follows:]

Prepared Statement of Robert Levin, Senior Vice President for Research, 
New York Mercantile Exchange

Mr. Chairman and members of the Committee, my name is Bob Levin and 
I am the Senior Vice President of Research at the New York Mercantile 
Exchange (NYMEX or Exchange).  NYMEX is the world�s largest forum for 
trading and clearing physical-commodity based futures contracts, 
including energy and metals products.  We have been in the business for 
135 years and are a federally chartered marketplace, fully regulated by 
the Commodity Futures Trading Commission (CFTC) both as a contract 
market and as a clearing organization.  On behalf of the Exchange, its 
Board of Directors and shareholders, I thank you and the members of the 
Committee for the opportunity to participate in today's hearing on the 
futures market and gasoline prices.  

INTRODUCTION
NYMEX provides an important economic benefit to the public by 
facilitating competitive price discovery and hedging.  As the benchmark 
for energy prices around the world, trading on NYMEX is transparent, 
open and competitive and heavily regulated.  Contrary to some beliefs, 
NYMEX does not set prices for commodities trading on the exchange.  
NYMEX does not trade in the market or otherwise hold any market 
positions in any of its listed contracts and, being price neutral, does 
not influence price movement.  Instead, NYMEX provides trading forums 
that are structured as pure auction markets for traders to come 
together and execute trades at competitively determined prices that 
best reflect what market participants think prices will be in the 
future, given today�s information.         
There is a strong beneficial and interdependent relationship between 
the futures and the underlying physical commodity or "cash" markets.  
The primary motivation for using the futures market is to hedge 
against price risk in the cash market.  Price volatility drives many 
into the futures markets.  Many prudent business managers rely on the 
futures market to protect their business against price swings in the 
cash market.        
Futures markets provide a reference point for use in executing off-
exchange trades at competitively determined prices.  An understanding 
of the NYMEX market, its pricing mechanism and the relationship between 
the futures price and the cash price will provide useful instruction 
and clarity to what is often perceived as an esoteric area of the 
broader financial marketplace.       

OVERVIEW
Futures markets fulfill two primary functions:  (1) They permit 
hedging, giving market participants the ability to shift price risk to 
others who have inverse risk profiles or who are willing to assume that 
risk for potential profit; and (2) They facilitate price discovery and 
market transparency.  Transparency involves many factors, including:  
(1) continuous price reporting during the trading session that is 
disseminated on a real-time basis worldwide by various market data 
vendors; (2) daily reporting of trading volume and open interest; and 
(3) monthly reporting of deliveries against the futures contract.  
NYMEX�s futures and options contracts are listed and traded by calendar 
month.  For energy contracts, trading terminates in the month preceding 
the month of actual delivery of the underlying commodity (if positions 
are not offset and instead are held through the termination of trading 
for that contract month).  Consequently, the front or spot month 
listed for trading during most of the month of May would be the June 
2006 contract month.  The daily settlement price for each contract 
month of a listed contract is calculated pursuant to Exchange rules.  
The rules governing the calculation of our settlement price reflect 
the business judgments exercised by Exchange officials. 
By listing contract months for trading out into the future, a common 
convention in the futures industry, our prices at all times reflect 
the collective consensus of the marketplace as to the future direction 
of commodity prices.  By contrast, many cash markets of the underlying 
commodities for our products, such as for gasoline, are quoted and 
traded in the cash market as day-ahead products.  Consequently, there 
can be at times significant differences between futures prices on our 
markets and prices in the day-ahead cash market.  
NYMEX energy futures markets are highly liquid and transparent, 
representing the views and expectations of a wide variety of 
participants from every sector of the energy marketplace.  Customers 
from around the globe can place buy and sell orders through brokers on 
the NYMEX trading floor.  On behalf of the customers, buyers announce 
their bids and sellers announce offers. The price agreed upon for sale 
of any futures contract trade is immediately transmitted to the 
Exchange�s electronic price reporting system and to the news wires and 
information vendors who inform the world of accurate futures prices.
Price signals are the most efficient transmitters of economic 
information, telling us when supplies are short or in surplus, when 
demand is robust or wanting, or when we should take notice of longer-
term trends.  NYMEX futures markets are the messengers carrying this 
information from the energy industry to the public. The wide 
dissemination of futures prices generates competition in the 
establishment of current cash values for commodities.

Price Discovery
The institutional setting of futures trading helps discover the 
competitive price which best represents what the market thinks prices 
should be in the future, given today�s information.  As such, futures 
markets provide reference points for use in buying and selling 
commodities at competitively determined prices.  The widespread 
dissemination of exchange-generated prices fosters competition in the 
establishment of current cash values for commodities.  Because of the 
liquidity and transparency of the futures market, the marketplace uses 
the futures price to provide the reference for setting prices in the 
cash market.  This is referred to as the "price discovery" function.    
Relationship between Futures Prices and Underlying Cash Prices
Futures markets are a derivative of the cash market and are designed 
to ensure that the cash and futures market prices converge to a single 
price at expiration of the futures contract.  The cash market typically 
consists of a variety of transactions that differ in the timing, 
location and form of delivery (as well as in other important commercial 
terms and conditions).  In many cases, the general terms governing 
these transactions are standardized which results in development of a 
series of fundamental products or commodities for the underlying market. 
In the oil market, historically, there have been a number of specific 
transaction types serving in this role.  Generally, market competition 
results in arbitrage by market participants between these commodity-
types of transactions and other less-standardized transactions such 
that fairly reliable statistical correlations develop between different 
types of products.  Futures contracts are expressly designed to either 
correspond to an existing cash-market "standard" product or fill that 
role on its own.
Although futures and all cash prices often do not always move in 
parallel, there is considerable support for the proposition that price 
changes in one part of the market, cash or futures, are frequently 
transmitted to other parts of the market and result in similar changes
elsewhere.  The futures markets, therefore, reflect cash market prices 
and, as a result, are able to be used as a hedging vehicle.  The 
difference between the cash and futures price at any time is known as 
the "basis."  Usually, basis is measured as the differential between 
the cash price and the nearby futures price.  The size of the 
differential provides a benchmark against which the closeout prices of 
both the cash and futures positions may be measured.  Historically, 
NYMEX futures have proven to be extremely reliable vehicles for 
converging to the cash market; a marketplace that consistently has 
performed with integrity.  

