Statement of
Robert W. Gee
Assistant Secretary for Fossil Energy
U.S. Department of Energy
to the
Subcommittee on Regulatory Reform and Paperwork Reduction
Committee on Small Business
U.S. House of Representatives
April 18, 2000

Mr. Chairman and Members of the Committee:

As virtually every American is aware, our economy has endured a new cycle of volatility in oil markets. It began in 1997 when the Organization of Petroleum Exporting Countries (OPEC) substantially increased oil production. At about the same time, global demand took a downward turn. Much of Asia lapsed into recession, and the world had two years of relatively mild winters. As a result, the availability of crude oil in global markets began to exceed demand, and oil prices plunged to historic lows.

In the spring of 1998, as Middle East nations watched oil prices plummet, both OPEC and non-OPEC oil producing nations proposed the first of three production cuts. As the consequences of continually falling prices became apparent to producing countries, they stiffened their resolve to hold to agreed production cuts. Just as these cuts took hold, Asian economies began coming out of recession, and world demand for oil began increasing Tight world markets began to drive up prices and led refiners to draw down stocks worldwide to meet demand growth.

Crude oil and petroleum product prices rose rapidly, especially over the past 12 months. West Texas Intermediate crude oil, one of the U.S.'s benchmark crude oils, rose from about $12 per barrel in February 1999 to $34 a barrel in the first week of March 2000.

This dramatic swing in prices has largely resulted from an imbalance between world supply and demand of less than 3 percent. In a world that consumes 70-75 million barrels of crude oil per day, a two million barrel per day excess in supply caused oil prices to spiral downward in 1998; a two million per day shortfall in supply, coupled with low stock levels, caused oil prices to skyrocket upward in 1999-2000.

Low inventories leave little cushion to meet sudden increases in demand or decreases in supply, increasing the possibility of price runups. In particular, U.S. Northeast heating oil and diesel prices surged in January 2000, when cold weather and supply problems occurred at a time when petroleum product stocks were low. With little distillate stock cushion, local supplies were diminished, and prices spiked. Large volumes of distillate imports, warm weather, and increases in production have since resolved this supply shortage in the Northeast.

The nation's consumers, however, are now facing a very tight gasoline market. U.S. crude oil and gasoline inventories are at historically low levels. On top of low stocks, refineries need to increase crude inputs about one million barrels per day by mid summer.

U.S. Dependence on Petroleum. Today, the United States is still heavily dependent on crude oil, in spite of the growth in use of other fuels such as natural gas and coal. In 1998, petroleum supplied nearly 40 percent of our energy needs. Since 1985, domestic crude oil production has been declining, while domestic oil consumption has increased by more than 20 percent. The result is a growing reliance on oil imports. In 1974, net imports of crude oil and products supplied about 35 percent of U.S. consumption. In 1998, net imports supplied about 52 percent of U.S. consumption, the highest percentage ever.

In the past, oil shortages have taken a significant toll on the U.S. economy. The most recent price spikes, while still a threat to reignite inflation and dampen economic growth, have not had the major or immediate impact on the U.S. economy they might have had 10 or 20 years ago. Increased energy efficiency - in cars, homes, and manufacturing - has helped insulate the economy from these short-term market fluctuations. In 1974, for example, we consumed 15 barrels of oil for every $10,000 of gross domestic product. Today we consume only 8 barrels of oil for the same amount of economic output.

Thus, the Administration's policy of encouraging conservation has paid real dividends for the American people.

The Problem of Volatility. Even though the nation's economy today is less sensitive to fluctuations in energy prices, extreme market volatility can still negatively impact several sectors of economy - both energy producers and consumers. The rapid increase in the price of home heating oil created hardship for many families in the Northeast and Americans living on modest incomes. High fuel costs have hurt independent truckers, small businesses that are energy intensive, and farmers.

Market volatility has also created difficulties for the nation's oil producers. When prices plunged in 1998-99, domestic production declined by more than 300,000 barrels per day. More than 30,000 oil workers - nearly 1 out of 10 - lost their jobs. Drilling rigs were scrapped. Even as prices rebounded, financial markets have remained cautious, money continues to be tight, and reinvestment in the domestic oil industry has not fully materialized. Some of the lost production may never come back on line.

In short, while $34 per barrel adjusted for inflation is still less than the $70 per barrel equivalent price seen in 1981, the extreme price volatility over the last year has created market dislocations. President Clinton and Energy Secretary Richardson have repeatedly urged policies that can help restore market stability by turning to markets and free market principles to set the future price of oil. At the same time, the Administration has recognized that actions must be taken to cushion the nation's economy and its most vulnerable consumers from future volatile swings in oil prices.

