Military

The International Aspects of U.S. Energy Security

Alan P. Larson, Under Secretary for Economic, Business, and Agricultural Affairs

Testimony Before the House International Relations Committee

Washington, D.C.

June 20, 2002

Chairman Hyde, Mr. Lantos, respected Committee members, I am delighted to be here today with Secretary Abraham to discuss the international aspects of U.S. energy security.  

Hard Facts About the International Oil Market 

A number of hard facts must be factored into the formulation of an energy security policy.  These hard facts include: 

·        Two-thirds of proven world oil reserves are in the Middle East. In contrast, the United States has 2 percent of proven world oil reserves; 

·        The United States, as well as Europe and Japan, rely on imports to meet a large and growing portion of our oil needs; 

·        Because markets are global, energy market disturbances that initially affect others will transmit aftershocks to us through prices and other economic linkages; 

·        Significant amounts of oil are controlled by problem States. 

Taken together, these facts mean that an effective energy security policy must have important international dimensions, including: 

1.  Policies to promote increased and diversified production of energy from a range of foreign suppliers, especially those in more secure areas. 

2.  Effective international measures to respond to physical oil supply disruptions, through the coordinated use of strategic stocks and the encouragement of spare oil production capacity. 

3.  Dialogue to encourage major oil producing countries to maintain responsible production policies that give full weight to their interest in preserving a growing world economy and a less volatile international oil market. 

     Energy security policy has two main goals.  First, to ensure that our economy has access to energy on terms and conditions that support economic growth and prosperity.  Second, to ensure that the United States and its foreign policy can never be held hostage by foreign oil suppliers.      

     Energy security is a timely and appropriate topic.  Earlier this year Iraq made yet another futile attempt to damage the world economy through an oil production shutdown, its third embargo in less than two years.  The Iraqi action overlapped with a short oil supply interruption caused by labor unrest in Venezuela.  These two disruptions removed close to 3 million barrels per day from the market and remind us that the international oil market can be both volatile and unpredictable.  

The National Energy Policy (NEP) Framework 

     Energy security must be a national priority.  As one of its first priorities upon entering office, the Bush Administration addressed the energy challenges facing our country and the world.  A little over a year ago, the Administration issued the National Energy Policy (NEP) report.  In discussing the report, American Ambassadors conveyed to host government officials that energy security is a priority of U.S. trade and foreign policy, and that energy cooperation would be an important measurement of our overall relationship.   

     This morning, I want to share with you some of the key international aspects of our policy, particularly those dealing with our energy security strategy. 

Diverse and Reliable Supplies Enhance U.S. Energy Security 

     Energy policies that rely on market forces have made our economy more flexible and responsive.  We use energy more efficiently; since 1970, America’s energy intensity (the amount of energy it takes to produce one dollar of GDP) has declined by 40 percent.  

     New technologies, such as deep water drilling and enhanced oil recovery, are reducing the environmental effects and the economic costs of accessing technically challenging oil and gas reserves in the United States.  For example, it is estimated that enhanced oil recovery techniques could add 60 billion barrels to existing fields nationwide.  Deregulation of electricity markets, when implemented effectively, has brought a significant fall in electricity prices as a result of competition.   

The U.S. is itself a leading energy producer.  The United States produced 72 of the 98 quadrillion BTUs of energy that we consumed in 1999.  

The United States is the world's second largest natural gas producer and its third largest oil producer. 

We are virtually self-sufficient in all energy resources except oil, of which we import 52 percent of our needs. Estimates indicate that over the next 20 years, U.S. oil consumption will increase by 33 percent or more than 6 million barrels a day.  Depending on many factors, including the policies we adopt, the Energy Information Administration estimates that imported oil could grow to 62 percent of our total oil consumption by 2020. 

Other developed regions are also dependent on foreign oil.  Europe currently imports 52 percent of its oil needs.  Japan imports 98 percent of its oil needs. (Chart 1) 

These high levels of imports by friends and allies, as well as by the United States, means that energy security cannot be defined as self-sufficiency.  With 2 percent of the world's proven oil reserves, the United States is unlikely to ever again be self-sufficient in oil. 

     It is in our national interest to limit our import dependence through market-oriented policies to increase domestic efficiency, conservation, and production.  However, oil imports will be an unavoidable component of the energy supply mix of the United States.  Under current circumstances, significant reduction of oil imports could not be achieved without severe effects on our industries and a significant reduction in the buying power of American families.  Through an effective energy security policy, however, we can do much to ensure that oil imports do not erode the independence of our foreign policy nor the security of our economy. 

About half of our imported oil comes from four countries, Canada, Venezuela, Mexico and Saudi Arabia.   