MARKET ANALYSIS
NYMEX staff monitors the supply and demand fundamentals in the 
underlying cash market to ensure that NYMEX futures prices are 
consistent with broad, ongoing, cash market price movements and that 
there are no price distortions.  Our analysis of the market has 
identified three key factors that are contributing to higher gasoline 
prices in the cash and futures market: 1) high crude oil prices; 
2) methyl tertiary butyl ether (MTBE) phase-out; and 3) reduced 
refinery utilization rates.  

High Crude Oil Prices
NYMEX trades light sweet crude oil futures contracts, one of our 
most actively traded energy products.  Crude oil is a strategic 
commodity that responds to global political tensions, particularly 
in the Middle East and West Africa.  In fact, crude oil prices are 
determined in a global market place.  That global market place is 
highly sensitive to geopolitical events, and the price of crude oil 
responds immediately. 
For example, recently, the Iranian nuclear threat appears to have 
contributed to price volatility as the market responds to the latest 
political developments.  For example, on April 10, the May NYMEX 
crude oil futures price increased $1.35 per barrel to $68.74 at the 
same time that there was a headline story about Iran and the potential 
for a military response.  Two weeks later, on April 21, the NYMEX 
June futures price reached an all-time high of over $75.00 coinciding 
with continued concerns about Middle East security and reports of 
Nigerian supply cuts arising from militant attacks.  During this same 
time period, there has also been reduced production in other oil 
producing countries due to political unrest.  Chart A (attached) 
reflects global crude oil prices using the front month NYMEX Light 
Sweet Crude Oil (WTI) futures and Brent Crude Oil futures prices.
Crude oil is the main feedstock for gasoline production and, 
consequently, crude oil prices can have a very strong influence on 
gasoline prices.  As such, the strength in crude oil prices has been 
an important factor leading to higher gasoline prices.
Gasoline is the largest refined product by volume sold in the United 
States and accounts for almost half of the national oil consumption. 
It is a highly diverse market, with hundreds of wholesale distributors 
and thousands of retail outlets, often making it subject to intense 
competition and price volatility.
NYMEX trades New York Harbor unleaded gasoline futures contracts.  
Market conditions in the gasoline market reflect the basic market 
fundamentals such as imbalance between supply and demand.  Tight 
gasoline supplies due to lack of refinery capacity, compounded by the 
lingering impact of Hurricane Katrina, and, more recently, the 
transition from MTBE to ethanol have driven prices upward dramatically 
in the cash and futures market.  

MTBE Phase-Out
The gasoline market is currently in a difficult transition period due to 
the phase-out of MTBE, and the related transition to ethanol.  As 
companies eliminate the use of MTBE and replace it with ethanol, gasoline 
refiners and importers must adjust their practices and systems.  Ethanol, 
which is chemically different than MTBE, contains more volatile compounds
than MTBE and, therefore, is harder to use in reformulated gasoline in 
the summertime.  In addition, ethanol cannot be carried in the nation�s 
pipeline system, and must be segregated from the wholesale distribution 
system until its addition at the truck rack.  Finally, ethanol presents 
new demand and supply implications, which must be factored into the 
pricing of gasoline.  
There is a level of uncertainty involved in this transition process as 
the marketplace adjusts to the new supply situation.  This uncertainty 
typically leads to higher gasoline prices in the short term.  Buyers and 
sellers have concerns about demand and supply fundamentals, and the 
higher costs are then passed on to consumers.  The transition process is 
now well underway but not yet completed, as the gasoline market begins 
to phase out MTBE-blended gasoline.  Most energy firms likely will
continue to draw down and use up their reformulated gasoline (RFG) 
inventory during the remainder of the month of May.  Market observers 
continue to believe that sometime this summer the Reformulated Gasoline 
Blendstock (RBOB) product will largely replace reformulated gasoline as 
the predominant gasoline product in the cash market.
Chart B, attached, shows the wholesale price of ethanol and MTBE in the 
New York Harbor area.  As you can see, ethanol prices are currently 
$1.00 per gallon higher than MTBE.  This large price differential 
indicates the strength of ethanol demand as compared to MTBE.  The 
ethanol is then added to RBOB to make finished gasoline.  NYMEX first 
listed RBOB gasoline futures for trading last October in anticipation 
of the phase-out of MTBE from the gasoline pool.  Chart C, attached, 
shows recent prices for finished RFG (with MTBE included) and RBOB 
(before the addition of ethanol).  The current RBOB price is about 
10 cents per gallon higher than finished RFG (with MTBE), and when the 
ethanol is added (at a 10% blend by volume) the finished ethanol-
blended gasoline recently has been priced even higher, at 15 cents 
higher than RFG with MTBE.  This accounts for some of the recent price 
rise in gasoline.

Reduced Refinery Utilization Rates
Gasoline prices have been supported recently by lower refinery 
utilization rates due to increased refinery maintenance this spring.  
Some refineries reportedly had delayed maintenance work in the 
aftermath of Hurricane Katrina to ensure adequate gasoline supplies.  
Furthermore, additional refinery work is needed this year to comply 
with new low-sulfur requirements in diesel and gasoline.  The end 
result is tighter gasoline supplies in the short-term until the 
higher refinery utilization rates can be restored. 
Even though no new gasoline refineries have been built in the U.S. 
in several decades, this imbalance has been mitigated to some extent 
by higher efficiencies from existing plants, which have generally 
operated at a high rate of utilization in recent years. However, such 
a high utilization rate also means that when utilization rates are 
reduced for any reason, there will be an immediate impact on the 
availability of new supplies of gasoline.
In the face of these market factors, the NYMEX system continues to 
work according to design.  As intended, NYMEX�s highly transparent, 
open and competitive market place adds a level of economic stability 
to the situation by providing a reliable and well-regulated price 
discovery and risk management forum.

CONCLUSION
At all times during periods of extreme uncertainty in the market, 
NYMEX has been the source for transparent prices in the energy 
markets.  Our price reporting systems, which provide information to 
the world�s vendors, have worked flawlessly and without delay.    
The NYMEX marketplace continues to perform its responsibility to 
provide regulated forums that ensure open, competitive and transparent 
energy pricing.  We can only imagine the market uncertainty and further 
devastation to consumers if NYMEX were unable to perform its duty and 
prices were determined behind closed doors.  
I thank you for the opportunity to share the viewpoint of the New York
Mercantile Exchange with you today.  I will be happy to answer any 
questions members of the Committee may have.     


