Hearing of the Joint Economic Committee - Is the Skyrocketing Price of Oil a Bubble or a New Reality for the U.S. Economy?
Statement
Okay, the hearing will come to order, and I want to thank everybody for being here, apologize for being a bit late. And today we're talking about the skyrocketing price of oil, and we want to explore whether the high price of oil is a bubble or a permanent, painful reality, or some of both, how it will affect our economy, and what we can do to reduce prices and break our dependence on foreign oil.
We know that gas prices and the high price of oil and oil products is the number one issue in America. Everywhere we go -- legion halls, parades, weddings -- this is one of the very first things that people bring up. I wouldn't even say one of the very first things. This is the very first thing almost everyone brings up. It's no wonder that Congress has held about 40 hearings on oil and energy policy so far this year, 11 this month alone.
Now, we're all looking to find answers to some pressing and important questions so we can shape the right economic and energy policies going forward. I'm hopeful we'll have some luck answering those questions today from our very distinguished panel, including Dr. Dan Yergin, a Pulitzer Prize-winning author of The Prize and one of the world's foremost experts on oil and energy. We eagerly look forward to hearing from him and from Dr. Frederick Joutz and Skip Laitner shortly. And I thank all three of you for coming and going out of your way to be here.
I think that everyone would like to believe that high oil prices are a bubble, that you burst the bubble, and the price will come down and stay down. We all hope that's the case, but it may not be so. Many would like to believe there's a silver bullet that can pop the bubble, but if there's no oil bubble, or prices temporarily decline and we put off doing the necessary things we have to do, like conservation or investing more in alternative fuel incentives, we'll be even further behind than we are now from breaking our foreign oil dependence.
One thing is clear. Demand is on the rise, especially in rapidly developing, large countries like China and India, and in this global economy they can compete for oil that's produced here or overseas as well as anybody else. The high price wins. I heard the other day that there'll be as many new cars in the developing world as there are total cars in the U.S. over the next 10-15 years. In other words, if every Chinese, Indian, Brazilian who never had a car and buys one, that'll be equal to the number of cars we now drive here.
In fact, the Energy Information Administration is projecting that oil prices will have increased by almost 70 percent from 2007 to 2008. Gasoline will increase by 35 percent, and diesel prices will increase by 50 percent. And the question everyone asks is demand has not gone up by 70 percent, so why do prices go up by 70 percent? And that's the question we want to answer here because that leads to the belief that there is a bubble.
I also think it's interesting that the big oil companies and OPEC are blaming speculators for out of control prices, when they may be much more of the cause. They're sort of diverting attention. It isn't as cut and dried, at least to me. Speculation may be exacerbating the demand problem, but if we guess wrong on the cause, we're going to put off the right solutions. There are some things that can be done to curtail the impact of speculation, like raising margin requirements and strengthening regulations. And I believe some of these may do some good. I'm for them. But they may not solve the problem in the long-run, particularly if we think these are the only things that should be done. The reality is that we need to look beyond quick fixes that will do little for consumers as they pay record prices at the pump.
Now, we have some charts up here. Many consumers are experiencing stagnant wages, sending a much bigger slice of their paychecks into their gas tanks. Americans are spending double on gasoline now than they spent in 2001. Across the nation families are being shaken down for about five percent of their take home pay just to pay to the gas man. Here's the chart that shows the percentage of disposable income that a family pays. It's doubled.
Low and middle income families are particularly hard hit. The recent data from 2006, when gas prices were only $2.50 a gallon, shows that the lowest 20 percent income levels spent ten percent of their paychecks on gasoline, and that's a scary figure who are trying to scrap by every day and have to take their cars to work often times.
For all the talk about how American families have benefited from the President's tax cuts, and for all the emphasis that Senator McCain is placing on making those tax cuts permanent, the simple, undeniable, you can look it up, no spin truth is the average American family is paying far more in higher gasoline prices this year than they received in the Bush tax cuts. So a lot of Americans are wondering what Washington can do to bring down oil prices and reduce our dependence on oil.