U.S. Energy Policy

One point I want to make clear is that the United States has a long-standing energy policy, followed for about 20 years by both Democratic and Republican Administrations. This energy policy is grounded in a general reliance on markets and prices to allocate energy resources. Usually, energy markets work well. However, when there are market imperfections or unwelcome distributional consequences of market operations, government has a role in addressing these concerns. That is why the government policy toolbox in the energy area includes items such as the Low Income Home Energy Assistance Program, weatherization assistance, and the Strategic Petroleum Reserve.

Let me take a moment to briefly outline the basis for our energy policy. Our energy policy is founded on:

• Market forces -- not artificial pricing.
• Pursuing diverse sources of supply and strong diplomatic relations with energy producing nations.
• Working to improve the efficiency and environmental acceptability of production and use of traditional fuels through new technology development.
• Diversifying our energy sources through long-term investment in alternative fuels and energy sources.
• Investing heavily in increasing efficiency in the way we use energy.
• Maintaining and strengthening our insurance policy against supply disruptions - the Strategic Petroleum Reserve.

These are the foundations of the Clinton Administration's policies - and over the long-term they work to provide affordable, secure supplies of energy.

Administration's Mitigation Measures. Beginning in January, the Administration moved forcefully at home and abroad to deal with both short-run and long-run causes of our current environment of "extreme" price movements.

Following this winter's runup in price for distillate fuels in the Northeast, Secretary Richardson coordinated the Administration's efforts. The Administration moved to implement traditional programs and went beyond these initiatives to help those in need. The Administration:

• Released additional Low Income Home Energy Assistance Program (LIHEAP) funds. The U.S. Department of Health and Human Services (HHS) released a total of $295 million in emergency funds to help low-income Americans pay their energy bills this winter. The bulk of these funds were targeted at Northeast states that had substantial fuel price increases;
• Submitted to Congress a supplemental request for $600 million to provide additional contingent emergency funds for LIHEAP through the end of the fiscal year (although this action is currently stalled in the Senate);
• Sought $154 million for low-income weatherization assistance in the FY 2001 budget and requested an additional $19 million in the FY 2000 supplemental request;
• Ensured availability of Small Business Administration loans for heating oil distributors who needed improved cash flow in order to meet contractual obligations and make deliveries;
• Worked with states on a case-by-case basis on possible Clean Air Act waivers to help add to the quantity of available fuels ensuring that people had adequate fuel oil supplies;
• Obtained "Hours of Service" waivers that enabled truckers to work extended hours to deliver the product safely;
• Urged refiners to defer routine maintenance turnarounds. Recognizing individual refinery needs and safety requirements, the Administration urged trade associations and companies to delay routine maintenance so that heating oil production would be adequate to meet demand this heating season;
• Urged electricity generators to switch from heating oil to natural gas where possible;
• Began the process to reestablish an Energy Emergency Office at the Energy Department to enable the federal government to work more closely with the states to anticipate, plan and respond in a more immediate and coordinated way when energy crises occur, including heating oil/gasoline shortages, power outages, or pipeline emergencies;
• Created a DOE/U.S. Coast Guard Task Force for Product Movement, to prioritize heating oil shipments at terminals when necessary, clear rivers as needed, deploy Coast Guard vessels and other resources to make certain there are no shipping or loading delays;
• Directed the Energy Department's Strategic Petroleum Reserve Office to renegotiate oil delivery contracts for the Reserve's royalty-in-kind program to ensure that more oil remained on domestic markets.
• Directed the Energy Information Administration to increase its monitoring of home heating oil prices;
• Announced regulatory changes to give nonprofit organizations more flexibility in providing weatherization assistance;
• Held a series of meetings with refiners, industry, consumers, and Northeast lawmakers; and
• Hosted a home heating oil summit in Boston on February 16 that brought industry leaders, congressional members and state officials together to address methods to address the price run-up.

To look at long-term solutions, the President has directed the Department to study the longer-term issue of heating oil supply shortages and price spikes by examining possible ways to reduce regional reliance on heating oil, mainly through the increased use of natural gas. Moreover, the Secretary has directed the Department to study the impacts of interruptible contracts on home heating oil supply.

Aftermath of OPEC Decision. For several months, Energy Secretary Richardson engaged in numerous discussions with oil producing nations urging them to increase production in line with current market demands. These diplomatic efforts paid off when OPEC announced its decision on March 28 to increase production quotas by approximately 1.7 million barrels per day. Coupled with additional outputs from other oil producing nations, the production increases will help replenish low inventories and better meet current demand.