	Mr. Shimkus.  Thank you very much.
	And now we turn to Ms. Orice Williams.  You are recognized for 
	5 minutes.  And welcome.
Ms. Williams.  Thank you.
	Mr. Chairman and members of the committee, I am pleased to be 
	here today to discuss our ongoing work on CFTC�s oversight of 
	energy futures.  As you are well aware, ever-rising prices have 
	resulted in a number of questions about oil and petroleum 
	prices and the role that derivatives markets play.
	Given the breadth of interest in these issues, GAO initiated 
	work under the authority of the Comptroller General. My remarks 
	today focus on this ongoing body of work.  While it is too soon 
	to provide findings and observations, we hope you find the 
	overview of our work to date useful.
	By way of background, futures markets consist of a variety of 
	participants, including hedgers and speculators.  Hedgers use 
	futures to shift the risk of a price change onto speculators. 
	Speculators assume the price risk that hedgers try to avoid in 
	hopes of making a profit.  Although speculators usually have no 
	commercial interest in the commodities they trade, the potential 
	for profit motivates them to collect market information regarding 
	the supply and demand of commodities to anticipate the potential 
	impact on prices.  Oversight of futures is provided by CFTC and 
	the exchanges where they trade.
	Our ongoing work focuses on two broad issues: one, the players 
	in energy futures markets, their activities, and changes in price 
	volatility since 2000; and two, the oversight of the energy 
	futures markets provided by CFTC.
	In addressing the first issue, our ongoing work is designed to 
	describe how energy derivatives function and to what extent 
	market participants with different investment objectives affect 
	the prices of energy futures.
	To do this, we are focusing on markets and market participants, 
	price discovery, market liquidity, and risk management 
	practices. We are also collecting information on the over-the-
	counter settlement process and NYMEX prices.
	We will discuss changes in the mix of participants and the use 
	of new trading platforms in futures products.  As part of this 
	work, we are building on existing research by analyzing CFTC 
	market data to determine historical trends in volatility for 
	certain commodities, including oil and petroleum.
	Our work will focusing on why volatility is an issue, how it 
	is measured, and what the trends show.  Through our analysis, 
	we hope to address issues such as causes and implications of 
	volatility.
	The second area we are studying is how energy futures are 
	overseen.  While CFTC is the primary focus, we will also 
	include other relevant regulators and self-regulatory 
	organizations, such as NYMEX.
	Specifically, we are reviewing CFTC�s and NYMEX�s surveillance 
	programs, oversight provided by other agencies, and information 
	collected through CFTC�s large trader reporting system.  We 
	will also explore oversight of the over-the-counter and any 
	other relevant markets.  Our work will also include reviewing 
	CFTC�s and NYMEX�s enforcement programs and analyzing settled 
	cases.
	Finally, we are in the process of assessing how CFTC is 
	positioned to protect market users by focusing on CFTC�s 
	regulatory approach, structure, and resources as well as any 
	potential gaps.
	In closing, I would like to note that we fully appreciate the 
	significance of these issues and hope that our report, which 
	is scheduled to be issued later this year, will provide useful 
	information to this committee and others.
	This concludes my oral statement, and I would be happy to 
	answer any questions that you may have.
	Thank you.
	[The prepared statement of Orice M. Williams follows:]

Prepared Statement of Orice Williams, Director, Financial Markets and 
Community Investment, Government Accountability Office