     Canada is our leading supplier of imported natural gas, electricity and oil.  All three flow across the border in both directions.  The Canadian energy sector is harvesting the enormous potential of its heavy oil reserves, which are already on stream at close to 600,000 barrels per day and whose full potential anchors Canada as a pillar of North American energy security.  World-scale oil and natural gas projects are also underway in Atlantic Canada, which is now the fastest growing source of natural gas, by pipeline, for New England.  Canada's vast resources, market based energy policies, and our interconnected energy infrastructures, contribute significantly to U.S. energy security and to the shared economic health of our two nations. 

Managing such a large trading relationship is a top Administration priority.  Next week the State Department will host the Energy Consultative Mechanism, which brings officials from both governments together to address trade, regulatory, and market developments.    

Mexico is one of our leading energy and trading partners.  The U.S. is by far the leading market for Mexican manufactured exports, which are now about 10 times the value of Mexico's oil exports.  Mexico clearly understands the importance of a healthy U.S. and global economy to its economic well-being.  Our energy trade is not a one-way street.  We import crude oil and electricity from Mexico, and are a net exporter of refined petroleum products and natural gas to Mexico.  The agenda of our Bi-National Commission meetings, an annual meeting led on our side by the Secretary of State, and including U.S. and Mexican cabinet-level representation, includes energy. 

The two-way nature of North American energy trade highlights the importance of addressing energy cooperation trilaterally, which is why we participate in the North American Energy Working Group. 

     Venezuela historically has been a secure and reliable energy supplier to the United States.  We have worked hard to build a more productive energy relationship with Venezuela.  We participate in frequent consultations with Venezuelan energy officials.  I met last week with the President of the Venezuelan state oil company PDVSA and the Vice Minister of Energy and Mines; they reaffirmed to me Venezuela’s commitment as a reliable energy supplier to the United States.  To meet its goal of expanding oil and gas production, Venezuela must take steps to improve its investment climate.   

     In recent years, dramatic improvements in exploration and production technology, notably through deepwater offshore exploration have opened up new sources in the Atlantic Basin, Canada, the Caribbean, Brazil and the entire western coast of Africa.  Developments in the Caspian Basin and Russia also promise to open up significant amounts of new production for world oil markets.   

Forecasts for oil capacity growth by country (provided in Chart 2) show that Caspian States, Nigeria, Canada and Russia will be among the fastest growing sources of new oil production capacity.  Our diplomatic engagement on energy issues in each of these regions and countries is intense.  Let me provide you with just a few concrete examples that demonstrate what we are doing to achieve these energy goals. 

     In light of its large possible oil reserves of about 233 billion barrels, we are making strong and successful efforts to develop multiple pipelines so that the Caspian Basin can become a rapidly growing area of new energy supplies that will be delivered reliably to the world market.  Detailed engineering of the Baku-Tiblisi-Ceyhan oil pipeline is nearing completion.  We expect that the consortium of companies will approve the development and award construction contracts this summer.  Similarly, the Shah Deniz gas pipeline from Azerbaijan to Turkey is moving through the detailed engineering phase toward the corporate approval stage later this year.   

     At the recent U.S.- Russia Summit, the President initiated a stronger energy relationship with Russia, now the world's second largest crude oil producer.  Russia is developing new oil and gas fields, including multi-billion dollar projects, with U.S. and other foreign investors.  We welcome strengthened energy ties with Russia, and their new energy production in the coming years will enhance U.S. and global energy security.   Our bilateral energy dialogue with Russia will focus on facilitating commercial cooperation both within and outside Russia and addressing bottlenecks that keep Russian energy from reaching world markets. 

     In other countries where energy production is likely to expand rapidly, such as Nigeria and Kazakhstan, we have negotiated bilateral energy cooperation framework agreements. These agreements will help promote development of the energy and related sectors in accordance with international standards of responsible economic, social, and environmental management, while helping to open new opportunities for American firms. 

     The Administration has recognized Africa's emerging role as a major energy supplier.  We are seeking Congressional concurrence to reopen a diplomatic mission in Equatorial Guinea to support the growing presence of American citizens working in the energy sector and to better monitor human rights developments.  I also participate in the Joint Economic Commission meetings with Nigeria, and we have expanded the focus of that mechanism to deal with the energy sector. 

     Part of our engagement in Africa is to encourage transparency.  This is why we are supporting the World Bank's monitoring role in the Chad-Cameroon pipeline and elsewhere.  We also strongly support the OECD Convention to prohibit bribery in international business transactions, an agreement that internationalizes the main elements of the U.S. Foreign Corrupt Practices Act. 