Typically, it takes 4 to 6 weeks for crude oil produced in the Middle East to reach the United States; however, markets often react well in advance of actual shipments.

As of the first week of this month, world and U.S. oil markets were continuing their month-long decline last week, taking most U.S. spot and futures prices to their lowest levels since mid-January. Spot and futures prices for West Texas Intermediate crude oil had fallen to 3-month lows by week's end, making the total drop nearly $9 per barrel since a $34 peak in early March.

Gasoline prices posted the market's sharpest declines during the initial week of April, as production and inventories continue to rise. A solid stock buildup for the week ending March 31 moved inventories back into the normal range, though barely. Distillate has followed the lower trend in crude oil and gasoline prices, with the winter heating season essentially over.

Ultimately, as markets determine if the increased production levels are sufficient to meet demand and rebuild depleted inventories, we expect the downward trend of prices to continue.

President's Actions to Strengthen Oil Reserves and Domestic Supplies. On March 18, President Clinton announced additional steps to strengthen America's energy and economic security. They included:

• A call to Congress to draw up legislation establishing a regional heating oil reserve with an appropriate trigger mechanism to help protect consumers in the Northeast and New England.

  The President remains concerned about the effect that future shortages of heating oil may have on consumers, particularly in the Northeast and New England. To reduce the likelihood that future shortages will harm consumers, the President is:

  • Supporting the Establishment of a Regional Reserve: The President supports the creation of a two million barrel heating oil reserve in the Northeast with an appropriate trigger to combat future product shortages. In the event of heating oil shortages, heating oil can be sold from the reserve to increase the supply on the market.
  • Directing DOE To Undertake Necessary Environmental Reviews: The President has directed the Department of Energy to begin the appropriate environmental reviews for the creation of the heating oil reserve.
  • Calling on Congress to Establish a Reserve Through Legislation: The President has called on Congress to pass legislation that authorizes creation of a regional heating oil reserve and includes an appropriate trigger. The President has reserved his right to establish a reserve under his existing authority in the event that Congress fails to act.

• Urging Congress to Reauthorize the Strategic Petroleum Reserve, our emergency crude oil inventory. The Strategic Petroleum Reserve is our "first line of defense" against the threat of energy shortages that can cripple our economy; however, the organic authorities for the Reserve in the Energy Policy and Conservation Act expired on March 31st. Congress extended EPCA for only six months last September. At that time, the Senate passed a 4-year extension. This past Wednesday, April 12, the House passed H.R. 2884 which extends Titles I and II of EPCA, which includes authorization for the Strategic Petroleum Reserve through FY 2003 and provides authority for a regional heating oil reserve. The bill has now been referred back to the Senate.

  It is critical that the Congress complete action on this important energy legislation as soon as possible to ensure that the President maintains the ability to use all available tools to respond to the needs of the United States economy.

• Enacting a comprehensive tax incentive package, balanced between incentives to support domestic oil production, continue diversifying our energy supplies, and increasing the energy efficiency of our economy. To support new domestic exploration and production, and to lower the business costs of producers when oil prices are low, the President has proposed:
• Expensing of Geological and Geophysical Costs: The President is proposing to support domestic exploration and production by adjusting the treatment of the costs of exploration and development -- geological and geophysical costs -- in the tax code.
• Allowing Expensing of Delay Rental Payments: A "delay rental payment" is an amount paid by a lessee to the lessor of a petroleum resource when the lessee does not begin producing commercial quantities of oil or natural gas as soon as was agreed. Allowing producers to expense delay rental payments in the year incurred will lower the cost of doing business and allow more dollars to be invested in finding and producing new domestic oil reserves.

Also, in his March 18 announcements, the President again stressed the need to diversify our energy supply by starting "down the right path toward real, long-term energy security." The President believes that any tax package to improve the energy security of the country must include incentives to improve energy efficiency and promote the use of renewable energy. In his proposal, therefore, the President also included (1) tax credits for electric, fuel cell, and qualified hybrid vehicles, (2) tax credits for efficient homes and buildings, and (3) tax credits for efficient, non-petroleum based sources of power. He also reemphasized the importance of Congressional passage of his FY 2001 budget request which includes more than $1.4 billion to accelerate the research, development and deployment of alternative energy sources and more efficient end-use technologies.

The Longer-Term Future

If we hope to avoid the roller coaster fluctuations of oil prices 5, 10 or 15 or more years into the future, we must invest in the development of better technology that can (1) reduce our oil consumption with harming consumers or the economy, and (2) increase our domestic production of oil and natural gas.