	Mr. Shimkus.  Thank you very much.
	Now the Chair recognizes the Chairman of the Full Committee, 
	Mr. Barton, for 5 minutes.
	Chairman Barton.  Thank you, Mr. Chairman, and thank you for 
	chairing in my absence.  I have done three things since I left 
	here, and I am due to be doing another one right now, actually.
	Thank you, each of you, for being here.
	Let me start with you, Mr. Levin.
	What is the futures margin?  What is the margin requirement for 
	energy futures right now on the market in the NYMEX?
	Mr. Levin.  Understood.  Mr. Chairman, it depends on which 
	market you are speaking of.  The futures margins are deposits, 
	and we assess them and base them on our estimate of the risk 
	that prices may move between now and the next settlement, which 
	is the next day.
	Chairman Barton.  Well, give me a range, then.  	
Mr. Levin.  Sure.  In the crude oil market, for members and non-members, 
right now, it changes.  We have different ones, because the members 
often do not hold positions overnight, many of them trade through their 
account and provide liquidity, is $3,500 per 1,000 barrels, but our 
contract right now--
	Chairman Barton.  So that is three and a half cents on a 
	dollar?
	Mr. Levin.  No, three and a half dollars, I think.  Yes, sir.  
	And that is $4,750 for non-members.  In the gasoline market, 
	right now, it is $6,000 per contract, the same amount, 1,000 
	barrels, and for 10,000 BTU, which is natural gas, it is 
	$7,500.
	Chairman Barton.  So the most it is, on a percentage basis, is 
	7.5 percent?
	Mr. Levin.  Yes, I think that is about right.  That is a current 
	right.
	Chairman Barton.  Okay.  And under current practices, that is 
	not a regulated fee.  It is set by the market makers themselves 
	and the board of directors.  Is that correct?
	Mr. Levin.  We actually set those--
	Chairman Barton.  Percentages.
	Mr. Levin.  --contract costs, whatever you want to call it.  It 
	is more of a staff-driven process, and in fact, I am involved 
	quite a bit on that.
	Chairman Barton.  So you are looking at it.
	Mr. Levin.  We are looking at it.
	Chairman Barton.  There are lots of reasons that I want to 
	participate in the futures market.  I can be a producer who 
	wants to lock in a specific price.  I can be a consumer who 
	wants to lock in, again, a specific cost.  In my State, 
	Southwest Airlines has publicly said that one of the reasons 
	they have been able to maintain profitability is because they 
	hedged in the futures market and locked in prices for aviation 
	fuel, which is a good thing.  It is good for Southwest.  Now 
	how high would you set that fee before it would be non-economic 
	or problematic for the producers and the consumers of the 
	commodity in question to take a position for business reasons 
	only?
	Mr. Levin.  I think it really depends, Mr. Chairman, on each of 
	those individual companies.  Some companies may already believe 
	that it is at that level, and they believe that their credit is 
	so good that nobody should be requiring them to put any good 
	faith deposit to participate in a market.  It would be very 
	difficult for me to speculate on what that level is.  I am not 
	sure for them, or for any company that, in general, it would be 
	much different.  And I don�t want to take too much of your time, 
	but--
	Chairman Barton.  Oh, no.  Every consumer in America is paying 
	approximately $3 a gallon for gasoline, and Dr. Yergin was on 
	the panel before you, and said in his testimony that $10 to $15 
	of the current price of oil is due to speculation.  Now that is 
	his opinion.  What I am trying to get at is I believe in the 
	futures markets and the derivatives markets as economic tools 
	for our Nation�s future prosperity.  I am not down on that. But 
	I am willing to think seriously about getting with the CFTC or 
	the SEC or whatever the relevant regulator is and in the 
	energy�s futures, let us set some floor levels on margin costs 
	to try and make it more difficult for speculators to speculate.  
	There has got to be a level where a producer or a consumer who 
	is using the commodity believes the price is too high and it is 
	not economic for them to hedge.  On the other hand, if we go 
	the other way and set the price as low as possible, there is 
	almost no risk for a speculator, especially somebody who is 
	making the market, to take a position overnight, and if the 
	market moves a certain way, you would make a pretty good piece 
	of change, and they have really not put up any money.  
When times are flush and prices are low, requirements can be low, but 
right now, if we can knock $10 or $15 a barrel off the price of oil by 
raising the margin requirement on the futures market for oil futures I 
would put that bill on the floor next week.  Do you understand what I 
am saying?  Now, I am not negative on what you are doing.  I support 
the free market, but you have got an unregulated situation where guys 
in a back room somewhere are setting these levels.  If you set it so 
low, there are a whole lot of folks that say, "Well, heck.  I can take 
a position.  I can scrape up $3,000 or $4,000 and take a position.  And 
if things work right, boom, I am going to make a lot of money.  And even 
if I lose my whole investment, I have only lost $3,000 or $4,000."  And 
the people that are taking the short end of the stick are every one of 
our consumers who are paying at the pump.  You know, if it is $20 a 
barrel out of $60, they are paying 33 percent more than they should, 
and 33 times 3--they are paying 99 cents a gallon more for gasoline 
than they should.
	Mr. Levin.  I would like to respond to that.  And I think you 
	covered a lot of areas, and I think that, at least if I 
	understood your understanding of how things happen in the 
	market.
	Chairman Barton.  And I am not an economics major.
	Mr. Levin.  I may change some of the description that you just 
	applied.  But first off, I also state this may not change your 
	view on anything that you said, but I think Dr. Yergin�s point 
	was not that speculators are causing $10 to $15 additional to 
	market.  I think he called it a security premium that he thinks 
	is really there because participants in the market are not 
	certain about future performance and ability to get supplies. 
	And I don�t think he suggested it was only in the New York 
	Mercantile Exchange market, but I think he is suggesting that 
	it is in the world market.  And I am not even here agreeing 
	that there is such a security premium or not.  I certainly 
	respect Dr. Yergin�s opinion, but I think there was a big 
	distinction.  And I don�t think he attached it to speculators. 
	Chairman Barton.  Let me put it this way.  If the futures 
	market in the next week, across the board, went down to $50 
	a barrel, wouldn�t retail prices go down?
	Mr. Levin.  I am not so certain how fast retail goes.
	Chairman Barton.  Would it go down?  You are not going to sit 
	here and tell us that the futures market doesn�t influence the 
	retail price.  The price that is on the New York Mercantile 
	Exchange today affects the perception of where the price is 
	going to be and the supply-demand availability.  To err on the 
	side of caution, if they see that price going up, everybody in 
	the retail chain, from the refiner to the distributor to the 
	retailer, is going to raise their price up.  That is a fact.  
	We have seen that happen.  We have seen it go up 30 or 40 cents 
	a gallon in Texas in the last 2 � weeks.  Now there are a lot 
	of reasons for it, I mean, Iran, Nigeria.  And again, I am not 
	negative on the futures market.  I am not at all.  But when I 
	found out what the percentage for a margin is, if I want to go 
	to a New York Stock Exchange and buy a common stock, I would 
	put up 50 percent of the money, and in some cases, I think you 
	have got to put up even more, but I can go buy a futures 
	contract and put up 3 � or 4 � cents on the dollar.  That is 
	pretty good leverage, you know: 90/10 leverage, 95/5 leverage. 
	That is not bad.
	Mr. Levin.  But once again, and as far as a particular margin  
	moment, but the New York Mercantile Exchange�s prices, we 
