Senate Committee on Energy and Natural Resources Budget Request

HEARING OF THE SENATE COMMITTEE ON ENERGY AND NATURAL RESOURCES DEPARTMENT OF ENERGY BUDGET REQUEST

SEN. WYDEN: Thank you, Mr. Chairman. I want to welcome the secretary, an old friend. We've written many laws together, particularly in the technology area.

Mr. Secretary, I want to go over the question of gasoline prices with you, because, as you know, they're just soaring. They're going through the stratosphere on the West Coast. And I am very troubled about the administration's policy on this issue, and I want to zero in specifically on what we're talking about.

I understand Senator Bingaman asked some questions about the Strategic Petroleum Reserve earlier. Your view was that the administration's position is they're going to be flexible with respect to when oil is released. There's currently a moratorium on filling the reserve through March. And, in effect, I guess the oil companies are allowed to delay delivery of oil now that they're obligated right now to (send?) strategic reserve.

I think this is a very regrettable policy. And I want to be very precise in terms of getting your assessment on a particular issue. I think reasonable people can differ with respect to when oil ought to be released. What I think is a no-brainer, however, is that this country have a clear policy, a policy that markets understand and a policy that consumers understand.

For example, the Wall Street Journal editorial page, not exactly a left-wing organ, so to speak, they said that if there was a firm declaration that the administration is prepared to release oil, that that alone, a statement that we would be prepared to protect our consumers and our businesses, that that alone would have a stabilizing effect on markets.

Why is it that we can't get a clear statement on this issue, and particularly a firm declaration that we'll use it when we need it? And I would be interested in (your response?).

SEC. ABRAHAM: I think we will use it when we need it. The question that obviously, as you said, people can differ on is what constitutes the threshold of when it should be used? We do not believe it should be used to address price fluctuations. We do believe it should be used when there are severe supply disruptions, and that obviously is subject to a lot of different people's perspectives.

But as I said earlier today, we are prepared to use and can act quickly if we decide that a period of disruption continues a basis for that. We would make that decision in consultation with our IEA partners in the event of the sort of disruption that we think would be appropriate timing to use the reserve.

SEN. WYDEN: So at what point would the administration be willing to use it so that a message can be sent to markets and consumers? I mean, as I say, you've got people like the Wall Street Journal editorial page saying, "Fine, let's have a debate about when it ought to be done." But the market would benefit from a firm declaration. And I would very much like to see that at a minimum.

There are some other questions I want to ask about that. But can you tell us when in terms of the kind of strong statement that the markets and consumers would benefit from if the administration --

SEC. ABRAHAM: I don't think I can amplify on what I've said or what the administration has said. I mean, the Wall Street Journal is a fine publication, but it doesn't govern our policy on this issue or any other. We believe that—we think the reserve is there to provide energy security in times of severe disruptions in supply, unavailability at a level that we feel constitutes a basis for using it, not in other circumstances. And we believe that the circumstances that rise to that level have not yet been met.

SEN. WYDEN: Let me ask just a couple of other questions on this point.

SEC. ABRAHAM: Sure.

SEN. WYDEN: The current high oil prices seem to be causing the American consumer to spend nearly $100 million more per day on energy compared to one year ago. So people come up at town meetings and the like and they want to know what's the government going to do for them. What would the Department of Energy say to the people of Oregon and people around the country who are paying these enormous sums, $100 million per day in energy costs? What's your message to them?

SEC. ABRAHAM: Well, I can assure the senator that if they are coming up to you that they are also coming up to the secretary of Energy when the opportunity is provided.

The circumstances that have caused the prices to rise in recent weeks have been building for some time, as you know. The independent analysis division of the Department, the Energy Information Administration, had already forecast a rising set of prices in this season compared to last year. It's not that much different, I might point out, than it was two years ago during the winter season in terms of comparable prices.

The main difference is that today we've had other factors that have come into play, some beyond our control—a strike in Venezuela, which, as you know, significantly shut down one of our four largest energy trading partners. We've had a much colder winter than last winter, and that has contributed in part to this. We also have had a stronger economy in this winter than we did in last winter, and that has also been a factor.

In terms of—as I said at the outset, when Senator Domenici asked me a similar question, the thing that one would note is the recurrent patterns, that whether it's a two-year cycle between these kinds of price increases or shorter or longer cycles, there does seem to be a cycle.

