Senator Pete V. Domenici National Association of Manufacturers Last week, T. Boone Pickens publicly predicted that we will see oil go up to $50 per barrel before we will see it go below $30 per barrel. I am not a market forecaster. I don’t know if Boone is right or not. It is possible that the recent price hikes are the result of market psychology instead of the relationship between supply and demand or the threat of terrorism to international wells and shipping ports. If it’s market psychology, prices should fall after the summer driving season. On the other hand, Boone may be right. We may have moved into an era of extraordinarily high oil prices. First, several international supply issues could keep prices high: 1. Venezuelan production is down; 2. Nigerian reserves estimates have been lowered; 3. Iraqi production is still low and jeapordized by military and political instability, and; 4. OPEC seems comfortable maintaining production quotas at current levels. I have some additional concerns that will affect oil prices in the near future. 1. Oil is still priced in dollars. That means oil has been insulated from the recent decline in the value of the dollar versus the Euro. I worry that OPEC nations might begin trading oil in Euros or some other non-dollar denomination. If that were the case today, oil prices would have increased 30 percent in the last year, just based just on the decline in the dollar. 2. I am also very concerned about increase in global demand. China has surpassed Japan to become the second largest importer of oil behind the United States. Chinese crude oil imports rose by a staggering 31 percent last year, at an increased cost of 55 percent. 3. I think we have underestimated the compounding effect of increasing world populations and simultaneously increasing standards of living. These factors increase the global demand for energy at an extraordinary rate. That will have a dramatic and lasting impact on the price we pay for foreign oil. 4. Finally, I am concerned that relations between the United States and Saudi Arabia are not what they were 25 years ago. I think our “friends” in the Middle East take a much more pragmatic, business approach to dealing with us. I also worry that our relative influence in the region is declining. Some have suggested that we “jaw-bone” the Saudis and the rest of OPEC into increasing production. I don’t want to discount that idea, but I have to wonder why OPEC would respond to our pleas. There is no consensus in Congress to either decrease our demand by sharply increasing CAFÉ standards or increase our supply by opening ANWR or producing more from the Outer Continental Shelf. I think OPEC sees us for what we are. We are hooked on imported oil. We now import nearly 60 percent of our oil and expect to import 70 percent by 2025. Gasoline costs more than $2 per gallon in most of the country and the price will likely go up through the summer. These facts don’t seem to shock people. There is no public outcry. We seem to have broken through any psychological barrier we may have had to these startling facts and have accepted them as our destiny. Let me speak to a recent proposal that the President open up the Strategic Petroleum Reserve and start releasing that oil supply into the market. Frankly, I think that’s the worst idea I’ve heard all year. Why would we risk a valuable national security asset for a penny’s saving on the price of gasoline? When President Clinton opened SPR to ease gasoline prices, we saw the price of a barrel of oil drop by a few dollars for a few days. But for the next several weeks, gasoline prices dropped by only one penny per gallon. We are a nation at war. We live in a world dominated, more than ever before, by violence and the fear of terrorism. We face the real possibility of having our oil supplies disrupted if key pipelines, refineries, or tankers are attacked by terrorists. If we tap SPR now, because gas prices are high, we leave ourselves with no margin for error. If our oil supply is cut, we are powerless to protect our own ongoing commerce. I believe we must vigilantly protect SPR as a vital national security asset. Of course, oil prices aren’t our only energy challenge. For the last 20 years, natural gas was the energy of choice for new power plants. It was clean. It was affordable. And was in abundant supply. Now, supplies are tight and prices have been climbing steadily since June, 2000. Today, natural gas is almost prohibitively expensive. In its 2004 forecast, the Energy Information Administration predicted that, by 2025, the U.S. would import 30 percent of its natural gas as Liquefied Natural Gas. Right now, it looks like local opposition on both coasts may keep us from building LNG import facilities. Gulf states like Louisiana, Texas, and Mississippi may welcome LNG facilities. They already have a huge natural gas infrastructure from production in the Gulf. But then we have to ship it to the states that use the most natural gas: the same East and West coasts that refuse to import it. The high cost of transporting LNG across country doesn’t do much to relieve natural gas prices. Not surprisingly, utilities are switching from natural gas to coal. That’s driving up the price of coal. Wholesale coal prices rose more than 30 percent over the last year. Over the next 20 years, our demand for coal is expected to exceed our demand for natural gas. The demand will make coal mining more efficient and I think the price of coal will come down over time. But I keep waiting for the other shoe to drop. If we implement proposals to regulate C02 or tighten the Clean Air Act, the cost of burning coal could climb sharply. None of these problems are new. Congress and the Administration are keenly aware of them. Three years ago yesterday, the President issued his National Energy Policy Plan. He outlined the challenges ahead, proposed solutions and called on Congress to pass a comprehensive energy bill that would put his proposals to work. He called for the development of hydrogen cars and more wind, solar and geothermal energy. He called for more nuclear energy, increased domestic production of oil and more clean coal. He outlined a plan that ensured us a supply of clean, abundant and affordable energy for decades to come. The House has passed an energy bill three times. It’s still struggling in the Senate – mostly because the Senate is very closely divided and Democrats do not want to give the president a victory on this issue. But I am optimistic that we will get an energy bill this year. The very problems I have identified are combining to create a perfect storm for the passage of an energy bill. Natural gas prices are so high they are driving tens of thousands of manufacturing jobs overseas. Rising gasoline prices have peeled $31 billion from our economy this past year. Meanwhile, rising crude oil prices caused the stock market to fall this week. Last summer, we were hit by the worst power outage this country has ever known. Consumers understand electricity better than they did before and they are demanding reliable power. They expect Congress to mandate that reliability. Energy prices are hitting consumers hard. They are driving up the price of everything, from the silicon chips in your computer – which is made from petroleum -- to the price of groceries. These aren’t happy events. But I believe they are events that might force Congress to act. I have energy bill that will invest nearly $2 billion dollars into the development of hydrogen cars. It will increase by tenfold the production of wind energy. We will see a rise in the production of solar and geothermal energy. With my bill, we will conserve more energy. The bill offers tax credits for buying energy efficient cars, building energy efficient homes and manufacturing energy-efficient appliances. We will build a pipeline that brings the largest, untapped supply of natural gas in this country down from Alaska to stabilize natural gas prices. We will do more to produce our own oil in the Gulf of Mexico and from inland wells – helping to stabilize oil prices. We will burn coal more cleanly that we imagined was possible ten years ago. We will mandate electricity reliability and expand and modernize our national grid. We will produce more, conserve more and diversify our national energy supply. Historically, this has been a country that found victory in its darkest hours. We have done so in war. We expect to do so again in this new war against terror. Likewise, our presidents and our Congresses rise to meet our domestic challenges. Despite politics and elections, we have always found a way to solve our biggest problems. I believe that the bigger our energy challenges become, the more likely this Congress will come together to find solutions. The energy bill isn’t perfect. But it’s the first big step in solving our energy problems. Delivering this energy bill to the President’s desk addresses the immediate crises and sows the seeds for next generation of energy solutions.