The north-south struggles in the 1970's seem to be behind us for the most part, and I think that gives us an opportunity. With the sovereignty issue firmly resolved by the oil-producing nations, the possibility exists for more creative relationships between the United States and the various oil-producing countries which would meet these nations' objectives and also encourage energy production. That is certainly the case here in this hemisphere with Venezuela and Mexico.

Two more points. In the 1970's, the biggest source of contention in the domestic energy arena I think as we look back was the economic clash, producers versus consumers, markets versus regulations. From the vantage point of today, the central clash in the 1990's looks to be different between environmental and supply considerations.

How do we find the balance between these legitimate and competing concerns? The reality is that the environmental consensus has broad support and has become an integral part of our political process and our national culture. Yet, it is no less true that the production and consumption of energy are intimately linked to our economic well-being and our security and strength as a country.

Will the conflicts between these two sets of concerns be resolved only on a case-by-case basis, issue by issue, the outcome depending on the constellation of forces at any given time, or can we find some form of mediation? I do not see a clear answer at this time, but that question will provide the context in which so many energy issues will be fought out, and it behooves all of us to apply ourselves to the critical question of the framework for approaching them.

I know others will address the question of motor fuel and transportation, so let me conclude with one final point. It is a lesson that Winston Churchill enunciated some 77 years ago when he was leading the effort to convert the British Navy to oil. Britain did not produce oil, as Churchill knew so well, only Welsh coal, and that meant it was going to be dependent on imports. His answer to the security problem posed therein was diversification.

He said, "On no one quality, on no one process, on no one country, on no one route, and on no one field must we be dependent. Safety and certainty in oil lie in variety and variety alone.

The case for diversification of options was overwhelming at the beginning of the 20th century. The Kuwait crisis reminds us that it is no less applicable at the end of the 20th century. What was wisdom for Winston Churchill in 1913 is wisdom for America in the 1990's.

Thank you.

[The prepared statement of Dr. Yergin follows:]

PREPARED STATEMENT OF DR. DANIEL YERGIN, PRESIDENT, CAMBRIDGE ENERGY

RESEARCH ASSOCIATES, CAMBRIDGE, MA

I very much appreciate the invitation to appear before the Senate Energy Committee at this critical moment. It seems that the Committee is really picking_up where it left off in its hearings on "World Oil Outlook" last March 2, 1990. The hearing room then was rather sparsely attended. And yet the record of that hearing makes striking reading in the context of where things stand today. In that hearing, the chairman, Senator Johnston, expressed his concerns about the trends in world oil and the potential effects on the "economy of the United States." It is time, he

said, "that we sound the klaxon." Unfortunately, the klaxon was not well heard. And I vividly remember Senator Domenici's prediction that, despite the fact that "nobody seems very concerned," nevertheless, "we will be back in this room" when oil is a crisis and the hearing room will be filled, for "the second most serious crisis for the United States, without any question, is our continued growing dependence upon foreign oil." None of us were privy to Saddam Hussein's thoughts and thus did not know we would be back so quickly. Yet here we are back in this hearing room, not two or three years hence, as we might have thought, but a mere seven months.

Responding to the committee's gracious invitation, I would like to offer a few thoughts about where we are and how we might proceed. Let me explain the context for my remarks. I have just come to the end of a long research project that centers on the relationship among oil, and politics, and our economy, and our way of life. It is entitled, perhaps ironically, "The Prize." In the time available this morning to respond to the topic of this hearing, I would like to draw on some of the things that I have learned in the course of this project that are relevant and put forward what might be suggested as guideposts for the future.