	believe, and I think evidence supports, do not just 
	unilaterally go up.  They go in tandem.  Sometimes you do see 
	other prices ahead of them.  Sometimes you see it first.
	Chairman Barton.  I understand.
	Mr. Levin.  But to say that the prices fall, I appreciate that 
	you understand, sir--
	Chairman Barton.  I am not negative on the futures market.  What 
	I am is trying to find out is what we would need to do to raise 
	the margin requirements so that the producers and the consumers
	of the commodities still can participate, but make it more 
	expensive for the purely speculative player.  The young lady to 
	your left and her study, or the study that she is testifying on, 
	indicates that speculators in the market are becoming a bigger 
	factor.  When pension funds are buying futures contracts, that, 
	to me, sends up a red flag.  You know?  I don�t have a problem 
	with Boom Pickens, my good friend down in Dallas.  He can play 
	the futures market all he wants.  But he also has enough money 
	that if you raise the margin requirement--he is a smart boy and 
	a wealthy boy--he is still going to be a player.  But my God, 
	you just said that you and a few guys kind of sit around the 
	coffee table and decide what the requirements are going to be.
	Mr. Levin.  No, I don�t think that is how I said it.  I said 
	that it sounded like that.  We aren�t sitting around a coffee 
	table.  But getting back--
	Chairman Barton.  Maybe you just send e-mails back and forth
	between your computer terminals, but--
	Mr. Levin.  And also, just to make a distinction, when you have 
	margin at the New York Stock Exchange, for that partial 
	payment, you own that stock outright.  When you have a margin 
	at a futures exchange, you don�t own anything.
	Chairman Barton.  But you have a right to it.
	Mr. Levin.  No, no.  You don�t have a right.  In fact, you--
	Chairman Barton.  If you exercise the contract, you do.
	Mr. Levin.  But that is when it terminates.
	Chairman Barton.  Right.
	Mr. Levin.  At that point, you have to put up full value, and 
	as we get closer to termination, you have increasing amounts 
	of that.
	Chairman Barton.  And as we all know, what percentage of those 
	contracts go to term?
	Mr. Levin.  A smaller percentage.
	Chairman Barton.  Less than 1 percent?
	Mr. Levin.  In terms of the form of delivery, I would say yes.
	Chairman Barton.  Yes.  Okay.  We will be in touch.
	Mr. Levin.  For the purposes that you said, sir, but we base our 
	margin calculation, as I said, on the assessed risk in the market. 
	We are able to utilize parameters from the market, a technical 
	term, but one that is not that difficult to understand.  We call 
	it the implied volatility that is derived from some of the 
	options and the futures pricing, but what volatility refers to 
	is the percentage representing a standard deviation of pricing.
	Chairman Barton.  We have a volatility test, too.  It is called 
	the election.  And the political volatility is pretty high 
	right now on this.  I don�t begrudge the traders, but I am a 
	lot more worried right now about the consumers of every Member 
	of Congress on both sides of the aisle and that volatility in 
	the marketplace, on the retail price of gasoline, is at a level 
	that I think it is worthy of serious inquiry on how these 
	margin requirements are set.  And I think you can make a fairly 
	good case that if we set them higher, the volatility in the oil 
	market would go down, and the price in the oil market would go 
	down.  And at least in the short term, I think that would be a 
	good thing for the American consumer and American economy.  And 
	I guarantee you, it would be a good thing for those of us that 
	run for election.
	Thank you, Mr. Chairman.
	Mr. Shimkus.  The Chair now recognizes my colleague from 
	Kentucky, Mr. Whitfield, for 5 minutes.
	Mr. Whitfield.  Thank you, Mr. Chairman.
	Ms. Williams, in your study, you note that you are looking at 
	fraudulent, manipulative, and abusive practices that have been 
	identified by the Commodity Futures Trading Commission and also 
	enforcement that they are going to take.  Could you elaborate 
	on the type of practices that you found to be fraudulent or 
	abusive?
	Ms. Williams.  I think, based on the information we have 
	collected to date, most of the activity taken by CFTC in the 
	energy area involve natural gas in fraudulent reporting.
	Mr. Whitfield.  Involve natural gas?
	Ms. Williams.  False reporting was the specific issue in the 
	natural gas market.
	Mr. Whitfield.  Maybe you could give me an example of false 
	reporting.
	Ms. Williams.  I think it actually has to deal with certain 
	reporting requirements, primarily in the over-the-counter market 
	and the information that was being provided by participants in 
	that market to the reporting body, that they weren�t providing 
	accurate information to the reporting body.  And CFTC took 
	action, because that could potentially affect the futures 
	market.
	Mr. Whitfield.  Was that a live threat or not?
	Ms. Williams.  Based on what we have collected to date, I am 
	not sure I could say that it was characterized as a live 
	threat.
	Mr. Whitfield.  Okay.  Mr. Levin, we appreciate you being here 
	today.  And it is my understanding that there are other future 
	exchanges trading energy products in the United States other 
	than your company.  Is that correct?
	Mr. Levin.  That is correct, Congressman.
	Mr. Whitfield.  And does the Commodity Futures Trading 
	Commission have authority to monitor trading of those markets 
	to ensure that the prices are not manipulated?
	Mr. Levin.  One of those markets is actually subject to 
	regulation by the FSA, which is the authority that oversees 
	commodities and securities regulation in the UK.  The reason 
	being that that is where their authority emanates from, and 
	there are courtesies provided between the Commodity Futures 
	Trading Commission of the United States to other exchanges that 
	are under foreign authority.  In this case, since I think you 
	are talking about domestically-traded products, that, I think, 
	the interpretation of that courtesy for foreign regulators 
	and other exchanges was with the understanding it would be 
	for products that are really foreign-based products, that 
	there may be some interest in the United States to trade as 
	well.  And in this case, there is an exchange that is trading 
	U.S.-based product very similar to our product, but it is 
	subject not to the CFTC as the ultimate authority, but to the 
	FSA.
	Mr. Whitfield.  Do you view that as a significant issue?
	Mr. Levin.  We have certainly been concerned about it and have 
	raised it with the Commodity Futures Trading Commission, 
	because it opens up the possibility of differential 
	regulation.  As examples, and with no disrespect intended to 
	FSA, there are really different views on position limits 
	between the CFTC and the FSA.  But NYMEX products are subject 
	to position limits.  The FSA-regulated products are not, even 
	though they are very similar.  Also, there is a large trader 
	reporting that takes place rather extensively under the CFTC, 
	so we are subject to that for our U.S.-based products, but 
	this other exchange is not for its U.S.-based products,
	because the FSA does not require that.
	Mr. Whitfield.  Now would legislation be required to regulate 
	that exchange, or can that be done administratively by the 
	Commodity Futures Trading Commission?
	Mr. Levin.  I think it can be done administratively by the 
	CFTC, sir.
	Mr. Whitfield.  And you are having ongoing discussions with 
	them about that?
	Mr. Levin.  Yes, officials from the exchange have raised that 
	with the CFTC.
	Mr. Whitfield.  Okay.  Okay.  I yield back the balance of my 
	time.
	Mr. Shimkus.  The gentleman yields back.
	I would like to recognize myself for 5 minutes.
	And Mr. Levin, in your testimony, you give an overview of the 
	two primary functions of future markets, including that they 
	permit hedging, giving market participants to shift price risk, 
	and that they facilitate price discovery and market 
	transparency.  Who regulates these functions?
	Mr. Levin.  They are regulated at two levels, Mr. Chairman.  
