[Senate Hearing 109-857]
[From the U.S. Government Publishing Office]
S. Hrg. 109-857
ENERGY SECURITY IN LATIN AMERICA
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON FOREIGN RELATIONS
UNITED STATES SENATE
ONE HUNDRED NINTH CONGRESS
SECOND SESSION
__________
JUNE 22, 2006
__________
Printed for the use of the Committee on Foreign Relations
Available via the World Wide Web: http://www.gpoaccess.gov/congress/
index.html
U.S. GOVERNMENT PRINTING OFFICE
34-697 WASHINGTON : 2007
_____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; (202) 512�091800
Fax: (202) 512�092250 Mail: Stop SSOP, Washington, DC 20402�090001
COMMITTEE ON FOREIGN RELATIONS
RICHARD G. LUGAR, Indiana, Chairman
CHUCK HAGEL, Nebraska JOSEPH R. BIDEN, Jr., Delaware
LINCOLN CHAFEE, Rhode Island PAUL S. SARBANES, Maryland
GEORGE ALLEN, Virginia CHRISTOPHER J. DODD, Connecticut
NORM COLEMAN, Minnesota JOHN F. KERRY, Massachusetts
GEORGE V. VOINOVICH, Ohio RUSSELL D. FEINGOLD, Wisconsin
LAMAR ALEXANDER, Tennessee BARBARA BOXER, California
JOHN E. SUNUNU, New Hampshire BILL NELSON, Florida
LISA MURKOWSKI, Alaska BARACK OBAMA, Illinois
MEL MARTINEZ, Florida
Kenneth A. Myers, Jr., Staff Director
Antony J. Blinken, Democratic Staff Director
(ii)
C O N T E N T S
----------
Page
Biden, Hon. Joseph R., Jr., U.S. Senator from Delaware........... 40
Craig, Hon. Larry E., U.S. Senator from Idaho.................... 1
Prepared statement........................................... 3
Cavallo, Hon. Domingo, chairman and CEO, DFC Associates, LLC, and
former Minister of Economy for Argentina....................... 12
Prepared statement........................................... 14
de Carvalho, Eduardo Pereira, president, Brazilian Association
of Sugar Cane and Ethanol Producers, Sao Paulo, Brazil......... 26
Prepared statement........................................... 28
Giusti, Luis E., senior advisor, Center for Strategic and
International Studies, Washington, DC.......................... 18
Prepared statement........................................... 21
Goldwyn, Hon. David L., president, Goldwyn International
Strategies, LLC, Washington, DC................................ 30
Prepared statement........................................... 33
Lugar, Hon. Richard G., U.S. Senator from Indiana................ 1
Martinez, Hon. Mel, U.S. Senator from Florida.................... 7
Nelson, Hon. Bill, U.S. Senator from Florida..................... 8
Salazar, Hon. Ken, U.S. Senator from Colorado.................... 4
Prepared statement.......................................... 6
Additional Material Submitted for the Record
Farnsworth, Eric, vice president, Council of the Americas,
prepared statement............................................. 56
Johnson, Stephen C., senior policy analyst for Latin America, The
Kathryn and Shelby Cullom Davis Institute for International
Studies, The Heritage Foundation, prepared statement........... 58
Mendelson-Forman, Johanna, Ph.D., senior associate, Center for
Strategic and International Studies, Washington, DC............ 62
(iii)
ENERGY SECURITY IN LATIN AMERICA
----------
THURSDAY, JUNE 22, 2006
U.S. Senate,
Committee on Foreign Relations,
Washington, DC.
The committee met, pursuant to notice, at 9:40 a.m., in
room SD-419, Dirksen Senate Office Building, Hon. Richard G.
Lugar (chairman of the committee) presiding.
Present: Senators Lugar, Chafee, Coleman, Martinez, Biden,
and Nelson.
Also present: Senators Craig and Salazar.
OPENING STATEMENT OF HON. RICHARD G. LUGAR, U.S. SENATOR FROM
INDIANA
The Chairman. This hearing of the Senate Foreign Relations
Committee is called to order.
We are honored to have two distinguished colleagues before
us on our first panel today. To respect their time commitments,
we will call upon them for their testimony immediately. After
they have completed their testimony, I will deliver an opening
statement, as will the distinguished ranking member as he
arrives, and then we have a remarkable panel to follow this
morning.
Rollcall votes will come, three of them, at about 11
o'clock. So we will do our best to maneuver around them. We
have some extraordinary opportunities today to learn about
energy policy, Latin America, and the intersection of these
with regard to our country.
It's a real privilege to call now upon the distinguished
Senator from the State of Idaho, Larry Craig, to be followed by
the equally distinguished Senator from the State of Colorado,
Ken Salazar. Gentlemen, proceed as you wish. Your full
statements will be made a part of the record. If you would
summarize within a 5- or 10-minute period, that would be
desirable.
Senator Craig.
STATEMENT OF HON. LARRY E. CRAIG, U.S. SENATOR FROM IDAHO
Senator Craig. Well, Mr. Chairman, thank you very much for
allowing both of us to be here. I'm pleased to have Ken at my
side as we discuss these important issues.
It is an opportunity to address both energy and Latin
American issues, and I want to commend you and your insight in
addressing this very timely and important set of topics, and
for introducing S. 2435, the Energy Diplomacy and Security Act.
Your bill will help move the Latin American region toward the
center of this country's strategic planning, and reevaluate
attitudes amongst some United States officials who currently
limit our ability to diversify our energy supply and also to
compete fairly with countries like China for resources in the
hemisphere.
Mr. Chairman, you know I've always been fairly direct and
blunt about these issues. Recent developments in Latin America
are not in keeping, in my opinion, with the United States'
energy, economic, or national security interest. For example,
the nationalization of industries in Latin America is
troubling.
Further, while this kind of backward-looking activity is
contrary to our country's belief in the power of property
rights and free enterprise in transforming developing
economies, it is nevertheless very welcome to countries around
the world with leftist-leaning governments and state-controlled
industries. In particular, it is my firm opinion that the likes
of China are exploiting these regressive developments right at
our doorstep.
Whether or not that's true, I know China is preparing to
plant oil rigs 50 miles offshore of our coastline. Venezuela
has recently purchased 18 rigs from that country. Hugo Chavez
has stated numerous times that he seeks to divert his oil
exports away from the United States to China.
But, in any event, the fact remains that our policies, if
they ever warrant that term toward Latin America, don't seem to
be working. And it is arguably the case that China is inclined
to exploit this precipitous decline in United States influence
in Latin America. It is a product of failure. The result may be
that some governments in Latin America are doomed to repeat
past economic mistakes and thereby relive their failed
turbulent histories, rather than join the expanding communities
of modern and progressive democracies.
As it relates to China's engagement in Latin America, let
me direct the committee's attention to two statements. In
yesterday's New York Times, Thomas Friedman points out that
China, too, thinks of Latin America as its backyard. In
particular, Friedman states, ``China is almost exclusively
focused on extracting natural resources--timber, iron,
soybeans, minerals, gas, and fish--to feed its voracious
appetite and keep jobs and factories humming in China.''
Additionally, the administration's own national security
strategy paper points to China's energy resource hunger and
states that China is ``expanding trade, but acting as if they
can somehow lock up energy supplies around the world or seek to
direct markets rather than opening them up.''
Mr. Chairman, I firmly believe your bill, S. 2435, of which
I am a cosponsor, will change a policy toward Latin America of
nonengagement on substantive issues that ought to be of mutual
concern to the United States and its neighbors. The position is
actually worse than merely benign neglect or nonengagement. At
the same time that we fail to engage on drug interdiction,
energy development, extradition, and similar criminal justice
issues, we are actually antagonizing the populations of
countries with whom we have a strategic interest in maintaining
productive relationships.
Mr. Chairman, I will ask that the balance of my statement
become a part of the record, and let me summarize and conclude.
I believe it is only through aggressive oversight and
pushing bills like S. 2435 that we can change course and
correct our policies in Latin America. Failure to
constructively engage this region and to promote partnerships
on energy and other issues between the United States and Latin
American countries will condemn the United States to
consistently poor outcomes on matters of importance to our
citizens.
Whether it is affordable energy or the jobs that arise from
soundly executed foreign policy or an orderly and legal
immigration policy, we have a responsibility to be friends,
neighbors, and to engage our neighbors to the south. I have no
doubt that the region you are addressing today is just as
important, if not more important, than the Middle East, where
we seem to focus all of our attention today.
In my opinion, if we do not correct our course in Latin
America, the long-term consequences to the United States will
prove seriously adverse. I hope we do not wake up one day and
realize that our focus has been too narrowly directed at the
Middle East while equally important events, including the
petropolitics of Latin America, are in the process of
delivering a profound and negative impact on this country.
I thank you for allowing me to testify, Mr. Chairman.
[The prepared statement of Senator Craig follows:]
Prepared Statement of Hon. Larry E. Craig, U.S. Senator From Idaho
Mr. Chairman, thank you for this opportunity to address both energy
and Latin America issues. I want to commend you for your insight in
addressing these very timely and important topics, and for introducing
S. 2435, the Energy Diplomacy and Security Act. Your bill will help
move the Latin American region toward the center of this country's
strategic planning by reevaluating attitudes among some U.S. officials
that currently limit our ability to diversify our energy supplies and
also to compete fairly with countries like China for resources in this
hemisphere.
Mr. Chairman, let's call a spade a spade. Recent developments in
Latin America are not in keeping with the United States' energy,
economic, or national security interests. For example, the
nationalization of industries in Latin America is troubling. Further,
while this kind of backward-looking activity is contrary to our
country's belief in the power of property rights and free enterprise to
transform developing economies, it is nonetheless very welcome to
countries around the world with leftist-leaning governments and state-
controlled industries. In particular, it is my firm opinion that the
likes of China are exploiting these regressive developments right on
our doorstep.
Whether or not it is the fact that China is preparing to plant oil
rigs 50 miles off our southern coastline, or that Venezuela has
recently purchased 18 oil rigs from that country, or the simple fact
that Hugo Chavez has stated numerous times that he seeks to divert his
oil exports away from the United States and to China--the fact remains
constant that our policies (if they even warrant that term) toward
Latin America don't seem to be working and it is arguably the case that
China is inclined to exploit the precipitous decline in United States
influence in Latin America produced by that failure. The result may be
that some governments in Latin America are doomed to repeat past
economic mistakes and thereby relive their failed turbulent histories,
rather than join the expanding community of modern and progressive
democracies.
As it relates to China's engagement in Latin America, let me
quickly point out two statements. In yesterday's New York Times, Thomas
Friedman points out that China, too, thinks of Latin America as their
backyard. In particular, Friedman states, ``China is almost exclusively
focused on extracting natural resources--timber, iron, soybeans,
minerals, gas, and fish to feed its voracious appetite and keep jobs
and factories humming in China.'' Additionally, the administration's
own National Security Strategy paper points to China's energy resource
hunger by stating that China is ``expanding trade, but acting as if
they can somehow lock-up energy supplies around the world or seek to
direct markets rather than opening them up.''
Mr. Chairman, I firmly believe your bill, S. 2435 (of which I am an
original sponsor) will seek to change a policy toward Latin America of
nonengagement on substantive issues that ought to be of mutual concern
between the United States and its neighbors. The position is actually
worse than one of merely negligent nonengagement. At the same time that
we fail to engage on drug interdiction; the development of energy
resources; extradition and similar criminal justice issues, we are
actually antagonizing the populations of countries we have a strategic
interest in maintaining productive relations with.
Mr. Chairman, to be blunt, we have some resistance to overcome in
this city to a new approach toward Latin America. While Republican and
Democrat administrations have come and gone, many bureaucrats remain
that harbor a strong institutional bias toward Latin America. That
said, it is my opinion that many high-level bureaucratic officials in
the State Department and the CIA have been misguided in their
responsibilities in the region. No doubt Hugo Chavez is a worrying
phenomenon. However, the questionable antics of our State Department
during the coup d'etat in Venezuela in 2002 have, in my opinion, had
dire consequences on our ability to appropriately influence not only
Venezuela, but other countries in the region as well. There is no
quicker formula for solidarity among Latin American governments than
the appearance of interference and victimization by the United States.
Further, we have small groups in this country who seem to genuinely
fear the likes of Chavez, Castro, and Morales and want nothing to do
with them even if it involves the pursuit of U.S. national interests.
This fear leads to comprehensive nonengagement, leaving the door open
for further and unwanted influence in the region from other countries
that do not have our well-being at heart. Those who fear these leftist
leaders of Latin America must have no faith in the great concepts of
America, capitalism, diplomacy, the power of engagement, and a human's
will to be free. Additionally, those driven by fear in this country
fail severely to see that isolation policies have never been
successful. Unfortunately, these small, fear-mongering groups do not
appear to be isolated in particular regions of our country. They also
appear to be locked in at influential bureaucratic posts at the State
Department and the CIA.
It is only through aggressive oversight and pushing bills like S.
2435 that we can change course and correct our policies in Latin
America. Failure to constructively engage this region and to promote
partnership on energy and other issues between the United States and
Latin American countries will condemn the United States to consistently
poor outcomes on matters of importance to our citizens--whether it is
affordable energy, or the jobs that arise from soundly executed foreign
trade policies.
I have no doubt that the region you are addressing today is just as
important, if not more important, than the Middle-East where we are
heavily involved today. In my opinion, if we do not correct our course
in Latin America, the long-term consequences to the United States will
prove seriously adverse. I hope we do not wake up one day and realize
that our focus had been too narrowly directed toward the Middle East
while equally important events including the petropolitics of Latin
America were in the process of delivering a profound and negative
impact on this country.
The Chairman. Well, I thank you very much for your
testimony, Senator Craig, and for your leadership in energy
policy, generally. I thank you for your specific reference to
the legislation we have offered and its general concept, that
our State Department must have officials who are engaged in the
geopolitics of energy. That clearly includes Latin America, as
well as the other areas that you have referenced. We must
urgently reorganize our own efforts, both legislatively as well
as administratively.
Senator Salazar, would you proceed with your statement.
STATEMENT OF HON. KEN SALAZAR, U.S. SENATOR FROM COLORADO
Senator Salazar. Thank you very much, Chairman Lugar, and
thank you to Senator Nelson and Senator Martinez for the
bipartisan leadership that you bring to this committee and to
this United States Senate. I also very much enjoy working next
to my colleague, Senator Craig, on so many issues, from
veterans' affairs to energy issues, and it's always a pleasure
to appear with him.
I come today to talk about energy security in Latin
America, as a member of the Energy Committee and as someone who
has long been involved in our struggle to understand the
unsustainability of our own energy policies and practices here
at home.
My home State of Colorado is home to the National Renewable
Energy Laboratory, and my constituents care deeply about the
issue of energy independence. From rural communities in the
eastern plains excited about new ethanol and wind technologies,
to the citizens who experienced the oil shale boom and bust
cycle of the late 1970s and early 1980s, they all care about
the issue of energy very deeply.
But I have also had the opportunity to think some about
this relationship between foreign policy and energy security,
and I appreciate the opportunity to briefly discuss some
thoughts with the committee today. I worry every day, like all
of us, about the horrible facts that we face with our
dependency crisis today.
America consumes one-quarter of the world's oil supplies
but has just 3 percent of world oil reserves. Roughly 22
percent of the world's oil is in the hands of countries under
United States or U.N. sanctions. By some accounts, only 9
percent of the world's oil is in the hands of free countries.
As many of us speak about energy independence, about
freeing the United States from an ever-escalating, zero-sum
competition for resources with China and India, and of freeing
the United States from our dependency on oil-rich regimes that
are sometimes among the very worst actors on the international
stage, this is a very serious topic that needs to be addressed.
I am pleased to be a cosponsor of Senate bill 2435,
Chairman Lugar's Energy Diplomacy and Security Act of 2006,
which is also cosponsored by Senator Biden and by Senator
Craig. This legislation sees the urgent need to elevate energy
issues on our diplomatic agenda, such as through an
institutionalized Western
Hemisphere Crisis Response mechanism. Last year's devastating
hurricanes and their aftermath made plain the need for this
kind of coordinated approach.
It also recognizes the opportunities inherent in this
effort by calling for a Western Hemisphere Energy Cooperation
Forum and Energy Industry Group. Those entities can help
emphasize our shared interests with Canada, Mexico, Central and
South America.
Those shared interests should be obvious, but too often
they are obscured by political rhetoric, misperceptions, and
old grievances. As I have often discussed with my colleague,
Senator Martinez, the highly politicized and provocative
policies of Venezuela's Hugo Chavez spring to mind when one
thinks about the energy issues in the region, as does the Evo
Morales decision to nationalize Bolivia's oil and gas fields.
In the Western Hemisphere, as elsewhere, control over
energy resources can be translated into a certain type of
political power, but this is not the whole story. We have much
to learn from our neighbors in the Western Hemisphere. We can
learn from Brazil's success with ethanol. We can learn from
Canada's experience with oil sands.
And we in turn, as the United States, have much to offer to
our neighbors. By serving as a catalyst for greater cooperation
and a more strategic approach to energy security in the region,
U.S. diplomacy can help energize the public and the private
sectors to address some of the real problems, like inadequate
electricity infrastructure investment in Latin America and
other challenges that they face that hamper regional growth and
create instability.
An energized approach to regional energy diplomacy, one
that is respectful of the development needs of our neighbors,
and one that takes the long-term view, would be a real asset in
our efforts to build a more stable and a more prosperous world.
I wish this committee all the best in its work on this issue,
and I look forward to helping you as an active partner in these
endeavors.
I am reminded, in conclusion, of the Alliance for Progress
which President Kennedy formed in the 1960s. I spent about 4
months in Central America back in the early 1980s, and the
people of Central America still remembered that Alliance for
Progress that had been formed.
So I think as we look at our world ahead in this new
century, that the relationship that we have with our neighbors
to the south and through all of Latin America is going to be
very crucial for us in our efforts to create a safer and more
secure world. And I believe that the energy coalitions that we
could form with these countries can create the foundation for
the kind of alliance that we need to have with all of Latin
America.
I thank you, Mr. Chairman. I thank you, Senator Nelson and
Senator Martinez, for your attention this morning.
[The prepared statement of Senator Salazar follows:]
Prepared Statement of Hon. Ken Salazar, U.S. Senator From Colorado
First I want to thank Chairman Lugar, Senator Biden, and the rest
of the committee for inviting me to testify today; it is always a
pleasure to work with my colleagues on both sides of the aisle who
share an interest in energy security issues. And of course I always
enjoy working alongside Senator Craig.
I come to today's topic of Energy Security in Latin America as a
member of the Energy Committee, and as someone long involved in the
struggle to address the unsustainability of our own energy policies and
practices here at home.
My home State of Colorado is home to the National Renewable Energy
Laboratory, and my constituents care deeply about energy issues--from
the rural communities excited about new ethanol and wind technologies
to the citizens who experienced the oil shale boom and bust cycle of
the late 1970s and early 1980s.
But I have also had the opportunity to think through the
relationship between foreign policy and energy security, and this
opportunity to briefly join the discussions of the Foreign Relations
Committee has helped to crystallize some of that thinking.
I worry about the horrible, realistic facts that we face with our
depending crisis today. America consumes one-quarter of the world's oil
supplies but has just 3 percent of world oil reserves.
Roughly 22 percent of the world's oil is in the hands of countries
under United States or United Nations sanctions. By some accounts, only
9 percent of the world's oil is in the hands of ``free'' countries.
I often speak, as do many others, of achieving ``energy
independence''--of freeing the United States from an ever-escalating,
zero-sum competition for resources with China and India, and of freeing
the United States from our dependency on oil-rich regimes that are,
sometimes, among the very worst actors on the international stage.
No one should mistake this as a quest for isolationism. Energy
markets are global markets, and that is not going to change. David
Victor recently published an op-ed about the much-touted success of
Brazil's energy policies in the Houston Chronicle. He noted that
Brazil's success involved removing buffers from standing between the
people of Brazil and the reality of the international energy markets,
thereby exposing an interesting paradox.
``Even as Brazil has become self-sufficient it has also,
ironically, become more dependent on world markets. That's because the
Brazilian Government has widely relaxed price controls so that the
prices of fuels within the country are set to the world market. Thus
Brazilians see real world prices when they fill up at the pump, and the
decisions about which cars to buy and how much to drive reflect real
costs and benefits of the fuel they consume.''
So I recognize that the quest for energy security is not about
pulling up the drawbridges and hunkering down. I also recognize that
moving toward a new energy economy on a global scale promises not
simply to remove obstacles and problems--it promises to enable new
partnerships and opportunities that can strengthen important
international relationships, serve as catalysts for new economic growth
and development, and enmesh more and more of the world in a web of
stabilizing relationships that are, literally and figuratively,
empowering.
That is why I am so pleased to be a cosponsor of S. 2435, Chairman
Lugar's Energy Diplomacy and Security Act of 2006, which is also
cosponsored by Senator Biden and by Senator Craig.
This legislation sees the urgent need to elevate energy issues on
our diplomatic agenda--such as through an institutionalized Western
Hemisphere Crisis Response Mechanism. Last year's devastating
hurricanes, and their aftermath, made plain the need for this kind of
coordinated approach.
It also recognizes the opportunities inherent in this effort by
calling for a Western Hemisphere Energy Cooperation Forum and Energy
Industry Group. Those entities can help emphasize our shared interests
with Canada, Mexico, Central and South America.
Those shared interests should be obvious, but too often they are
obscured by politicized rhetoric, misperceptions, and old grievances.
The highly politicized and provocative policies of Venezuela's Hugo
Chavez spring to mind when one thinks about energy issues in the
region, as does Evo Morales' decision to nationalize Bolivia's oil and
gas fields. In the Western Hemisphere, as elsewhere, control over
energy resources can be translated into a certain type of political
power. But this is not the whole story. We have much to learn from our
neighbors in the Western Hemisphere. We can learn from Brazil's success
with ethanol. We can learn from Canada's experience with oil sands.
And we, in turn, have much to offer. By serving as a catalyst for
greater cooperation and a more strategic approach to energy security in
the region, U.S. diplomacy can help energize the public and the private
sectors to address some of the real problems--like inadequate
electricity infrastructure investment in Latin America--that hamper
regional growth.
An energized approach to regional energy diplomacy--one that is
respectful of the development needs of our neighbors, and one that
takes the long-term view--would be a real asset in our efforts to build
a more stable and prosperous world. I wish this committee all the best
in its work on this issue, and look forward to being an active partner
of yours in these endeavors.
The Chairman. Well, thank you very much, Senator Salazar.
Thank you for that personal reference to your own experience in
the past, as well as the work you now do on committees that are
certainly allies of our efforts. This is not a jurisdictional
problem in the Senate. It's one that offers opportunities for
many committees, and we would like to play our role. We really
thank both of you for contributing to that through your
presence this morning.
We have, as you both have witnessed, both of our Senators
from Florida. Before I excuse our two witnesses from the first
panel, I would like to ask those Senators if they have
questions or comments they would like to make.
Senator Martinez.
STATEMENT OF HON. MEL MARTINEZ, U.S. SENATOR FROM FLORIDA
Senator Martinez. Mr. Chairman, thank you very much. I
appreciate that, and I appreciate my colleagues being here on
this important issue.
I couldn't agree more with Senator Craig's assertion that
the importance of Latin America to our country sometimes is
well understated. The fact is that it is a tremendous area of
opportunity but also one in which, if we do not care about it
enough, we may also encounter very great difficulties. I think
there are great opportunities for cooperation. Obviously,
political stability, rule of law, are essential for us to have
the kind of relationships that are positive and that can be so
fruitful, as we've seen with Mexico and Brazil.
On the other hand, when we have a disregard for human
rights and private property rights, then we see the
catastrophic end which can come, the example, obviously, Cuba.
But also we see the very, very negative trends in Venezuela,
which are not good for their own people or good for the
relationships in the region, recently followed by Bolivia, what
I think is unfortunate because it has caused tremendous
disruption to many of their strong partners like Spain and
other Latin American countries.
The example of Brazil is one that we should note because
their shift to ethanol, which has allowed them to achieve
energy independence, a country that does not enjoy large fossil
fuel deposits, is something that I think we could take a great
lesson from. What they have done with flex fuel vehicles as
well as extensive use of ethanol is something that I think is a
great lesson for us.
But thank you for holding this hearing, and thank you for
the opportunity to speak.
The Chairman. Thank you very much, Senator.
Senator Nelson.
STATEMENT OF HON. BILL NELSON, U.S. SENATOR FROM FLORIDA
Senator Nelson. Mr. Chairman, I think it's worth noting
that both the Senators have expressed concern about Hugo
Chavez. And isn't it interesting that as he threatens to cut
off his oil supply to the United States, a threat that at this
moment I think is a hollow threat--simply because of his
enormous investment and the fact that the refineries on the
Gulf Coast are the kind of refineries that can process his
grade of crude, and his infrastructure over the United States,
all the Citgo gas stations are part of PDVSA--so it's probably
a hollow threat right now.
However, the fact that he is threatening to cut off what
is, in effect, 12 percent of our daily consumption of oil in
the United States underscores the point that the two gentlemen
have said: We ought to be looking to alternative fuels, so that
we're not dependent on that foreign supply of oil, his,
Venezuela's, or others.
And thank goodness that the Peruvian people suddenly said
enough of this foreign meddling in their internal politics and
their elections for president, and said, ``We don't want
another country to come in,'' as Venezuela, through President
Chavez, was trying to do. So that gives us a glimmer of hope.
But both of these Senators have stated it well. The United
States foreign policy ought to be much more heavily involved in
Latin America, and one of the things that we can do indirectly
is change our dependence on foreign oil, so that we don't have
that daily dependence on Venezuelan oil.
Thank you.
The Chairman. Thank you, Senator Nelson. Let me just
conclude by mentioning that Senator Craig has been very active,
and we have tried to support his efforts. It is possible the
Canadian firm, Iogen, will make an investment in his State of
Idaho to produce cellulosic ethanol. This would be the first
large production, and would offer indications of how that
process is going to go.
I think it's a tremendously important investment. I know
Senator Craig has addressed the Secretary of Energy, as I have,
to try to get through the regulations that seem to need to get
written to utilize the legislation Congress has already passed
on loan guarantees. Do you have any up-to-date news, Senator
Craig, that you can share with the committee on how that
proceeds?
Senator Craig. Well, Mr. Chairman, thank you very much.
Obviously ethanol is becoming a substantial success story in
this country. To be able to go to a greater biomass like
cellulose--straw, stubble, cornstalks and all of that--is a
tremendous opportunity. You've explained it well.
In the EPAC legislation of last year we produced the
necessary tools by which to help that happen. DOE and OMB are
working closely right now to get those regs out. I did meet
with our new OMB Director this week, and it was a most frank
discussion because it's kind of like one department pointing at
the other, both blaming each other. I said, ``Blame game is
overwith, guys. Go to work and get it done. The timeline is
important for us, for this country, for this technology.''
Mr. Portman agrees with that. I think he will move
aggressively. He tells me he will do so. He is focused on those
particular regulations. It's not just for Iogen and cellulosic
development. It's for a broad range of other new technologies
coming into the market that we're interested in, collectively.
And so I think with your urging--and I tremendously thank you
for your support in that--and your continued urging, I think
they need to know that we're very intent on what they're doing.
I think they now understand that, and that time is of the
essence.
Thank you.
The Chairman. Well, thank you very much, Senator Craig. And
I would just add, I have been in touch with our Hoosier friend,
Al Hubbard, at the White House, so that he might be helpful
likewise----
Senator Craig. Good.
The Chairman [continuing]. Because the President himself
has spoken of the importance of cellulosic ethanol. I think our
joint feeling is, this is the time to get on with it. This is
really an important and urgent situation. But I thank you for
your additional testimony.
Senator Craig. Well, thank you.
The Chairman. We thank both of you for coming and look
forward to continuing to visit with you.