(1) First, how did we go from $15 to $35-40 oil so suddenly? That question takes us back to those hearings last March and the trends that formed the basis of the discussion then. The world oil market was tightening rather rapidly, because of the fall in U.S. oil production, strong demand for oil particularly in the Far East, and the problems in Soviet oil production. Spare capacity-which is the key concept-had declined from 10 million barrels per day in the middle 1980s to around 4 million barrels per day in the middle of 1990. Dependence was rising rapidly on the Middle East, and the question of the timing of capacity additions was moving to the fore. This meant that the world oil market was becoming increasingly crisis or accident prone. Yet, for the most part, these trends were simply ignored or waved away with the refrain that oil would always be available. If you will forgive me, I think what I observed in those hearings last March is still very relevant to how we got to this point: "The world of quotas is over. The surplus era seems to be over, at least for the time being, and OPEC is operating at a very high capacity rate. That means that there is not much give in the market. . . . You can start making a list of things and suddenly you can see... the kind of event that can cause a shock, a temporary shock, but the consequences of it can be very destabilizing to the economy." 2 A few years ago, the world oil market could have lost four million barrels per day and with no difficulty made up that loss. Today, with the loss of Iraq and Kuwait, we are scrimping by, and there is essentially no give at all in the system. There is no spare capacity, and indeed apparently not quite enough capacity to meet demand. The high prices we are seeing today reflect two components: One is the significant disruption in supplies, the tautness in the market, the problems of crude quality, the logistical disruption (which should get greater attention), and so forth. This disruption is on the same scale as 1973 and 1979. The other component is anxiety and fear. What pushed up the price over the last couple of weeks specifically, in addition to the fundamentals of supply and demand, were the Iraqi moves on the foreign embassies in Kuwait and then Saddam Hussein's verbal threat to the Saudi oil fields. We will see the oil price rise and fall on fears and expectations of militarily conflict at any given time. The blunt fact is that, in addition to registering market conditions, the oil price today has become a thermometer that measures war fever.

Will oil prices go higher? There are forces that will work against that-the recession, the conservation response to higher prices, and the existence of inventories. And we have a great source of strength that we did not have in previous crises-the Strategic Petroleum Reserve which was created specifically to counter disruptions and to ward off the severe economic harm of such disruptions. What could push prices up? The weather, unexpected accidents or bottlenecks in oil production and refining anywhere in the world-and conflict in the Middle East. Remember it is uncertainty or even panic that causes buyers-whether they be oil companies or airlines or industrial users or individual motorists-to build inventories during a crisis, and it is drive for higher inventories that pushes up the price.

(2) Looking back on the 1970s, we can see the stresses that this type of situation puts on our political system. Sharply rising energy prices hit the public hard, particularly lower-income groups. And the Kuwait crisis was neither in anybody's GNP projections nor in anybody's family budge. There is an inevitable cry to "do something" and that tends to get us off on domestic political controversies that miss the

1U.S. Senate, Committee on Energy and Natural Resources, World Oil Outlook: Hearing, 101st Cong., 2nd Sess. (Washington: GPO, 1990), pp. 2, 32. 2 Ibid., p. 99.

point that there is a real disruption in the world. Given a little time—and the stimulus of price-the global logistical and supply system can adapt. In the meantime, we should try to restrain the emotional reaction: "During the oil crises in the 1970s, the United States political system was paralyzed in the face of one of the biggest and most costly disruptions of the postwar era. Anger, finger-pointing, scapegoating-all became a substitute for the development of a rational reaction to a very serious problem." I hope that this particular crisis does not develop into an extended affair, if it does, I certainly hope that we, as a country, can keep our eye on the ball and the main issues. Short-term expedients, like price controls and allocations, end up imposing a long-term cost on the nation and impede the adjustment. Many of you will remember the irony of the gas lines-shortages in the cities and areas of population growth, with gasoline to spare in resort areas to which no one could get. But the reaction of suspicion is deep-seated in American culture. The first hearing on high gasoline prices that I found in my research was one conducted by Senator Robert "Fighting Bob" LaFollette in 1923. Senator LaFollette warned that gasoline prices would soon hit a dollar a gallon. (Though, as it turned out, they fell to 13 cents a gallon, it was in the course of those gasoline hearings that Senator LaFollette stumbled onto Teapot Dome.)