First, let me tell you what Washington didn't do. With seven years under the belt of this administration, the White House taken zero proactive steps to reduce our dependence on foreign oil, zero. If it wasn't for the recent Democratic Congress passing long overdue, modest increase in fuel efficiency standards for cars, President Bush would have left the White House with a spotless record, committing no sins against Big Oil or OPEC.
Now, with almost 70 percent of the oil we consume going into our gas tanks, it's a crime against our future that since 1995 so many here in Congress and, of course, in the White House opposed increasing fuel economy standards for so long. Even now in the midst of $140 a barrel oil and $4 gasoline prices, the only solution some of my friends on the other side of the aisle are familiar with is drilling in the Arctic Refuge. By 2018, ten years from now, ANWR might produce enough oil -- and this is not my estimates, this is the Department of Energy -- to decrease gas prices by one to four cents a gallon in 2018.
The only short term way to increase supplies right now leads directly to the sands of Saudi Arabia. As we see here, OPEC is producing well under its capacity, despite record oil prices. Saudi Arabia is about the only country that has extra capacity right now. It's the 800-pound gorilla of oil production, and even after modestly increasing production this weekend, they still have excess capacity. Most experts believe they could produce another million barrels of oil, which would have an immediate impact on price. Today Saudi Arabia is still producing this year below its 2005 production level, and that's not because of lack of maintenance or wells running dry as it is in, say, Russia, or Venezuela, or Mexico.
But having said that, in the long-term, we must address the demand side of the oil equation. That is the only answer, in my judgment.
One good thing that can come out of the oil shock in the '70s was the push for dramatic energy conservation. Jimmy Carter is not regarded as a very successful president, but a lot of the things he did had positive effects on oil prices for a decade or more later. Why don't we do more of it now? It would reduce prices at the pump and be the easiest thing to accomplish legislatively.
And we'll hear about this from Mr. Laitner, but California -- people forget this. California make Herculean efforts under Governor Jerry Brown I think over 20 years ago during his administration to reduce consumption. They put into effect all kinds of conservation measures for buildings, utilities, appliances. And now California, the car capital of the country, is well below the national average in energy usage consumption. As one environmentalist said, alternative fuels are the sizzle, but conservation is the steak.
Even as someone who supported targeted drilling in the East Gulf -- I was one of the few Democrats who voted. I said let's drill in the East Gulf. I didn't see much environmental damage, and we should do more drilling in the East Gulf. That's closest to the refineries. It probably has the greatest known capacity of untapped oil and gas. You still can't drill your way out of the problem. If you don't do conversation, if you don't do alternative energy, and you don't tell the big oil companies they can no longer run energy policy in America, we won't success, plain and simple.
So there are two main things in my mind that set our nation way off track on energy prices: First, because there were low prices -- and that is good we were complacent. We didn't prepare for the future, because the handwriting was on the wall. And second, the power of the oil, utility, and car companies, which for years and years and years prevented us from enacting real alternative energy programs.
So there are a lot of questions. I'm sure not all of my colleagues will agree with everything or even most of what I've said. But I think we ought to have a debate on this very important issue and look at the causes before we look at how we're going to solve the problems.
BREAK IN TRANSCRIPT
Thank you, Senator Bennett. I think I'll take the prerogative. Chair just mention two quick points before we get to our witness. One, the difference between Saudi Arabia and Alaska is the Saudi Arabian oil is available now and the Alaskan oil is available ten years from now. We can all go back. You didn't do drilling. You didn't do automobile raising mileage standards. Nobody's blameless here no matter what your perspective is, and a lot of mistakes were made in the past. What do you do now?
And one other point -- I despise Chavez and the head of Iran. Exxon-Mobile last year spent 60 percent of its profits buying back its stock. That will not produce one type of new energy, whether it's alternative energy -- when the head of Exxon-Mobile told us he didn't believe in alternative energy -- or oil and gas. With that, I'm using the prerogative of the chair to get in the last word. I don't do that much, but couldn't resist.