The Chair would now like to call the second distinguished
panel that will appear before the committee this morning: the
Honorable Domingo Cavallo, chairman and CEO, DFC Associates,
former Minister of the Economy for Argentina; Mr. Luis Giusti,
senior adviser, Center for Strategic and International Studies
in Washington, DC; Mr. Eduardo Pereira de Carvalho, president,
Brazilian Association of Sugar Cane and Ethanol Producers, Sao
Paulo, Brazil; and the Honorable David L. Goldwyn, president of
Goldwyn International Strategies, LLC, of Washington, DC.
Gentlemen, we are delighted to have you.
The Chairman. I am going to proceed now, as I indicated,
with my opening statement. When Senator Biden comes to our
hearing, we'll recognize him of course for that same
opportunity.
The Foreign Relations Committee meets today to continue our
examination of the ways in which energy is transforming
geopolitics and threatening United States national security and
economic prosperity. In previous hearings we have defined the
severity of these threats, examined options for reducing United
States oil dependence, and explored in detail how energy is
affecting our relationships with other nations, including
India, China, and the Persian Gulf states.
Today we meet to look at energy security in the context of
our relations with Latin America. Mexico and Venezuela are two
of America's top oil suppliers. Mexico has been a reliable
energy partner. Venezuela, on the other hand, has made repeated
threats to suspend oil supplies, and President Hugo Chavez has
tried to use Venezuela's oil wells to gain political advantages
in this hemisphere. His inflammatory rhetoric and actions,
coupled with the precipitous nationalization of the natural gas
sector by Bolivia, underscore the vulnerability of United
States national security to the political manipulation of
energy.
The Government Accountability Office has just completed a
draft version of a report that I commissioned, that examines
our country's vulnerability to an oil supply disruption by
Venezuela. The report says that a 6-month disruption that
removed, and I quote, ``all or most Venezuelan oil from the
world market,'' could raise oil prices by $11 per barrel and
reduce U.S. GDP by $23 billion. Even more startling is the
possibility the Venezuelan Government might follow through on
its threat to shut down its wholly owned refinery system in the
United States, operated by Citgo.
Even without a government disruption of the flow of oil
from Venezuela, oil production in that country faces serious
challenges that could impact the global price of oil and the
United States economy. The GAO report points to a severe
deterioration in the ability of Venezuela to meet its oil
production targets in the foreseeable future. This has happened
because the Venezuelan oil industry has allowed its technical
and managerial expertise to deteriorate, and has failed to
invest sufficiently in the maintenance of its oil fields.
The GAO study reinforces the urgent need to move away from
reliance on volatile and sometimes hostile producers. According
to the GAO, administration officials told them, and I quote,
that ``they do not have Venezuelan-specific contingency plans
for a potential loss of oil.'' Instead, our response to a
Venezuelan oil disruption would rely on the Strategic Petroleum
Reserve and diplomatic efforts to convince other oil producers
to increase production.
In March, I introduced, as has been mentioned by our
Senatorial colleagues, the Energy Diplomacy and Security Act,
S. 2435, which would realign our diplomatic priorities to
address the new geopolitics of energy security. It would
dramatically enhance our international energy activities, and
move our policy away from the outdated notion that energy
security is simply about finding more oil and gas.
Although global in scope, a particular priority of this
bill is to stimulate partnerships in the Western Hemisphere.
The high cost of energy imports, vulnerability to supply
shocks, and the increased potential for conflict are concerns
widely shared in the region.
The bill creates a standing ministerial-level Western
Hemisphere Energy Forum, modeled on the Energy Working Group of
the Asia Pacific Economic Cooperation Forum. The Energy
Diplomacy and Security Act also calls for international
partnerships among energy producers and consumers.
One area of energy cooperation that could be especially
fruitful for our hemisphere is ethanol. The expansion of
ethanol capabilities would improve the diversity and
reliability of fuel supplies, create jobs in many countries,
and help reduce greenhouse gas emissions. Brazil, long ago, saw
the importance of ethanol and is now energy self-sufficient.
Brazil and the United States can work together to improve our
mutual energy security, and that of the region, by spreading
our shared expertise. The current protective tariff on ethanol
imports to the United States should be reconsidered in light of
this mutual interest in improving energy security.
This morning, we are joined by two distinguished panels,
and we have heard from the first, our colleagues Senator Larry
Craig and Senator Ken Salazar. Both, I would point out, are
members of the Energy Committee of the United States Senate and
cosponsors of the Energy Diplomacy and Security Act. We
appreciate the benefit of their energy expertise and their
counsel as our committee continues to examine these issues, as
does the Energy Committee.
On the second panel just before us, we will hear from four
experts with deep experience in Western Hemisphere energy
affairs. We welcome Dr. Domingo Cavallo, the former Economy
Minister of Argentina, and currently chairman and CEO of DFC
Associates; Mr. Luis Giusti, the former president of Venezuela
National Oil Company, currently senior adviser at the Center
for Strategic and International Studies; Mr. Eduardo Carvalho,
formerly the Deputy Finance Minister of Brazil, currently the
president of Brazil's Association of Sugar Cane and Ethanol
Producers; and Mr. David Goldwyn, former Assistant Secretary of
Energy for Policy and International Affairs, and currently the
president of Goldwyn International Strategies.
We thank each one of you for coming to see us this morning.
Let me say at the outset that your statements will be made a
part of the record in full. I would like to hear from all of
you, and we ask for you to summarize your comments within
perhaps a 10-minute period of time. We will be liberal in
interpretation because our desire is to hear you and to make
sure that all of you are heard, prior to 11 o'clock, when we
will have rollcall votes. So we will work our way around that
as best we can, with as much continuity as possible.
We thank you for your patience with our legislative system
and the duties that each one of us have, not only to hear
distinguished witnesses but to vote at least three times on our
armed services authorization bill this morning. I'll ask you to
proceed in the order that I have introduced you, and that would
be first of all Mr. Cavallo. Would you turn on your microphone,
please.
STATEMENT OF HON. DOMINGO CAVALLO, CHAIRMAN AND CEO, DFC
ASSOCIATES, LLC, AND FORMER MINISTER OF ECONOMY FOR ARGENTINA
Mr. Cavallo. Chairman Lugar, Senator Martinez, Senator
Nelson, Senator Chafee, thank you for this opportunity to
discus with you a situation that impacts energy security.
As paradoxical as it may sound, the ``Bolivarian'' policies
that the President of Venezuela describes as ``integrationist''
are destroying the very valuable comparative advantage that the
Southern Cone of America had developed in the previous decade.
Therefore, I predict that they will be self-defeating.
President Hugo Chavez's rhetoric and actions not only
create a sense of vanishing security in the United States but
also, through their influence on President Evo Morales of
Bolivia, have a concrete negative impact on several South
American countries. Their policies are destroying a very
promising regional integration process that until recently
benefited the energy-scarce economies of the region.
To make things worse, Argentina, which during the 1990s,
led the regional energy integration process, has been trapped
by misaligned energy prices in 2002. This has the effect of
reinforcing the disintegration process fostered by President
Hugo Chavez.
Chile and Brazil are already suffering the impact of
regional energy disintegration. For the time being, the
Argentinean Government does not acknowledge the negative effect
on its economy
because it has shifted the burden of the adjustment to Chile.
Nevertheless, the country's business community is already
foreseeing natural gas and electricity shortages ahead.
The sooner Argentina starts to work together with Chile and
Brazil to revive the energy integration process of the 1990s by
re-encouraging private investment in the energy sector, the
better for reversing this trend and for opening the eyes of
President Evo Morales and making him conscious of the bad
advice and false promises he receives from President Hugo
Chavez.
During the 1990s, energy supplies increased in the Southern
Cone, thanks to significant investment in exploration and
exploitation of hydrocarbons and in the generation,
transmission, and distribution of electricity and gas. Energy
availability and energy costs became an important source of
comparative advantage for the region vis-a-vis other regions of
the world.
This competitive edge had its origin mainly in the
availability of reserves of natural gas in Bolivia and in
Argentina, and acquired a regional dimension thanks to the
rapid process of cross border energy integration. Availability
of natural gas reserves strongly influences the cost of
electricity generation because natural gas is the main, primary
input for the production of electricity.
In my written statement I provide a description, with
prices and quantities, of this very nice process of energy
integration and the good results that it generated.
This favorable integration process began to change when, in
the aftermath of the Argentine crisis in 2002, the Argentinean
Government decided to impose a price freeze on natural gas
tariffs at the ``pesified'' precrisis level. This, which would
have been already problematic in the absence of any other
developments, happened at the time when the international
prices of energy began to surge.
In practice, this implied that the prices of natural gas in
Argentina fell to one-third of its precrisis level at the same
time when the international price of energy more than doubled.
The consequences of these policies were to foster domestic
demand and to discourage domestic supply.
In the year 2005, Argentina already imported again 5
million cubic meters a day from Bolivia, and had to curtail
exports to Chile. To this date, the most optimistic forecasts
of energy production in Argentina predict that it will stop
being a net exporter of gas by the year 2010, but most likely
at the current rates of consumption Argentina will become a net
importer earlier.
This new situation generated the surge in demand for
Bolivian gas. The forecast predicts the level of demand of 68
million cubic meters per day in 2010, compared to 31 million
cubic meters per day in 2005. This is because the entire region
will become dependent on Bolivian gas. Peru, which has been
investing in exploring and exploiting natural gas,
intelligently chose to develop a facility for exporting LNG via
the Pacific, so at this point it can only be expected to be a
marginal source of supply for its neighbors via cross-border
gas ducts.
The increased demand for its natural gas reserves could
have allowed Bolivia to increase exports at more advantageous
prices, if it had chosen to create the correct market
incentives for further exploration and exploitation of its
existing untapped reserves.
Unfortunately, President Evo Morales, following the advice
of President Hugo Chavez, has chosen a policy path that will
likely have the opposite effect. By breaking its contractual
agreement with the private companies that had invested in
exploration and exploitation of natural gas in the last decade,
it has increased the uncertainty faced by private sector
producers, and will likely generate disinvestment in the
sector.
The combination of these policy choices in Argentina and
Bolivia have had the effect of restricting supply and lethally
harming the comparative advantage that had evolved in the
previous years.
The advocates of these new energy policies in Latin America
argue that Chavez's Venezuela will become the main regional
supplier of natural gas at low prices and the supplier of
capital and technology for Yacimientos Petroliferos Fiscales
Bolivianos to expand its natural gas production. This is not
warranted by the recent developments by Venezuela's own oil and
gas production.
Oil production that had reached 3.5 million barrels per day
in 1998 has dropped to 2.6 in 2005, and natural gas production
dropped from 89 million cubic meters per day to 77 in the same
period. This is not surprising because Venezuela under Chavez,
rather than increasing human capital investment in the state-
owned energy company, PDVSA, and creating incentive for private
sector risk-taking, has done exactly the opposite.
In practice, the only state-owned company that could
actually help Yacimientos Petroliferos Fiscales Bolivianos
become an efficient energy producer is the Brazilian Petrobras,
which has shown to be efficient and visionary. During the same
period in which Venezuela reduced its energy production,
Brazil, which is significantly poorer in nonrenewable energy
resources, has increased its oil production from 1 million
barrels per day to 1.5 million, and its natural gas production
from 17 million cubic meters per day to 30 million.
But the Bolivian strategy, instead of choosing Petrobras as
its partner, so far has made it its main victim. If, as it has
already been announced by President Lula, Brazil encourages
more investment in exploration of its own offshore gas reserves
and succeeds in becoming self-sufficient in natural gas by
2008, or invests in regasification plants to access the LNG
market, Bolivia may lose its main client. By then, President
Evo Morales will realize that the advice of President Hugo
Chavez was lethal.
Paradoxically, its only alternative for the future will be
to encourage the production and exportation of LNG, as former
Presidents Quiroga and Sanchez de Lozada had envisaged. Of
course, that solution will require creating very favorable
conditions for international private investment, because
Bolivia will have neither the human nor the financial resources
for such an endeavor.
[The prepared statement of Mr. Cavallo follows:]
Prepared Statement of Hon. Domingo Cavallo, Chairman and CEO, DFC
Associates, LLC, Former Minister of Economy for Argentina
Chairman Lugar, Senator Biden and members of the committee, thank
you for this opportunity to discuss with you a situation that impacts
hemispheric energy security.
As paradoxical as it may sound, the ``Bolivarian'' policies that
the President of Venezuela describes as ``integrationist'' are
destroying the very valuable comparative advantage that the Southern
Cone of America developed in the last decade.\1\
---------------------------------------------------------------------------
\1\ I would like to acknowledge the comments of Pablo Givogri, Raul
Garcia, and Carlos Bastos.
---------------------------------------------------------------------------
President Hugo Chavez's rhetoric and actions not only create a
sense of energy insecurity in the United States, but also, through
their influence on President Evo Morales of Bolivia, have had a
negative impact on several other South American countries. Their
policies are destroying a very promising regional integration process
that until recently benefited the energy scarce economies of the
region. To make things worse, Argentina, which during the 1990s led the
regional energy integration process, has been trapped by misaligned
energy prices since 2002. This has the effect of reinforcing the
disintegration process fostered by President Hugo Chavez.
Chile and Brazil are already suffering from the impact of regional
energy disintegration. For the time being, the Argentinean Government
does not acknowledge the negative effect on its economy because it has
shifted the burden of the adjustment to Chile. Nevertheless the
country's business community is already foreseeing natural gas and
electricity shortages. The sooner Argentina starts to work together
with Chile and Brazil to revive the energy integration process of the
1990s by re-encouraging private investment in the energy sector, the
better the chances are for reversing this trend and for making
President Evo Morales aware of the bad advice and false promises he
receives from President Hugo Chavez.
THE REGIONAL ENERGY INTEGRATION PROCESS OF THE 1990S
During the 1990s, energy supply increased in the Southern Cone,
thanks to significant investment in exploration and exploitation of
hydrocarbons and in the generation, transmission, and distribution of
electricity and gas. Energy availability and energy costs became an
important source of comparative advantage for the region vis-a-vis
other regions of the world. This competitive edge had its origin mainly
in the availability of reserves of natural gas in Bolivia and in
Argentina, and acquired a regional dimension thanks to the rapid
process of cross border energy integration. Availability of natural gas
reserves strongly influences the cost of electricity generation because
natural gas is the primary input for the production of electricity.\2\
---------------------------------------------------------------------------
\2\ Gas interconnections reached around 7,000 kilometers in
extension connecting Argentina, Bolivia, Brazil, Chile, and Uruguay.
---------------------------------------------------------------------------
This process was guided by several energy integration protocols
signed by Brazil, Argentina, Uruguay, Paraguay, Chile, and Bolivia.
Each country was committed to restructuring its energy sector according
to a common vision and common regulatory principles. These were (a)
promotion of competition, (b) attraction of private capital, (c)
regulation of monopolist activities, (d) open access to transport
facilities, (e) economic criteria for price setting, (f) independent
regulatory authorities, and (g) encouraging the participation of many
international actors.
This very promising process of regional integration is now in
crisis. The policies of price freezes for natural gas and electricity
in Argentina after the devaluation of 2002 significantly reduced
investment carried out by the private sector in the energy sector. \3\
More recently, as the consequence of nationalization of hydrocarbons in
Bolivia, natural gas producers have announced the suspension of new
investments. In summary, these recent policy decisions by the two key
suppliers in the energy matrix of the region are destroying the natural
comparative advantage that had been developed in the previous decade.
---------------------------------------------------------------------------
\3\ The government intervention in the gas market deepened in 2004
when gas prices were segmented by end-user category and activity. After
the 2002 devaluation and domestic rates ``pesification,'' gas prices
were split between the domestic and the external market. Until such
date, gas prices for both markets had evolved with virtually no
noticeable differences among them. The government's agreement with
producers in 2004 determined a further split in gas prices within the
domestic market prices. Such domestic price split distinguishes the
captive distributors' market (residential, commercial users)--which
maintains the same rate--from the deregulated clients market (mostly
large users buying directly from the producers).
---------------------------------------------------------------------------
THE EFFECT OF PRIVATE INVESTMENT IN THE ENERGY SECTOR OF ARGENTINA
In the early 1990s, Argentina organized the energy sector in line
with the principles of the signed integration protocols and, in a short
period of time, became a net exporter of natural gas to the region. The
production of natural gas in Argentina increased from 62 to 98 million
m\3\/day between 1995 and 2000. Thanks to this impressive increase in
supply, Argentina stopped importing natural gas from Bolivia in 2000
\4\ and began exporting significant volumes to gas-strapped Chile
(since 1997).\5\ The market wellhead prices paid to natural gas
producers that created the incentives for exploration and extraction of
natural gas in Argentina was around $1.4 per mmbtu in the Neuquen
basin. The City Gate prices that include transportation costs, ranged
from $2.0 per mmbtu in the Greater Buenos Aires Area to $2.8 per mmbtu
in Santiago. These prices were roughly half of the price of natural gas
in the U.S. market. This price differential exemplifies the extent of
the aforementioned comparative advantage in natural gas that had
emerged in the Southern Cone.
---------------------------------------------------------------------------
\4\ Imported volumes decreased significantly during 1999--1.1
million m\3\/day compared to 1998 volumes--4.7 million m\3\/day.
\5\ Exports to Chile from Argentina increased from 1.9 MMm\3\/day
in 1997 to 12.0 MMm\3\/day in 2000.
---------------------------------------------------------------------------
THE EFFECT OF PRIVATE SECTOR INVESTMENT IN THE ENERGY SECTOR OF BOLIVIA
Bolivia, which as a consequence of expansion of natural gas
production in Argentina, was losing its only foreign client, began
negotiating with Brazil the export of volumes of natural gas that were
four times bigger than those that it had been exporting to Argentina.
At the end of 2001, the negotiated wellhead price of U.S. $1.2 per
mmbtu in the Tarija basin \6\ translated into a U.S. $3.0 per mmbtu in
the San Pablo City gate. This was slightly higher than prices paid in
Argentina and Chile but still substantially lower than prices in the
United States. The exports of natural gas from Bolivia to Brazil
reached 22 million m\3\/day in 2005. Production in Bolivia increased
from 9 to 31 million m\3\/day between 2000 and 2005.
---------------------------------------------------------------------------
\6\ The base wellhead price of the gas to be exported through
Bolivia to Brazil (BTB) pipeline was U.S. $0.95 per million btu for a
volume from 8 to 16 MMm\3\/day. For additional volumes up to 30.08
MMm\3\/day the established base price is U.S. S1.20 per million of btu.
These prices are adjusted through a formula related to the price of an
international fuel oil basket.
---------------------------------------------------------------------------
POLICY REVERSAL IN ARGENTINA
These favorable integration forces began to change when, in the
aftermath of the Argentine crisis in 2002, the Argentinean Government
decided to impose a price freeze on natural gas tariffs at the
``pesified'' precrisis level.\7\ This, which would have been already
problematic in the absence of any other developments, happened at the
same time when the international prices of energy began to surge. The
prices of natural gas in Argentina fell to one-third of its precrisis
level at the same time that the international prices of energy more
than doubled. The consequence of this policy was an increase in
domestic demand and a decrease in domestic supply. In the year 2005,
Argentina imported 5 million m\3\/day from Bolivia, and had to curtail
exports to Chile. The most optimistic forecasts of energy production in
Argentina predict that it will stop being a net exporter of gas by the
year 2010. But most likely, at the current rates of consumption,
Argentina will become a net importer earlier.
---------------------------------------------------------------------------
\7\ Wellhead gas prices for the distribution market were indirectly
frozen as a consequence of suspending the pass through gas price
mechanisms to end users rates--contemplated in the licenses awarded by
the Government of Argentina.
---------------------------------------------------------------------------
INCREASED DEMAND FOR BOLIVIAN NATURAL GAS
This new situation generated a surge in demand for Bolivian gas.
The forecasts predict a level of demand of 68 millions m\3\ per day in
2010 compared to 31 million m\3\ per day in 2005. This is because the
entire region will become dependent on Bolivian gas. Peru, which has
been investing in exploration and exploitation of natural gas,
intelligently chose to develop facilities for exporting LNG via the
Pacific, so at this point it can only be expected to be a marginal
source of supply for its neighbors via cross border gas ducts.
The increased demand for its natural gas reserves could have
allowed Bolivia to increase exports at more advantageous prices, if it
had chosen to create the correct market incentives for further
exploration and exploitation of its existing untapped reserves.
Unfortunately, President Evo Morales, following the advice of President
Hugo Chavez, has chosen a policy path that will likely have the
opposite effects. By breaking its contractual agreements with the
private companies that had invested in exploration and exploitation of
natural gas in the last decade it has increased the uncertainty faced
by private sector producers and will likely generate disinvestment in
the sector.
EXPENSIVE CONSEQUENCES OF POLICIES IN BOLIVIA AND ARGENTINA
The combination of these policy choices in Argentina and Bolivia
have had the effect of restricting supply and lethally harming the
comparative advantage that had evolved in the previous years. Once
these policies have worked out all their effects, the costs of energy
for industrial consumers of natural gas and electricity power plants in
the main industrial areas of the region will be close to the levels
paid by their counterparts in the United States. The reason is that
natural gas users in these areas will have to purchase LNG from foreign
markets at international prices which are roughly equivalent to
alternative sources of energy like fuel and diesel oil.
VENEZUELA'S FALSE PROMISES
The advocates of these new energy policies in Latin America argue
that Chavez's Venezuela will become the main regional supplier of
natural gas at low prices and the supplier of capital and technology
for YPFB (Yacimientos Petroliferos Fiscales Bolivianos) to expand its
natural gas production. This is not warranted by the recent
developments of Venezuela's own oil and gas production. Oil production
that had reached 3.5 million of barrels per day in 1998 has dropped to
2.6 in 2005, and natural gas production dropped from 89 millions m\3\
per day to 77 in the same period. \8\ This is not surprising because
Venezuela, under Chavez, rather than increasing human capital
investment in the state-owned energy company, PDVSA, and creating
incentives for private sector risk taking, has done exactly the
opposite.
---------------------------------------------------------------------------
\8\ Furthermore, only 15 trillion of cubic feet (TCF) gas reserves
are not associated with oil and could be develop as an additional
source of natural gas for exports. Of these, 11 TCF are already
committed to a LNG project. So, Hugo Chavez is offering gas that
Venezuela actually will not have available.
---------------------------------------------------------------------------
PETROBRAS COULD HAVE HELPED YPFB
In practice, the only state-owned company that could actually help
YPFB become an efficient energy producer is the Brazilian Petrobras,
which has shown to be efficient and visionary. During the same period
in which Venezuela reduced its energy production, Brazil, which is
significantly poorer in nonrenewable energy resources, has increased
its oil production from 1 million barrels per day to 1.5 million and
its natural gas production from 17 millions m\3\ per day to 30. But the
Bolivian strategy, instead of choosing Petrobras as its partner, so far
has made it the main victim.
IN THE MEDIUM TERM BOLIVIA WILL SUFFER
If, as it has already been announced by President Lula da Silva,
Brazil encourages more investment in exploration of its own offshore
gas reserves and succeeds in becoming self-sufficient in natural gas by
2008, or invests in regasification plants to access the LNG market,
Bolivia may lose its main client. By then, President Evo Morales will
realize that the advice of President Hugo Chavez was lethal.
Paradoxically its only alternatives for the future will be to encourage
the production and export of LNG as former Presidents Quiroga and
Sanchez de Lozada had envisaged. Of course, that solution will require
creating very favorable conditions for international private
investment, because Bolivia will have neither the human nor the
financial resources for such an endeavor.
WELLHEAD NATURAL GAS PRICES IN THE SOUTHERN CONE
[US$/MMBTU]
------------------------------------------------------------------------
Precrisis--prices
before Segmented
At Wellhead devaluation markets--2008
(2001)
------------------------------------------------------------------------
Tarija Basin (Bolivia)
Exports to Brazil................. 1,23 3,00
Exports to Argentina.............. -- 3,00
Noroeste Basin (Argentina)
Residential and Small Users 1,21 0,40
(commercial, small industries)...
Other Users (CNG and users with 1,21 0,98
consumption >300 m\3\/day).......
Deregulated Market (large users).. 1,18 1,51
Exports........................... 1,26 1,89
Import from Bolivia at Border..... -- 3,24
Neuquina Basin (Argentina)
Residential and Small Users 1,44 0,48
(commercial, small industries)...
Other Users (CNG and users with 1,44 1,04
consumption >300 m\3\/day).......
Deregulated Market (large users).. 1,39 1,64
Exports........................... 1,48 2,05
Austral Basin (Argentina)
Residential and Small Users 1,03 0,34
(commercial, small industries)...
Other Users (CNG and users with 1,03 0,87
consumption >300 m\3\/day).......
Deregulated Market (large users).. 0,98 1,45
Exports........................... 0,96 1,81
Santos Basin (Brazil) 1,58 3,60
------------------------------------------------------------------------
CITY GATE NATURAL GAS PRICES IN THE SOUTHERN CONE
[US$/MMBTU]
------------------------------------------------------------------------
Precrisis--prices
before Segmented
At City Gates devaluation markets--2006
(2001)
------------------------------------------------------------------------
Greater Buenos Aires (GBA)
By TGN System
Residential and Small Users 1,96 0,65
(commercial, small industries)...
Other Users (CNG and users with 1,96 2,07
consumption >300 m\3\/day).......
Deregulated Market (large users).. 1,93 2,63
Import from Bolivia............... -- 4,45
By San Martin Pipeline
Residential and Small Users 1,97 0,66
(commercial, small industries)...
Other Users (CNG and users with 1,97 2,11
consumption >300 m\3\/day).......
Deregulated Market (large users).. 1,92 2,76
San Pablo
Gas from Bolivia...................... 3,02 4,82
Gas from Domestic Production.......... 1,89 3,91
Residential, Commercial, Industries... 3,02 4,82
Power Generation...................... 2,59 3,92
Santiago
Gas from Neuquina Basin (all users)... 2,81 3,44
------------------------------------------------------------------------
The Chairman. Thank you very much, Mr. Cavallo.
I would like to proceed now with our second witness, Mr.
Giusti.
STATEMENT OF LUIS E. GIUSTI, SENIOR ADVISOR, CENTER FOR
STRATEGIC AND INTERNATIONAL STUDIES, WASHINGTON, DC
Mr. Giusti. Thank you very much, Mr. Chairman. It's an
honor to share the floor with you and the rest of your
colleagues.
I'd like to start with a brief backdrop. The discussion
about oil independence has taken center stage in this country,
but that independence, understood as self-sufficiency, is not
the real issue, not only because it's not feasible but because
the business of oil is global. The high prices of recent times
result not from the large imports of oil into the United
States, but from the fundamentals and perceptions of the global
oil market.
Today, crude oil inventories in OECD countries are at a 20-
year high, and global inventories are at an 8-year high. The
futures market has been in ``contango'' since October 2004,
meaning that future prices are higher than pump prices, which
has triggered sustained stockpiling. On the other hand, growth
in demand for oil has been slowing down, 3 million barrels a
day in 2004, 1 million barrels a day in 2005, and so far this
year about 800,000 barrels a day, indicating that the high
price is having an effect on consumption.
Then why are prices so high? The most important factor is
the erosion of spare capacity. Having been large in the past,
15 million barrels a day in 1985, 9 million barrels a day in
1991, and 8 million barrels a day still in 2002, it is now down
to 2 million barrels a day.
But can we expect the future development of new large spare
oil production capacity for us to feel comfortable again? Most
likely the answer is no, because with the exception of Saudi
Arabia, nobody is planning to build it. The spare capacity
enjoyed in the past was not planned for. It resulted from an
overestimation of long-run demand. Inadvertently, we developed
a comfort cushion.