	They are regulated by the Commodity Futures Trading 
	Commission.  And we also, the exchange itself, has self-
	regulatory responsibilities that are the result of 
	Congressional legislation, so we regulate it as well.
	Mr. Shimkus.  Is the NYMEX the only futures exchange that is 
	trading energy products in the United States?
	Mr. Levin.  No, sir.  There is another one that we were just 
	discussing, but it is the International Commodity Exchange.  
	It took over the International Petroleum Exchange, IPE, that 
	was based in London.  And it also trades in the United States.  
	And it trades U.S.-based products in the United States, but 
	subject to that foreign regulation.
	Mr. Shimkus.  So it is not regulated by the CFTC?
	Mr. Levin.  No, it is not.  And I do not believe it is at all
	subject to the same self-regulatory responsibilities, but by 
	no means do I mean that to say that they do not take oversight 
	of what trades there seriously, but it is not subject to the 
	same rigor as the CFTC.
	Mr. Shimkus.  Well, would you say it is regulated or 
	unregulated?
	Mr. Levin.  Well, there are aspects that are much less 
	regulated, because on the natural gas side, which is a 
	different component.  The product that is U.S.-based that is 
	subject to the FSA are its crude oil futures, its WTI cash-
	settled product.  And that is less regulated, far less 
	regulated than we are, because of the position reporting, large 
	trader recording position limits they are not subject to on the 
	natural gas side.  That is a lesser type of regulation.  It is 
	under CFTC authority.  There are also the cash-settled based 
	on a NYMEX product, in this case, our natural gas product.  And 
	it has even less regulation under the authority that they 
	operate.
	Mr. Shimkus.  Can trading in that market impact crude oil 
	prices in the United States?
	Mr. Levin.  I would consider that market to be part of the 
	market in the same way that NYMEX and all of the other 
	components that I identified are, and I would say absolutely.  
	It is part of the world oil market.  And trading in that market 
	has an influence, as these other components do.
	Mr. Shimkus.  But would you consider it a foreign market if it 
	is located in the United States?
	Mr. Levin.  Well, I think that, from our perspective, we 
	certainly questioned that interpretation because it is a 
	U.S.-based price.  It is largely for U.S. participants and it 
	is very relevant as a U.S. market.
	Mr. Shimkus.  And going at some of the issues the Chairman had, 
	and he is pretty impassionate.  There is a function for you all. 
	And you defined the margin as a good faith deposit, is that 
	correct.
	Mr. Levin.  I did, yes, sir.
	Mr. Shimkus.  Have the current margin-setting procedures proven 
	effective in preserving the financial integrity of the market?
	Mr. Levin.  Well, they absolutely have.  As everyone knows, 
	there is a lot of volatility in the market, but the basis for 
	which we set our margins have been very effective, and it is 
	very infrequent that we find that we are under-margined.  We 
	consider it a very bad policy to be either under-margined, 
	because we are not protecting ourselves against risky 
	performance in our market.  But over-margined, too, because 
	that could lead to a lack of trading and the lack of a server 
	to perform our role, the market would, thus, suffer and be a 
	lot less transparent.
	Mr. Shimkus.  And I wish you had had a chance to really get 
	involved with the Chairman on that.  How does the small 
	percentage of the contract value protect the market against 
	major market move, or does it?
	Mr. Levin.  It is not that it protects against the major 
	market move.  Literally, it is that we have found that the 
	means in which we apply our margins, that this implied 
	volatility has been a very effective indicator of boundaries of 
	where price may move until the next collection of payments. The 
	risk management is also because every participant in the market 
	is sponsored and guaranteed by a financial overseer of the 
	many, many international banks, domestic banks, major financial 
	entities, or others on the market.  We found that there are 
	margins in that collection and those guarantees that, despite 
	bouts of volatility in the market, we have had very good 
	financial performance in the market.
	Mr. Shimkus.  And the Chairman, I ask my colleagues for 
	forgiveness here, but if you raised the margins that the 
	Chairman is addressing, what does that do to your market and 
	what does it do to prices?
	Mr. Levin.  Well, he had indicated, I think earlier, if I heard 
	correctly, a percentage which was arbitrary.  There may be times 
	in our market where we have had margins that high because of 
	our risk assessment.  I think that would drive virtually all 
	participation away.  And then our concern is that we will lose 
	the benefits of the futures market.
	Mr. Shimkus.  Thank you.
	The Chair recognizes the gentleman from Michigan for 5 minutes.
	Mr. Stupak.  Thank you, Mr. Chairman.
	I am glad to see that members are starting to focus on this 
	futures market, because we have been pushing legislation and 
	trying to get hearings on our legislation, and I tried to help 
	investigate this high price of oil.  And one of the issues we 
	came up with and thought of on how there may be some things 
	that we can help to bring some stability to the price and then 
	also give the relief to the taxpayer, or I should say to those 
	that are caught up with gas.  So I am glad to see all of the 
	interest in it.  I am sorry the Chairman is back and forth.  I 
	was actually on the floor on that amendment, so we have votes 
	on the floor.
	So let me get to it.
	Mr. Levin, as you put in your statement, trading on NYMEX is 
	transparent, open, and competitive because of your reporting 
	system.  So does it not make sense to provide this same 
	transparency, open process of reporting to the off-market 
	traders or the OTCs, as they are called?
	Mr. Levin.  Congressman, obviously, given the transparency we 
	operate under and provide, we are great supporters of it.  We 
	also recognize that there are transactions in the market that, 
	just in general and philosophically, that are private and that 
	maybe do not require or maybe are concerned that would become 
	advocates in intruding too overbearingly to private company 
	transactions.  I certainly understand the sensitivity of the 
	topic, and there could be a perspective that supports it, but we 
	are also very concerned with even the well-intentioned policies 
	that begin to intrude more and more into principal to principal 
	commerce.  There could be some unintended consequences.  And that 
	is why we are somewhat timid to come out and endorse something 
	like that.  I wouldn�t want it, as I said, to be misinterpreted, 
	though.  We operate as a transparent institution, and we are great 
	supporters of transparency.
	Mr. Stupak.  That leaves part of the private operation more 
	susceptible then to greater speculation, greater margins, greater 
	price increases, greater fluctuation in price, because you need to 
	know what are the motivating factors behind some of these.
	Mr. Levin.  It is so early, it is possible.  If they are truly 
	private, though, they may have no influence beyond those 
	individual transactions and not get reported elsewhere in the 
	market, and I think that is--
	Mr. Stupak.  But you need to know how much is there, I mean, 
	how much is private that OTC is trading.  Some estimates, and I 
	was going to ask Ms. Williams if she wanted to join in, please 
	do, of the off-market trading could be as high as 60 to 75 
	percent.  Is that fair to say on all future energy trading?
	Mr. Levin.  In all honesty, we don�t know, either, how much 
	there is, and we have ourselves over the years tried to make 
	estimates.
	Mr. Stupak.  So what is your best-guess estimate?
	Mr. Levin.  You know something?  I don�t know what my best guess 
	is.  I can tell you sometimes people have told us that over-the-
	counter is much more than on exchange, but we think that when we 
	heard more about that, it sounded like there was multiple 