BREAK IN TRANSCRIPT
SEN. SCHUMER: Well, thank you, and I want to thank all three of our witnesses for really excellent testimony that tries to deal with this issue. And we're going to limit questions to five minutes and try to do two rounds so people can have a second chance.
First to Dr. Yergin, I was surprised in your testimony that you really emphasized the psychological effect, and sort of bad things seem to be prominent and good things seem to be downplayed. Now, that would sort of not necessarily indicate, but augment the view that non- market forces, non-immediate economic market forces, are having some effect on this price. And, you know, the U.S. Energy Information Administration is predicting that while oil prices may remain high in the short-term, prices should drop off to the $75 range in the future.
Do you agree with that prediction? A friend of mine says that one thing that will bite in here is the fact that we're using less gasoline, and sooner or later people are going to realize that, and in a huge country like ours where so much of our oil is gasoline, that that will have an effect.
So I'd like to -- do you agree with the United States Energy Information Administration's prediction?
MR. YERGIN: We found that best way to think about -- we once did a study called the Perils of Prophecy about oil price forecasting, and so much of what happens to oil prices are affected by other things, such as what happens to GDP, what happens to global politics and so forth. I think, though, in our base case we would think that as we see the kind of things that have been described here, greater efficiency, market response, supplies with delay coming on -- that would set the stage for prices to come down from where they are.
I think right now I'm really struck by this kind of pessimism about future supply and focus on what's, you know, what's going wrong. And I just find that a very important part of the psychology of the markets right now. And I saw your response, and I mentioned that other things like kind of demand response here are not getting the attention. When that happens then I think the markets can change.
SEN. SCHUMER: Yeah, and let me then ask you this, because there is so much talk, the issue du jour here in Congress is speculation. And if you just sort of stop the speculation that the price would come down. That's a little different than what you're saying. You're talking more about markets and the way they function.
And I guess speculators are a result of that, as opposed to a cause of it is how some people put it.
So do you think that if we did some things in speculation, limiting speculation, either raising margin requirements -- some talk about that or at least giving the CFTC power to do that, or saying that the speculator or the buyer must want the product for some eventual use, as opposed to just holding it as an investment. That's pretty severe, but Senator Lieberman is talking about that. Do you think either of those would have -- what kind of effect would those have on price, if any?
MR. YERGIN: Well, I think that obviously the tool of shifting margin requirements seems to be a reasonable tool that regulators should have as they do in other markets. I think knowledge of what's happening in over-the-counter markets, all of those things are the starting point.
I think that the notion that -- that you should legislate asset allocation on the part of investors or 401(k) or whoever, you know, whoever it may be, I think that's a pretty slippery slope to get into that. And I think that if you limit liquidity, how then does the airline whose back is against the wall -- our airlines are spending, I think, $60 billion this year on jet fuel. We know the bad shape they're in. If they can't hedge, they would be even in worse shape.
So I think removing the liquidity from the market would not be a wise thing to do. So I think there's some things that -- that make great sense to do. I think everybody -- Senator Klobuchar raised the question, there needs to be trust about the markets. And the first way you'd get that is by transparency and better information. I think you do that before you rush in and start making a lot of changes.
SEN. SCHUMER: Well, just the proposal that some of us are a part of here that our -- our side of the aisle has put forward is more information, giving the CFTC the ability to investigate and then letting them change the margin requirements without setting a number. That seems to be something that you would think might be positive movement.
MR. YERGIN: Well, I think that's -- I think that's the reasonable thing, and I think -- I believe the CFTC is going to report in September on --
SEN. SCHUMER: Yes.
MR. YERGIN: -- the state of the markets. I think these markets have changed rapidly, developed rapidly. And I think the first step is to really more fully understand them.
SEN. SCHUMER: Thank you. Congressman Brady. And we're going to have a second round.
BREAK IN TRANSCRIPT
SEN. SCHUMER: Okay, we'll go to a second round here. This is for all three panelists, but particularly Mr. Laitner first. There's no silver bullet, but if there's one cost efficient way to deal with this that we haven't dealt with since the '70s, it's efficiency, in my judgment. I think it's the easiest.