Perhaps now the world will have to develop a new
perspective of the meaning of inventories. The director of the
International Energy Agency, Claude Mandil, has gone to great
length and efforts to convey the message that strategic stocks
of OECD are enough to cover 18 months of an eventual absence of
Iranian exports, 2.7 million barrels a day, but to little
avail.
The conclusion is that the oil market is global, and oil is
generally fungible. For that reason, in analyzing supply
stability, it would be shortsighted to look at oil flows from
Latin America into this country in isolation, or for that
matter any other oil imports from other regions or countries.
The United States will continue to be a large importer of oil,
and those imports can only increase. Stability and security
will always depend on the global fundamentals, irrespective of
where the imported oil comes from.
Having said that, I'm going to address the three points
that you asked me to comment about in your letter. The first
one has to do with reliability of supplies from Venezuela, a
point that has been already mentioned several times this
morning.
Let's start with capacity. Currently Venezuela's production
capacity stands at 2.6 million barrels a day, but since that
number includes 1.1 million barrels a day being produced by the
private companies that operate the joint ventures, it can be
deduced that the PDVSA capacity is 1.5 million barrels a day,
and that represents a severe drop of 1.8 million barrels a day
since this government, the current government, has been in
office. This is a result of poor management, weak technical
capacity, and weak execution capacity, mostly deriving from the
dismissal of 18,000 workers.
However, and I think this is a very important point,
despite this diminished capacity during the 7 years of the
current Venezuelan Government, oil from that country continues
to flow to the United States at a rate of about 1.4 to 1.5
million barrels a day, in line with the tradition of many years
of trade. I would argue that despite the aggressive political
discourse against the U.S. Government, oil exports to this
country have a high priority in the slate of Venezuelan sales.
As part of the political agenda, President Chavez
continuously threatens the U.S. Government with suspending
exports to the United States, and has indicated that those
exports would most likely be diverted to China. This was
mentioned by your colleague, Senator Nelson.
The 1.5 million barrels a day of Venezuelan oil imports
into this country are the result of many dozens of contracts
with clients in the United States that have been buying
Venezuelan oil for decades. Many of those clients have
refineries capable of processing sour and heavy feedstock,
which constitutes the largest portion of Venezuelan oil.
The continuity of those exports to the United States is of
utmost importance for Venezuela, despite anything that is
contained within the political discourse of the Venezuelan
Government. Exporting that oil to China is practically
impossible, because the refining network in China is mostly
primitive and incapable of receiving those volumes of sour and
heavy crude.
It would take several years of bilateral, coordinated joint
planning and investment to turn such an initiative into
reality, and this, by the way, is not happening. And it would
be absurd to build this capacity to export to China at the
expense of the most profitable option for those exports, which
is none other than the United States. It would take new oil to
be developed for this initiative.
Nevertheless, in the unlikely event of a suspension of
those shipments, Venezuela would have to sell the crude at
other destinations, and oil being generally fungible, oil from
other places would come to the United States shores. It would
naturally generate logistical complications and at least
temporarily increase costs, but eventually the necessary
adjustments would take place and everything would return to
normalcy.
It is true that imports of Venezuelan oil are very
important to the United States, but it is a fact that Venezuela
needs badly its oil exports to the United States, and
especially the current government, in order to finance its huge
expenses.
Finally, the threat of a shutdown of Citgo refineries
occasionally included in the political speech of the Venezuelan
Government is empty talk. Citgo operates through a network of
some 14,000 retail outlets, but it does not own any of them. It
only owns refineries, terminals, and pipelines. An arbitrary
shutdown of Citgo refineries would imply breaching thousands of
contracts without justification, posing an unmanageable and
costly legal situation for Venezuela.
I would argue that the only risk represented by the present
Venezuelan administration concerning oil supply to the United
States is not current, it's not of today. It relates to
frustrated expectations of building up new barrels in the
future. This is a direct consequence of the diminished
operational and financial capacity of the national oil
corporation. In addition, plans and projects of expansion
coming from private international companies operating in
Venezuela are losing momentum as a result of the frequent
changes of rules and the difficult surrounding environment
these companies have to face, so a significant increase of that
country's production is unlikely.
The second topic you assigned to me was resource
nationalism. In the history of oil we will find a secular
inclination of oil countries to get a larger share of the
revenues. However, attracting the capital required has implied
moderating that appetite in order to allow the oil companies to
assume calculated risks and make an attractive profit.
The very high prices that we are seeing now have generated
huge revenues, leading every oil country to consider ways of
capturing a larger portion of the windfalls. Even the United
States and the United Kingdom and Canada have discussed the
idea of higher or new taxes. Despite the somewhat questionable
justification of some actions aimed at changing taxes and
contracts, the initiatives of seeking to renegotiate terms are
understandable and are within the realm of manageable and
acceptable. As a reference, in no country is resource
nationalism stronger than in Saudi Arabia, yet it is perhaps
the most reliable supplier in the world.
What is certainly unacceptable is to take actions like the
recent unilateral expropriation of the hydrocarbons industry in
Bolivia. The only other case in which we have seen abusive
actions, never to that degree, of course, is in Venezuela.
In the case of Ecuador, for example, the government has
insisted that the seizing by the government of Block 15 of Oxy
should not be interpreted as equivalent to the Bolivian case.
They argue that the affair is purely legal and related to an
alleged violation of contract by the international oil company.
Well, time will soon tell what is the case.
And the last point, and I'll try to be brief on this, that
you assigned me was, what about opportunities for increased
United States and Latin American cooperation?
And I would like to remind you that there was a spinoff of
the Summit of the Americas in 1994. It was called Energy
Integration of the Americas. A lot of work was carried out to
try to identify barriers for a larger integration, like
political hurdles, tariffs, quotas, logistics, and eventually
undertake the necessary forums, with the ultimate objective of
having a seamless energy platform that would benefit all
countries and in addition facilitate and improve commercial
activities.
We could say a lot more about this, but there is no time
here. We can discuss as we go along, but my view is that
salvaging the initiative of 1994 could be an excellent way of
having a fresh start that should be in every country's best
interest.
However, I am sure you will agree with me in stating that
the dialog cannot compromise the basic principles of business,
a market-based approach, public-private cooperation, respect
for property rights and contracts, and the right balance among
policy, regulations, and operations and business. Although this
would probably mean that we would have a few casualties,
because maybe some would not like to come to discuss under
those terms, countries such as Brazil, Colombia, Chile, Peru,
Trinidad-Tobago, and even Ecuador, could lead the way, together
with the United States to the north, of course. Their leaders
are thinking creatively, and have instituted effective measures
to develop their respective resources in productive ways. The
presence of Canada would certainly enhance the initiative.
There is no silver bullet here, but hard work along the
described lines could translate into a more balanced and
reliable regional energy network. This, by the way, would be
entirely consistent with section No. 4 of the EDSA, Energy
Diplomacy and Security Act, which refers to strategic energy
partnerships.
Thank you very much, Mr. Chairman.
[The prepared statement of Mr. Giusti follows:]
Prepared Statement of Luis E. Giusti, Senior Adviser, Center for
Strategic and International Studies, Washington, DC
I. BACKDROP
As a result of the tightness of the oil market during the last 4
years, the world as a whole, and certainly the United States, has been
affected by extremely high oil prices. This has a detrimental effect on
our day to day, reflected by the prices we pay for gasoline and diesel
at the pump, as well as heating oil and gas for our homes.
As a result, the discussion about oil independence has taken center
stage in this country. But that independence (understood as self-
sufficiency) is not the real issue. Not only because it is not
feasible, but because the business of oil is global. The high prices of
recent times result not from the large imports of oil into the United
States, but from the fundamentals and perceptions of the global oil
market.
It would take much longer than the time assigned to this testimony,
to explain why and how we got to where we are today. However, it is
worthwhile to point out briefly that today crude oil inventories in
OECD are at a 20-year high and global inventories are at an 8-year
high. The futures market has been in ``contango'' since October 2004
(meaning that future prices are higher than prompt prices), which has
triggered sustained stockpiling. On the other hand, growth in demand
for oil has been slowing down (3 million BD in 2004, 1 million BD in
2005, and 800,000 BD in the first half of 2006), indicating that the
price is having an effect on consumption. Then, why are prices so high?
The most important factor is the erosion of spare capacity. Having been
large in the past (15 million BD in 1985, 9 million BD in 1991 and 8
million BD in 2002), it is now down to 2 million BD. A second factor is
the tightness of the refining network in a time of strong demand for
high quality refined products, which is driving prices up along the
whole supply chain.
But, can we expect the future development of new large spare oil
production capacity for us to feel comfortable again? Most likely the
answer is ``no,'' because with the exception of Saudi Arabia, nobody is
planning to build it. The spare capacity enjoyed in the past was not
planned for. It resulted from an overestimation of long-run demand.
Inadvertently we developed a ``comfort cushion.'' Perhaps the world
will have to develop a new perspective of the meaning of inventories.
Currently, global oil stock cover runs at 72 days (commercial stocks),
which should be a strong reason for comfort. Maybe a somewhat larger
stock cover will replace the absence of spare capacity. Additionally,
the director of the IEA has gone to great length and efforts to convey
the message that strategic stocks of OECD are enough to cover 18 months
of an eventual absence of Iranian exports (2.7 million BD), but to
little avail. In the event of a major disruption, how much a difference
would it make between having say 76 days or 71 days of stock cover?
That difference would be immaterial, but it can mark a difference of
$4-$5 per barrel in today's oil market.
The conclusion is that the oil market is global and oil is
generally fungible. For that reason, in analyzing supply stability it
would be shortsighted to look at oil flows from Latin America into this
country in isolation, or for that matter any other oil imports from
other regions or countries. The United States will continue to be a
large importer of oil and those imports can only increase. Stability
and security will always depend on the global fundamentals,
irrespective of where the imported oil comes from.
II. A BRIEF LOOK AT OIL AND GAS IN LATIN AMERICA
Following is a summarized description of the characteristics of the
most important countries in connection with oil and gas in Latin
America.
Chile
Chile has meager oil reserves of 150 million barrels, and its oil
production is 18,400 BD, while its consumption is 225,000 BD, the
deficit being covered by imports, mainly from Argentina and Brazil, but
also from Nigeria and Angola.
Colombia
In 1999, oil production in Colombia stood at 820,000 barrels per
day. However, as a result of lack of investment production, has fallen
to 530,000 BD and the country faces a future sustained decline. Proven
oil reserves have fallen to a very modest 1.6 billion barrels and
proven gas reserves are scarcely 4 trillion cubic feet. Fears have
risen that the country will become a net importer by 2010. On the other
hand, more than 80 percent of Colombian territory remains unexplored
and its basins hold a large hydrocarbons' potential (possible reserves
have been estimated at 47 billion barrels), but for many years the
country failed to attract new investment due to the poor internal
security environment, coupled with unfavorable energy investment terms.
Nevertheless, during the last 2 years the Colombian Government has
turned the trend around by putting in place a much more attractive
framework for investments in exploration and production. The most
important reform was the creation of a regulatory agency (Agencia
Nacional de Hidrocarburos), in charge of regulation and administration.
A large portion of Ecopetrol's portfolio was carved out and assigned to
the agency. This new framework plus a more attractive model for
investment, in addition to the much improved political stability and
security resulting from the effective policies of President Uribe, have
oil companies flocking to the country. It should be expected that very
soon Colombia would become a producer of growing importance in the
region and perhaps an important oil exporter.
Peru
Peru's oil reserves are very small at 253 million barrels and it
barely produces 100,000 BD, while it consumes 160,000 BD. But it is
rich in free gas reserves, with some 16 Tcf. These reserves will be
tapped by the Camisea project, the most ambitious project in the
history of Peru. Consisting of the extraction, transportation, and
distribution of natural gas, this project is a fundamental factor of
Peru's energy strategy. By tapping into a reliable, low-cost energy
source, Camisea will not only provide direct benefits to electricity
end-users, but it will also improve the country's competitiveness and
increase its technical capacity. The project will help alleviate Peru's
trade deficit by converting the country from energy importer into an
exporter by 2007. Direct investment in the project will be around $2
billion. Part of the gas volume will go as LNG to the North American
west coast.
Trinidad--Tobago
Unlike the rest of the islands in the Caribbean basin, Trinidad/
Tobago is hydrocarbon rich and is the largest producer of oil and
natural gas in the region. Oil reserves are a modest 1 billion barrels
and oil production is 130,000 BD, but gas
reserves are 26 Tcf and current gas production is 2,700 MMcfd. Since
the 1970s,
Trinidad/Tobago has embarked in several successful initiatives that
have expanded its local gas industry as part of a government strategy
to promote industrialization. Its large natural gas reserves have
enabled the country to become the most industrialized in the Caribbean.
The energy sector represents 72 percent of total exports, and the
country's political stability and attractive geology, as well as its
proximity to the high demand United States, Latin America, and Europe,
have supported high levels of foreign direct investment. The country
has established a large LNG infrastructure and today has three
liquefaction trains with 10 mtpa, plus a fourth one about to come on
stream. Immediate plans contemplate building two additional trains.
Together with Nigeria, Trinidad/Tobago dominate the Atlantic LNG
market.
Brazil
Brazil has a population of 175 million, fifth largest in the world
and its economy of $452 billion is the 13th in the world. After years
of efforts in exploration, mostly offshore, Brazil has reached an oil
production of 2.0 million BD. However, its sustained economic growth
has increased oil demand to a level of 2.2 million BD, with the deficit
covered by imports from Africa, the Middle East, and minor volumes from
Argentina. Great credit for the large increase in oil production goes
to its national oil company Petrobras, which has become a world class
oil company and a leader in deep water drilling. In recent years, the
company has gone international in E&P. Current oil reserves stand at 11
billion barrels. Its gas reserves are a modest 8.8 Tcf, with production
of 1,100 MMcfd being less than the 2,300 MMcfd of demand. The deficit
is covered by imports from Bolivia and Argentina.
The recent actions by the Bolivian Government cast shadows over the
longer term gas trading to Brazil, a country that will very likely be
looking for alternatives, including LNG imports. An additional
highlight is that the country is the world's largest producer and
exporter of ethanol. Over half of all cars in the country are flex
fuel, meaning they can run on 100 percent ethanol or on an ethanol-
gasoline mixture. Ethanol in Brazil is made from sugarcane, which
prospers in the country's tropical climate. The current high prices of
oil, natural gas, and hydrocarbon products have prompted the government
to mandate all gasoline for domestic consumption to contain 25 percent
ethanol. Also, Brazil has plans for sizable nuclear developments. Two
plants are already in operation and a third one is under construction.
There is a large accumulation of stranded gas in the north, in a place
called Urucu. The hydrocarbons industry in Brazil is well organized,
with a strong institutional framework, including a regulatory agency.
Practically every big international oil company has acreage and/or
other interests in the country. This has been crucial for supplying the
needs of a very large country, although great challenges lay ahead.
Argentina
Argentina has oil reserves of 2.7 billion barrels and it produces
700,000 BD, while oil consumption is 400,000 BD (41 percent of primary
needs). Oil exports are important for the country, but marginal in a
worldwide context. They essentially go to Brazil and Chile. The country
is long in natural gas, with reserves of 21 Tcf. It produces some 4,400
MMcfd, enough to supply its domestic needs (45 percent of primary
energy) and to export some volumes to Uruguay and Chile. However, it
imports some gas from Bolivia, for geographic/logistical rehaznos, and
in recent times its policies have slowed down investments affecting gas
exports.
Bolivia
The third poorest nation in the hemisphere behind Haiti and
Nicaragua, holds oil reserves of 440 million barrels and produces
42,000 BD. However, it is very long in natural gas with reserves 54 Tcf
(30 Tcf proven and 24 Tcf probable). Despite those huge reserves, gas
production stands at 1,500 MMCf/d and investment has slowed down to a
trickle and some companies are leaving due to an insecure and arbitrary
operating environment. The most recent actions of expropriation of the
oil industry may prove to be the last nail in the coffin for the
possibilities of a large-scale gas development. This can be considered
a tragedy. A combination of ignorance and populism has led to a
rejection of foreign investments, and there is virtually no credible
alternative scenario whereby Bolivia would be able to grow economically
without exploration, production, and export of its natural gas
reserves.
Ecuador
The country holds oil reserves of 2.5 billion barrels and oil
production is 550,000 BD, two thirds of which go to the export market.
This is a marginal number in a worldwide scale, but it is of
fundamental importance for the future of Ecuador. Gas reserves stand at
a meager 0.4 Tcf. This country is also seeing international energy
investors depart because an unfair and arbitrary investment climate, in
addition to excessive bureaucracy and political volatility.
Mexico
Mexico has a population of more than 100 million and its economy is
the number 10 in the world ($640 billion). It has benefited immensely
from its partnership in NAFTA. It has the fourth largest oil reserves
in the hemisphere (oil 12 billion barrels and gas 15 Tcf) and currently
produces 3.5 million BD. It is the third supplier of crude to the
United States, behind Canada and Saudi Arabia. However, its reserves
are plummeting and it is forced to import billions of dollars of
gasoline and natural gas. Despite having possible oil reserves of 50
billion barrels, the lack of investments is leading the country to a
short-term demise as an oil exporter. This is the direct result of a
combination of heavy dogmatism and populism, that has dominated the
political landscape for decades. The last two governments have
struggled to open the energy sector to private investments, with only
modest political progress, although the magnitude of the eventual
collapse of the oil industry is beginning to change the minds of many
politicians.
Venezuela
The country remains the most important oil and gas country in the
hemisphere, with 78 billion barrels of oil reserves, 150 Tcf of natural
gas (although only 15 Tcf are of free gas), and some 220 billion
barrels reserves of extra-heavy oil in the Orinoco Belt. After the
sustained increase in production capacity to 3.5 million BD during the
1990s, the country has suffered a major setback resulting from
political instability and arbitrary management of the oil industry. In
addition, frequent changes of the rules and several international
arbitration lawsuits have instilled confusion and uncertainty in the
international oil companies partnering with PDVSA in Venezuelan
territory. As a result, oil production capacity has fallen to 2.6
million BD, despite an increase of 1.1 million BD resulting from the
contracts with private companies that were put in place in the previous
administration. Unless the prevailing uncertainty and the frequent
obstacles posed by the government can be diffused, Venezuela will
undoubtedly continue being important, but its growth as an oil exporter
will only be marginal (see the following point).
III. RELIABILITY OF SUPPLIES FROM VENEZUELA
Oil production capacity in Venezuela has suffered a severe drop in
the past few years. In February 1999, when the current government took
office, that capacity stood at nearly 3.5 million BD. At that moment,
already some 200,000 BD were operated by private oil companies as part
of the new contracts signed for joint operational agreements and
strategic associations. Thus, the capacity of PDVSA proper was some 3.3
million BD. Currently, Venezuela's production capacity stands at 2.6
million BD, but since that number includes 1.1 million BD being
produced by the private companies that operate the joint ventures, it
can be deduced that PDVSA's capacity is 1.5 million BD, i.e., a drop of
1.8 million BD. This is the result of poor management and weak
execution capacity, mostly deriving from the dismissal of 18,000
workers.
However, during the 7 years of the current Venezuelan Government,
oil from that country continues to flow to the United States at a rate
of 1.4-1.5 million BD, in line with the tradition of many years of
trade. I would argue that despite the aggressive political discourse
against the United States Government, oil exports to this country seem
to have a high priority in the slate of Venezuelan sales.
As part of the political agenda, President Chavez continuously
threatens the U.S. Government with suspending exports to the United
States, and has indicated that those exports would most likely be
diverted to China. But, as you very well know, the U.S. Government does
not own terminals, refineries, pipelines, or distribution networks. In
fact, it does not even buy oil, with the exception of the occasional
program of royalties in kind. The 1.5 million BD of Venezuela oil
imports into this country are the result of many dozens of contracts
with clients in the United States that have been buying Venezuelan oil
for decades. Many of those clients have refineries capable of
processing sour and heavy feedstock, which constitute the largest
portion of Venezuelan oil. The continuity of those exports to the
United States is of utmost importance for Venezuela, despite anything
that is contained within the political discourse of the Venezuelan
Government. Exporting that oil to China would be practically
impossible, because the refining network in China is mostly primitive
and incapable of receiving those volumes of sour and heavy crude. It
would take several years of bilateral coordinated joint planning and
investments to turn such an initiative into reality (it is not
happening), and it would be absurd to build it at the expense of the
most profitable option for those exports, which is non-other than the
United States market. Add to that the volumes that go to Citgo, a
subsidiary of PDVSA, and it is highly unlikely that there would be any
disruption of Venezuelan exports to the United States. Nevertheless, in
the unlikely event of a suspension of those shipments, Venezuela would
have to sell the crude at other destinations, and oil being generally
fungible, oil from other places would come to the U.S. shores. It would
naturally generate logistical complications and at least temporary
increased costs, but eventually the necessary adjustments would take
place and everything would return to normalcy. It is true that imports
of Venezuelan oil are very important to the United States, but it is a
fact that Venezuela needs badly its oil exports to the United States,
and especially the current government in order to finance its huge
expenses.
Finally, the threat of a shutdown of Citgo refineries, occasionally
included in the political speech of the Venezuelan Government is empty
talk. Citgo operates through a network of some 14,000 retail outlets,
but it does not own any of them. It only owns refineries, terminals,
and pipelines. An arbitrary shutdown of Citgo refineries would imply
breaching thousands of contracts without justification, posing an
unmanageable and costly legal situation for Venezuela.
The only real risk represented by the present Venezuelan
administration concerning oil supplies to the United States is not
current. It relates to frustrated expectations of building up new
barrels in the future. For the past 6 years the Venezuelan Government
and PDVSA have been announcing ambitious (normally not viable)
expansion plans of the country's production, but nothing significant
happens. This is a direct consequence of the diminished operational and
financial capacity of the national oil corporation. In addition, plans
and projects of expansion coming from private international companies
are losing momentum, as a result of the frequent changes of rules and
the difficult surrounding environment they have to face. So a
significant increase of that country's production is unlikely.
These opinions are entirely consistent with the ones I have
expressed in my public writings and interviews, and which I gave to
representatives of GAO with whom I met for some 4 hours as part of
their work in putting together their report for Senator Lugar.
IV. RESOURCE NATIONALISM IN LATIN AMERICA
The term ``resource nationalism'' is in hot vogue these days. But
what does it really mean? If what we have in mind is the seizing of
higher revenues, we should not forget that in the history of oil we
will find a secular inclination of oil countries to get a larger share
of the revenues. However, attracting the capital required has implied
moderating that appetite, in order to allow the oil companies to assume
calculated risks and make an attractive profit.
In recent times, the price of oil has reached extremely high
levels, but most importantly levels that no one would have expected
only 4 years ago (in early 2002 price predictions for the year were
$22-$23 per barrel, and OPEC had agreed to a ceiling of 21.7 million BD
in anticipation of a very soft market). These very high prices have
generated huge revenues, leading every oil country to consider ways of
capturing a larger portion of the windfalls. Even the United States and
the United Kingdom have discussed the idea of higher or new taxes.
Despite the somewhat questionable justification of any actions aimed at
changing taxes and contracts, the initiatives of seeking to renegotiate
terms are within the realm of the manageable and acceptable.
What is certainly unacceptable is to take actions like the recent
unilateral expropriation of the hydrocarbons industry in Bolivia. I do
not intend in these lines to address the implications of that case,
which are well known by the distinguished Senators present here. The
only other case in which abusive actions have been undertaken by a
government is in Venezuela, although it has never gotten to the
extremes of unilateral expropriation.
In the case of Ecuador, the government has insisted that the
seizing by the government of Block 15, formerly in charge of Oxy,
should not be interpreted as equivalent to the Bolivian case. They
argue that the affair is purely legal and related to an alleged
violation of contract by the international oil company. Despite a very
poor sense of timing to say the least, coming in the middle of
discussions of a FTA with the United States, and without taking sides,
it looks like it could in fact be an isolated case. Time will soon
tell.
In Colombia, Peru, Brazil, and Trinidad-Tobago, there are no
indications whatsoever of anything similar to the case of Venezuela,
and much less to the case of Bolivia. Mexico is a special case in its
own characteristics. Finally there is Argentina, but I am sure that my
friend Domingo Cavallo, will give you an accurate picture of that case.
V. OPPORTUNITIES FOR INCREASED UNITED STATES-LATIN AMERICA COOPERATION
ON ENERGY SECURITY (GOVERNMENTS AND PRIVATE SECTOR)
In 1994, as a spin-off from the Summit of the Americas held in
Miami, an initiative called ``Energy Integration of the Americas'' was
installed. Its objective was to build an integrated energy data bank,
evaluate existing interconnections among the countries, identify
barriers for a larger integration (political hurdles, tariffs, quotas,
logistics, etc.), and eventually undertake reforms and agreements, with
the ultimate objective of having a seamless energy platform that would
benefit all countries, and in addition facilitate and improve
commercial activities. The initiative, which involved the public and
the private sectors of each one of the countries of the American
hemisphere, was launched in Washington and was followed up with working
meetings in Santa Cruz, Bolivia and in Caracas, Venezuela. One of the
relevant features of the existing network is that while North America
has a large deficit of oil, Canada and Latin America have large
surpluses of energy resources, which if developed efficiently and
effectively, can be a leading engine of regional development and an
important contributor to global competitiveness. However, in the next
few years the initiative lost momentum and eventually faded out.
The evolution of the energy landscape in the past few years has
once again brought to the fore the importance of the subject. In the
words contained in a recent report published by the Council of the
Americas, if geography is destiny, the Americas are ripe for
development of an energy partnership benefiting both suppliers and
consumers, while linking the economies of the countries and increasing
trade. The report continues to argue that the entire Western Hemisphere
stands to gain if energy partnership is pursued, assuming the
implementation of terms and conditions consistent with a market-based,
public-private approach to energy sector development. Beyond politics,
the key questions center on the ability to raise and utilize
effectively the massive amounts of increased investment required to
develop the resources that already exist. Fundamentally, unless
investment climates are improved in the energy sector and elsewhere,
investors will continue to look to other markets as opportunities with
greater interest than the Americas. Without necessary investment,
reserves will be depleted, imports into the region will increase, and
terms of trade will deteriorate. My view is that salvaging the
initiative of 1994 could be an excellent way of having a fresh start
that should be in every country's best interest. However, the dialog
cannot compromise the basic principles of business, a market-based
approach, public-private cooperation, respect for property rights and
contracts, and the right balance of policy-regulation-operations/
business. Although this would probably mean losing a few significant
actors, countries such as Brazil, Colombia, Chile, Peru, Trinidad-
Tobago, and even Ecuador could lead the way. Their leaders are thinking
creatively and have instituted effective measures to develop their
respective resources in productive ways. The presence of Canada would
certainly enhance the initiative. There is no silver bullet, but hard
work along the described lines could translate into a more balanced and
reliable regional energy network.
VI. REFERENCE
Council of the Americas' Energy Action Group, Energy in the
Americas--Building a Lasting Partnership for Security and Prosperity
(Washington, DC: Council of the Americas, October 2005), 6-8.
The Chairman. Well, thank you very much, Mr. Giusti.
I would like to call now on Mr. Carvalho.
STATEMENT OF EDUARDO PEREIRA DE CARVALHO, PRESIDENT, BRAZILIAN
ASSOCIATION OF SUGAR CANE AND ETHANOL PRODUCERS, SAO PAULO,
BRAZIL
Mr. de Carvalho. Thank you, Mr. Chairman, honorable
Senators. Thank you for the honor and privilege to address this
committee.
We are living in a changing era for energy, given
environmental imperatives and security of supply of fossil
fuels. Two countries, the United States and Brazil, emerge in a
privileged position to develop ethanol as an octane booster or
a gasoline enhancer or even as its perfect substitute.
There will be no silver bullet, as my colleague has said,
to petroleum substitution. But, and I quote, ``Biomass ethanol
is the best alternative to partially replace oil derivates in
the next decades, considering consumers acceptability and
strategic considerations,'' as declared recently by none less
than Shell International.