Part of our engagement in Africa is to encourage transparency.  We have a strong policy interest in assisting oil-producing countries to channel their energy resources into solid and sustainable economic development that will benefit their populations.  Unfortunately, the record shows that when this does not happen, there is conflict and rampant corruption.  That is why we are supporting the World Bank's monitoring role in the Chad-Cameron pipeline and elsewhere. 

We are also keenly focused on the protection of human rights.  Together with the British and Dutch Governments, we have partnered with oil, gas and mining companies and human rights groups on a "Voluntary Principles on Security and Human Rights" process.  These Principles are designed to provide practical guidance to strengthen human rights safeguards in company security in the extractive sector.  

     The Asia Pacific region is the world's fastest growing consumer of energy and a source of significant energy resources.  The U.S. leads the Energy Security Initiative of the Asia Pacific Economic Cooperation (APEC) group, which is helping the region to diversify energy sources through the promotion of gas and renewable energy, to build new petroleum reserves, and to stabilize energy markets in cases of natural disasters or terrorist attacks. 

     The Middle East holds two-thirds of proven world oil reserves. (Chart 3).   Given its huge reserve base, the Middle East will be among those regions adding sizeable new oil productive capacity to world markets, and we are encouraging initiatives by Saudi Arabia, Kuwait, Algeria, Qatar, the UAE and other suppliers to open up areas of their energy sectors to foreign investment.   

For example, Saudi Arabia invited foreign companies to help develop its natural gas sector.  Foreign investment is expected to exceed $25 billion, and U.S. companies have won lead roles. 

Dealing with Oil Supply Interruptions  

The sharp, unanticipated interruptions in oil supplies in

1973 and in 1979 were followed by severe economic consequences for the U.S. and world economy.  We learned from these painful experiences the value of strategic oil stocks. 

The U.S., as the world's largest oil importer, has made major investments in strategic oil stocks.   The value of these stocks was highlighted during "Operation Desert Storm."  In the weeks before the "Desert Storm" military action, member governments of the International Energy Agency (IEA), announced that they would make available to the market 2.5 million barrels per day once fighting began.  The United States contributed 1.125 million barrels per day, followed by large contributions from Japan and Germany.  The IEA's credible commitment calmed the market and  in concert with the advent of allied military action, oil prices actually declined sharply once Desert Storm began, depriving Saddam Hussein the oil weapon.

The National Energy Policy report sets out our policy that these strategic stocks are to be used in case of actual, physical shortfall.  The President directed that the Strategic Petroleum Reserve (SPR) be filled up to its 700 million-barrel capacity, in a deliberate and cost-effective manner.  The current fill rate is close to 150,000 b/d.   

At a draw rate of 2 million barrels per day, the SPR alone could provide enough coverage to counter a disruption for 286 days.  Privately held stocks would also be available to cushion a disruption. 

International Energy Agency (IEA) member nations are required to hold stocks equal to 90 days or more of each nation’s net imports.  Presently, IEA countries hold some 3.7 billion barrels of oil stocks.  

The United States, Germany, and Japan hold almost 90 percent of total IEA public stocks and would make up the biggest part of a sustained drawdown. 

The maximum drawdown rate for IEA public crude oil stocks is up to 12 million barrels per day in the first month and around 8 million b/d in the following two months. (Chart 4).  

The maximum drawdown rate of public oil stocks is made up of 4.2 million b/d from the SPR, 2.3 million b/d from Japan, 2.3 million barrels per day from Germany.  

U.S. investment in oil stocks was made in partnership with the Congress.  Combined with the stocks of our IEA allies, these strategic stocks send an important signal to global economic markets that we are prepared to manage the unexpected.  Together, consuming governments are ready to do their part to provide stability and reliability to the market in the event of a major supply disruption.   

Because of the credibility of our strategic oil stocks, we have the ability to deter some potential supply disruptions.  For example, this April, with our IEA allies, we sent clear signals to market participants that a sustained, or widened, Iraqi embargo could be countered by International Energy Agency member countries.  Iraq’s attempts to blackmail the international community did not work.  

Both producers and consumers know that the use of oil as a political weapon is unacceptable, and the lesson from instances in the past is clear, it does not work. 

     Recent additions to Asian oil stockpiles, led by the newest International Energy Agency member, Korea, bolster world energy security.  The IEA is working hard to encourage large non-IEA countries, such as China, to hold stocks and thereby, provide additional security to world oil markets.  

Saudi Arabia, the world's largest oil producer, has pursued a policy of investing in spare oil production capacity, and diversifying its export routes to both of its coasts.  These enormous investments allow Saudi Arabia to credibly assure markets that it has the spare production capacity to mitigate supply disruptions.  Saudi Arabia has used this capability effectively. 