It's -- it's -- and it has the greatest bang for the buck. I mean, I mentioned in my testimony the success California has. People don't realize that if you took away cars, California's efficient per capita use of energy would be similar to many countries in Europe. And even with cars, they're more efficient than most states.
Why is it that efficiency, which should not create the kind of political hackles that some of the other things do, why has it gotten so little attention play in -- in the United States thus far? And I'd ask Mr. Laitner and then the two other panelists to comment briefly.
MR. LAITNER: Senator Schumer, that's an excellent question. And we just put out a report last month on what we term the "invisible efficiency investment boom." Since 1970, we have in effect, doubled our efficiency over time --
SEN. SCHUMER: Right.
MR. LAITNER: -- in ways that have been responding to smart investment. But it's the efficiency we don't see, as we use our goods and services -- in other words, efficiency is the energy we don't use in providing travel or providing entertainment or food on the table. And because of that hidden nature, that secondary attribute, it's not something that jumps out at you so as you can count on and you can reliably turn to for immediate impact on the market.
So the critical need is to make the efficiency much more visible --
SEN. SCHUMER: Has efficiency slowed -- I mean, we know that there was a dramatic increase in efficiency after the oil shocks of the late '70s. Has our, if you will, our rate of efficiency slowed down?
MR. LAITNER: Yeah, let me just give you a quick sense of the history. Up until 1973, we were very anemic in our ability to improve efficiency. But as you suggest, '73 to '86, we improved our efficiency better than about 2.6 percent a year as an economy. And then it flattened out less than 1 percent a year over the next decade. And then something interesting happened, one of the new fundamentals that Dan is talking about. I think it has to do with broadband information and communication technologies.
In 1995, Moore's Law began to have an economic consequence. We began to see that in the rapid drop in prices for semiconductors and in computers, technologies, even in software. That lead to what we are now seeing as the Internet economy in various ways that led to my ability to download Dan's book through Amazon Kindel (ph). I didn't have to travel anywhere. It's not in paper at all. It's a dematerialized thing, easily available. I save money doing it. That is among -- that is among the things that are contributing to the new tools that Dan was talking about.
So that we did see a process of capital deepening in the United States up to about the year 2000 and 2002 that led to an uptake in efficiency again. But now more recently, beginning with these uncertainties in the market and what we are here today feeling very seriously, that process has slowed. So we're no longer investing quite like we are. Even in the computer industry, there is hesitation to make those investments in that smart technology.
The capacity is there if the will is there. And if we have that leadership, I think it can again return.
SEN. SCHUMER: Right. And that's market forces working in technology, which generally are efficiency producing things. But here in the government, if we were to adapt the same standards that California did on a national basis, buildings, appliances, utilities, that would have a dramatic effect, I assume.
MR. LAITNER: That would have a dramatic effect, and that's one of the reasons we laid out the 10 policies --
SEN. SCHUMER: Yes.
MR. LAITNER: -- we've recommended to be taken a look at, and that would include exactly that point.
SEN. SCHUMER: Yeah, I'm trying -- I've tried in the energy bills to get us to do that, but just nobody even cares about it very much. And Dr. Yergin, I would make a point here and want to hear what you have to say. It may have something to do with just the psychological effects you're talking about. People aren't paying attention to efficiency, even though it's happening and even though it could happen relatively easily. And they pay attention to ANWR where there's huge contention and unlikely -- that's it's unlikely to happen. Does it -- you think that a greater focus on what efficiency can do, just that in itself, might help a little bit?
MR. YERGIN: Yes, it's something I've thought about for a long time. And as Skip was talking, as you were asking the question, I was thinking if we wanted to put out, let's say, a book about energy, we could have a dramatic photograph of windmills and off-shore platforms --
SEN. SCHUMER: Right.
MR. YERGIN: -- a power plant, but how do you put a photograph of energy efficiency on the cover?
SEN. SCHUMER: Yes.
MR. YERGIN: It is the, as you said, it's the invisible one and yet you know when you look at how much we've saved as a country compared to where we were in the '70s, you see this is an immense resource.