And that's a pattern that I think at least can be, not in the short term effectively addressed, as effectively addressed as it can be in the longer term, by passing energy legislation designed to try to increase domestic production, moving forward with our hydrogen initiative that I know you're quite interested in, to try to move us past the level where we're so dependent on energy imports. And those are some of the things, at least, that I hope we can work together on.

SEN. WYDEN: The thing that troubles me about this, Mr. Secretary—because there's no question about cycles and the like—I think there's a double standard. I think that the administration is willing to cut breaks for oil companies and isn't willing to cut them for the consumer. And I want to be real specific about what concerns me and then get your assessment about it.

Since December, the Bush administration has allowed oil companies to delay delivery of 10 million barrels that they're obligated to deliver to the Strategic Petroleum Reserve. The administration obviously took this action; tight supplies resulting from the strike in Venezuela drove up the prices.

And clearly it looks to me, and I think a lot of the people that I represent, is that the administration is willing to cut oil companies a break and say, "All right, your deliveries can be delayed," but consumers can't be cut a break when you've got tight supplies and prices going through the stratosphere.

And it just looks like a double standard to say that tight supply provides a basis to give oil companies a break on the deliveries of oil they owe to the reserve but not to give the consumer a break. What's your response to that?

SEC. ABRAHAM: My response is that while it might appear that way, it's actually quite the contrary. The oil companies who are putting oil into the reserve do so under our royalty-in-kind exchange program. That is, they're using this to offset royalty obligations to the United States.

When they have a deferral, as we have done in the last couple of months, they have to pay a premium for that. In other words, they have to send more oil to the reserve ultimately than they would have otherwise, because they got the chance to keep that oil in the marketplace.

Moreover, the reason and the rationale for keeping it in the marketplace, as my former colleague from Michigan, Senator Levin, writes me on often, is the fear that the more oil we take out of the market, the tighter the market even becomes from what it would otherwise be. And the belief that we have is that taking even more oil out of the market will drive up the cost to consumers.

So, in other words, the oil companies are going to end up paying more because they have to pay a premium for this; in other words, like interest almost. And the consumers are paying less, actually, because there's more oil in the market, thus, to at least a modest amount, reducing—or increasing supply at a time when the price is already too high.

SEN. WYDEN: We could continue the point. I guess I would say, Mr. Secretary, it's not very plausible to me that somehow this is being hard on the oil companies. Oil companies sought and have desired the particular course of action the administration is taking. Consumers are trying to get another course of action.

I just hope that you will take the counsel of some pretty independent people, including the ones I'm citing—Wall Street Journal editors and people who sat where you're sitting even as recently as last week. They've said, at a minimum, state a policy that you're going to protect the consumer and businesses and others that are getting hammered.

All up and down the West Coast, where we have this tight market, people are being pinched like never before. And it sure looks to me like there's a double standard here. The oil companies have gotten something they wanted. You've described the deferral in a different way.

And, again, reasonable people can have a difference of opinion with respect to this. The oil companies are plenty happy with the administration's decision, and consumers are getting hosed because they're not getting any protection from the strategic reserve.

SEC. ABRAHAM: Well, I'm glad to take your advice, as I always do, and include it in the considerations which we have. I would, though, say that, at least in terms of the deferrals, we've had strong and quite wide-spectrum advice, in terms of political spectrum, that taking more oil out of a market at a time when there's already constraint in the market is not going to help consumers, it's going to raise the cost of their gasoline or home heating oil; and that if we're charging oil companies extra to do that, it seems to me we're offsetting any benefit they might have (reached?). In fact, that's the reason we will charge them a premium.

SEN. WYDEN: We will find common ground on other things like the Cox-Wyden fuel cell bill and the like. But you ought to know how strongly people feel about this. I mean, my state has the second- highest unemployment rate in the country. I also was in California visiting my mother. Gasoline is well over $2. People are looking for their government to stand up for them.

And it looks to me, as I've said, that there's a double standard. And Spence Abraham is a very good and honorable fellow, and we disagree passionately on this issue, and there'll be other ones we agree on. But I hope you'll look at sending a message to the markets and the consumers on this issue, because I think it's going to pound our economy at a time when we are very vulnerable.

Thank you, Mr. Chairman.