Improved Global Markets Enhance Energy Security 

We enhance our own global security by working cooperatively with key countries to expand the sources and types of global energy supplies. 

The National Energy Policy underscores the need to deepen our dialogue with major oil producers on our shared interests in accurate information related to oil markets and in stable markets.  This is consistent with Saudi Crown Prince Abdullah's call for deepened producer-consumer understanding.   

This enhanced dialogue with oil producers can contribute toward a well-functioning oil market.  Responsible producers and consumers have a shared interest in improving the transparency, timeliness, and accuracy of the data that guide global oil markets.  

Responsible oil producers with large reserves also have a significant stake in stable markets.  Unstable oil markets have dramatic roller coaster effects on the public finances of oil producers.  And as history has shown, surges in oil prices tend to reduce economic growth, stimulate new production and lower prices and demand for OPEC oil in subsequent quarters.  

The Administration believes that market forces should play a larger and larger role in determining oil prices. 

Just as the world is emerging from a global slowdown, oil producers and consumers can best reinforce mutual interests by sending the market signals that the economic recovery -- and the recovery in oil demand growth -- will be sustained.  

Open Energy Sectors and Trade Enhance Energy Security 

A tremendous amount of capital will be needed to increase energy production and enhance our energy efficiency.  The United States welcomes the benefits and contributions that large international investments have made in our energy sector. 

Major foreign investors in our energy sector include a European based oil major, the largest energy producer in the U.S., and a leading Russian company that has moved to acquire a  robust retailer network in the United States.  State-owned firms from Saudi Arabia, Venezuela, and other major oil producers hold significant refinery and distribution ventures here as well, deepening our shared energy ties, and our interest in stability. 

U.S. openness to foreign investment has made us one of the world's most competitive economies, and has provided us with capital and jobs for our people.  Investments by major producers also enhance our security of supply and their security of demand. 

American energy firms are world leaders, and their investments and services in energy producing countries enhance market linkages and energy security. 

Promoting energy investments and trade is a core element of our engagement with major oil-producing countries.  We will use our membership in multilateral organizations and negotiations such as the Asia-Pacific Economic Cooperation (APEC) forum, the World Trade Organization (WTO), the Organization for Economic Cooperation and Development (OECD), and the Free Trade Area of the Americas (FTAA), to reduce barriers to trade and investment. 

Additionally, we vigorously support American trade and investment through a variety of programs offered by the Export-Import Bank, Trade and Development Agency (TDA) and Overseas Private Investment Corporation (OPIC). 

Problem Countries Require Exceptional Treatment 

While our general energy security approach is to actively support the global opening of trade and investment opportunities, there is a set of problem countries whose  policies and actions are of such concern that we bar or restrict American firms from most commercial activities with these states, including exploring for or developing energy resources, or, in most cases, buying or importing their oil.  These countries include major oil producers such as Libya, Iran and Iraq, as well as Sudan, Cuba, and to a more limited extent, Burma.  Libya, Iran, Iraq, Sudan and Cuba are designated State Sponsors of Terrorism.   

In dealing with these nations, we balance our desire to

diversify our energy sources with our very real concerns about the security threats that these nations pose to the international community. 

With the Iran Libya Sanctions Act (ILSA), Congress set out a policy to discourage the development of petroleum resources in Iran and Libya that could be used to support international terrorism and to acquire Weapons of Mass Destruction (WMD). 

The Secretary of State and other Administration officials have worked hard to sensitize our friends and allies about the depth of our concerns.  While some of our allies don't agree with our focus on the energy sector, they share our goals of stopping terrorism and the spread of WMD.   

I mentioned earlier that Iraq has periodically suspended its exports in a futile attempt to cause economic harm and to gain political advantages.  We must anticipate that Iraq will continue to be a wild card in world oil markets. 

An important component of our Iraq policy is working with

friends, allies, and the UN Security Council.  The UN recently passed a unanimous resolution (1409) that will simplify humanitarian imports for the Iraqi people under the Oil for Food Program and will tighten controls on military-related imports.   

Revenues from the purchase of Iraqi oil do not go to the

regime, but are used to buy humanitarian goods under the UN's oil-for-food program and to pay for damages caused by Iraq's invasion of Kuwait. 

Conclusion 

Energy security is a priority of U.S. policy.  The National Energy Policy recognizes that energy security has both domestic and international components.  On the international front, we seek to enhance cooperation with both consuming and producing governments to mitigate the impact of supply disruptions, to diversify sources and fuel mixes, to promote energy trade and investment, and to improve the functioning of the global energy market.  Reliable, affordable, and environmentally sound energy supplies support U.S. and world economic growth.  They are the result of a well-executed, market-based, forward-looking National Energy Policy.  

Thank you for your attention.