So you say how do you get there? Well it's the advance of technology itself, you get it through regulation, information, exhortation, price, tax, all of those things do it. You know, in 1998 was the lowest gasoline price we'd ever had in this history of our country. And that of course is the time when you had the great SUV boom because --
SEN. SCHUMER: Right.
MR. YERGIN: -- it didn't make sense. Now you see how quickly everybody's playing kind of catch up with this new regime of prices.
So I think it's, it really needs the kind of multi-faceted approach to keep it front and center. It seems to me that it has, and I don't know if you find it in your discussions on the Hill, do you find greater resonance now than say two years ago on this subject?
SEN. SCHUMER: Some but not enough to get us moving here. I mean, one of the things I was thinking of talking about was, well, I'm not wild about this off shore drilling, but at least if you're going to try to do that, you ought to do it combined with some demand reduction and serious efficiency.
As I said ten years ago, I proposed, my friend Senator Bennett's gone but I mean some of us are trying to be two sided on this, demand and supply. Now how much of demand should be fossil fuels and how much demand should be alternatives we can debate, but even putting that aside as I said I proposed to Senator Murkowski get me ten votes for automobile efficiency and I think I can get you ten votes for Alaska, in those days Alaska was less contentious.
And I talked to some of the environmental groups and not all but some of them said you know I'd hold my nose but if you could do that or not do that, I'd rather do it.
So I think you know we do have to come up with sort of the grand compromise here that where Democrats sort of hold their nose a little bit and figure out ways to increase supply, as I mentioned I supported, what was it a handful of Democrats support drilling in the East Gulf and Republicans do far more, even though they may think it's not just the market, to encourage efficiency, and we might have the work of a grand compromise. Frankly, I don't think this administration can pull it off. It's too late and they haven't shown it but either President Obama or President McCain might be able to do that.
MR. YERGIN: Well I think that grand compromise is what our $14 trillion economy requires to assure that it has the proper energy foundations --
SEN. SCHUMER: Right.
MR. YERGIN: -- of the future.
SEN. SCHUMER: Let me since we're in the second round I'll go a little, since my time's up but I'll go a little longer with Congressman Brady's --
Dr. Joutz, tell us about the dollar and the fall of the dollar and how much effect that has had on our increased oil prices and again I'd be happy to have either Dr. Yergin, well Dr. Yergin in particular, it's not Mr. Laitner's area of expertise, comment on that.
MR. JOUTZ: First I guess one thing's important to mention is that the world oil market uses the U.S. dollar as its benchmark price. And as the dollar moves, that effects their revenues and it effects their revenues for also importing goods from the United States and other countries.
When the value of the dollar is appreciating, their real revenues increase and their real imports increase. However, when the dollar depreciates, as it has been doing since about 2002, we've had on a trade weighted basis about a 20 to 25 percent decline in the value of the dollar. That means two things.
First, the revenues that oil exporting countries have received purchase less than they did before.
On the other side of the coin, the one that's more important to us, from the American consumers and firms standpoint, as the dollar has depreciated and the price of a barrel of oil has increased, we've been paying the full price effect of these much higher oil prices. So when it's risen from $25 to $30 a barrel in the mid '90s to $40 and today $138 or $135, we're paying the full freight on that. And part of that is due to the value of the dollar declining against other currencies.
Now --
SEN. SCHUMER: Had to put a percentage, I know that's hard to do.
MR. JOUTZ: I think it's about, I want to say about 25 percent --
SEN. SCHUMER: Of the increase?
MR. JOUTZ: Overall I think I could say that.
SEN. SCHUMER: Pretty significant?
MR. JOUTZ: It's pretty significant. But there's another sort of double edged sword here. As the value of the dollar has decreased, yes we have been paying more for oil as Dan mentioned I think this year it's going to be about $600 billion of importing oil.
As the value of the dollar has increased, U.S. manufacturing firms, U.S. service companies have become much more competitive around the globe. And what we've seen over the last two to three years is we've seen the export sector in the United States has been rising. And American firms that previously were competing against foreign firms are now more competitive domestically.