	counting of the same transactions.  I would say somewhere, maybe 
	it could be, a good guess, as much as on exchange, but it could 
	be more.  But that would be adding all of the exchanges together.  
	So there is a fair amount of over-the-counter trading.  There 
	clearly is.
	Mr. Stupak.  I assume that to mean 25 percent?
	Mr. Levin.  Oh, no, before the market we were referencing before, 
	the cash-settled WTI at the other exchange, under the IPE, they 
	are grant trading.  If you had added their grant trading and our 
	trading, it might be as large as all of that volume together.
	Mr. Stupak.  Okay.  And Ms. Williams, does the GAO have an 
	ability to tell exactly how much futures trading is occurring 
	off the market?
	Ms. Williams.  I wouldn�t say that we have the ability.  This 
	is one of the issues that we are trying to get our arms around, 
	but there is no central source for the information.  So we are 
	not likely to be able to come up with a number for the over-the-
	counter market.
	Mr. Stupak.  Sure.  Okay.  Is that something you are going to 
	try to address in the GAO report?
	Ms. Williams.  Yes, that is something that we are trying to 
	address.
	Mr. Stupak.  Mr. Levin, you also point out in your statement 
	that because of the transparency of NYMEX trading, futures 
	prices use the set prices on the cash market, otherwise known 
	as price discovery function.  Does off-market trading affect 
	this price discovery?
	Mr. Levin.  We believe, I think indirectly it does, because in 
	many cases, the over-the-counter market has some active 
	organizations that are dealers in that market.  And they have 
	many customers.  And sometimes, their transactions are more 
	customized.  Sometimes they are rather standardized.  But in 
	their collecting of transactions, they also manage their 
	risk in markets such as ours or others like it where with 
	others in the cash or over-the-counter markets.  So there is 
	a lot of multiple trading that finds its way into the 
	collection of transactions.  And in that sense, I think it 
	has an influence, and I think, as I indicated earlier, 
	there is kind of simultaneity as well as a reactor-ship 
	between all of these transactions.
	Mr. Shimkus.  If the gentleman would wrap, we would give 
	Dr. Burgess--
	Mr. Stupak.  Just one quick question.
	How many barrels are traded on NYMEX every day, just to give 
	us some reference point here?
	Mr. Levin.  I think these days, in a very active market, 
	there has been somewhere in the neighborhood of 250 million 
	barrels a day.  I think that is a ballpark.
	Mr. Stupak.  Thank you both for your interest.
	Mr. Shimkus.  And thank the Chairman for all of the gracious 
	time I offered.
	Mr. Stupak.  Thank you, Mr. Chairman.
	Mr. Shimkus.  The Chair recognizes the gentleman from Texas 
	for 5 minutes.
	Mr. Burgess.  Thank you, Mr. Chairman.
	Ms. Williams, you talk about the CFTC and how they have the 
	ability or need the ability for oversight.  Do they have all 
	of the tools they need at this point?
	Ms. Williams.  That is one of the things that we are looking 
	at in the course of our study, and I am not in a position to 
	give a specific response now, but we are looking at that.
	Mr. Burgess.  Are you going to follow up with the committee, 
	perhaps, with a written response, then, to that?
	Ms. Williams.  I will be glad to do that.
	Mr. Burgess.  I think that would be very, very useful.  It 
	would give us some direction, or we will come up with some 
	tools, and they may not be the tools that you need.
	Mr. Levin, last summer we passed the energy bill.  We put 
	MTBE in some legal peril, and it has been abandoned.  And 
	maybe that is a good thing, ultimately.  Maybe it is not.  But 
	the result has been, with this summer�s driving season upon us, 
	we see the prices increase.  How much was that anticipated by 
	the market?  Did you guys see that coming?
	Mr. Levin.  We knew that the transition would be difficult, 
	Congressman, because there have been other transitions 
	environmentally-based for the last, really, 15 or 16 years in 
	the gasoline market, in particular.  And the full consequence 
	is that there is a lot less forward trading and thus forward 
	price protection--
	Mr. Burgess.  My time is really very short, and we have got to 
	go vote, but can I just ask, was there any sort of advisory or 
	warning put out by the Mercantile Exchange about this change?
	Mr. Levin.  No, I mean, I think they really accepted those 
	regulations as they went in.  And we couldn�t have predicted, 
	because, as you indicated, it was really a reaction to 
	something in the bill, which was that it was stated explicitly 
	they wouldn�t be given protection by the Government.  And so a 
	lot of the industry finally decided that they are going to 
	abandon it.  There was no official date given.  It was hard 
	to--
	Mr. Burgess.  I think that the reasons, and I think the 
	American people could accept the reasons.  It is going to cost 
	us something to get MTBE out of our lives, and if it is worth 
	it to do that, we are willing to pay for it.  But I guess what 
	bothers my constituents when I talk to them is that why didn�t 
	we see this coming?  Why was there no warning?  Maybe that is 
	the committee�s fault.  Maybe that is the House�s fault?  
	Maybe that is the Senate�s fault.  I don�t know.  But from 
	your perspective, with NYMEX, was there any sort of advisory 
	circular put out there, "Hey, guys.  Watch this, because MTBE 
	is out of the picture.  When we reformulate next summer, it 
	is going to be big trouble.  If anything else happens, like 
	two hurricanes, like takeover in Bolivia, you name it."
	Mr. Levin.  Congressman, it really wasn�t in that context.  
	It would be hard to predict the timing.  We knew the transition 
	would be difficult, but because it would really be commercially 
	driven, we might have thought it would coincide with the 
	summer, but even there, we have two gasoline products.  
	Reformulated is still trading more at NYMEX than the 
	replacement in spite of the fact that there has been this 
	transition taking place.  So we haven�t seen that full 
	commercial transition, and that is why it is difficult to 
	predict even now, and certainly back then, when it would take 
	place and exactly how it would take place.
	Mr. Burgess.  Well, looking at one of your charts, I guess 
	chart B, it makes me very concerned about price gouging by the 
	ethanol producers.
	Mr. Shimkus.  The gentleman�s time has expired.  No.
	Mr. Burgess.  When we look at that, well, can you explain the 
	factor by which the price of ethanol has increased?  Is it 
	because of increased demand because of replacement of MTBE or 
	are there other factors?  I guess the thing is, we heard this 
	in the policy committee this morning, it is the same price as a 
	gallon of gas most places in the country, at least in South 
	Carolina.
	Mr. Levin.  I think it is demand driven.  And we are concerned. 
	We know, too, that there isn�t a big difference between, as you 
	said, the MTBE and the ethanol.  I don�t know that it is a one-
	to-one replacement between them, but nonetheless, right now, 
	our blend-stock gasoline is trading above ten cents a gallon on 
	the wholesale market, and you still haven�t added the ethanol 
	in yet, so that will raise that even more at the time that they 
	are combined.
	Mr. Burgess.  So they affect the blend-stock and not just the 
	ethanol individually?
	Mr. Levin.  I think it is mostly the ethanol, but yes, there is 
	a piece of that that is blend stock, yes.
	Mr. Burgess.  Mr. Chairman, we have got to go vote.  I will 
	yield back.
	Mr. Shimkus.  The gentleman yields back.  We have about two 
	minutes and 58 seconds to get down to the floor to vote.  I 
	think we are going to be fine.
	We want to thank the second panel for waiting and then for your 
	answers.  It has been very, very helpful.  And with that, I--
	Mr. Burgess.  Mr. Chairman, before you adjourn, could I just ask 
	unanimous consent that we do get those guidelines from the GAO 
	when that report is ready?
	Mr. Shimkus.  Without objection, so ordered.
	And with that, I adjourn the hearing.
	[Whereupon, at 1:44 p.m., the committee was adjourned.]
	