Brazil's large experience with ethanol has been developed
over the last 30 years, not only in high blending volumes but
also in 100 percent ethanol-dedicated cars, or in its present
version of flex fuel vehicles. This was possible due to the
gradual setting of a huge infrastructure for ethanol
distribution, whereby all of the more than 33,000 gas stations
all over the country have at least one dedicated pump for E100
fuel.
At the same time, the United States has been expanding its
own ethanol production at an astonishing growth rate of about
20 percent a year, consistent with public policies established
to increase its consumption to 7.5 billion gallons in 2012, but
its potential use can be much more ambitious. Today, the
combined ethanol production of the United States and Brazil of
around 9 billion gallons accounts for less than 2 percent of
the total world consumption of gasoline. Could we think of a
potential market for ethanol of 49 times the present
production?
Brazil has been working to promote the global market for
ethanol. In order to achieve this growth, we consider that it's
important to launch a Brazil-United States partnership. Brazil
and the United States account for 70 percent of world ethanol
production. In our view, there is not going to be a global
market until we see ethanol being produced and consumed in many
countries. We need more players. Such partnership between our
two countries could pursue goals such as common standards,
technical cooperation, common research projects and, above all,
joint efforts to promote ethanol in third markets.
Therefore, let me be very clear on this point. The
Brazilian private sector does not have any goals of displacing
the domestic ethanol industry in the United States. We realize
that a thriving ethanol industry in the United States is of
enormous importance to consolidate a global market for ethanol.
In this spirit, I repeat, we do not think that it would be in
our own interest to displace domestic production in the United
States, our goal being complement it and/or displace oil
imports.
Within the spirit of such a desirable partnership, it's
important to point out that autarkic development in renewable
fuels contradicts the framework of a free and global trade in
fossil fuels. The present tariff and other duties on imported
ethanol in the United States are an obstacle to an even more
aggressive market expansion, and certainly an inducement to
higher prices than those that could prevail in more liberalized
conditions.
Is Brazil able to contribute, with its vast potential, to a
larger ethanol market? Certainly.
Let us consider, first, the necessary acreage for it.
Today, no more than 7.5 million acres are used to produce 4.5
billion gallons of fuel in Brazil, but we have in Brazil more
than 250 million acres that can be taken as a potential area to
expand agriculture, respecting all preservation areas,
especially the rain forests. Current expansion programs suggest
a production level of 8 billion gallons by 2011, based on our
domestic market, mainly induced by the spectacular acceptance
of flex fuel vehicles, and some moderate growth assumptions on
exports.
The search for alternative fuels must be based on their
economic, environmental, and social sustainability.
Economically speaking, Brazilian sugarcane ethanol is already
competitive with any gasoline obtained from $40-a-barrel crude,
without any form of subsidy either in agriculture, industry, or
to the consumer.
Sugarcane ethanol is a most efficient instrument to
sequester carbon dioxide in the atmosphere and consequently
mollify the serious threat of global warming. For each unit of
fossil fuel consumed in the whole process of production,
sugarcane ethanol generates 8.3 units of renewable energy.
The social dimension is shown by the high rate of
employment generation, turning the areas with sugarcane
cultivation into one of the most developed areas within the
country, the highest wage paid in the agriculture sector, the
best social conditions, education, health, and so on. There is
every reason, Mr. Chairman, to believe that the conditions
created in Brazil can be replicated as well in the tropical
regions of the world, benefiting hundreds of millions of
people, especially in Latin America, Africa, and Southeast
Asia.
A freer trade policy regarding ethanol in the United States
would enhance the potential of not only much more ambitious
goals to gasoline substitution, but also prevent and smooth out
possible price peaks and pressures. Additionally, it could
induce effective changes in the process of economic development
of a vast number of underdeveloped and developing nations.
In short, free markets and fair systems to govern them need
to be recognized as powerful instruments to secure a balanced
supply of renewable fuels in the near future, and Brazil and
the United States would have much to gain by joining forces to
globalize ethanol as an energy commodity.
Thank you, Mr. Chairman.
[The prepared statement of Mr. de Carvalho follows:]
Prepared Statement of Eduardo Pereira de Carvalho, President, Brazilian
Association of Sugar Cane and Ethanol Producers, Sao Paulo, Brazil
Mr. Chairman, honorable Senators, thank you for the honor and
privilege to address this committee. We are living in a changing era
for energy, given environmental imperatives and security of supply of
fossil fuels.
Two countries, the United States and Brazil, emerge in a privileged
position to develop ethanol, as an octane booster, or a gasoline
enhancer, or even as its perfect substitute.
There will be no ``silver bullet'' to petroleum substitution. But,
``biomass ethanol is the best alternative to partially replace oil
derivates in the next decades, considering consumers acceptability and
strategic considerations'' as declared recently by none less than Shell
International.
Brazil's large experience with ethanol has been developed over the
last 30 years. Not only in high blending volumes, but also in 100
percent ethanol dedicated cars, or in its present version of flex fuel
vehicles. This was possible due to the gradual setting of a huge
infrastructure for ethanol distribution, whereby all of the more than
33,000 gas stations all over the country have at least one dedicated
pump for E100 fuel.
At the same time, the United States has been expanding its own
ethanol production at an astonishing growth rate of around 20 percent a
year, consistent with public policies established to increase the
consumption to 7.5 billion gallons in 2012. But its potential use can
be much more ambitious. Today, the combined ethanol production of the
United States and Brazil, of around 9 billion gallons, accounts for
less than 2 percent of the total world consumption of gasoline. Could
we think of a potential market for ethanol of 49 times the present
production?
Brazil has been working to promote a global market for ethanol. In
order to achieve this goal, we consider that it is important to launch
a Brazil-United States partnership. Brazil and the United States
account for 70 percent of the world's ethanol production. In our view,
there is not going to be a global market until we see ethanol being
produced and consumed in many countries. We need more players. Such
partnership between our two countries could pursue goals such as common
standards, technical cooperation, common research projects and--above
all--joint efforts to promote ethanol in third markets.
Therefore, let me be very clear on this point: The Brazilian
private sector does not have any goals of displacing the domestic
ethanol industry in the United States. We realize that a thriving
ethanol industry in the United States is of enormous importance to
consolidate a global market for ethanol. In this spirit, I repeat, we
do not think that it would be in our own interest to displace domestic
production--our goal is to complement it and/or displace oil imports.
Within the spirit of such a desirable partnership, it is important
to point out that autarkic development in renewable fuels contradicts
the framework of a free and global trade in fossil fuels. The present
tariff and other duties on imported ethanol in the United States are an
obstacle to an even more aggressive market expansion, and certainly an
inducement to higher prices than those that could prevail in more
liberalized conditions. Is Brazil able to contribute, with its vast
potential, to a larger ethanol market?
Certainly.
Let us consider, first, the necessary acreage for it. Today, no
more than 7.5 million acres are used to produce 4.5 billion gallons.
But we have in Brazil more than 250 millions acres that can be taken as
a potential area to expand agriculture--respecting all preservation
areas, especially our rain forests. Current expansion programs suggest
a production level of 8 billion gallons by 2011. This, based on our
domestic market, mainly induced by the spectacular acceptance of the
flex fuel vehicles, and some moderate growth assumption on exports.
The search for alternative fuels must be based on their economic,
environmental, and social sustainability. Economically speaking,
Brazilian sugarcane ethanol is already competitive with any gasoline
obtained from a $40 barrel of crude, without any form of subsidy--
either in agriculture, industry, or to the consumer.
Sugarcane ethanol is a most efficient instrument to sequester
carbon dioxide in the atmosphere and consequently mollify the serious
threat of global warming: For each unit of fossil fuel consumed in the
whole production process, sugarcane ethanol generates 8.3 units of
renewable energy.
The social dimension is shown by the high rate of employment
generation, turning the areas with sugarcane cultivation in one of the
most developed areas within the country: The highest wages paid in the
agricultural sector; the best social conditions (education, health
care, etc.).
There is every reason to believe that the conditions created in
Brazil can be replicated elsewhere in the tropical regions of the
world, benefiting hundreds of millions of people, especially in Latin
America, Africa, and South East Asia.
A freer trade policy regarding ethanol in the United States would
entrance the potential of not only much more ambitious goals to
gasoline substitution, but also prevent and smooth out possible price
peaks and pressures. Additionally, it could induce effective changes in
the process of economic development of a vast number of underdeveloped
and developing nations.
In short, free markets and fair systems to govern them, need to be
recognized as powerful instruments to secure a balanced supply of
renewable fuels in the near future. And Brazil and the United States
would have much to gain by joining forces to globalize ethanol as an
energy commodity.
Thank you.
The Chairman. Well, thank you very much, Mr. Carvalho, for
that important visionary statement and agenda that you
presented.
I would like to call now upon Mr. Goldwyn.
STATEMENT OF HON. DAVID L. GOLDWYN, PRESIDENT, GOLDWYN
INTERNATIONAL STRATEGIES, LLC, WASHINGTON, DC
Mr. Goldwyn. Thank you, Mr. Chairman. Mr. Chairman, members
of the committee, it's a pleasure to be here.
I think, without a doubt, the erosion of U.S. power and
influence around the globe due to our dependency and that of
our allies and our competitors on oil is the key foreign policy
challenge of our time. I commend the chairman and the committee
for a comprehensive and a sustained and very responsible
approach to this issue, and it gives me hope that maybe this
time we'll actually do something about it.
With respect to the hemisphere, I would say that the energy
trends in the hemisphere are mixed, but overall investment is
declining, production is flattening, and resource nationalism
is rising in the key producing nations. With respect to our
diplomacy in the region as you have focused on it, it's
increasingly confined to North America. Most of our
longstanding bilateral and multilateral energy dialogs are
dormant, and we have no strategic engagement on energy with two
of the most important producers, Venezuela and, of course,
Brazil.
But the key foreign policy issue that results from all this
is that U.S. influence in the hemisphere is declining fast. I
share the chairman's vision that we need a fresh approach to
energy diplomacy in the hemisphere, and I think the Energy
Diplomacy and Security Act provides a terrific framework for
this kind of approach.
But, in addition, I think the United States has to enhance
its energy security by engaging the region on the issues that
concern its people, and those are the issues of job creation
and poverty alleviation, migration, and trade promotion. An
asymmetrical approach, one that focuses on a broad range of
issues rather than just energy security, may pay great
dividends in energy security, more than one that's just focused
on energy. I think the ``energy for development'' component of
the EDSA is a good example of how to leverage this asymmetrical
approach.
So this morning I'm going to talk very briefly about the
trends in the hemisphere, how and why they negatively impact
our foreign policy that's driving this, and then, what we
should do about it.
In terms of the hemisphere itself, I think as my colleagues
have said this morning, there's no question that Latin America
is a key component of United States energy diversity. We don't
have a whole lot of diversity from the Middle East if we don't
have the supply from this hemisphere. It's much more important
even than Africa in that context. There's no getting around its
importance. Also, they are close by and, as Luis has said,
deeply integrated into the U.S. system.
We're seeing two trends now. One is the rise in state
control, and that's in Venezuela and Bolivia, Ecuador, and as
the former finance minister has said, what happened to
Argentina in 2002. And there we're seeing investment leave
those countries, we're seeing production flatten.
But the other trend is toward a market model, and there I
think we have to acknowledge Brazil's tremendous success,
Colombia's, and Peru's. Brazil has gotten a lot of credit for
being self-sufficient in oil because of ethanol, but they
increased their production by 1 million barrels a day over 10
years, and that has an equal or greater effect on their self-
sufficiency.
But the problem is, since the greatest producers are Mexico
and Venezuela, the net effect is negative, and that's a
problem. Why is that a problem, and why do we care? Well, there
are economic reasons why these trends are bad. Obviously, it's
bad for the shareholders of U.S. companies when their profits
get cut significantly, and when production flattens, it puts
long-term pressure on oil prices.
But the real consequence that we need to worry about is the
foreign policy impact, and there we're seeing a growing
rejection of free markets, an erosion of democratic structures
in a lot of countries, and the decline of U.S. influence in the
region. What's new about this is that for the first time since
the fall of the Soviet Union, the United States has a political
and ideological competitor in Hugo Chavez, and a competitor
that is well financed with oil wealth and very creative about
how they're competing with us.
I would argue that this trend is reversible, and that U.S.
alliances can be expanded and restored, if we are prepared to
engage the hemisphere with respect and creativity on the issues
that matter to the hemisphere. But we have to compete, and
right now I would argue in Latin America we're not even on the
field.
Some examples of how our influence is declining: First,
polls show our image is at a historic low in the hemisphere.
Anti-United States rhetoric is up. Support for liberalized
markets and free trade is declining. The FTAA is pretty much
dead in the water. The 2005 Mar de Plata Summit of the Americas
couldn't even produce a consensus statement. We have suspended
our military cooperation with 10 countries because they don't
conform to our orthodoxy on the International Criminal Court.
We couldn't get support, probably for the first time in our
history, on a candidate for the Secretary General for the OAS,
and we're actually not doing so well on who the next Latin
American candidate is on the Security Council, either.
A greater concern is that as these populist regimes take
power, democratic structures are eroding. By democratic means,
referenda and other things, the political space is eroding.
Space for political opposition is disappearing as referenda
create more and more restrictive rules for how these
governments govern. And our institutions like IRI and NDI,
which have been great ways to build party opposition, are
basically no longer welcome in these countries. These internal
governance issues need to be the focus of our policy.
Now, why is this happening? There are really three reasons.
Some of this is self-inflicted wounds from U.S. diplomacy, some
of it is internal, and some of it is energy. I think we have to
acknowledge the self-inflicted wounds of U.S. diplomacy in the
hemisphere. We don't pay attention to Latin America because of
Latin America.
Our policy in Latin America has primarily been about
counternarcotics. When we had close ties with regimes that
marginalized their own indigenous populations, we didn't pay a
whole lot of regard to it, and now they're in power, and guess
what? They don't like us too much. It's actually ironic because
we provided a lot of support for political parties in these
countries, particularly in Bolivia, and by empowering them and
teaching them how to participate in the process, they are now
in power, but our support has not been very well recognized.
Our image is also declining because of policies in other
places in the world, no doubt in the Middle East, and things
like Guantanamo and Abu Ghraib have hurt our image in the
hemisphere. Our direct assistance for things like child
survival is declining for budgetary reasons, so we're viewed as
being insensitive to the region's concerns.
But there are lots of internal reasons also, and that's
that trade liberalization and GDP growth have not led to
poverty alleviation or the inclusion of excluded minorities in
countries like Venezuela, Bolivia, Ecuador, and Peru. That has
led to a rejection of markets and the Washington consensus.
That doesn't mean that it's bad, but it means that we haven't
really looked at all the consequences of what those countries
actually experienced.
Another reason is that their populations are growing, they
need more money, and guess where they go. They go to oil
revenues because that's the greatest source. And, as Luis has
said, the United States, the United Kingdom, Canada, lots of
people are raising taxes.
But the new piece and the piece of most concern is the
competition from Venezuela. Hugo Chavez is not the first
hemispheric leader to try and compete with the United States or
demonize us to increase his popularity, but he's the best
financed, and rarely has the United States been so destructive
and inept in our own way of competing with someone.
I think we have to be careful here not to dismiss the
reasons why Hugo Chavez came to power, or to exaggerate the
potency of his model in other places in the region. What does
have to concern us is that Venezuela is trying to export this
model to other countries, and they're being clever about it.
In places where trade liberalization has hurt a country--we
do a trade deal with Colombia, we wipe out the Bolivian soybean
market. What's U.S. policy? Let the market provide. What's
Venezuelan policy? We'll buy your soybeans. It's clever.
On the days when U.S. oil companies are here testifying
about how Congress needs to deal with low income heating
assistance programs, what does President Chavez do? He decides
to provide heating oil to Northeast communities. It's clever.
They have also capitalized on these differences in the
regions by offering subsidized energy products in cooperation
and joint investment to the rest of the region. And I think the
jury is frankly out on whether this model will be of appeal,
whether anybody wants their investment, but everyone will take
cheap oil and the cheap products.
So the question is, what are we doing to compete? What are
we doing to defend our model? What are we doing to try and
improve our own brand in the hemisphere? And here I think we
need to do a couple of things.
I think the Energy Diplomacy and Security Act is a terrific
framework. We have to care about energy. We have to focus on
the region. We have to build up our frameworks in the
hemisphere. And I would just argue, as I have in my written
testimony, that we have to have the flexibility to allow us to
do this at the subregional level as well.
But we need a positive agenda in the hemisphere. We really
need one that recognizes the need to improve education and
infrastructure, that addresses the negative social impact of
trade liberalization, and that offers the respect and
cooperation of the United States to the countries that work
with us. I think this is going to advance our interests no
matter what the price of oil is.
We need to address issues like poverty. We can do a lot of
things. One is on trade liberalization. We ought to think about
lifting that tariff on Brazil and developing that market. We
have to show there are rewards for these kinds of exports. We
can improve the visa process for people who will be the future
leaders of these countries. We could improve our military
cooperation with the region's militaries, without this
orthodoxy; and deal with migration with Mexico, which is
obviously important to them. We can support World Bank and
Inter-American Development Bank programs on things like
bringing electricity, particularly rural electrification, in
the region. This is stuff that people care about, and like the
Alliance for Progress that the Senators talked about earlier,
it shows that we actually care about their welfare. It's a
positive agenda.
I think we can also do things like compete in areas where
we have adversaries. In Venezuela and Bolivia, we should not
abandon the field. We should not reduce our diplomacy. We
should not reduce our engagement. We should ratchet it up,
because we have something to say and we should defend it. And
Venezuela, hopefully we'll talk about it in the question and
answer period, but there too I think we ought to end the dialog
through the media, talk directly, and reengage.
Overall in the hemisphere, dialog and diplomacy will be the
important means to try and address energy security in the
hemisphere. But more than the dialog, we really have to have
the product, we really have to have the substance, and that's
where I think we need this asymmetrical approach that addresses
a broader range of issues.
Thank you.
[The prepared statement of Hon. Goldwyn follows:]
Prepared Statement of Hon. David L. Goldwyn, President, Goldwyn
International Strategies, LLC, Washington, DC
Mr. Chairman and members of the committee, it is an honor to speak
with you today about the intersection between growing resource
nationalism in Latin America and the erosion of United States influence
in the hemisphere. The energy trends in the hemisphere are mixed, but
overall investment is declining, production is flattening, and resource
nationalism is rising in some key producing nations. United States
energy diplomacy is increasingly confined to North America. Most of our
longstanding bilateral and multilateral energy dialogs are not
functioning. We have no strategic engagement on energy with two of the
three key producers: Venezuela and Brazil. U.S. influence in the
hemisphere is declining fast. The United States needs a fresh approach
to energy diplomacy in the hemisphere. The Energy Diplomacy and
Security Act (EDSA) provides an excellent framework for such an
approach. In addition, the United States will enhance its energy
security by engaging the region on issues that concern its people: job
creation, poverty alleviation, migration, and trade promotion. An
asymmetrical approach, one that addresses a broad range of issues
rather than just energy security, may pay dividends equal to or greater
than one focused solely on energy. The ``Energy for Development''
component of the EDSA is an excellent example of this kind of approach.
EDSA should also, however, ensure that the United States has the
flexibility to utilize subregional energy dialogs and that any new
framework strengthens, rather than weakens, the energy diplomacy
mission of the Department of Energy. I will discuss current energy
trends in the hemisphere, their impact on U.S. foreign policy, the
status of existing energy security dialogs, and the utility of a fresh
approach, with a specific focus on EDSA.
I. THE IMPORTANCE OF THE HEMISPHERE
Latin America is a strategic region for United States foreign
policy for many reasons. We are neighbors, trading partners, investment
partners and we share deep family and cultural ties. The hemisphere is
democratic, with one notable exception. In the energy sphere, the
hemisphere provides the United States with a large portion of our
diversity of oil and gas supply. For this reason, the failure of the
hemisphere to realize its potential for growth is a serious concern for
U.S. and global energy security. Latin America is far closer to the
United States market than the Middle East. While the investment climate
in key Latin American countries is deteriorating as state control
increases, even in Venezuela access to exploration acreage remains
superior to that in the Middle East. Additionally, the non-OPEC
producers in this region exert counterpressure on OPEC's monopoly
power.
Mexico and Central and South American nations delivered nearly 14
percent of global oil production in 2005, and possess approximately 9.7
percent of global oil reserves, with 6.5 percent in Venezuela and 1.1
percent in Mexico alone. The region is also a major refining center,
with nearly 9.2 percent of the world's refining capacity. Regional
refineries are designed to serve the specialized needs of U.S. markets.
The most important exporters, Venezuela and Mexico, consistently rank
in the top four sources of United States oil supply along with Canada
and Saudi Arabia. Venezuela averaged 1.29 million barrels per day (m/
bpd) in 2005; Mexico averaged 1.59 m/bpd in that year.
II. ENERGY TRENDS IN THE HEMISPHERE
In Latin America today we see two trend lines. One trend is toward
rising state control of energy resources--in Venezuela, Argentina,
Bolivia, and Ecuador, in particular. The concern here is that this
trend will limit the growth of global supplies of oil and gas by
undermining the value of existing investments, discouraging future
investment or barring foreign investment altogether. The economic
consequence of these trends is that the hemisphere will contribute less
to the diversification of oil supply, thereby increasing the importance
of OPEC supply and over time undermining economic development in the
region. The political consequences of these trends in the short run are
the decline of U.S. influence in the region to competing ideologies and
the erosion of democratic structures.
A second trend is toward creative fiscal regimes that welcome
foreign investment and require state-owned companies to compete with
international companies, with independent regulators that promote fair
and efficient regulation. Countries observing this model are increasing
production or stalling the decline of existing reserves. Brazil,
Colombia, Trinidad and Tobago, and Peru are key examples of this
creative model.
When we consider that Mexico, so far, continues to bar foreign
investment in its upstream oil and gas sector, and the size of the
reserves and production of the countries practicing the resource
nationalism model, the net effect is negative. Foreign investment in
the oil sector is shifting away from South America to North America,
particularly to Canada's oil sands. When we compare 2005 to 2004, only
Brazil and Trinidad managed to increase production significantly, while
other countries faced decline or very modest gains.
A. The rise in state control
Venezuela and Mexico are the most important oil exporters in the
hemisphere. While Brazil, Colombia, Ecuador, and Argentina are
important destinations for foreign investment, and helpfully produce
enough oil to meet their own domestic needs and make some contribution
to the global export market, they are not strategic suppliers to the
global market at this time. Only Mexico, Brazil, and Venezuela produce
more than a million barrels per day. Bolivia has enormous gas reserves,
but exports mostly to Brazil and modestly to Argentina. Only Trinidad
and Tobago is a key supplier to the world gas market.
From those countries now committed to increasing state control, the
United States faces two key challenges: The loss of production growth
and diversity of supply from the region if new economic frameworks are
unattractive to foreign investors and, most critically, the loss of
United States influence from well-financed political competition.
THE ECONOMIC IMPACT OF RISING STATE CONTROL
The recent wave of changes in contractual terms and dramatic
changes in tax regimes in Venezuela, Bolivia, Ecuador, and in recent
years Argentina, threatens to slow new investment and eventually deepen
instability and poverty in these nations as well as destroy shareholder
value for the companies invested there. The deterioration in the
investment climate for energy in these countries is primarily an
economic threat, helping to lock in constrained supply and high prices.
We are seeing the revision of economic terms at a time when producers
rather than companies hold more market power.
Venezuela passed a hydrocarbons law that mandated a 51 percent
share by the national oil company and a higher royalty rate.
Operations, such as those under Operating Service Agreements, which may
have stretched the legal interpretation of the law when they were
begun, were subject to a strict and adverse legal interpretation when
they appeared to be poor earners for the government. Taxes once
renounced, like the export tax, have been revived so that the
government can earn, in essence, a fixed 33.33 percent royalty. The
impact, according to expert analysts like Deutche Bank and Wood
Mackenzie, is a massive flight of investment capital from Venezuela's
heavy oil sector to Canada's oil sands, effectively freezing
development of the hemisphere's largest oil reserves during one of the
greatest oil booms in history.
In Bolivia, President Evo Morale's May 1, 2006 decree declared that
the state would take control of all gas fields. Royalty payments to the
Bolivian Government at the largest gas fields, including San Alberto
and San Antonio, will now increase from 50 percent to 82 percent. All
producers are obliged to sell at least 51 percent of their holdings to
the Bolivian Government, with the value of that share to be assessed by
audit and negotiation. The state will take 60 percent of production
from other fields. Bolivia has left itself an open door through which
it can compromise or retreat: Details of new contracts are to be worked
out on a case-by-case basis. But companies were given only 6 months to
renegotiate contracts or be expelled.
In Ecuador, President Palacios seeks to increase windfall revenues
from 30 percent to 50 percent and to renegotiate production sharing
contracts, while still embroiled in disputes over company claims for
refunds of value added tax payments denied by the government. Ecuador
has now seized and will attempt to operate an oil field developed by
Occidental Petroleum. Argentina reversed a successful fiscal regime by
imposing export taxes and other restrictions which have returned it to
being a net oil importer.
The net effect of these developments is that new investment in
these countries is virtually frozen at a time when prices should be
driving new exploration and production. It is notable that even China,
which is aggressively competing for exploration acreage worldwide, is
not a major player in the hemisphere. China holds less than 10 percent
of upstream assets in the hemisphere, primarily recent acquisitions of
Western assets in Ecuador and Peru, and enjoys no preferential access
in Venezuela at this time. No new investment has been made under
Venezuela's 1998 hydrocarbons law. New investment is unthinkable in
Bolivia until existing companies can determine the extent of their
losses. Ecuador's investors are mulling legal action for expropriation
and suspension of existing investments. The future growth potential of
the hemisphere is being undermined and the region's economies risk a
major contraction if oil prices drop significantly anytime over the
next decade.
B. The market model
The hemisphere is not monolithic. We have seen remarkable success
stories like Brazil, Colombia, and Peru, which have created independent
regulators and obliged their national energy companies to compete with
outside companies for exploration rights. Such progressive cases
provide bright spots in the region. Brazil has received enormous, and
well-deserved credit for the contribution that sugar-based ethanol has
made to its self-sufficiency in oil. But equal credit should go to
Brazil for a remarkable change in its terms for welcoming foreign
investment, which made Brazil one of the most desirable destinations
for exploration. Brazil's aggressive oil production strategy increased
domestic oil production by 1 m/bpd over 10 years. In 1995, Brazil
produced less than 700 m/bpd. In 2006, they are forecast to produce
close to 1.7 m/bpd. Their jump in domestic production has had as great
an impact on reduction in oil imports as anything else.
Competition has also made Petrobras a better company and a fearsome
global competitor. Peru is set to become a net gas exporter if plans to
build an LNG terminal and production from the Camisea project meet
expectations. But these market-based energy producers are not the
dominant economic models in the hemisphere, are not major oil exporters
and, with the exception of Brazil, do not operate in the countries with
the greatest reserves. Colombia is battling a rapid decline of its
reserves and production. Peru is a net exporter.
Mexico
Mexico has been a long-time reliable supplier, but its upstream oil
sector has been closed to foreign investment and it is projected to
decline unless this policy changes or unless the Mexican Government
dramatically increases the amount of PEMEX earnings it can keep for
capital investment. In 2004, PEMEX paid the government 60 percent of
its revenues. Mexico has enormous oil potential on its side of the Gulf
of Mexico and a change in policy could both change global oil markets
and create a formidable source of wealth for development of the country
itself. Mexico will hold a closely contested Presidential election this
July, and the winner will have to address how to avoid seeing Mexico
decline as an oil power. For now, all candidates appear to oppose
foreign investment in the energy sector but economic reality,
opportunity, and perhaps creative political action could yet provide
this generation of Mexicans with an economic bonanza.