So the movements in the dollar make some of us better off and in other ways, worse off.
SEN. SCHUMER: Do you have anything to say on that, Dr. Yergin?
MR. YERGIN: Yes. In my testimony I cite the Dallas Federal Reserve which attributes between 2003 and 2007 about a third of the price increase in the rise of the price of oil to the dollars decline. And we think that if you start looking from July 2007 you certainly see with the dollar and other commodities they start to go up as the dollar goes down. In other words, this is part of the --
SEN. SCHUMER: Yes.
MR. YERGIN: -- global impact of the credit crisis.
At the same time you know just this week we saw in terms of stagflation the doubling that the Chinese are going to pay for iron ore prices which tells you that the demand for all commodities prices are high, and although we focus on the downturn here, everywhere else you go in the world, there is this preoccupation with inflation.
SEN. SCHUMER: Right.
One other, this is a question for Dr. Yergin. So you look for everyone demands a short term solution, you know let's snap our fingers and get something done, very hard, very hard to do. Maybe the best one is the one you mentioned, sort of a psychological talking up the good side and talking down the bad side a little bit. But it seems to me something that I've thought, the one place where there is more ready supply is the Saudis. They've increased supply a couple of hundred thousand barrels, I think 300 and then 200 but they still have by most estimates I would guess a million more barrels a day that they could produce. Is there anything that would induce them to do so? Is there anything we can do to get them to do so, or do you feel that it won't make a difference or they're just won't do it?
MR. YERGIN: Part of the issue is the quality of the oil that they have available --
SEN. SCHUMER: Yes.
MR. YERGIN: -- is not the one that there's a demand for. There isn't a physical shortage. That would also leave the world with zero, let's say they produced it all, it would leave us with zero spare capacity, which would be a very precarious position in terms of any kind of prices.
The other thing that I focus on and this is in Skip's area, I really do think that we could very quickly, without influencing any of our standards of living, bring down our gasoline consumption by six, seven, nine, 800,000 barrels a day with some very minor changes in our behavior that always are just put over there under that category of called tips, but if you say it's not tips, it's a strategy. So I actually see conservation as part of our strategic resource --
SEN. SCHUMER: The kinds of things Mr. Laitner laid out --
MR. YERGIN: Yeah.
SEN. SCHUMER: -- in his ten points.
MR. YERGIN: And it's just -- it bugs me that they're always regarded as sort of just tips when you can put them together and that can have an impact because changes in demand kind of help change the outlook.
SEN. SCHUMER: Congressman Brady's being very kind. I had a few other questions I wanted to touch on.
The oil workers that you mentioned that we have a shortage of just people and equipment, you know, classic market economics would say that's going to solve itself rather soon because there's a greater demand for oil. And it hasn't happened yet. Could you please tell us a little about what you think, why it's happened and will it solve itself? And is there anything we can do about it?
MR. YERGIN: Yeah, what happened is that you had a 20 year contraction in the oil and gas industry, you had two price collapses, two episodes of $10 a barrel. So just as the industry finishes its contraction and downsizing, that's when demand explodes with China and India and so forth and that's why we're playing a game of catch up.
Petroleum engineering departments closed down, people stopped enrolling, so I do think that will fix. But it won't fix overnight because it takes five, ten years to get an engineer up to appropriate standards and experience. You need, but if you wanted -- four years ago you could have rented a deep water drill ship for $125,000 a day. Today it would cost you $650,000 a day. Those ships are going to get built, but there again it doesn't happen overnight. But I think it will, those incentives three, four years from now will see an industry that will be more equipped to meet the needs, it will be a much more internationalized industry, we'll see more Chinese and Indian engineers.
SEN. SCHUMER: Anything we can do to hasten that?
MR. YERGIN: I'd like to give that a little thought. I think on the educational side, that might specifically look at the education of energy technologists would be something that would be well worth, that would be one thing well worth examining.
SEN. SCHUMER: Well thank you.
BREAK IN TRANSCRIPT
Source