Response for the Record by Daniel Yergin, Chairman, Cambridge Energy 
Research Associates


The Honorable John D. Dingell

Your written testimony of May 4, 2006, (pages 13-15) criticizes the 
system for reserve disclosure mandated by the Securities and Exchange 
Commission, and states that: "Modernizing the reserves disclosure 
would clearly improve understanding of the resource base and its 
potential and provide clarification for purposes of energy security."  
Please describe and explain the specific changes that you believe are 
necessary.

The basic need is to update the SEC�s "1978" system of reserves 
disclosure to take into account the�major and�indeed massive changes in 
four dimensions - in technology, the globalization and commoditization 
of markets, the scale and complexity of projects, and the globalization 
of the energy industries and capital markets.� For instance, the deep�
water frontier in the late 1970s was 600 feet; today, it is more like 
12,000 feet.� Computing had only a tiny fraction of the power it has 
today.  Also, at�the time the system was put in places, prices were 
controlled by the federal government, and the documentation from the 
time indicated that the expectation was that prices would�change�as 
the result of�decisions involving federal price controls.�Finally, it 
is important to note that the 1978 system was created primarily for the 
onshore U.S. industry, and the industry is now very much more than US 
and very much more than onshore.
In designing the 1978 system, the SEC relied on the�primary source for 
defining "proved reserves." That was the definition, and the expertise 
around it, developed and promulgated by the�leading professional and 
technical society, the�Society of Petroleum Engineers (SPE)�in 1965, 
with some modification thereafter.� Since then the SPE has updated its 
definitions three times and is in the process of updating them again.��
The SEC, however, has�not revisited its definitions since 1978.� 
Modernizing the SEC�s definitions would provide investors with�more 
complete information and would provide a more thorough understand of 
the overall reserve base,�grounded in today's technology.�
�	To do this, it would be sensible for the SEC to reengage with 
�	the contemporary expertise and current technical knowledge. 
�	The�upstream oil and gas industry routinely uses definitions 
�	and guidance issued by the SPE�s Oil and Gas Reserves Committee 
�	to calculate reserves. The SPE definitions are the subject of 
�	continuous dialogue among academics, technical experts, and 
�	industry participants; and they reflect the most up to date 
�	accepted practices. Their evergreen nature makes them robust 
�	as a standard�and benchmark.
�	�A striking example of what would be achieved were the SEC to 
�	�update its definitions would be the inclusion of  oil produced 
�	�from oil shale and oil sands in  the definitions of proved 
�	�reserves.  �It is expected that Canadian oil sands could�reach
�	�2 mbd of production by 2010-the equivalent of a quarter of�total
�	�current US liquids production.   The United States will be the 
�	�major market for this resource.  Yet, currently, under the 1978 
�	�system, there is little clarity as to the nature of these 
�	�resources.�

�
According to a March 16, 2006, letter from the Honorable Christopher Cox 
(copy attached), the SEC is working with the International Accounting 
Standards Board�s Extractive Industries Project Team to establish a 
single set of reserve and resource definitions for both the mining and 
oil and gas industries.  The project is intended to achieve 
modernization and greater convergence between the definitions and the 
related accounting principles. Please explain why this undertaking is 
or is not responsive to your concerns.

While we applaud the workings of the IASB and the objectives of 
establishing a convergence in accounting standards, including with 
disclosure of oil and gas reserves, we do raise the question as to the 
speed and momentum of this project.  We believe that the SEC could 
effectively undertake a direct and prompt modernization of the 1978 
system, thereby reaffirming its leadership and authority in this area. 


The SEC letter states at page 2 that: "Reserve volumes are not included 
as assets in audited balance sheets because of the inherent difficulty 
of accurately estimating them.  As a result, SEC and FASB rules direct 
oil and gas exploration companies to provide a significant amount of 
supplemental information relating to their reserves in an unaudited 
footnote to their financial statements."  Do you agree or disagree 
with this treatment, and why?
�
We agree with the current approach-it is not practical to include 
reserves volumes in the audited balance sheets. However, we think that 
some re-examination of the current SEC treatment�may be warranted in a 
different direction.� The SEC permits presentation of�additional data 
in an un-audited footnote. However, it�appears that the�intention of 
the original drafters of the regulations was that the disclosures 
represented a minimum level of disclosure and that companies should 
be encouraged to disclose additional data if they believed it would 
better inform investors.��More recently registrants�have�been 
discouraged from providing information beyond the proved level.��There 
is a�case for the SEC's encouraging companies to disclose any 
additional information they believe provides a fuller picture than 
just the content of the footnotes mandated by FAS69 rather than to 
discourage it, and that case should be examined.
�

The SEC letter further notes that only one (El Paso Corporation) of 
the 10 largest oil companies has reported any material weaknesses in
its internal controls over  financial reporting, but warns that 
"internal controls regarding the compilation and presentation of 
reserve disclosures are not covered by the internal control reports."  
Should they be?  Why or why not?   
�
�There is no obvious reason to�require the bringing of oil and gas
�reserves disclosures within the internal control reports. It is not�
�at all clear that the additional costs and efforts would be 
�justified nor that it would lead to any increase in the reliability 
�of reserves estimates.