III. THE IMPACT OF HEMISPHERIC ENERGY TRENDS ON U.S. FOREIGN POLICY
The most important challenge to the United States from these
hemispheric energy trends is political, not economic. U.S. influence in
the hemisphere is waning in key areas, support for liberalized markets
and free trade is declining, and democratic structures are under stress
as populist governing models reduce the space for political opposition.
The November 2005 Mar De Plata Summit of the Americas could not produce
a consensus statement. Military cooperation with nearly 10 countries
has been suspended for the failure of these neighbors to conform to
U.S. orthodoxy on the International Criminal Court. The United States
could not muster support for its candidate for Secretary General of the
Organization of American States.
Much of this decline is self inflicted. The hemisphere has not been
a priority for U.S. foreign policy for many years, other than as target
for our counternarcotics policy. Bilateral relations are focused on
whether the hemisphere supports U.S. policy in other areas. The image
of the U.S. is declining in the hemisphere due to U.S. policies in the
Middle East and human rights issues raised by our treatment of
detainees from Abu Ghraib to Guantanamo. Nonmilitary aid for
development assistance and child survival is declining for budgetary
reasons. The United States is widely perceived as insensitive to the
region's concerns and our influence has been harmed as a result.
The Venezuelan challenge
For the first time since the fall of the Soviet Union, the United
States now has an ideological and political competitor for political
influence, arising primarily from Venezuela.
High oil prices have enabled President Chavez to maintain very high
revenues for his government, allowing increased domestic social
spending, high levels of foreign assistance, and modest reinvestment by
PDVSA in countries in South America and the Caribbean. President Chavez
has a competing vision from that of the United States on a broad range
of issues. He opposes the United States on trade integration, our
liberal (versus his Bolivarian) model of democracy, on Iran and Iraq,
and seeks to exclude the United States from regional economic energy
arrangements in South America and the Caribbean. His economic policy is
to raise taxes and royalties on foreign energy investment, demand
majority control of projects, and in the non-oil sector to seize land
or other underutilized industrial resources for the state.
Venezuela competes with the United States in the hemisphere,
offering aid for solidarity. Venezuela has capitalized on the different
needs of the hemisphere's subregions by creating PetroCaribe,
PetroAndina and Petrosur to foster cooperation and joint investment on
a subregional basis. It has created an alternative trade grouping
called ALBA, the Bolivarian Alternative for the Americas--which
attempts to force nations to choose between trade agreements with the
United States and with Venezuela. Venezuela is also identifying places
where trade liberalization has a negative impact and stepping in to
provide redress. Venezuela purchased debt issues from Argentina and
Ecuador, and when the Colombia free-trade agreement with the United
States threatened Bolivia's soybean crop, Venezuela agreed to purchase
it.
The jury is still out on whether the Venezuelan economic model is
viable at $25 oil and whether their neighbors support the Bolivarian
vision and will really allow joint investment, or if they are just
accepting President Chavez's assistance. But the political challenge to
the U.S. vision for the region is unmistakable.
The Venezuelan model is an issue in every nearly every election in
the hemisphere. In Bolivia, the mobilization of long disenfranchised
indigenous forces--aided by years of United States assistance in party
building and election organizing--led to the election of President Evo
Morales, who is following the Venezuelan model. In Peru, Alan Garcia
defeated Ollanta Humala, a proponent of the Venezuelan model, in a
close election. In Mexico, the PAN candidate, Felipe Calderon, has
closed a large gap with his PRD opponent, Manuel Lopez Obrador, by
asserting he will follow the Venezuelan model if he is elected.
Given these mixed results, we should be careful not to overstate
the salience of the Venezuelan model or to dismiss too quickly the
forces that gave rise to it in the first place.
The roots of the antimarkets approach
It is important to understand what is behind the challenge to the
U.S. model. We are seeing the rise of state control and forced revision
of contracts for two reasons. One is that trade liberalization and
increased GDP growth have not led to poverty alleviation or inclusion
of excluded minorities in countries like Venezuela, Bolivia, Ecuador,
and Peru, leading to a rejection of liberalized markets and the
Washington consensus in many countries. Another is that growing
populations have increased the pressure for governments to raise
revenues in economies that are still resource-dependent, so governments
are appropriating the best available source of cash regardless of the
long-term consequences. This latter trend has led to higher taxes and
royalties all over the world, including the United Kingdom.
The United States should protest violations of contracts or
expropriations where these takes place and deny benefits such as
bilateral trade agreements to countries that do not respect the
agreements they have signed. The United States suspension of free-trade
agreement talks with Ecuador is a good example of this. But the market
will either tolerate or punish the economic actions of governments that
raise tax and royalty rates or other fiscal terms adversely. If
companies can make money under the new terms offered by Venezuela or
Bolivia, they will pursue these opportunities. If companies cannot
profit, they will close their operations, and if countries do not spend
their own capital to develop their resources, then production will
fall, their revenues will shrink, and the popularity of their programs
will shrink with them. This may lead to higher energy prices, but
foolish economic policy is not a basis for U.S. Government
intervention.
The need for a new hemispheric foreign policy approach
What the United States lacks is a positive agenda in the
hemisphere, one that recognizes the need to improve education and
infrastructure, addresses the negative social impacts of trade
liberalization, and offers the respect and cooperation of the United
States to those countries that work with us. This will advance U.S.
interests, no matter what the price of oil is. We need to address
legitimate issues like poverty and advocate how our model can address
them. Examples of this are addressing trade barriers to agricultural
imports, expanding educational opportunities in the United States for
future leaders, improving the visa application process, expanding
military to military contacts, especially exchanges under the
International Military Education and Training Program, dealing with
migration issues with Mexico in a spirit of respect and fairness,
supporting World Bank and Inter American Development Bank
infrastructure programs in the hemisphere, supporting the development
of civil society and the capacity of democratic institutions and
treating our relations with our hemispheric neighbors as intrinsically
important, not as litmus tests of loyalty to the United States on Iraq
or other issues external to the region itself. In countries where we
face ideological competition, like Venezuela and Bolivia, it is crucial
that we do not abandon the field. We need to increase our diplomatic
engagement and defend our way of thinking.
I believe that Bolivia's recent actions will mark the nadir of the
turn toward repudiation of contracts. Countries like Bolivia and
Ecuador are too poor and frankly, too insignificant to global energy
markets to sustain the kind of behavior they are engaging in. Powers
like Brazil can communicate this to Bolivia better than the United
States can. The United States should maintain dialog with Bolivia and
give it our best, even if unwelcome, advice and cooperate where we can.
Venezuela is a more complicated case. Venezuela is a competitor,
but it is not likely to halt supply to the United States as an act of
political warfare unless we embargo them first. They have, in fact,
remained reliable suppliers of oil and products, despite the heated
rhetoric reported in the media. An act of energy aggression by
Venezuela against its neighbors is also unlikely at this time. Any hope
Venezuela has for regional leadership would evaporate if they used
their oil wealth for acts of military aggression against a neighbor.
Withdrawing oil supply from the market will harm their new friends and
future markets, as well as cut the government's supply of revenue. The
United States could, would, and should use the Strategic Petroleum
Reserve to redress the unlikely event of a production halt by
Venezuela, or another (equally unlikely) strike by its workers. For
now, the Venezuelan challenge is ideological.
Here too U.S. policy has failed to understand what factors have led
to President Chavez's enormous popularity. Venezuelan Governments prior
to the Chavez government governed poorly, practiced corruption, ignored
poverty, and excluded minority sectors of its society. The Chavez
government came to power determined to
return control of energy policy from the national oil company to the
government
ministry, to reclaim some of the oil rents held by the national oil
company for the government's own account, and to change the economic
terms of its acreage allocation from those set when oil was $10. This
is a policy the United States would support in any other country. The
government has spent lavishly and allegedly unwisely on social
programs, but this is what we pray most African Governments would do
with their own oil wealth. The famous strike of 2002-2003 was a battle
between the national oil company and the government and the government
won. I cannot imagine the United States supporting the PEMEX in a
battle against the Mexican Government for control of the PEMEX Board of
Directors. The U.S. rhetorical support for the coup that displaced the
President for a day was foolish, destructive, and devastating to our
bilateral relations.
Where Venezuela has gone wrong economically is by changing contract
terms with impunity and hostility, rather than by negotiation with
companies who have been its partners for decades, invested billions in
its energy sector, and created the production that now enriches the
nation. The manner in which the recent changes have taken place has
been shortsighted, destructive, and unnecessary. Venezuela has changed
its interpretation of its own tax laws, but it is provocative and
disingenuous to accuse companies of being tax cheats as a consequence.
Time will tell whether the attractiveness of Venezuela's tremendous oil
and gas reserves overcomes the pain inflicted by the way these changes
have been made. Oil companies tend not to be emotional about these
issues as long as they are making money.
Where Venezuela has gone wrong, politically, is by using legal
methods to restrict freedom of the press, prosecution to intimidate
political opposition, and constitutional assemblies to unbalance
formerly balanced institutions like the Supreme Court and national
election commission. The regime itself, helped by the failure of a
political opposition to mount a campaign describing what it was for,
and high oil prices sufficient to fund the government and external
programs at the same time, does not appear to need to use either tactic
to win large majorities. These internal governance issues should be the
focus of a regional policy, which includes, but is not led by the
United States. We should have objective assessments as to whether
Venezuela's actions are undermining any other important United States
security interests. Venezuela has positioned itself as an ideological
competitor to the United States in the hemisphere. We need not and
should not treat Venezuela as an enemy; we should, however, try to
compete. We should also end our dialog via the media and resume the
dialog between our senior foreign affairs, commerce, energy, and
cultural officials. We should work with Europe and with hemispheric
partners to reinforce a message of respect for democratic institutions.
IV. THE STATUS OF CURRENT DIALOGS AND THE NEED FOR A FRESH APPROACH
The United States has had a number of bilateral and multilateral
energy policy fora in the hemisphere over the years. Some are active,
while others have lapsed or are stagnant. These fora are platforms to
understand market dynamics, share best practices on energy efficiency
and conservation, share understanding on ways to enhance energy
production, and exchange views on how a nation's energy policies may be
enhanced or reformed to promote the nation's own policy. These policy
dialogs are also essential for building the understanding and
relationships that are essential for trade promotion and conflict
resolution.
The premier multilateral energy forum was the Hemispheric Energy
Initiative (HEI), a multilateral meeting of the hemisphere's energy
ministers, with many active subgroups, which was cochaired by the
United States and Venezuela. The HEI is dormant due to the status of
our relationship with Venezuela, leaving us with no effective forum at
all. Bilaterally, the United States had a Principal Coordinators Energy
Dialog with Venezuela, as well as a 30-year technical cooperation
agreement with Venezuela. The bilateral Venezuelan dialogs were
suspended for political reasons.
The United States has a trilateral energy policy dialog with Canada
and Mexico, which has addressed electric power, energy conservation,
harmonization of standards and market outlooks. It has taken many
forms, but it functions very well.
What remains of engagement is not adequate. A fresh approach which
engages the United States with all the region's producers and consumers
is sorely needed. I commend the Chairman for the vision contained in
EDSA and for the framework it provides. I wish to comment on four
aspects of the bill.
With respect to section 3, on the Sense of the Congress on Energy
Security and Diplomacy, I strongly share the call to integrate energy
security into national security policy coordination by an interagency
grouping and by creation of a new position at the State Department. In
practice, there will be a need for energy security to be considered in
many of the bilateral policy groups as well, so the issue is not
marginalized, but these are important new measures. I would hope that
the Secretary of Energy will be a player on bilateral policies in the
Middle East, Central Asia, and other regions as well, so that the
Energy Department's expertise is enhanced and not diminished.
The Strategic Energy Partnerships contained in section 4 of the
bill will be essential. We may have some of these on paper, but they
need to have the diplomatic attention that has been lacking. The lack
of high-level engagement with Brazil is a case in point. Here I would
caution that we should not exclude dialog with countries that are
ineligible to receive economic or military assistance. This kind of
assistance gets suspended from time to time, with countries ranging
from Nigeria to Venezuela. We should not tie the hands of our diplomats
especially when we are using other measures like withholding assistance
to impact a country's behavior.
The Energy Crisis Response Mechanisms in section 5 are essential
for bringing China and India into the international collective energy
security system. Here, too, I would urge some flexibility to include
other nations such as Thailand, Singapore, or Indonesia in such a
system so we do not marginalize them or miss the chance to build an
even stronger collective energy security system with consuming nations
who will have a common interest with us.
Finally, with respect to section 6, I share the Chairman's view
that we need a new Hemispheric Energy Cooperation Forum with a strong
private sector forum. The United States needs to engage producing
countries with successful policies, such as Brazil, Colombia, and Peru,
as well as competitors like Venezuela. We need to engage the consuming
countries as well, in the Caribbean and Central America, as well as the
Southern Cone, to address policies that favor consumers. One lesson we
have learned from the HEI is that different regions of the hemisphere
have different needs--some focus on power generation, others on
integration of their grids, still others on access to oil and gas. The
United States may be able to forge stronger bonds, and frankly compete
more effectively on an energy security vision for the region, if we can
organize along subregional lines, and meet in plenary when the timing
is right. I think we have to recognize that while there is a state of
conflict among the producing nations, a hemisphere-wide forum will face
great challenges in achieving any meaningful consensus. I think we need
one, but I suggest the bill provide some flexibility in how it is
organized.
I have some concern, as a former Assistant Secretary of Energy,
with putting the State Department in charge of this effort with
Energy's cooperation, rather than the other way around. I recognize
there may be jurisdictional issues here. One factor I urge you to
consider is that we need to deepen the international energy diplomacy
capacity of the Department of Energy. Their relationships with civil
servants in ministries across the globe provide a bridge across changes
in government here and there. They can talk when the politics of
nonenergy issues obstruct dialog among the foreign ministries. It is
easier to get energy ministers together for regular meetings than
secretaries of state. Their staff should be expanded and serious
program budget established to make our cooperation more than
rhetorical. For true reform to be achieved, I agree that foreign
ministers, indeed heads of government will have to be involved. This
will be the key to integrating energy security into foreign policy. But
I urge some flexibility on the bureaucratic leadership provisions of
this section as well.
V. EXTERNAL POLICIES
In addressing challenges in Latin America, EDSA recognizes that the
United States cannot go it alone. I note with admiration that the
Chairman has placed an emphasis on integrating energy security into
NATO policy, and into dialog with China and India. I would only add
that we need to take an asymmetrical approach to our multilateral
diplomacy outside the energy sphere. We need to focus the United
States-European Union Dialog on democracy promotion and conflict
resolution in Latin America. We must also begin a dialog with China and
India on security and stability in energy-producing areas. Both are
great powers and we share an interest in stable energy supply and
conflict resolution. As these powers grow on the international stage,
we need to talk to them about their policies and how they interact with
the IMF, World Bank, and international multistakeholder efforts like
the Extractive Industries Transparency Initiative.
While it is the topic of many of your other hearings, it must be
said that regional approaches to combat the use of oil as a tool of
foreign policy are tactical measures to manage the near-term
consequences of the impact of oil wealth on many oil producing nations.
The energy dependency of the United States, our allies in Europe and
developed Asia, and the growing dependence of rising powers such as
China and India on imported oil, is rapidly eroding United States
global power and influence around the world. My colleague, Jan Kalicki,
and I, and a host of energy experts from around the world from
producing and consuming nations, analyzed the sources of these problems
and suggest a set of domestic and international solutions to them in a
book we coedited titled ``Energy and Security: Toward a New Foreign
Policy Strategy'' (Wilson Center Press/Johns Hopkins University Press,
2005). As the Chairman so eloquently argued in his Brookings speech
this year, a strategic approach to this program must focus on reducing
the importance of oil as a global commodity. While this is a 20- or 30-
year effort, a strategic energy policy that invests in new technology,
uses tax and regulatory policy to accelerate the deployment of
alternative fuels and vehicles, and drastically increase fuel
efficiency, and expands the system of collective energy security to
include China and India, is the only way to protect America's power and
influence for the long term. I commend the committee for its historic
attention to these fundamental issues.
The Chairman. Well, thank you very much, Mr. Goldwyn, for a
very comprehensive statement on our whole diplomacy, in
addition to the energy focus.
Let me recognize the distinguished ranking member of the
committee, Senator Biden, for his opening statement or
comments.
STATEMENT OF HON. JOSEPH R. BIDEN, JR., U.S. SENATOR FROM
DELAWARE
Senator Biden. Mr. Chairman, I apologize. I had to, attend
another meeting, and I apologize for being late. I look forward
to being able to ask some questions.
The Chairman. Let me just pragmatically suggest 5 minutes
on this first round. We're all sort of coming and going, and
the Chair will try to recognize people as they reappear, and
hopefully the panel will not be dismayed by these comings and
goings.
I want to start by asking this question. Essentially you
have mentioned, Mr. Carvalho, that it would be helpful even in
a bilateral relationship with Brazil, but you have extended
that to really all other countries in the hemisphere, to have
what might be a roundtable in which we would discuss how
Brazil's success in ethanol from sugar could be replicated by
many countries in Latin America, and for that matter, elsewhere
around the world.
And second, I ask you this. Could that roundtable, in
addition to production expertise, and all the problems Brazil
faced over 20 years which need not be faced by everybody else
if we learn the Brazilian story well, talk about flex fuel
cars? How are these going to be produced? Who will do that sort
of thing?
Because in our experiment here in the United States, in my
home State of Indiana, we're into production of corn ethanol in
a big way. But then it leads to a question: What about there
being only 75,000 flex fuel cars in the whole State of Indiana,
and only 32 filling stations that have a pump? In other words,
how do other countries, in addition to Brazil and the United
States, if we get into this dialog, replicate what is required
for that type of alternative situation?
Whether it's sugar ethanol or corn ethanol or cellulosic,
as we discussed with the first panel, all these potential
alternative fuels offer great possibilities for countries in
Latin America that just don't have any deposits of oil, but do
maybe have sugar or fiber that can yield ethanol, as we can in
50 States in the United States. In other words, theoretically
it's possible for every country to be involved in the energy
business, for new wealth to come to each of these countries in
a way that no one has envisioned until recently.
We have just discovered the Brazilian model in the last 120
days. My guess is that around this country virtually no one
knew 77 percent of the cars are flex fuel, or 52 percent of the
sugar crop goes to ethanol, or facts that all of us now rattle
off simply because this has become almost doctrine of how you
have success. Plus there has been some good offshore drilling
for oil, which is also very important in terms of bringing
about this energy independence.
Now, just physically, how do we get everybody around the
table? You are out there in the field now, in Brazil, and
you've come here today to dialog with us in the United States.
We're encouraging a lot more of that, which is good in itself,
a Brazilian-American relationship. And you suggest that we drop
the tariffs and the barriers. I endorsed that in the opening
statement.
But beyond that, how do we extend this to the rest of the
continent, to Central America?
Mr. de Carvalho. Well, Mr. Chairman, I think you are
extremely qualified to talk about it, and I have read carefully
your article, together with our Ambassador Abdenur, and I
congratulate you on----
The Chairman. He's a good man.
Mr. de Carvalho [continuing]. Your vision on energy. The
fact that the introduction of ethanol as a partial substitute
for gasoline, as we have said, there's no silver bullet at all,
but certainly ethanol can contribute. The problem is how we can
generalize production and then consumption of ethanol, and the
fact that the sustainable ethanol out of sugarcane cannot be
replicated outside the tropical world calls for the cellulosic
processing, ethanol production, which always has been 10 to 15
years ahead.
I have been dealing with this for the last 20 years. Always
it's 10 or 15 years ahead. But now I propose something
different. Why don't we join on research? Why don't we get
together and see what kind of improvements on research programs
can be made in order to accelerate? We cannot wait another 10
to 15 or 20 years to have ethanol production that can be
sustainable everywhere in the world. Because if we get this
process, we will develop ethanol production everywhere,
especially in the northern hemisphere. And then the market is
there, as I said. There is 450 billion gallons of gasoline
market to be conquered by ethanol.
Now, we should be collaborating. I think that we have to
recognize different problems. I think Argentina began a program
on ethanol, although in the early 1980s, but unfortunately
didn't go ahead. Colombia today has a very important program of
substitution, of blending ethanol in their gasolines, and the
sugar in-
dustry is transforming part of their sugar exports into ethanol
pro-
duction to use locally. I think Guatemala is in such a process.
In Mexico there is a study. I think we could be together in a
kind of association or whatever instrument, to get together to
work toward those goals.
There is much that needs to be done. We have never to
forget, though, that ethanol in production in the gasoline
market is not an economic proposition at the beginning. It
should be economic, certainly, but it's much more than that. It
is strategic.
So why have we had success in Brazil? Because that was a
strategic decision of the country, faced with necessity.
Necessity is what made our program a successful one today, but
it was not always a success, and several times people didn't
regard it as a viable program at all. So there must be
political leadership. Otherwise, there will be no place for
ethanol, because oil companies will never allow us to sell
ethanol if there is not a political mandate to do so.
And once you have the political mandate, then you will have
the possibility of improving your infrastructure of
distribution, of gas stations, etcetera, etcetera, etcetera.
But when people realize there is a political decision of the
country to get rid really of the oil ethics, as President Bush
has said, then things will fall.
When people realize that your 5 million flex fuel cars that
you have in the United States can be fueled by ethanol, the gas
stations will come, but not if you design a program that is
only fitted for the local production capacity. The market for
ethanol in the United States is much larger than the 7.5
billion gallons of ethanol that is due to be produced in 2012.
The actual market for gasoline today, which is the actual
potential market for ethanol, in the United States alone is 140
billion gallons a year. Imagine what you can do with that.
Imagine the kind of investment that people will be ready to
make if there is such a strategic political decision.
That's some of the thoughts that your provocation helps me
to----
The Chairman. Well, I'm glad to have provoked you into a
remarkable statement. I appreciate that.
Senator Biden.
Senator Biden. I would like to follow up, if I may, Mr.
Carvalho. What was the effect on the rural economies, not just
on the country's overall lack of dependence any longer on oil?
What were the spinoff effects on the economies in rural areas?
In other words, did it generate other economic benefits, in
addition to giving you the independence on balance of payments,
deficits, etcetera? Are there tangible effects in rural
communities?
Mr. de Carvalho. Well, thank you, Mr. Senator, for your
question. It's very simple. Sixty-five percent of all sugarcane
production, 70 percent of all sugar and ethanol production is
concentrated in the state of Sao Paulo.
If you go to the sugarcane areas in Sao Paulo, you will see
what we call the California of Brazil, because the distribution
of income, the generation of employment, No. 1--because it's a
high employment industry. Especially on the sugarcane fields,
we employ at least a million employees, direct employees, which
means some 3 to 4 million in direct employment, and where you
have the highest wage rates in agriculture sector in the whole
Brazil. You can see visually what happens in the places where
sugarcane comes.
There was a saying in the early part of our introduction of
a few programs, ethanol programs, in the late 1970s, early
1980s, whereas people said, ``No, sugarcane is going to destroy
food production,'' and this argument is being used today here
in our states elsewhere, which is not true. The capacity of the
agriculture is much more, agriculture is much more
sophisticated than that.
We are not substituting food production. We are the country
inducing further food production, because the income levels
rise and demand rises and people begin to produce much more
things.
Senator Biden. I was on one of the Sunday shows, and so I
missed a ``Meet The Press'' show on oil executives. Any of you
guys see that? I didn't, until I saw clips of it.
The oil executives were making the argument to Mr. Russert
on Sunday that corn ethanol wasn't a really good bet.
Everything from the price of corn chips to other food products
would go up, and that the total cost to the economy would be
significant in diverting this much of the agriculture
production.
I kind of found it interesting. At the same time they
talked about how they're going green. And that's why I asked
the question about the impact on rural communities, not only in
terms of employment in harvesting sugarcane and the refining
process, but the generated income in the region from refining--
that you would have a greater wealth in these communities.
That's why I asked the question. I found it fascinating that
there were many arguments why diversification was going to
drive up the prices.
The second question I have is on this point, if I may, for
another moment. You made the same statement that others have
made on this issue: That transition is not perceived to be in
the interest of the oil companies, notwithstanding the oil
companies are arguing that they are making transitions
themselves.
Did you find a necessity to provide a floor for the price
of oil, so that they couldn't drive this emerging market out of
business? In other words, in our case right now, it's
economical to go to corn ethanol, if oil is at $30 a barrel.
What was your experience with the industry in trying to retard
or encourage this transition?
Mr. de Carvalho. Well, Mr. Senator, we had that problem,
because all the ethanol industry was built in the late 1970s
and early 1980s. But when oil prices began to drop by the
middle of the 1980s, our ethanol program was practically
abundant. And we producers, we had to sustain the whole process
of building up our sugarcane fields, our plants, and they were
just on stream.
Fortunately enough, at that moment Soviet Union
disappeared, so a protected market for Cuba's sugar
disappeared, and there was an opportunity for our plants to
transform sugarcane into sugar and not ethanol, and we became
the leader in sugar exports during the 1990s. We were no one in
the sugar market in the early 1990s, and we finished the decade
being the number one exporter of sugar in the world.
But the fact is that we had a tremendous increasing
productivity. Our cost of production for 1,000 liters of
ethanol in the early 1980s was $850, and today I don't know
what is the cost of production because my associates, they
don't tell me what their cost of production is, but I know it's
below $200, constant dollars, of the same quantity of 1,000
liters.
So we will increase productivity. We will never say that I
would like to have a guaranteed minimum price of oil in order
for us to compete with it. No, that's not the way to proceed.
What we have is to believe that the cycle of petroleum is
changing and we will not have any more cheap oil. We have to
bet. The private industry is there to risk, and this risk we
can assume.
Senator Biden. Thank you. My time is up.
The Chairman. Thank you very much, Senator Biden.
Senator Chafee.
Senator Chafee. Thank you, Mr. Chairman, very much, and
welcome, distinguished panelists.
Senator Craig in the first panel said the fact remains
constant that our policies--and he said if they warrant that
term--toward Latin America don't seem to be working, and then
Mr. Goldwyn said what the United States lacks is a positive
agenda in the hemisphere, and then Mr. Goldwyn talked about our
counternarcotics efforts. Is that the area where we've really
gone wrong and alienated some of our friends in the hemisphere,
and what can we do better in that area?
Mr. Goldwyn. Well, I think we haven't gone wrong in seeking
counternarcotics cooperation. And I think some of the trade
preferences that we have offered, that we are about to
eliminate, to countries that try and switch from crops that
produce drugs to other ones, has been a good effort and maybe
we ought to continue it. But I think the problem is that we
haven't done a whole lot else.
I think with respect to that policy, the fact is that the
profit that farmers make from these alternative crops is well
below what they were making from growing coca, and the amount
of jobs created by those programs was pretty thin, and so it
wasn't very appealing. Other people were able to compete with
us. So I think we need to be more creative on our
counternarcotics program.
But I think the greatest problem is that we didn't do a
whole lot else, and the fact is that trade liberalization is a
wonderful thing but it has severe dislocation consequences and
we didn't really think those through. We didn't really engage
the region's governments on how they were dealing with it. And
so we have these large indigenous, marginalized populations
that have been out of the economy for years and are very
hostile to the Washington consensus.
So I think what we need is a policy that's a little bit
more creative. Now, that might be a better way to look at job
creation there. It might be lifting some of these trade
barriers, so they can grow sugar and corn and other things and
export them to the United States without facing our trade
barriers. Probably the best job creation policy that we could
have for the hemisphere, would be to lift the barriers we have
on the things that they make the most.
But I think that we also need to look at some positive
engagement in the region. Things like rural electrification
would make a huge difference. It would promote development in
areas that are pretty much off the grid. It's not needed in
every country, but it's needed in a lot of them.