(3) This crisis once again demonstrates the importance of a coordinated international response among the industrial nations through the mechanism of the International Energy Agency. There is only one oil market, and all buyers are affected. The IEA helps to modulate the rivalries and suspicions and fears, which in general fuel panic and, in this case, would undercut the remarkable international consensus that the administration has forged. Since we in the United States do not see and hear these suspicions, we tend to underestimate them. We do not appreciate the way that the United States is seen as the behemoth in the world oil market-the Saudi Arabia of oil consumption.

(4) Where do we go from here? Clearly, energy and oil are at the heart of this conflict, and a situation in which we depend on an increasingly-taut world oil market holds unacceptable costs. Even if there had not been an invasion of Kuwait, the market would have been riled by other serious problems, if not outright crisis, in the years immediately ahead.

Two directions are clear. One is to increase the use of North American natural gas and to move away the impediments to its use. The other is a renewed commitment to conservation. It is noteworthy that both were already being propelled forward for environmental considerations. Security concerns now do likewise. The original development of the interstate natural gas system was given a big boost by security concerns in the late 1940s. That is likely to happen again. It's often said that America failed on energy conservation. We disagree. Between 1973 and 1985, the United States became 25 percent more energy efficient and 32 percent more oil efficient. If the United States had stayed at the 1973 levels of efficiency, it would have used the equivalent of 13 million barrels of oil per day more than it actually did in 1985. But, it is also true that in the period of low prices after 1986, conservation flattened out. In contrast to the 1970s, there is wide recognition that conservation has a very important contribution to make to our economic well-being and our security. But the argument ahead is how to achieve it—whether to urge it, or price it, or tax it, or regulate it. I imagine that will be a subject of considerable discussion in the future.

(5) Rapid growth in U.S. oil imports is not only expensive for this country but destabilizing for the world market. We do have to address the U.S. oil production decline and what can be done to slow it. U.S. crude and condensate production has fallen 1.6 million barrels since 1986. In the March 1990 hearing, Senator Johnston asked what might be expected in terms of future decline. Let me now offer our projection: by the year 2000, it could well fall by about another 1.5 million barrels. These are numbers with global implications:

U.S. Oil Production (crude and condensate): 1985, 9 mbd; 1990, 7.4 mbd; 2000, 6 mbd; and 2005, 5.6 mbd. (Source: Cambridge Energy Research Associates.

Looking back, we can see that the United States rather wantonly let a lot of oil production evaporate that is not recoverable. The production loss might have been mitigated, but that is history. The loss of that production turns out to be a heavy cost for the whole nation, as every motorist is finding, and as we see recession stalking the economy.

Daniel Yergin, The Prize: The Epic Quest for Oil, Money and Power (New York: Simon and Schuster, November 1990), p. 775.

(6) We should certainly take a very hard look at the directions of effort in research and development. To Senators who have been swamped in the budget deficit struggle, the last thing one wants to do is suggest spending more money. But R&D is our seedcorn. Unfortunately, changes in the way America does business appear to have had a pernicious effect on corporate sector spending on research and development; and it would make sense to ensure that we are pursuing a diversified portfolio as a nation when it comes to spending in this area.

(7) The North-South struggles of the 1970s seem to be behind us-for the most part. With the sovereignty issue firmly resolved by oil producing nations, the possibility exists for more creative relationships between the United States and the various oil producing nations, which would meet those nations' objectives and also encourage energy production. That is certainly the case here in this hemisphere, with Venezuela and Mexico.

(8) In the 1970s, the biggest source of contention in the domestic energy arena was the economic clash-producers versus consumers, markets versus regulation. From the vantage point of today, the central clash in the 1990s looks to be differentbetween environmental and supply considerations. How do we find the balance between these legitimate and competing concerns? The reality is that the environmental consensus has broad support and has become an integral part of our political process and our national culture. Yet it is not less true that the production and consumption of energy are intimately linked to our economic well-being and our security and strength as a country. Will the conflicts between these two sets of concerns be resolved only on a case-by-case basis, issue-by-issue, the outcome depending on the constellation of forces at a given time, or can we find some form of medication? I do not see any clear answer at this time. But that question will provide the context in which so many energy issues will be fought out, and it behooves all of us to apply ourselves to the critical question of the framework for approaching them.