• Reducing Our Oil Consumption. Although total petroleum consumption was approximately the same, in million barrels per day, in 1999 as 1979, our per capita consumption has dropped about one fifth and our energy consumption per dollar of gross domestic product has dropped about a third. This has been achieved through a number of efficiency and alternative fuel efforts which we plan to continue for the future.

  For example, the Department's transportation program is working with its partners to (1) develop an 80 mile-per-gallon prototype sedan by 2004; (2) improve light truck fuel efficiency by 35 percent while meeting newly issued EPA Tier 2 emission standards by 2004; (3) develop technologies to increase fuel economy of the largest heavy trucks from 7 to 10 mpg (nearly 50 percent) by 2004, and (4) to increase domestic ethanol production to 2.2 billion gallons per year by 2010.

  The Administration is also supporting market incentives like the tax credit proposal for hybrid vehicles. These efforts will result in vehicles with higher fuel economy and increase the production and use of alternative fuels, both important avenues to reducing the potential for future oil price fluctuations.

  Also underway in our Energy Efficiency Program are important technology development efforts to improve efficiency per unit output of nine of the nation's most energy intensive industries by 25% relative to business as usual by 2010. We are working to bolster the deployment of energy-efficient and renewable energy technologies in commercial, institutional and apartment buildings by increasing Rebuild America community partnerships. We are also providing assistance to States to update and implement complex commercial building codes by simplifying approaches to code use and enforcement, and training approximately 10,000 code officials, designers, and builders.

• Increasing Our Domestic Production. Research and development partnerships between government and industry have become increasingly important in recent years. The domestic petroleum industry of the 21st century is not the industry of the 1970s or even the 1980s. It no longer is dominated by "Big Oil." Increasingly today's modern-day domestic oil industry is an industry of independents - an industry of smaller companies. Independent producers now drill 85 percent of all new wells in this country. They account for almost half of the crude oil produced in the lower 48 States and two-thirds of the natural gas. They are the ones that can benefit most from new technology -- especially technology that can resolve production problems in the older, more complex U.S. fields -- but they are the ones least able to afford research and development. Eighty percent of these companies employ less than 20 workers.

  To help these smaller companies maintain production from U.S. fields, we have restarted our program to share the costs of field tests of new or improved technologies that keep endangered resources in production. More than $23 million has been provided in cost-sharing assistance. We have targeted special grants to our smallest companies that allow them to apply new technologies to solve specific oil field problems. More than 45 companies have received these grants and as a result, have kept hundreds of wells in production. We are identifying "best practices" being used throughout the oil industry, and showing other producers how they can be used to overcome regional production constraints and how they can improve the bottom line.

  These are some of the efforts that keep oil flowing that might otherwise be shut in. If we are successful, we can halt the decline in domestic production during this decade. This will preserve access to reservoirs and provide time for better technology to be developed that can extract even greater amounts of crude oil from the Nation's reservoirs.

Conclusion

Clearly, we need to recognize that petroleum product price volatility is a periodic policy issue -- particularly during times of New England cold snaps or supply cutbacks by overseas oil producers. With cost-driven lower inventory levels and electronic markets, petroleum product prices are responding immediately to market developments. While prices are excellent sources of information for all sorts of business and personal decisions, rapidly changing prices introduce uncertainty that has its own costs for consumers and producers.

It will take a combination of actions - both near- and long-term, both to encourage additional domestic oil production and to increase the efficiency in our future use of oil - to give the United States a more stable energy future.

The problem of market volatility will not be solved overnight. It will take continuing dialogue and a common understanding among both consuming and producing nations that stability in oil markets is a shared and desirable goal.

A fully responsive and capable Strategic Petroleum Reserve is also a key element of a more secure energy future, and we will continue to work with Congress to pass its reauthorization as soon as possible. Also given the hardships imposed by fluctuations in home heating oil prices to many low-income families in the Northeast, we will continue to work with Congress to establish a regional arm of the Strategic Petroleum Reserve that will provide heating oil to help cushion future price swings.

Finally, we will continue to make investments in technology that can improve the energy efficiency of our economy and increase the amount of energy that can be produced within our own borders.

These steps are key elements of a sound, comprehensive energy strategy that has helped sustain the longest economic expansion in American history. They will enhance America's energy security, create jobs, protect the environment, and produce long-term savings for consumers.

This concludes my prepared statement, Mr. Chairman. I will be pleased to answer any questions.