I think our visa application process and educational
exchanges, where once upon a time we brought lots of people
from the hemisphere to our universities, and they went on to
become finance ministers and heads of state, well, now it's
kind of hard to get a visa to come to the United States and we
don't welcome a lot of those people here. We are basically
throwing away the seed corn of the future leaders. So I think
things along that line would give us a positive agenda in the
hemisphere.
Senator Chafee. Maybe I could ask the other panelists to
comment also on how we can have a better relationship in the
hemisphere. Mr. Cavallo? If you agree with Senator Craig and
Mr. Goldwyn's premise?
Mr. Cavallo. Yes, I agree with what Mr. Goldwyn said,
except that I don't think that it's trade liberalization that
caused the problems in Latin America. Actually I would say the
lack of trade liberalization in terms of the protection that
the United States still
provides to, for example, agricultural products that are
efficiently produced in Latin America, and also we have seen
the case of ethanol which is particularly related to the supply
of energy in the world.
Now, I think that the big mistakes of the United States in
dealing with Latin America refer to the management of a
financial crisis. The United States in the early 1990s offered
Latin American support through the Brady Plan and through the
joint participation in the negotiation of the Uruguay Round,
and also in the Initiative for the Americas, to launch reforms
that were not decided in Washington, that had been decided in
each one of the Latin American countries by their leaders, but
were in line with the prevalent views in the United States and
in the most advanced countries in the sense that a market-
oriented system would be more efficient and conducive to
improved growth and wealth in all the countries.
Now, the United States was not ready enough, or more than
the United States, the IMF, to work together with the countries
at a time of crisis to prevent the very negative effect of
financial crisis in the region. That was particularly the case
of Argentina.
For example, all the problems that the Southern Cone is now
facing in terms of energy supply relates to the combination of
``pesification'' and devaluation that came as a consequence of
the financial crisis in Argentina. But the United States and
the IMF could have helped Argentina to have a smooth transition
to a new set of policies by the end of 2001 and 2002, but
instead of doing that, it preferred to let Argentina go to
hell, you know.
So I think that the policy of the United States vis-a-vis
Latin America should pay more attention to global stability of
the countries and be ready to help in critical moments, to
prevent the sort of climate of confrontation that we now have
in the hemisphere.
Senator Chafee. Thank you very much. I see my time has
expired. Thank you.
Senator Coleman. Thank you. There's so much that I want to
ask and so little time. I've just got to make just a general
statement beforehand.
We talk about American policy, and I would agree that we
need a more positive agenda, but I think to blame trade
liberalization on some of the challenges we're seeing with
populist regimes in Latin America, I'm not sure I necessarily
buy that. With all the negatives, there are a lot of positives
going on, too.
Uribe just gets reelected. Humala is rejected in Peru. John
Danilovich with the Millennium Challenge Account is doing some
tremendous things, and brings great experience to that. The
election of Bachelet in Chile and our relationship with Tabare
Vazquez in Uruguay.
And I would say respectfully, Mr. Cavallo, that the
concerns that Argentina has had about its fiscal situation is
not an IMF problem. I mean, part of what we're saying is, you
know, people have to act responsibly. When Uruguay had a
problem, we were there.
So it's easier to paint with a broad brush these challenges
in the region, but I think even the challenges ultimately
perhaps develop into opportunities. I think that Brazil and
Colombia, and even Spain is now looking at Chavez as a problem,
and it's not a United States problem. It's a problem of
instability in the region. And so when Morales moves against
the oil fields, the Brazilian interests, all of a sudden the
Brazilians have an awakening.
And we have got, you know, Colombia wants to do an
agreement, and I hope that we get to it, and there are some
challenges with that. And Peru, Bolivia, looking at the
Millennium Challenge Account, we've got to deal with that. So I
think there's a range of opportunity. I think it's a little
simplistic to kind of look at the United States as the big bad
guy here and somehow the cause of some of the challenges. There
are some deep-seated issues in Latin America. And we need to be
at the table, and I certainly agree with that.
Let me ask, Mr. de Carvalho, one of the things you talked
about was in regard to ethanol, the service stations. We talked
about the challenge. Half the ethanol, half the E85 pumps in
America are in my State, Minnesota. So as we talk about flex
fuel engines, we talk about production of ethanol, and you're
right on the money, you know. We talked about 7.5 billion
gallons in 2010 as some high watermark. We're going to exceed
that. If we did nothing, we'll be at 14 billion gallons, and it
can't all be done by corn and soybeans.
And I want to reflect on the very good question by the
ranking member. You know, this issue about what kind of
economic, well, I can tell you that $100 million of economic
activity, now close to probably $150 million, in Fairmont, MN
is a big deal. It's a big deal in Austin, MN. It's a big deal
in Benson, MN. It's a big deal getting capital investment in
rural communities that are growing jobs and then raising
prices, so I think there's great opportunity.
But the question I have is, for Brazil, we face an issue
here with the lack of infrastructure, and I thought you made
the comment that the stations there will come. Did Brazil do
anything to support that infrastructure, to create that
infrastructure? What did the Government do to provide greater
opportunity for distribution of ethanol?
Mr. de Carvalho. To remember the circumstances at the time
when the program was launched, second half of 1970s, early
1980s, the 100 percent ethanol car was launched in 1979 on the
second oil shock. When you are blending ethanol with gasoline
it's a very simple operation, economically speaking. But when
you are selling the 100 percent ethanol, which in your case is
the E85, you have to know that you have to price it accordingly
with the mileage of each one of those fuels.
Although ethanol is a fantastic enhancer to driveability,
it has a minus component, which is the fact that you drive less
miles per gallon than with gasoline, and this differential must
be seen at the price at the gas station. It means that for you
to sell E85, you have to price it below 70 percent of the
gasoline prices.
Senator Coleman. But my question, if I may, in the limited
time I have, the presence of the pump itself, the actual
infrastructure--in other words, one of the challenges we have
is the lack of E85 pumps in places, so----
Mr. de Carvalho. That is simple. We had this special
gasoline at the time, the blue gasoline, whatever they were
called at the time. They were transformed into ethanol deposit
and pump. The pump is there. The problem is the distribution
system, but the pump is there.
They have at least four or five deposits at the gas
station, so you can put one of them dedicated to ethanol, and
you arrange some of the rubber, some of the material, to be
more consistent with the corrosive action of the ethanol which
is higher than gasoline. But this is a very simple problem.
The problem is on the distribution system, the basis, how
you distribute it. For instance, you do have a problem here
because you do not carry ethanol on your pipeline system, and
that's something incredible, because we do transport our
ethanol on our pipeline system, and Petrobras has an experience
of 30 years of doing so. But, unfortunately for us, you do not
do so, which makes the markets of both East and West Coast
extremely accessible to our ethanol because of the general
costs of distribution.
Now, what you have to do is, you have to have volume of
production, and price competitive with gasoline, but because of
your low taxes on gasoline it's difficult to arrive at such a
situation under present production circumstances and then the
protection, because protection, as we know, induces higher
prices. Higher prices does not induce for the consumption of
ethanol on your 5 million flex fuel vehicles that you have
today. That could represent at least 2 to 3 billion liters,
gallons, of ethanol consumption, the existing flex fuel fleet
you have in the United States.
Senator Nelson. Senator Coleman, we're down to 2\1/2\
minutes to vote.
Senator Coleman. All right. I would just ask this question,
and the ranking member will recess the committee until the
chairman comes back, so that we can cast this vote on the
floor.
What I would like for you to state for the record, is the
threat that Chavez makes in the cutoff of the oil--we discussed
it earlier, about how he would give up all of the
infrastructure that he has in the United States through the
Citgo stations and so forth--what is the timing when he would,
in your opinion, make good on that threat to cut off the oil to
the United States? That's what I would like you to state for
the record.
Senator Biden. Please. Fire away.
Mr. Giusti. Fire away? I personally think that it's highly
unlikely that we're going to see anything of that kind in the
foreseeable future, in the next few years. And the reason, the
reason is that those exports are not only necessary for
Venezuela, but they do not have alternative destinations
because of the sour and heavy nature of the crudes that are
exported to the United States.
And the second thing, which I also mentioned in my
statement, had to do with Citgo. And the threat that they're
going to shut down the refineries of Citgo I think is also very
highly unlikely because the stations, the outlets, are not
owned by Petroleos de Venezuela, and as a result of that those
are contracts with clients.
So in the event, unlikely event, that they would shut down
the refineries, there will be a breach of thousands of
contracts, and I cannot foresee how that could be managed
legally, to have a breach of 10, 12, 13,000 contracts in the
United States. I think this is highly unlikely. This is my
answer to that.
Mr. Goldwyn. If I could add to it, I agree with everything,
with what Luis Giusti has said. Chavez often couches his threat
with ``if we are attacked, if something happens to us, then we
will cut off the oil.'' And I really think it is only in the
face of an attack by the United States or an embargo or a
direct action by us that he would actually do this.
The Chairman. Well, I appreciate your continuing on as we
are coming and going. Let me commence another round of
questioning at this point, and simply explore the issue further
with you, Mr. Goldwyn. You made the three points as to why
things have not gone well for the United States diplomacy
overall, the first point being we've not paid much attention to
Latin America.
And there have been, most of us have noticed, we've had
testimony, we were all deeply involved in election campaigns in
Central America in particular, occasionally South America, in
the 1980s. We saw a lot of visitation by members of this
committee, by members of the Senate, various groups. But in the
1990s we became preoccupied with the fall of the Soviet Union,
with Russia, with Eastern Europe, with other implications of
that situation, and unfortunately there was a lapse of
attention.
The energy situation for us is imperative, but likewise, as
you have suggested, poverty and income and so forth are pretty
important for all of us, whether we're in the United States or
in Central or South America. Suddenly we have the possibilities
of using agriculture for industry, whether it's the sugar crop
in the tropical areas or cellulosic fiber in the nontropical
areas. In our country corn and soybeans come to mind as
possibilities.
I notice, for instance, just in rural counties in Indiana
where the ethanol is about to be produced--it hasn't quite
gotten there yet, but it will in the next few months--the
injection of that much new income into a small county in
Indiana, plus the enhanced value of the corn that is soaked up
from all around, are going to have huge implications that
people in our State have not quite grasped yet. They will. It
will be almost like oil wealth coming suddenly to a country
that has something of this sort. But that could also happen
throughout Latin America.
Diplomatically, how do we get this to happen? Who calls the
meeting? Who begins to integrate a structure of relationships?
As people like myself and even the President have inquired,
what if we drop the tariff with regard to ethanol vis-a-vis
Brazil?
Countries in Central America who are part of our new
Central American Free Trade Agreement will say, ``Now, hang on
here for just a minute. We think that may disadvantage us.''
And they reason that really won't work for them.
We have sugar producers in the United States who will say,
``Now, hang on,'' again, because here sugar is going to be
coming in under a different guise. And we say, ``Well, you
folks just don't get it. We have an energy crisis in the
country. It's not just a sugar subsidy problem for 1,100 farms
that are left in the South, that deal with this sort of
thing.''
In other words, the vested interests in each of these cases
are entrenched with political clout in their governments, ours
included. However, is it a possibility that in fact the United
States and other countries can begin to talk about new wealth
for every country and the possibilities of sharing expertise,
and all of the lessons we have learned? Mr. Carvalho's
situation went from $800 to $200. There is no need for us all
to go through that whole experiment again. Does this make a
difference, do you think, ultimately, in the overall diplomatic
situation, in addition to our energy predicament?
Mr. Goldwyn. Mr. Chairman, I think that it could. I think
it could really be transforming for our hemispheric policy. Let
me address two questions. First is how do you do it, and then
what is the impact.
There are three options for how you, in a sense, call this
meeting. There is the now-dormant Hemispheric Energy
Initiative, the spinoff of the Summit of the Americas. It's
dormant because the United States and Venezuela are the
cochairs. But it doesn't mean that you can't have a hemispheric
summit called by the United States and Brazil, you know, with
this topic. But that's a meeting of energy ministers. That's
one option.
The other is the ad hoc approach. We have a global
partnership on carbon sequestration. We've got a global
partnership on nuclear energy. There's no reason why we can't
have a hemispheric partnership on biofuels or alternative fuels
and energy, and we can invite to it anybody who wants to
participate.
But as you have said, Mr. Chairman, the focus here isn't on
the producers, it's also on the consumers. It's all these
countries in Central America and the Caribbean that are
terribly squeezed by product prices right now, and it's all the
countries that can produce fuel. So you could do that on an ad
hoc basis----
The Chairman. That's the point I have often made, that
there are some consumers here in addition to all the producers
that we're talking about.
Mr. Goldwyn. More consumers than producers, and a lot of
the producers subsidize the cost of the products in their own
country, so it's a tax on them, too. And so that's why we
always focus on the big guys, but there are greater numbers in
focusing on the consumers.
And a third way is really to create a new forum, the way
you've suggested in your bill, which would be to have our State
Department's trade ministries and other people together at the
table.
I think one of those approaches is the way to do it. You
can bridge these differences and these entrenched interests by
looking at what the potential market is for alternative fuels
in the hemisphere, what the potential could be, what measures
like our renewable fuel standard could drive you there, and
whether they are high enough. You might show that the pie is
big enough for everybody to produce or for people to produce
more without severely damaging United States sugar interests or
damaging the Central American interests. There
might be a hook to include more countries in some sort of a
regional trade agreement, even though the authority is about to
expire, which is based on expanding the pie rather than the way
people tend to look at it right now.
The Chairman. Mr. Giusti, do you have a comment in this
area?
Mr. Giusti. Yes. Thank you very much, Mr. Chairman. I would
like to say that I'm sure that many good things can be done
along the lines that David has been mentioning, but I would not
cast in general a negative outlook on the region. You were not
here when Senator Coleman spoke, but I share a lot of his
views. There are many good stories there.
First of all, the FTA of Peru, the FTA of Columbia, even
Ecuador, I think some of the things are going to be solved and
that will come to terms also. The story in Colombia is an
excellent story concerning the reform, the new institutional
framework, the fact that companies are flocking there, it's
going to become an exporter. We have the case of Trinidad-
Tobago, not being Latin America, which is a great story. Brazil
is an excellent story in many ways.
And I think we have to be careful not to follow too much
the very loud voices that capture most of the headlines,
because there are a lot of things that can be said at that
moment. Because everybody says, you know, the White House,
instead of really what it is, which is the multilateral
institutions, and there are consequences.
But a lot of the countries have learned that they really
have to reinforce their institutional framework, and they're
making great progress. So I think there is room enough to
really do a lot of good things in terms of diplomacy from the
United States.
The Chairman. Mr. Cavallo.
Mr. Cavallo. Yes, I agree that there is room for reviving
the trade negotiations, starting with or focusing on the energy
issues, but I think the only chance of attracting complete
interest by the Latin American countries is to start linking
energy to agriculture, and I think ethanol could be a good
bridge between the two subjects.
Of course, the reason why Free Trade of the Americas has
not become very interesting for Brazil or for Argentina or for
other efficient producers of agricultural products was because
of the fact that agriculture is always left for the discussion
in the Doha Round. Now, I suggest that the United States starts
working together with Latin America, as it did in the late
1980s, early 1990s, at the time of the Uruguay Round, to try to
cooperate, to get free trade of agriculture products in the
Doha Round, and to start discussing these issues within the
hemisphere linked to energy.
The Chairman. Along that line, do I hear you right? We
don't know how the Doha Round will come out. Some are very
pessimistic. But in the meanwhile, is it conceivable we could
have a free trade agreement on agriculture in the hemisphere?
Mr. Cavallo. Yes, that would be a big step.
The Chairman. This need not be a total comprehensive
agreement of everything in the world but, as you are saying,
there is clearly a link with agriculture and energy.
Mr. Cavallo. And energy.
The Chairman. And maybe we all have something to say about
that, but the point that some of you have made, is to show some
interest on the part of the United States in other countries in
the hemisphere, to indicate that we really care, that we have a
national interest in this. The consensus would be in fact a
free trade agreement for agriculture.
Now, somebody might say, ``Oh, why don't we try out
something else,'' but let's sort of keep it simple for the
moment. Doha is all wrapped around agriculture because the
world has simply got to solve that before we take on
automobiles or pharmaceuticals or everything else.
Agriculture does speak to the plight of many people who are
very poor, and some of them who are not doing too well in the
United States, for that matter. When I talk about counties in
which suddenly an ethanol plant arrives, why, that may be a
deliverance in terms of jobs as well as revenue in the banks
and various other things in our country. So I am intrigued by
that slice of the pie that you have mentioned. It may be
helpful for us here.
Mr. Cavallo. Yes, and let me add one point. You should not
be accepting on the effectiveness, or you should be clear that
I think Hugo Chavez has not been effective in convincing the
rest of South America, particularly because of the consequences
for the energy-scarce countries of Latin America of the actions
he is implementing, and also he is recommending to Evo Morales.
The Chairman. Taking that principle of our relationship
with Venezuela which you were discussing as I was coming in,
winding up that thought, what if we were to have this dialog
with all the countries in the hemisphere about agriculture and
energy?
There is no reason why we could not be of help to Venezuela
in this situation, you know, as opposed to an adversarial
situation in which we say, ``Are you about to cut off our
oil?'' or what have you, and accept the fact that that is
unlikely, as many of you have mentioned, because of the
refinery problems and because of many problems of this sort,
and at the same time welcome Venezuela around the table,
welcome Evo Morales around the table.
Now, these folks might not know exactly what to do and say
in these situations. They might not come. They might advise
others to stay away. But, nevertheless, it's an affirmative
situation in which, as opposed to picking out places where the
sky may fall, we are really trying to address the situations of
many countries with whom our relationships might be
refurbished.
So I have envisioned this as a way and I think all of you
are expressing this--that we meet problems that are
strategically urgent with regard to energy in the world. In
other hearings, for example, we have heard that maybe three-
quarters of all the oil reserves in the world are really now
governed by states, by people like Vladimir Putin, or others
who may be in charge, or Iran currently, and so forth, as
opposed to there being a free-flowing market.
The testimony used to be, ``After all, this is very
fungible. It shows up one place, doesn't show up someplace
else.'' But what if, as is being suggested, governments as a
matter of policy simply don't develop reserves, or restrict
certain areas from receiving whatever they are?
We are about to hear testimony again from Europeans that
they are not only disturbed, but in some cases frightened, by
the fact that President Putin suggested his emphasis might go
to the Far East. Our testifiers would say, ``Well, that isn't
practical. The natural gas lines all go to Europe, and oil
might go there.'' But nevertheless, even the implication that
there's a possibility, that somehow if you're 80 percent
dependent on natural gas from Russia, as Hungarians are, for
example, or even 40 percent in Germany, that you might see your
industry in real disarray while one of these experiments went
on, is worrisome in this context.
In our hemisphere we don't have that kind of urgency for
the moment, although in our own national situation in the
United States we do have a sense of urgency. It's most often
expressed by people coming into our hearings and asking, ``Are
the oil companies gouging me at the pump locally?'' or some
situation of that variety, as opposed to the overall problem of
the difference between demand and supply in the world being as
narrow as you have all pointed out, and the events of the day
causing spikes and difficulties.
We've had a revelation, I think, as we've heard about
Brazil. That's why we've focused so much on that today. The
Ambassador of Brazil has visited with me and with others.
Brazilian officials are noticing a more friendly attitude, that
we're deeply interested in what's happening. And so as a
result, why, the visitations have increased substantially.
We've always been interested in Brazil, but maybe not with that
intensity for a while.
I wrote an op-ed for the Miami Herald with the Ambassador
of Brazil, just to illustrate the fact that two people can
actually pen an article together that other people in the
hemisphere might read. Just leaving aside whatever we said,
just the fact that we were doing it, and the fact that this is
a unique experience, illustrates what you have been saying
about lack of attention, lack of intensity.
This is why I'm trying to think organizationally with our
State Department. What if we do set up this new bureau and we
do have this focus? Somebody has to staff it. Somebody has to
call the meetings. Our role as legislators is really not
administrative. We are not over there day-by-day, sort of doing
the Lord's work in our diplomacy. Through these hearings we try
to bring advice from people like yourselves that have seen a
good bit of this situation, that might be helpful.
Do you have any further comment, Mr. Carvalho? I've already
asked you so many questions, but you've been most informative.
Mr. de Carvalho. Mr. Chairman, you have said a lot of very
important things. Let's take Minister Cavallo saying about
agriculture and energy. First of all, we must understand what
is the oil, what are we living.
We are living in a situation whereas there is no more
surplus cushion production capacity, as you have said. It has
been sharply reduced, and essentially all the oil producers
don't want to have discussion. It means that increasingly oil
will be more and more scarce, and there will be substitution
for natural gas where it's possible to do so, or not. But then
Europeans are preoccupied with the Ukrainian situation.
Now, what is oil, or what is natural gas, or what is coal?
It's photosynthesis that was buried in the soil for 500 million
years. Now, we have the possibility of having the
photosynthesis in every agricultural field in the world produce
energy.
Now, what is the problem with agriculture today? And this
is a very important point, and I think that Mr. Cavallo
mentioned it, and I think that David mentioned it also. It is
the fact that with present agricultural technology you can
produce anything. The specter of hunger, the specter of the
population growing and not growing food production, that's
something of the past. We have proven that we can produce
whatever product is necessary from agriculture. The problem is
income distribution that doesn't lead people to have access to
what can be produced, which is a completely different problem.
Now, what is the problem of developing underdeveloped
countries, is that those countries are able to produce
agricultural products. That's what they are able to do. They
cannot produce big computers. They cannot produce the big
Mercedes, beautiful cars. But they can produce grains, they can
produce energy, but they are induced not to produce because
there are no markets, because the present agricultural markets
are closed by the protection of the developing Northern
Hemisphere countries. That's true. That's what happens. Where
you have tariff peaks, where you have real protection which
does not appear, is on agricultural products.
Now, if you take the $360 billion figure for subsidies in
Europe and North America, you will understand that it's
impossible for those countries in the south to produce products
because markets are closed. They are only open when there is a
clear interest in having this market open. The rule is to close
the market.
We are seeing the present difficulties of the Doha Round of
the negotiations. Unfortunately, Mr. Chairman, you are not
there on the negotiations table, because I would love to have
you on the negotiations table on the side of the U.S.
Government, because your position is so clear, so open.
But in energy we can have a differential. Let's open up.
Let's not pay the farmer not to produce, which is nonsense in
the world. You pay the guy not to use the land, but let's use
the land to produce energy. Let's put the subsidies not to
produce competing food produces, let's use these subsidies to
begin ethanol and biodiesel production, and some day in the
future these subsidies will disappear.
Let's use the subsidies, not as a permanent defense to
nonproductive production, agricultural production, but to
induce and to enhance processes that need some subsidy to begin
with, and then, 10 years from now, 5 years from now, 15 years
from now, we will have increasing independence and reliability
on renewable fuels to substitute the fossil ones. We have
everything. We have the lands. We have the technology, and some
of it must be developed. We have the goodwill of people. Why
don't we do that?
So I strongly support your act, Mr. Chairman, to get
together people and to try to design programs and actions that
can produce this result.
Mr. Giusti. Could I make a brief comment, Mr. Chairman?
The Chairman. Please.
Mr. Giusti. This is extremely important, of course, the
ethanol, and I support it in full, but we should not lose the
perspective of the global picture. There is abundant oil. There
is abundant gas. We may be a little bit confused because of the
market that we're seeing now, but the market will change. It
would take a long time to analyze the market in detail, which I
of course will not try to do here, but we can speculate about
that.
But one thing is clear: Oil, the oil is there. If you take
proven and probable reserves and you add them up, and even
taking the very ambitious profile of the International Energy
Agency, oil would last for the next 50 years, even without
exploration. That is not the real question, and the big oil
issue is not a question.
The real question is, is there going to be the right
paradigm in terms of the cooperation between the national oil
companies and the international oil companies? Those two groups
have their own problems. The problem and the limitation of the
IOCs is access to reserves.
But then the national oil companies do not have the above
ground resources, which is market savvy, financial capacity,
technology, managerial and operational expertise. Some of them
have. The high price is not helping, because people tend to
feel that they can do everything on their own.
But I think we will evolve into a new stage when the market
changes, where once again this cooperation is going to have to
come about, because at the end the question is, who is in
charge of supplying oil to the world? Nobody. It's only actors
that have common interests that will bring about the
development of these resources. And even when ethanol and other
sources are going to be extremely important in the future, we
still are hanging in with 25 or 30 years or even more of fossil
fuels, especially oil and gas, and we have to deal with those.
The Chairman. That's a very important point, and I suppose
that each of you would agree with this idea. To the extent,
however, that we have vital ethanol production and alternative
fuels and so forth, we're likely to have more civil
conversation with all the nations about oil. That is our
predicament, given the fact that we don't have any
alternatives, that some people, to use a cliche, have us over
the barrel for the moment.
But if in fact it was apparent that there are all sorts of
ways that we can fuel our cars and other things, then oil is
only one of the options we have. There probably will be a lot
of years to get to that point.
On that very score, let's say that we got this energy-
agriculture dialog going. Would other countries, other than the
United States and Latin America, be more effective, say, in
visiting with the Mexicans about PEMEX, just to take that
example?
I have visited with the Mexicans, and we even raised this
in this committee. They advised, ``Why don't you suggest that
the United States might invest $10 billion in PEMEX, to try to
get the facilities up-to-date, to get the production going
again, to maybe double the production? It would be good for
Mexico, for the GNP of that state and all its citizens, quite
apart from the hemisphere.'' So I raised that issue in a public
hearing like this.
Well, no one in the United States pays any attention to
such a thought, but they do in Mexico, and it's all adverse,
with people indicating that ``this is our national heritage.
This is almost like Mexican blood in the soil. We don't want
Americans fooling around with that.'' I understand that.
There's a high degree of nationalistic fervor surrounding this
subject.
But at the same time, in terms of the best interests of
Mexico, the hemisphere, the United States, all the rest of us,
it would be helpful if in fact they doubled their production,
improved their facilities, and increased their national wealth.
But some of you make the point, I think correctly, that maybe
the posture of the United States vis-a-vis all the countries in
the hemisphere is not quite the posture right now that leads
anyone to do reasonable things.
I'm just wondering, is there anybody in Latin America who
could visit with the Mexicans about this situation?
Mr. Giusti. I am sure that, if I may, I am sure that a lot
can be done, and the reason is very simple. The Mexicans have
realized, in a very hard way, that they have to change.
This is a country, this is a company, PEMEX, that has
consumed 15 billion barrels of oil reserves in the past 15
years. They have gone down from 27 billion barrels to 12. They
are seeing their future as an oil country in jeopardy, and
unless they do something--because when you have to go and drill
a well in these areas where they have expectations, in the Gulf
of Mexico, that well will cost you even $100 million. They
don't have the money. They know they need it.
I'm sure that anybody who is elected now in Mexico is going
to face a very, very difficult dilemma. All of these roots that
come from the early 20th century are going to have to be
revised, because this nationalism is really, the way it's
conceived now, it's really going to destroy the possibilities
of Mexico. So I think there is room there, and especially with
some of the candidates that really have a clear vision of this.
Mr. Goldwyn. If I can join in, Mr. Chairman, I think
Petrobras would probably be one company that could talk to
PEMEX. Luis Tellez contributed a chapter to a book I coedited
on energy and security. He is the former energy minister for
Mexico.
He looked to Norway as an example of how Mexico could find
a vision for state-led development of the energy sector and
have the security that they wouldn't lose control of the
resources, but they could develop them in a model that might be
more palatable to them. It could be the former Venezuelan
model, it could be the Petrobras model, or the Norwegian model.
He argues that more than anything else, to leave the resources
for this generation of Mexicans in the ground rather than
develop it would be a waste.
If I could offer a quick comment on your previous point. If
I understood you correctly, what you're proposing would be
really a phenomenal act of geopolitical jujitsu. Because I
think what you were suggesting is that we could mobilize the
nongovernment-controlled sectors of the oil producers, and make
the farmers into the energy producers, and create a
constituency in each of those countries which was pro-free
trade, which would be very hard for those governments to resist
because they would have to in a sense oppose their own farmers
who wanted to export fuel or export crops for fuel.