(9) One characteristic of the reaction to the 1970s was to build flexibility into energy consumption. The one sector where that has not occurred, of course, is transportation. There will certainly be a renewed effort to diversify the fuel sources for transportation, perhaps with existing technologies, perhaps with new ones. At the same time, great efforts will be made to increase the fuel efficiency standards for the automobile fleet. All that I would like to do at this point is note that changing the fuel source and increasing efficiency both will involve tens of billions of dollars. New fuel sources on a scale to be significant would require a massive new infrastructure.

(10) Finally, let me conclude with a lesson that Winston Churchill enunciated some 77 years ago, when he was leading the effort to convert the British Navy to oil. But Britain did not produce oil, as Churchill knew so well, only Welsh coal. His answer to the security problem posed therein was diversified: "On no one quality, on no one process, on no one country, on no one route and on no one field must we be dependent. Safety and certainty in oil lie in variety and variety alone." The case for diversification of options was overwhelming at the beginning of the twentieth century. The Kuwait crisis reminds us that it is no less applicable at the end of the twentieth century. What was wisdom for Winston Churchill in 1913 is wisdom for America in the 1990s.

Senator BINGAMAN. Thank you very much, Doctor. Let us hear from all of the witnesses before we start questions.

Our second witness is Dr. John Gibbons, the Director of the Congressional Office of Technology Assessment. Dr. Gibbons is an expert in energy and environmental issues. Prior to joining the Office of Technology Assessment, Dr. Gibbons served in positions at the University of Tennessee, Oak Ridge National Laboratory and the Federal Energy Administration.

Dr. Gibbons, thank you for being here.

+ Ibid., p. 160.

STATEMENT OF DR. JOHN GIBBONS, DIRECTOR, OFFICE OF TECHNOLOGY ASSESSMENT

Dr. GIBBONS. Mr. Chairman, thank you. I have submitted my full testimony for the record, along with a couple of attachments, and I would only like to summarize those remarks this morning.

Senator Ford wanted some short answers this morning, and I think I can quote from Pogo when he said, "From here on down it is uphill." My testimony here this morning will focus on the longer-term issues-the simple arithmetic and the compelling case for the Nation to be about its business.

Let make three points. First, the U.S. oil supply and demand are obviously on a rapidly diverging path. There are no quick fixes. There are no easy fixes, and we must set long-term goals, a program to go with those goals and stick with it through thick and thin, high price and low price, because change in this system is inherently slow.

It involves putting into place technologies and investments, replacing capital stock-things that are inherently multiyear, if not multidecade in their very nature.

The second point, energy policy should be crafted not in isolation, but to support the overriding goals of economy, environment, and national security. Some energy options are better aligned with these multiple goals than are others.

The third point: some years back we used to think of the fossil fuel age as an age that would last mankind for probably several hundred years, and now seemingly endless tribulations in the Middle East where most of the oil is, and environmental and global climate concerns could greatly constrain our thinking about the length of time in which we can use fossil fuels, especially as we move to the lower grade fuels.

What does that mean? It means that the time that we have left for the fossil fuel age is less than we thought-several times less probably—and that we have perhaps 50 years to make our move to a transition to a nonfossil-fuel world. That means solar and nuclear are our options, gentlemen, and it takes at least 50 years to put that system into place.

Let me remind you very quickly with several slides of what our situation is.

[Slide.]

Dr. GIBBONS. The first slide simply points out that of the 17 million barrels of oil a day we use, we are importing 8 million barrels, and of that 8 million barrels, 2 million barrels per day are coming from the Mideast and our dependence on Mideast oil has grown substantially over the past decade. About a third, or 29 percent of the Mideast oil is the Kuwait and Iraqi oil.

[Slide.]

Dr. GIBBONS. The second figure breaks down our consumption of that oil into the sectors. The top line is our total consumption and the distance between the top line and the next line is that consumed in transportation, et cetera. They are summed up together. Residential and commercial eats up 8 percent of our oil; utilities, now 5 percent and falling; industry, 24 percent; and transportation, 63 percent of all of our oil use. Of that 63 percent, 40 percent, two