We have to solve the cellulosic ethanol problem in order to
really be able to produce at that scale and price-competitive,
but it's such a big idea, if that's what you're talking about,
that I think it's certainly worth talking about because that
could really be transforming not only in the hemisphere but
also in Africa.
The Chairman. Well, I thank you for illuminating the idea
and endorsing it so well.
Let me thank each one of you. We have another vote, and
then we will have another vote, so I don't want to detain you,
but we really appreciate so much your testimony, your papers as
well as your forthcoming responses. We look forward to calling
upon you again, if we may.
So saying, our hearing is adjourned.
[Whereupon, at 11:00 a.m., the hearing was adjourned.]
----------
Additional Material Submitted for the Record
Prepared Statement of Eric Farnsworth, Vice President, Council of the
Americas
The Council of the Americas (Council) appreciates the request of
the Senate Foreign Relations Committee to provide testimony concerning
energy security in Latin America and to offer comments in relation to
the ``Energy Diplomacy and Security Act,'' S. 2435. For over 40 years,
the Council has been a leading voice for policy and business in the
Western Hemisphere. Our members include over 170 prominent companies
invested and doing business in the Americas, with a mandate to promote
policy and commercial partnership in the Americas based on democracy,
open markets, and the rule of law.
Since mid-2004, the Council has led an Energy Action Group, a
leading public-private dialog designed to focus attention on the
strategic issues at the heart of hemispheric energy issues, while
providing concrete recommendations to policy makers for the outlines of
a Western Hemisphere energy strategy. On this basis, in late 2005 the
Council issued a well-received report with recommendations, ``Energy in
the Americas: Building a Lasting Partnership for Security and
Prosperity,'' which called attention to the vital issues at stake while
highlighting areas of partnership and convergence as well as areas for
further attention.
ENERGY IN THE WESTERN HEMISPHERE IS A STRATEGIC MATTER FOR THE UNITED
STATES
Despite other issues around the globe that demand the attention of
policy makers, energy in the Western Hemisphere--whether we realize it
or not--is of the highest strategic importance to the United States. We
are the world's largest energy user; even if we are overtaken at some
point by China, our own energy needs will continue to increase as both
our economy and population grow. At the same time, though we ourselves
have abundant energy resources including oil, gas, coal, and a growing
potential for alternatives, we are not self-sufficient, and self-
sufficiency is not a realistic goal. We are energy interdependent, and
to meet our needs, we will have to continue to rely on imported energy.
The perception is that most of our imported energy comes from the
Middle East, a region of constant political and military risk, making
supplies uncertain. In fact, three of our top five sources of imported
energy are in the Western Hemisphere: Canada, Mexico, and Venezuela
(along with Saudi Arabia and Nigeria), making the Western Hemisphere a
key to our economic well-being and strategic interests. If existing
trends continue until 2025 or 2030, the increasing U.S. demand for
energy can actually be met by sources from our own hemisphere, but only
if the massive investments are mobilized that will be required to fully
develop these impressive hemispheric resources. As a result, all other
things equal, a more coordinated, vibrant energy partnership in the
Americas based on market forces would support broader U.S. economic and
strategic interests.
At the same time, the democratic development of Latin America and
the Caribbean is a top regional priority for United States policy
makers on a bipartisan basis, and enhanced wealth creation in the
hemisphere is a critical component for that development. In fact, given
significant concern in Washington with Latin America's supposed ongoing
``lurch to the left,'' democratic development is perhaps the top
regional issue facing U.S. policy makers. To put things into
perspective, the World Bank recently reported that between 1980 and
2000, per capita GDP in Latin America grew, in total, less than one
percent. On the other hand, over the same period of time China enjoyed
per capita GDP growth of over 8 percent per year. It is in addressing
this development gap, which increases every year, that energy in the
Americas becomes so important, and so relevant to broader U.S.
interests in the hemisphere.
ENERGY RESOURCES EXIST, THE QUESTION IS INVESTMENT
Fortunately, including Canada's massive oil sands deposits,
recoverable energy reserves in the Western Hemisphere surpass even the
Middle East and dwarf other regions of the world. In terms of proven
conventional reserves in the Western Hemisphere, Venezuela is at the
top, followed by the United States, Mexico, Brazil, and Ecuador, and
Brazil has also just announced promising additional finds. The
hemisphere also enjoys plentiful deposits of natural gas--a key fuel
source in terms of electric power generation. After the United States,
Venezuela again has the highest level, followed in order by Canada,
Bolivia, Trinidad and Tobago, and Mexico. As well, significant
potential exists to produce and consume alternative fuel sources, such
as ethanol, from Brazil, Colombia, and elsewhere, or coal bed methane
from Canada. In terms of coal, the United States remains well ahead of
our hemispheric neighbors in both production and consumption.
These resources by any measure can play an important, if not
paramount, role in regional development if produced and consumed
wisely. On the supply side, absent energy, the development prospects
for a nation such as Bolivia, South America's poorest nation, or
Ecuador, are uncertain at best. Nonetheless, recent government actions
that aggressively target foreign energy investors, change the rules of
the game mid-stream, or unduly politicize the energy sector and
actively discourage the direct foreign investment that is required to
identify, finance, and manage the energy resources that are
increasingly difficult, for technological, geologic, or other reasons,
to develop. In a global economy, such investment will flow elsewhere,
where the risk-reward profile is more favorable.
On the demand side in the hemisphere, without greater attention to
market efficiency in the development and utilization of energy
resources, it will be more difficult for producers and consumers alike
to build regional competitiveness in a global economy.
This directly impacts the hemisphere's ability to compete
successfully against the rapidly modernizing economic giants of China
and India, as well as a host of other nations. For example, Chile is
now looking to ship liquefied natural gas from East Asia, incurring
transportation and infrastructure costs, rather than pipe it from its
neighbors, because regional gas supplies are subject to political
manipulation and thus unreliable. Once new supplier relationships are
established with the Far East, South American producers will be less
able to sell their own products efficiently to their neighbors.
Clearly, there would appear to be a mutuality of long-term
interests in the hemisphere in building energy partnership in the
Americas.
The Western Hemisphere is part of a global economy, competing for
the same marginal investment dollars as other geographic regions. For
investors to invest, the risk-adjusted climate must be welcoming. It is
therefore incumbent upon nations in the hemisphere wishing to develop
their natural resources who might otherwise lack technical and
managerial expertise, as well as significant capital of their own, to
create an investment climate whereby foreign energy companies can work
in partnership with local governments to develop their resources in a
mutually beneficial manner. Attention to industry-specific and more
general investment climate issues is needed: Improvements in education,
training, and the rule of law; regulatory certainty; nondiscriminatory
and stable tax regimes; effective personal security; anticorruption;
and effective dispute resolution. Those countries which have paid
attention to these matters have seen investments increase. As well,
international financing institutions have an important role to play in
mobilizing capital for investment.
RECOMMENDATIONS
Several recommendations flow from this analysis. First, it is self-
evident that maintenance of a secure energy supply from foreign sources
is a strategic matter for the United States, and energy in the Americas
must therefore be a priority. Increasing partnership in hemispheric
energy matters must be an important part of our overall hemispheric
policy approach, not an afterthought or taken for granted. A balanced,
engaged approach is needed.
Second, in a global environment, competitiveness is perhaps the key
issue facing the hemisphere. High direct or indirect energy costs such
as petroleum in the transport sector or power generation, respectively,
impact all energy users, making the region a less attractive place to
do business, and quality of life suffers, too. As well, investment
climates that are unattractive compared to other countries and regions
will not attract the direct foreign and domestic investment required to
develop either the energy resources mentioned above nor the broader
economy. Mexico, for example, despite sitting on sufficient natural gas
reserves, actually imports natural gas and has done so since 2000. This
directly impacts Mexico's national income accounts and their national
competitiveness profile at a time when that nation, even with the NAFTA
relationship with the United States and Canada, faces a direct economic
challenge from China. Hopefully, we will see forward movement on these
issues in Mexico after their elections in less than 2 weeks, but that
remains to be seen, and of course it is up to Mexicans themselves to
determine how best to develop their own energy resources.
In the North American context, energy issues are an important part
of the Security and Prosperity Partnership (SPP) which the
administration has rightfully made a priority, and which the Council
has strongly endorsed. As in other hemispheric nations, it is difficult
to see how Mexico develops if its energy reserves continue to fall due
to a lack of investment in the energy sector, and an underdeveloped
Mexico is of strategic concern to the United States, particularly in
relation to the vexing issue of illegal immigration. But it is not just
Mexico; it will be impossible to fully develop Canada's energy
resources, too, unless the three governments find a means whereby labor
markets and products to service the fields are made more flexible
through the SPP or alternative means.
Finally, in addition to conservation, which is perhaps the top form
of alternative energy available, both the public and the private
sectors must do a better job exploring the possibility of alternative
fuels in the hemisphere, which could prove to be a boon for development
while making the region less reliant on imports from elsewhere. As a
strategic matter, no less than the late George Kennan advocated an
aggressive reduction in energy consumption in order to lessen our
reliance on energy imports from unstable areas. He might also have
considered viable alternatives in the Western Hemisphere. More
recently, the President quite rightly mentioned ethanol in his State of
the Union address, and he also discussed it directly with Brazil's
President Lula during a short trip to Brasilia in November. Chairman
Lugar has also been a strong and thoughtful proponent of these issues.
The resources are there, especially in Brazil and also Colombia,
particularly if a free trade agreement with the latter nation is
approved that will allow importation of ethanol duty-free to the United
States. What has been missing has been a market to use ethanol as well
as a price point of conventional fuels high enough to make ethanol
economically viable. But as oil prices remain historically high, the
cost of ethanol production is now economical. As well, flex fuel
automobiles, which automatically determine the proper fuel mix between
gasoline and ethanol, are becoming a legitimate alternative. The
question, though, is not actually about energy, but rather trade
policy. Ethanol from South America is primarily made from sugar, which
remains politically sensitive in the United States. Nonetheless, as a
strategic matter, the issue bears active consideration.
These issues are ripe for further consideration. The energy
resources exist, and so does the need. What does not yet exist, though
could, is the size and quality of investment needed to develop and
effectively utilize these resources. That is the real issue facing
those who would promote energy partnership in the Americas.
Once again, the Council of the Americas appreciates the opportunity
to provide testimony on this critical matter before the Senate Foreign
Relations Committee and stands ready to assist committee members as
they further investigate these important issues.
______
Prepared Statement of Stephen C. Johnson, Senior Policy Analyst for
Latin America, The Kathryn and Shelby Cullom Davis Institute for
International Studies, The Heritage Foundation
Chairman Lugar, distinguished members of the committee, thank you
for inviting me to submit testimony on this important subject--energy
security in Latin America. Your hearing comes at a time when rising
gasoline prices have opened our eyes to the vulnerabilities of supplies
worldwide, especially those in our own neighborhood.
Speaking at The Heritage Foundation on March 31, 2006, Assistant
Secretary of Energy for Policy and International Affairs, Karen
Harbert, said that a secure and prosperous Western Hemisphere is vital
for our national interest. Integrated energy markets, interconnected
infrastructure, development of a broad range of resources, and
efficient use will benefit the United States and the populations of
neighboring countries.
However, there are significant roadblocks to achieving those goals.
Differing philosophies about resource ownership, exploitation, and
distribution within the Americas hamper the establishment of a free
energy market. Weak or inconsistent
governance plagues some states, thereby limiting investment and
cooperation. Dwindling reserves and rising consumption generally
threaten energy security where further exploration and research into
fresh technologies is absent.
Keys to overcoming these impediments are more active hemispheric
diplomacy, urging neighboring countries to embrace open markets, not
cartels, more support for improvements in democratic governance, and a
commitment to diversify energy supplies.
STAGGERING STATISTICS
Energy sources can be broken down by fossil fuels, electricity
generated from renewable sources, and nuclear energy. By far, fossil
fuels are the mainstay of transportation systems and electrical
powerplants--our major concern.
On average, the Western Hemisphere consumes about 30 million
barrels of oil per day, of which the United States uses more than 20
million barrels, two-thirds of it imported.\1\ In 2005, net imports
accounted for 58 percent of U.S. total petroleum consumption. According
to the Department of Energy, 13 states in our hemisphere provided 49
percent of the United States' gross imports of crude oil and petroleum
products. Top suppliers included Canada, Mexico, and Venezuela. These
three countries accounted for 39 percent of United States gross imports
in 2005, with Ecuador, Colombia, Brazil, Trinidad and Tobago, and
Argentina following close behind.\2\
---------------------------------------------------------------------------
\1\ U.S. Department of Energy, Information Administration,
International Energy Annual 2003, June 28, 2005, table 1.2, at
www.eia.doe.gov/pub/international/iealf/table12.xls (February 10,
2006).
\2\ Karen A. Harbert, ``Western Hemisphere Energy Security,''
testimony before the House Subcommittee on Western Hemisphere Affairs,
March 2, 2006.
---------------------------------------------------------------------------
As economies expand worldwide, car ownership is rising and new
factories require more energy. As an example of the relationship
between energy consumption and growth, China's petroleum use increased
by 15 percent in 2004, outpacing its 9 percent economic growth rate.\3\
Without significant discoveries of new reserves or technological
advances, the world will face an energy crunch.
---------------------------------------------------------------------------
\3\ Jason Bush, ``China and India: A Rage for Oil,'' Business Week,
August 25, 2005, at www.businessweek.com/bwdaily/dnflash/aug2005/
nf20050825_4692_db016.htm?chan=gb (February 7, 2006).
---------------------------------------------------------------------------
The United States has estimated reserves of 21 billion barrels of
oil (in decline since the 1970s) and 192 trillion cubic feet of natural
gas. Canada has 178 billion barrels of oil and 56 trillion cubic feet
of gas, making it potentially the largest petroleum supplier. Mexico
has only 15 billion barrels of oil and about 16 trillion cubic feet of
gas.\4\ Venezuela has an estimated 77 billion barrels of oil (supplying
about 7 percent of United States' needs) and about 149 trillion cubic
feet of gas.\5\ These, plus other known global reserves might last for
30 years or more, barring no new discoveries.\6\
---------------------------------------------------------------------------
\4\ Based on estimates from U.S. Department of Energy, ``World
Proved Reserves of Oil and Natural Gas.''
\5\ Ibid.
\6\ The United States produces almost 90 percent of the
hemisphere's coal and has significant reserves--but there are limits to
how it can be used.
---------------------------------------------------------------------------
OBSTACLES TO COOPERATION AND SECURITY
Countries throughout the Americas hold differing concepts of
property rights and the purpose of government that impact resource use
and the stability of markets. Consequently, they have sharply divergent
capacities to exploit resources and pursue technological advancement.
Apples and oranges
In colonial times, Britain's weak rule permitted the growth of
community governments and free commerce in the north. As a result,
North Americans developed a system of property rights that protected
that which was granted to, bought, or invented by an individual.
Spain's military expeditions imposed centralized government and
monopolies in the south. If not so stated in national charters of
resulting independent nations, the right to own property was considered
a concession of the state. Whereas individual citizens and private
enterprises could stake claims to underground treasure in the United
States and Canada, almost all Latin American constitutions made
subsurface resources the property of the state.
Today, property rights may be stronger in some Latin American
countries than others, but minerals, petroleum, and gas are controlled
by those in power. Governments predominantly own fields, pipelines, and
refineries, subjecting them to political influences. Where economies
are not big or free enough to support enterprises that can explore,
extract, and market resources, the state offers concessions to foreign
operators in exchange for part of the revenues.
These arrangements can remain stable for years. But if market
prices rise, politicians may desire a bigger cut of the profits or
suddenly think they have the capacity to operate such industries on
their own. Ecuador's May 2006 takeover of Occidental Petroleum's
concessions is an example of the latter. In Venezuela, deputy oil
minister Bernard Mommer recently told foreign oil companies, ``The
government can promise you whatever they want--it is not binding.'' \7\
Such caprice is an outgrowth of centuries-old personalistic rule and
traditions of impunity.
---------------------------------------------------------------------------
\7\ Thomas Catan and Andy Webb-Vidal, ``Caracas warns oil companies
of more tax increases,'' The Financial Times, April 11, 2006, p. 11.
---------------------------------------------------------------------------
Squandering profits
For years, the revenue transfer from Pemex (Petrleos Mexicanos) to
the Mexican state was the epitome of industry serving a single-party
state. By the time Mexico's first opposition president, Vicente Fox,
came into office, Pemex was turning over more than half its revenues to
the government, amounting to half the federal budget. At the same time,
executives claimed it was losing about $1 billion annually to internal
corruption.\8\ Since then, Petroleos de Venezuela (PDVSA) has surpassed
Pemex as an example of industry supporting a misguided state, but also
funding the malicious agenda of an authoritarian leader.
---------------------------------------------------------------------------
\8\ Tim Weiner, ``Corruption and Waste Bleed Mexico's Oil
Lifeline,'' The New York Times, January 21, 2003, p. 1.
---------------------------------------------------------------------------
On December 2, 2002, business and labor leaders called a national
work stoppage, hoping to pressure Venezuelan President Hugo Chavez into
resigning. Some 35,000 PDVSA workers walked out, temporarily slowing
production. Chavez fired nearly half of them, then put the semi-
autonomous oil giant under his direct control. Petroleum income now
appears to support his Bolivarian social programs, foreign debt
purchases, campaign contributions to leftist candidates in neighboring
countries, and a worrisome arms build-up. Democratic, market-oriented
Trinidad and Tobago could be a target of intimidation should Chavez
decide to seize some of its adjacent offshore gas fields.
Throughout the region, Chavez plays petropolitics. In September
2003, he accused the Dominican Republic of harboring former President
Carlos Andres Perez, a political foe. He then stopped oil deliveries,
triggering a temporary energy crisis while Dominican authorities
scrambled for new suppliers. Such turmoil helps lift prices, giving him
the ability to offer discounted fuel to cooperative admirers in foreign
countries, including the United States, where he can influence politic
discourse and public opinion. In May 2006, he donated fertilizer and
oil to Sandinista mayors in Nicaragua. Presidential elections will take
place there in November.
President Evo Morales of Bolivia is headed in a similar direction,
announcing the partial nationalization of gas fields in May 2006. He
has so far followed Chavez's playbook in politics, announcing a
constituent assembly to rewrite the constitution, inviting Cuban
advisors to help run the police, and devising a scheme to redistribute
land. Bolivia's pygmy economy generates about the same activity
annually as Springfield, IL, and higher rents from the hydrocarbon
industry could help Morales consolidate power as long as mismanagement
does not put him out of business.
Markets versus monopolies. Outside of the taxes, salaries, and
dividends to stockholders, private energy companies use profits to
modernize equipment, service fields and mines, and conduct research in
such areas as renewable energy supplies. In contrast, Mexico's Pemex
still supports the state to such an extent that field maintenance and
further exploration has become a minor priority leading to stagnating
output. Foreign investment could help, but Mexican elites fear such an
opening could lead to loss of financial control, while pliant
politicians have convinced the public that national patrimony is at
risk. Sadly, Mexico now imports natural gas from the United States,
even though it has some 15 trillion cubic feet of reserves.
Further South, Venezuela's Chavez announced an extravagant $20
billion, 5,000-mile gas pipeline from Venezuela to Argentina that will
probably never materialize.\9\ More realistically, he is starting to
unite state hydrocarbon industries into a cartel under his control.
Petrocaribe, Petrocentro, Petroandina, and Petrosur are entities he
invented under an umbrella organization called Petroamerica. Ecuador's
statist oil and Bolivia's hydrocarbon industries are good candidates
for membership. Argentina, Uruguay, Central America, and many Caribbean
states with few or no resources could make up the client base. High
prices outside the cooperative would support subsidies within. But
attendant corruption, mismanagement, and lost foreign investment could
also provoke collapse.
---------------------------------------------------------------------------
\9\ The gas pipeline will be more expensive to build and operate
than liquefying and shipping gas. ``The Explosive Nature of Gas,'' The
Economist, February 11, 2006, p. 36.
---------------------------------------------------------------------------
Energy-hungry China, the world's fourth largest economy, is another
power player on the state industry side of the ledger. China has
pursued petroleum partnerships with Venezuela, Ecuador, Colombia,
Argentina, Brazil, Mexico, and most recently Cuba, where it could soon
be drilling in the Florida Straits, 50 miles from United States shores.
China's state-to-state business deals reinforce the region's tradition
of centralized decisionmaking and anti-competitive practices.
JUMPING THE HURDLES
Rising global consumption and the emergence of powerful new
economies mean that timely adoption of effective energy strategies is
crucial. The best way to assure sufficient resources is to foster
competition and let markets respond to needs. And while prospects for
much of the region seem grim based on prevailing anti-market policies
in neighboring countries, the United States has reliable energy
partners in market-oriented Canada, Trinidad and Tobago, and even
statist Mexico, Colombia, and Peru. Brazil could become an important
associate in developing new supplies of ethanol, a product that
involves more private enterprise than government monopoly. To move the
ball forward, the United States should:
Embrace regional energy diplomacy. Right now Venezuela's
Chavez has seized the initiative by developing monopolistic
arrangements in Latin America. As suggested by the proposed
Energy Diplomacy and Security Act (S. 2435), the U.S.
Departments of State and Energy could promote a hemispheric
energy security forum to encourage collaboration among willing
states on competitive
energy markets, attracting investors, replacing monopolies with
regulatory authorities, and sharing information and research--
as some Latin American countries have attempted to do before
without much success. The U.S. Congress should support those
and existing multilateral diplomatic efforts with adequate
funds for travel and dedicated personnel.
Urge neighboring countries to embrace free markets, not
cartels. Eventual adoption of stronger property rights and
competitive enterprise is the key to spreading prosperity
through jobs and ownership. One way to make state energy
monopolies truly public is to distribute company shares among
the country's voting population. The government's role then
converts to regulation. United States public diplomacy could
help Latin American publics understand such concepts.
Consistently support improvements in democratic governance.
Since elections took place in the majority of Latin American
nations in the 1990s, United States support for checks and
balances, constituent representation, transparency, and rule of
law has been spotty. Development funds have been shifted to
serve other regions of the globe while big dollar environmental
and health programs have dominated Latin American assistance
efforts. The U.S. Secretary of State should ensure that
development programs in Latin America help consolidate deeper
democratic traditions to bring voters of all classes and income
closer to their governments and diminish the appeal of
authoritarian populists.
Promote diverse energy supplies. At home, the U.S. Congress
should end the 54-cent per gallon tariff on sugarcane-based
ethanol meant to protect U.S. corn farmers. There are other
uses for corn besides making ethanol. The United States,
Caribbean and Central American allies, and Brazil could then
collaborate in developing ethanol markets to free each other
from Hugo Chavez's extortionist petropolitics. American
lawmakers should ease complicated regulations that limit
refinery expansion and mandate complicated regional recipes for
gasoline that have made it difficult for existing refiners to
meet growing demands. By equal measure they should make further
exploration possible for responsible extraction of fossil
resources.
CONCLUSION
According to the United States Department of Energy, Latin America
will require nearly $1.3 trillion in energy sector investment between
now and 2030. Unfortunately, high oil prices have resulted in a
resurgence of government control over industries and the rise of
populist, authoritarian leaders in Venezuela and Bolivia. Outside of
the hemisphere's market economies, needed investment will probably not
occur. While the United States cannot rescue every neighbor from bad
decisions, it can encourage cooperation among allies in making ones
that will help sustain growth and broaden prosperity.
As responsible neighbors, we must agree on policies that allow
market forces to shape demand, guide energy users in changing
consumption habits, and promote the development of new technologies
such as fuel cells and hydrogen power. Considering the emergence of
powerful global economies and expanding populations in our own
hemisphere, there is little time to lose.
Again, I appreciate the chance to provide testimony on this
important topic and commend the committee for its work.
______
Prepared Statement of Johanna Mendelson-Forman, Ph.D., Senior
Associate, Center for Strategic and International Studies, Washington,
DC
My name is Dr. Johanna Mendelson-Forman. I am a senior associate at
the Center for Strategic and International Studies, and formerly the
director of Peace, Security and Human Rights Programs at the U.N.
Foundation. I am an expert on post-conflict reconstruction issues,
security and development, and a Latin Americanist by training. I
appreciate this opportunity to provide the committee with written
testimony.
For the last decade I have worked on security issues in this
hemisphere and in Africa. My work on peace building and development
have led me to conclude that among the most important relationships
that can ensure a durable peace is by using the issue of energy supply
as a tool for building security and development. A secure source of
energy in a country emerging from war can mean the difference between a
safe environment and one riddled by crime. Giving communities access to
electricity and lighting can reduce criminal activity that often
frequents war zones.
Using the potential of renewable energy, we have also learned that
creating products like ethanol and biodiesel can provide a ready means
of employment of demobilized soldiers and combatants. Not only will
growing the feedstock for biofuels allow people to earn a decent living
and provide immediate job security, but it is also clear that renewable
biofuels can support transportation. Biodiesel is easily used in trucks
and cars with diesel engines. Little refining is needed for this
product. And helping farmers produce crops that can be converted to
bioenergy also gives these individuals a chance to export products to a
world market where alternative fuels are in high demand.
Unfortunately, our planning for reconstruction has often overlooked
what has become very clear in the last few years of soaring energy
costs, and less reliable sources of fossil fuel. In Africa, the
Caribbean, and many parts of Southeast Asia, the climate is ripe for
converting sugar and other crops into fuel. And the appropriate use of
biomass energy, while used at a community level, could also be expanded
to ensure that all people have access to fuel for cooking.
Not only does an energy and security approach benefit the war-
affected country, but it also has the ability to create work, serve as
a poverty alleviation tool, and provide a means for energy deficient
countries to rise from dependence on fossil fuels. In the recent World
Bank Report on biofuels the Bank economists calculated that for every
unit of energy produced from agricultural crops you create 100 new
jobs. The 25 poorest countries, many of which are also conflict-ridden,
are also bereft of natural resources for energy generation. A focus on
renewable sources of energy helps to promote peace and a more stable
economy. Development of an indigenous biofuel industry could provide
the last best chance for highly indebted nations to reduce the burden
of paying for high priced energy derived from fossil fuels, thus
permitting precious state funds to be used on social and economic
development.
One need only look at our own hemisphere to comprehend the linkage
between energy and security in the last few years. The Caribbean, our
third border, is a region ripe for the creation of a huge biofuel
producing zone. Today it still lacks the adequate infrastructure or
investment to start the process in a systematic or coherent fashion.
But a policy that promoted an energy zone in the Caribbean would go far
in supporting the concept behind the legislation introduced by Senator
Lugar.
Weak states and the increased vulnerability that many Caribbean
islands have to drug traffickers and transnational crime also further
complicates the situation when little funds are left to fight these
kinds of problems when resources are going to pay for energy costs.
Regional dependency on fossil fuels among almost every Caribbean island
(except Trinidad and Tobago which has oil and natural gas) makes all
these nations vulnerable to the petroleum diplomacy of President Hugo
Chavez of Venezuela who has provided cheap subsidized fuel from
Venezuela to win over support for his political agenda in the Americas.
Subsidized Venezuelan oil gives Chavez an important leverage point for
political gain as so many of these island states have come to rely on
him to meet their energy needs. This situation further exacerbates
United States relations with many Latin American states who see their
need for oil as a trade-off between support for the government of Hugo
Chavez and their own need to maintain good relations with the United
States.
TRANSNATIONAL THREATS AT THE THIRD BORDER
Without a stable supply of energy for oil dependent nations of the
Caribbean, existing problems will only be exacerbated by the shock of
economic instability coming from fluctuating oil prices. A majority of
Caribbean states experience problems that already impact U.S. national
security and well-being, with significant potential growth:
Weak or failing states (Haiti),
Potential launching grounds for terrorist activities,
Transshipment of narcotics,
HIV/AIDs,
Illegal immigration,
Transshipment of weapons, and
Safe havens for criminal activities such as money
laundering.
Even though many Caribbean islands have experienced economic growth
over the past decade, these gains are now in jeopardy as short- to
medium-term high-priced fossil fuels and long-term depletion concerns
threaten economic sustainability. Only with specific interventions to
protect island economies through alternative energy sources will the
Caribbean be able to sustain economic growth. Also, a move toward
energy independence will promote security through generating
development and stability.
Access to energy has also served as both a stick and a carrot for
United States policies in the Latin American region. Currently, United
States dependency on oil produced in Venezuela has created turmoil in
our policies to democratic development and democracy promotion. The
Caribbean, in particular, has been a focus of the use of oil as a
carrot through potential political endorsement at the regional and
international levels. The potential for the use of Caribbean oil
dependence as a stick is inherent in the lessons from the recent
experience of the Russian shut-off of Ukrainian gas supplies, and not a
relationship conducive to United States national security.
I will use the opportunity of this testimony to describe two
important cases. The first will discuss the potential for using
alternative energy production as a means of saving Haiti from state
failure, while also providing the Dominican Republic with an important
export market for its sugar production. Combining peace building and
renewable energy may very well save Hispaniola from the long-term
prospect of state failure and decline.
The second case will discuss how in Bolivia, a country where the
United States Government spends millions of dollars on coca eradication
and crop substitution, that a better way to approach this problem may
be through a focused project for renewable energy that would use
feedstock that could be converted into ethanol, and then used for both
domestic and export markets. The world demand for ethanol continues to
grow each day, and giving Bolivian peasants a chance to grow crops
whose export value is high, and where demand is insatiable, affords a
brighter alternative for development than our current crop substitution
programs provides.
1. Saving Hispaniola
An island-wide project on bioenergy could create significant
benefits for peace and security. Not only would the development of
alternative energy sources benefit the Dominican Republic, it may also
lay the foundation for greater cross-border collaboration with Haiti.
The continued deterioration of political, economic, and environmental
conditions in Haiti creates strain on the Dominican Government as
continued migration across a porous border, transshipment of illegal
narcotics, and the vulnerability to spreading issues of HIV/AIDS and
violence rises. The benefits of biofuels for energy self-sufficiency
and poverty reduction would potentially also be available to Haitian
communities at the border. Such a situation could lead to a wider
effort to use energy as a bridge to peaceful relations between the two
nations and improvement of the Haitian economic and social
situation.\1\
---------------------------------------------------------------------------
\1\ Information for this section is derived from a field assessment
performed by the author, and Dr. Daniel de la Torre Ugarte and Ms.
Charlotte McDowell for the U.N. Trade and Development Agency (UNCTAD)
and the U.N. Foundation Biofuels Initiative in November 2005.
---------------------------------------------------------------------------
CONTEXT
The Dominican Republic is a poor island nation that has experienced
remarkable economic growth in the last few years. Agriculture and sugar
in particular, has been replaced by free trade zones and a range of
service industries as the main revenue generating businesses as the
primary source of export earnings. Yet, according to the 2005 National
Human Development Report, the Dominican Republic's shift to these
industries was accompanied by considerable social upheaval and scarce
human development. The accelerated and unplanned growth of the tourism
sector has created problems of resource overexploitation, citizen
insecurity, and the predominance of enclave economies, and is seen as
unsustainable in its current form. The free trade zones have been
stagnating and are losing competitiveness in relation to other
countries, and job creation has been greatest in the informal sector,
thereby prompting the deterioration of quality of employment and living
conditions for the majority of the population.\2\
---------------------------------------------------------------------------
\2\ UNDP National Human Development Report, Dominican Republic
2005.
---------------------------------------------------------------------------
But sustained economic growth and social integration in the
Dominican Republic will require the resolution of two important issues:
Energy and the political crisis in Haiti. Without a source of fuel to
generate electricity, the Dominican Republic will be unable to grow its
important tourism industry, let alone in an environmentally sustainable
and socially responsible manner. Unless the downward spiral of Haiti is
stopped, the proximity to a failed state at its border will continue to
put pressure on the Dominican Republic through unabated migration of
Haitians that continues to tax an already underfunded public sector and
is the cause of much social tension. Thus, without alternative energy
sources, economic development will remain illusive, and unless the
Haitian border is converted into a zone where projects that generate
employment and energy on both sides, there will be little hope for
long-term economic progress and social stability.
ENERGY NEEDS
The dramatic rise in oil prices over the last 6 months has
precipitated a crisis in the energy sector. Over 80 percent of the
Dominican Republic's energy comes from petroleum products. As the price
of oil has increased so has the Nation's debt. With no other immediate
energy source, the Dominican Republic is now searching for sustainable
alternative energy supplies that can mitigate the effects of its oil
dependency.
Bioenergy is not a new idea in the Dominican Republic. Its large
sugar plantations have already attracted the attention of investors.
But to date no large-scale conversion of sugarcane to ethanol has
occurred, as the United States' quota system, the possibility of
gaining preferential market access to the European Union, and the
domestic price support provided by the Dominican Government combine to
create prices well above world market levels. These conditions have
delayed investment considerations on biofuels, and therefore thinking
about biodiesel fuel is relatively new and limited to small scale
projects.
Yet all this may change, based on information gathered on the
recent visit to the Dominican Republic. Not only is there a new
consensus at the highest political level that alternative energy is a
priority issue, but it is also clear that the most recent increase in
oil prices has strengthened the hand of President Leonel Fernandez to
take steps regarding the energy crisis. These steps will ultimately
result in important conservation initiatives such as allowing combined
ethanol-gasoline mixtures. He has also supported the National
Commission on Energy to coordinate the government's response to the
island's energy needs. On November 8, the President signed an agreement
with President Uribe of Colombia in which Colombia will provide energy
assistance and the transfer of technology for ethanol production. It is
also clear from the number of Brazilian investors knocking at the doors
of government agencies that the time for biofuels has arrived in the
Dominican Republic.
POTENTIAL FOR AN ISLAND-WIDE PROJECT
Another compelling reason for considering the Dominican Republic
for a pilot case for the biofuels initiative is that it shares an
island with one of the most environmentally devastated nations on
earth--Haiti. After years of neglect, internal conflict, and entrenched
poverty, Haiti's problems have compounded the urgency of finding
alternative energy sources that would serve the needs of both Haiti and
the Dominican Republic. Projects that used the development of renewable
energy resources between both countries could also have a positive
impact on resolving some of the more intractable political problems.
Solving the energy needs of both the Dominican Republic and Haiti could
also lead to some innovative models of peace building. Bringing
citizens together around common problems, such as the lack of
electricity or fuel, can potentially create solutions that politicians
may be unable to resolve.
PRODUCTS: ETHANOL
Sugarcane has historically been one of the most important
agricultural products of the Dominican Republic. During the mid-1980s,
sugar accounted for 85 percent of the country's export earnings.
However, sugarcane production peaked with the 1982 output of 11.8
million metric tons, and in 1993 the amount of land planted with
sugarcane peaked at 234,000 hectares (736,000 MT).
Currently, the sugar industry is far from these levels, with
production reaching only 5.3 million metric tons and a total of 135,000
hectares planted with the crop. This loss in both land utilization and
productivity has resulted from several factors: The reduction of the
export quota to the United States, world overproduction of sugar and
therefore falling international prices, the arrival of non-sugar
sweeteners, lack of investment in the sector, and unsuccessful
privatization efforts.
Given the experience of sugar production in the Dominican Republic,
these gaps between historical and current sugar production raise the
question of whether conversion of sugarcane to ethanol provides an
alternative for revitalization of sugarcane production. The answer to
this question is complex, as there are two clearly distinguishable
producer groups with diverse interests. On one hand are large, modern,
integrated producers, and on the other hand are colonos: Independent
landholders that received land from the privatization of land
previously owned and operated by the government.
Most of the current domestic market and sugar export quota is
filled by the production of the modern sector, which also absorbs about
30 percent of the colonos' production. These producers sell at prices
well above the 15 cents per pound that characterizes world markets.
This access is to a large extent a function of their control of
marketing and distribution systems in both the domestic and U.S.
markets.
For these modern producers, the conversion of sugar to ethanol is
not an immediately attractive venture. Ethanol would garner prices for
sugarcane below 12 cents per pound, compared to the current price of
nearly 20 cents per pound. Even when considering expansion of
productive capacity beyond the traditional sugar market, it would not
be possible to recuperate the capital investment required for the
conversion to ethanol within the expected time frame to recoup their
capital investment of 7 years. In summary, modern producers do not see
themselves as pioneers of ethanol production in the Dominican Republic.
The other important producer group is the colonos. They represent
approximately 60,000 hectares of sugarcane land. The colonos view the
conversion of sugarcane to ethanol as a way to develop a market for the
sugar they currently produce or could potentially produce on fallow
land. They are confident that a long-term plan for ethanol would allow
them to invest in sugar productivity that would yield more than 60 MT/
ha, a level nearly double their current yield of 32 MT/ha. This would
allow colonos to produce sugar for ethanol at levels that would be
profitable for private investors. The aim would be to supply enough
feedstock for at least three plants of 1 million metric tons. However,
one of the challenges facing the colonos is their lack of control of
processing facilities needed for both sugar and ethanol.
Although foreign private investors have shown interest in
establishing ethanol conversion plants to process the colonos'
harvests, the issue still remains on how to coordinate between
producers and processors to maintain a stable long-term agreement on
the price and supply of feedstock. Potential investors have indicated
the need for a clear institutional and legal framework for biofuels, as
well as the need for specific incentives for ethanol production. The
level or type of incentives required to make these investments feasible
is unclear.
In any case, utilization of bagasse for the cogeneration of
electricity is viewed as necessary complement of ethanol conversion
facilities. The level of electricity generated beyond the needs of
conversion facilities would depend on the efficiency of the boilers and
the size of the plants.
Finally, there is support at the country's only oil refinery
(REFIDOMSA) for the use of ethanol in a fuel blend of up to 10 percent
with gasoline. The refinery has already drawn up plans for developing
the infrastructure to store and blend either local or imported ethanol
with gasoline in preparation for the possibility of low-priced ethanol.
BIODIESEL
There is nearly common agreement on the part of all public and
private actors in the biofuels sector to support production of
biodiesel. The area known as the ``linen del noroeste'' (northwest
line) is viewed as one of the areas with greatest potential, and is
also one of the most economically depressed areas of the country. This
region includes a significant amount of idle land suitable for the
production of Jatropha, castor, coconut, and other species rich in oil
content. To a large extent, the enthusiasm for biodiesel production is
rooted in its potential to provide not only a cleaner and renewable
source of energy, but also in its potential to generate economic
development in the region and to recuperate eroded areas. The
transparent integration of biodiesel into the current distribution and
utilization system is also perceived as an important advantage.
While there is much more agreement regarding the potential
production of biodiesel than there is for ethanol, there is less
specific information. The Ministry of Agriculture is currently in the
process of assessing the resource potential for these and other
species, as well as regions in the country suitable for production.
Various stakeholders expect that the oil crops used as feedstock
for biodiesel would be largely produced by small farmers, and that the
cost of the feedstock would be compatible with small scale, less
capital intensive conversion processes.
Some of the oil crops that are endemic to the Dominican Republic
and Haiti, such as Jatropha, could also play a significant role in
recuperating degraded soils and slopes, thereby alleviating a
significant environmental problem for both countries.
INTEGRATED DEVELOPMENT OPPORTUNITIES
There are currently various cases in the Dominican Republic of
small scale alternative energy projects aimed at creating energy self-
sufficiency in rural areas by utilizing biomass. These projects range
from development of biodigestors by the Organization of American
States' Inter-American Institute for Cooperation on Agriculture (IICA)
to research by the University Institute of Technology (INTEL) on the
possibilities for generating energy from various seaweed species.
Additional reports of individual communities that have developed solar
power capabilities with the support of Peace Corps volunteers and have
been demonstrating their results to interested members of other
Dominican and Haitian communities, indicating that further small-scale
projects have yet to be disseminated and replicated.
The proliferation of such small-scale, development-oriented
projects indicates the need for coordination of researchers and
practitioners in the interests of creating dialog on existing efforts.
Both the UNDP country office and the Dominican Global Foundation for
Democracy and Development expressed interest in potential joint support
of a series of conferences to generate knowledge-sharing and
cooperation on such projects.
A Haitian-Dominican private-sector and NGO consortium is also
currently seeking funding for a planned cross border community-based
biodiesel project.\3\ This effort has been presented to the local UNDP
office as well as the European Community for funding. The project would
initially work to develop jatropha, sweet sorghum, and castor beans to
generate biofuels for community-based consumption on both sides of the
border. They have also drawn up plans for a potential ethanol project
that would utilize mobile mills to be deployed across the border to
Haiti to overcome infrastructure problems and provide for Haitian
laborers in their native communities to gain employment. The UNDP
office has reportedly secured a European contribution to this project
that should become available by the end of the year, and is looking to
their own ability to provide small grants to such an effort and related
energy sector projects. Both the NGO itself and the UNDP office
expressed the need for additional technical support for this project.
---------------------------------------------------------------------------
\3\ The Consorcio Tecno-DEAH is supported by the Dominican
Institute of Integrated Development (IDDI), and directed by Omar Bros,
Flanz Flambert, and Alex Rood.
---------------------------------------------------------------------------
Aside from this potential project, other U.N. offices have limited
activities in the area of energy. FAO is in the initial stages of
considering the impact of renewable energy projects in the Dominican
Republic. In 2004, they published a report on the rehabilitation of the
Dominican sugar industry and a socioeconomic survey of the small-scale
sugar growers that could be relevant to an ethanol-based project, and
have also made important contacts with both the political and
agricultural community. For its part, the UNDP has been working in the
area of energy to a limited degree through its small grant program, but
efforts have been primarily in the area of electrification of rural
areas and solar projects. The potential for collaboration with the UNDP
through the small grants program and technical support or information-
sharing appears to hold positive partnership opportunities rather than
the duplication of efforts.
Environment for change
The legal-regulatory environment has the potential to assist
biomass energy alternatives. As early as 1949, a law was passed
regarding ethanol-gasoline mixtures for automobiles. Even before this
current crisis, the government of former President Hipolito Mejia
signed an executive order in 2002 that would provide tax exemptions to
businesses for developing technical facilities to mix ethanol with
gasoline.\4\ In October 2005, President Fernandez issued an executive
order that created technical requirements for the mixing of ethanol
with gasoline, and also set specific guidelines for mixture that would
allow up to 10 percent ethanol to be mixed with gasoline.\5\ While this
was an important step and signaled to refiners that ethanol mixtures
are allowable, the actual decree does not mandate immediate
implementation.
---------------------------------------------------------------------------
\4\ Decreto No. 732-02, 2002 (September 10).
\5\ Decreto No. 566-05, 2005 (October 11).
---------------------------------------------------------------------------
In terms of trade, the Dominican Republic has access to
preferential and growing United States markets for ethanol through the
provisions in the Caribbean Basin Initiative and the CAFTA-DR
agreement. Because the legal import quotas of these initiatives are
expressed in percentages, as the U.S. market continues to grow, the
absolute amount allowed for duty-free imports will also grow. The
United States recently passed a renewable fuels mandate of 7.5 billion
gallons, which may provide a significant export opportunity for
countries such as the Dominican Republic.
1. Caribbean Basin Initiative--The Caribbean Basin Initiative was
established in 1983 to promote ``a stable political and economic
climate in the Caribbean region.'' As part of the initiative, duty-free
status is granted to a large array of products from beneficiary
countries, including fuel ethanol under certain conditions. If produced
from at least 50 percent local feedstock (e.g., ethanol produced from
sugarcane grown in CBI beneficiary countries), ethanol may be imported
duty-free to the United States. If the local feedstock content is
lower, limitations apply on quantity of duty-free ethanol.
Nevertheless, up to 7 percent of the U.S. market may be supplied
duty-free by CBI ethanol containing no local feedstock. In this case,
hydrous (``wet'') ethanol produced in other countries, historically
Brazil or European countries, can be shipped to a dehydration plant in
a CBI country for reprocessing. After the ethanol is dehydrated, it is
imported duty-free into the United States. Currently, imports of
dehydrated ethanol under the CBI are far below the 7 percent cap
(approximately 3 percent in 2003). For 2003, the cap was about 150
million gallons, while only about 60 million gallons were imported
under the CBI. Dehydration plants are currently operating in Jamaica,
Costa Rica, and El Salvador.
2. CAFTA-DR--The Free Trade Agreement with Central America and the
Dominican Republic (CAFTA-DR) does not increase overall access to the
United States ethanol market. The agreement allows the Dominican
Republic and Central American countries and to share in the CBI quota,
but does not increase the quota.
Whether through CBI or CAFTA, the vehicle currently exists to
utilize export potential to the U.S. as a means to generate the volume
and experience required for a viable domestic ethanol industry.
Public opinion
Public awareness of the energy crisis is at best a financial issue.
The price of gasoline at the pump has impacted lower income families
with one car and the price of public transportation. It has also
affected the cost of electricity, exacerbating what is already one of
the highest electricity costs in the region. Energy conversation as a
public policy is still in its initial phases. The government has chosen
to educate consumers about saving energy through public service
announcements and billboards. The National Energy Commission published
a consumer guide, but it is unclear who actually has read it, or the
degree of its dissemination nationwide. What is clear is that
environmental considerations for clean energy are less evident, though
many nongovernmental organizations exist with a mission to promote
conservation of natural resources, forest land, and soil.
For the Dominican Republic, the challenge is one of timing and
creating a consensus around what steps are needed immediately to ensure
reduced demand for gasoline and electricity. The social impact of
closing gasoline stations is dramatic. From the time that the President
ordered service station closures until the week of November 20, 2005,
newspapers reported a 34 percent decline in gasoline consumption. But
progress on this front will ultimately impact the economy as fewer
individuals are mobile on the weekends, especially during the key
holiday shopping season.
Another challenge for the Dominican Republic will be to find a way
to service the debt it has incurred in the electric sector. According
to interviews and newspaper accounts, the government has a half-billion
dollar shortfall in electricity revenues, something that continues to
prevent adequate and continuous production of electricity. That
situation, coupled by a 40 percent loss of electricity through
distribution inefficiencies and illegal tapping of power lines, has
created an unworkable situation in a country where fossil fuels are
essential for power.
Foreign investment opportunities
Internationally, the conditions in the Dominican Republic have
attracted the attention of foreign investors who see the potential for
bioenergy and are aggressively pursuing government offices in search of
contracts and long-term arrangements to reap the rewards of ethanol
production. Brazil has been especially evident in its trade missions to
government offices and to private sector investors as that nation have
both the technology and the ethanol that could jump-start the
production of fuel mixtures. A joint Belgian-Spanish private sector
endeavor has plans for immediate construction of a 100,000 ton ethanol
plant, along with support of the sugar-grower federations, although the
actual start date of construction is uncertain.\6\
---------------------------------------------------------------------------
\6\ The venture was agreed to by ALCOGROUP of Belgium, an ethanol
producing and distributing company, and Tomas Destil of Spain, a
specialist in engineering and manufacturing of alcohol distillation
plants. The plant was originally scheduled to be under construction in
September of 2005 and to go online in the last trimester of 2006.
---------------------------------------------------------------------------
How much foreign investment will help move the Dominican Republic
toward energy independence is still unknown. In our conversations with
government officials and private sector individuals, there was a more
marked interest to pursue biodiesel as a first solution to high
petroleum prices. Indeed, there was broad consensus about biodiesel as
a major approach to the immediate energy needs because of the lower
necessary investment for production. Additionally, the land needed for
biodiesel production could be less arable, and even arid, given the
current sources of oil from nut-bearing plants like Jatropha and Castor
bean. Even though ethanol was on everyone's agenda, it was also evident
that it would require much larger investments to start production on
any larger-scale program.
Potential funding mechanisms
It is very likely that biofuels-related projects would have access
to the Clean Development Mechanisms (CDM) of the Kyoto Protocol. Access
to these mechanisms could provide marginal revenues that would reduce
investment risk for biofuels projects. However, gaining access to these
funds is not a trivial task: It requires the estimation of
environmental impacts from a baseline situation and is a complex
process that could delay or even limit access to projects in the
Dominican Republic. There is also a need to access long-term financing
that could make projects viable with significant investment in fixed
assets over a longer-term repayment period than private investors are
willing to offer. Due to their potential environmental and social
impacts, some of these projects could be particularly suited to
``socially concerned'' investors.
Government position today
President Leonel Fernandez has laid a strong foundation for a new
energy policy in the Dominican Republic. With an eye toward good
governance and insistence on using a National Energy Commission to
unite his key ministries, he has created a sense of urgency and
collaboration on the need to solve the energy crisis that was evident
in all our meetings, from the Foreign Ministry, to Agriculture, to
Industry and Commerce. Every government leader sees himself or herself
as a stakeholder. It would be too easy to say that coordination and
information sharing is complete, however. As in any bureaucracy, there
are gaps in communication, and a lack of understanding in specific
issue areas. Yet given the nation's history of having suffered a long
period of authoritarian rule, followed by a series of centralized
government authorities, the situation under Fernandez' leadership
provides the basis for eventual success in developing a much higher
degree of energy independence.
The political component of Fernandez' mission is also important.
Unlike his predecessors, he recognizes that any energy solution in the
Dominican Republic must also embrace the actual situation in Haiti. His
approach to securing an energy future of Hispaniola is genuine, and
though an uphill battle, is sensitive to how his Haitian neighbors
affect not only the Dominican Republic's own social climate, but also
its potential as a place for foreign direct investment.
Challenges
Key challenges for 2006 will include:
Developing an integrated strategy among government agencies
and public groups on an appropriate and measured policy
framework for bioenergy and other alternative sources, from
photovoltaic to wind energy.
Encouraging small-scale projects that provide immediate
energy cost relief to the rural areas, such as methane farms,
and other types of biomass projects that can help local
producers.
Creating a public campaign that supports the eventual
conversion of sugar to ethanol, while also engaging larger
producers and independent sugar growers in a dialog about the
timing and sequencing of such conversion.
Developing an immediate program to launch biofuels as a
means to generate electricity in its national power system.
Providing broad citizen education at all levels of schooling
that support energy conservation.
Working with the international community to ensure that the
efforts in the Dominican Republic are captured so they can be
applied and refined for use by other small island states.
Creating a binational commission after the Haitian elections
that uses the current energy crisis as a means to rebuild trust
and confidence between the two nations, thereby creating a new
pathway for engagement and dialog.
The Dominican Republic is ripe for new energy opportunities. It was
easy to engage leaders, NGOs, the private sector, and academics on the
importance of energy independence. If the high price of fossil fuels
continues over the long-term as experts predict, it will be even more
urgent to consider the leadership of the Dominican Republic, through
its President Leonel Fernandez, as a role model for working toward
short-, medium-, and long-range solutions to current conditions.
2. Ending addictions and creating new markets: Biofuels for crop
substitution
The United States has two addictions: One to oil and the other to
drugs. In his State of the Union speech in January, President Bush
announced that the United States must end its addiction to oil. And he
advocated agricultural crops as alternative energy sources. What he
failed to note is that those same crops could also address another
addiction--cocaine.
A proposal to encourage Andean growers to substitute grasses that
can be converted to ethanol for the lucrative coca plant could help
address the scourge of cocaine. With a world market suddenly craving
ethanol, not only would farmers have a crop with insatiable demand, but
growing it would provide a legal, sustainable income. This two for one
result could form the foundation of an approach to Latin America that
promotes the region's need to address security, poverty reduction,
energy needs, and sustainable development.
Our dependence on imported petroleum from conflict areas must end.
There is no better opportunity than in our own backyard. The Caribbean
and Central America are especially ripe for a full-blown energy policy
that uses the agricultural resources already in place--sugar and oil
palms--to support ethanol and biodiesel industries that will reduce
dependence on fossil fuels, create employment, and address an ever-
increasing demand for sustainable energy from renewable resources. And
the Andean region, where hundreds of hectares of illegal cocaine are
grown and destroyed, the potential to convert these plants into
biofuels for transportation could transform the economy of the entire
region.
With $70 a barrel oil, and no end in sight, the Caribbean nations
are quickly turning to biofuel production as an alternative to their
mono-economies based on sugar and tourism as the hope of the future.
And high oil prices make using sugarcane even more profitable for
regional producers to make ethanol than to import fossil fuels. With
the market for Caribbean sugar limited in Europe and the United States,
small producers are making the switch. St. Kitts and Nevis have already
diverted their sugar harvest to ethanol, and larger islands like the
Dominican Republic and Barbados are exploring such prospects, while
also thinking about ways to convert other sources such as palm oil to
biodiesel. This model could also be replicated in the Andean countries,
where large scale production of feedstock for biofuels opens an entire
new market for international trade and development.
Brazil began tapping ethanol more than three decades ago. More than
40 percent of Brazil's energy comes from green sources, compared with 7
percent in the developed world. It plans to become energy self-
sufficient this year, a landmark accomplishment. The country has
developed ethanol technology and is aggressively marketing its
technology to other countries, particularly the Caribbean. The
efficiency of converting sugarcane into ethanol is enhanced by using
the waste, bagasse, to fuel the entire process, thereby eliminating the
dependence on fossil fuels and reducing energy costs.
Even with the second largest supply of natural gas in the
hemisphere, Bolivia still remains dependent on foreign oil sources for
transportation. If a program to encourage energy self-sufficiency were
launched with a way to generate better livelihoods for those currently
growing coca plants, the potential for creating a drug-free zone in the
Andes would carry with it energy independence.
An enlightened new policy toward our Latin American relations must
attack our addiction to oil and drugs in a way that also addresses
United States national security concerns. Biofuels are part of the
solution. Continued income inequality produces political unrest which
can prepare the ground for terrorism to take root. And corruption that
arises from the trade in illegal narcotics, porous borders, weak
governance, and continued regional dependence on Venezuelan oil weaken
the United States' ability to leverage its influence in a region where
our national interests remain an integral part of our own post 9-11
security agenda.
A Latin America policy that anchors itself on the development of
alternative energy sources such as ethanol and biodiesel not only
addresses the challenge of the future energy needs, but also becomes a
major tool for development, poverty reduction, and regional diplomatic
and commercial cooperation.
A renewable energy policy for the hemisphere--especially the
Caribbean and Central America, and the Andean region--developed in
close cooperation with Brazil will also confront some of the major
threats that we face now:
Energy self-sufficiency as oil supplies are being depleted,
a reality in some countries as early as 2025.
Poverty reduction and the creation of sustainable
livelihoods through development of highly marketable products--
the demand for which grows steadily as China, India, and other
countries expand rapidly.
An alternative to the expansion of nuclear energy in poor
countries that can ill-afford the construction, let alone the
maintenance, of nuclear power plants.
Ending the tyranny of drug cartels that corrupt security
forces, and victimize growers who have few viable economic
alternatives in farming.
Reducing the risks of failed states, especially in the
Caribbean.
The president's message of ending addictions should be taken at
face value. Isn't reducing poverty and income inequality, while also
ending the vagaries of global petroleum supply, a good approach to our
hemispheric security policy?
Thank you for allowing me the opportunity to propose some new
approaches to an old problem. The time is ripe for creative thinking
about how to use energy security as a keystone in our approach to
hemispheric issues, to build stronger ties with our neighbors, and to
promote programs that reinforce policies that prevent terrorism from
taking root in our own backyard. The surest way to that goal is by
engaging in an enlightened development program in the Americas that
makes renewable energy the core of its approach and provides
opportunities for public-private partnerships to ensure that within the
next decade we live in a region no longer dependent on fossil fuels for
transport and for living.