“Energy: The Great Connector”
The Need for an American Energy Policy
by U.S. Senator Chuck Hagel (R-Nebraska)
Economic Strategy Institute
September 20, 2000

	The one driving factor in the advancement of mankind has been energy.   Fire...oil for heat and lamps...water mills...coal...electricity...refined oil...hydro power...nuclear power.  Advancements in energy have fueled the great advancements of civilization.  

	Today, energy touches every facet of our lives.  It heats, cools, powers and lights our homes, our places of business, our schools, and our hospitals.  It fuels our modes of transportation whether on road, rail or air.  It powers up our computers, the Internet and the information superhighway.  It goes into the production of food, medicine, clothing and every consumer product ranging from household appliances to health and beauty products.   It allows the stock markets to open each morning.  It powers the transactions of commerce and business.  It fuels the planes, ships, tanks, submarines and weapons that protect this nation.

	Energy is the great connector, it fuels the productive capacity of the world.  It affects world stability.

	Energy is serious business.  America must have a national energy policy that ensures we have reliable, stable and affordable sources of energy.  This cannot be neglected.  To do so leaves our nation vulnerable on all fronts.	

	Energy policy ties together America’s economy, standard of living, national security, and our geopolitical strategic interests around the world...and our future.  

Economic Growth – US and Global
	Perhaps the area where energy has the most immediate and visible effect is on the pocket books of individual Americans and the economic growth of our nation.

	Oil prices have more than tripled in less than two years, closing at nearly $37 a barrel yesterday – the highest price since the buildup to the  Persian Gulf War in November of 1990.   The President of the Organization of Petroleum Exporting Countries (OPEC) said last Friday that the price of oil may temporarily hit $40 a barrel this winter.  I believe we could see $50 a barrel in the next few months.

	American consumers have felt this most immediately at the gasoline pump.  Although they’re down a bit from their peak this summer, gasoline prices currently average more than $1.60 a gallon  – far from the days last year when we had 90-cent-a-gallon gasoline.

	This winter, consumers are likely to feel an even stronger bite when they heat their homes.  Natural gas and home heating oil prices are also on the rise.  The prices for natural gas, which is used to heat 58 million homes, have doubled since the beginning of the year.   Customers of heating oil, including more than one-third of the homeowners in the Northeast, may pay more than $2 a gallon – or twice the current price – to heat their homes this winter.

	As energy prices rise this winter, Americans will again be reminded of the lessons we learned in the 1970s about the volatility of energy prices and the impact they had our economy.  The forecasts are not optimistic.   Said Leo Drollas, chief economist at the center for Global Energy Studies, “I think the only thing we can do is pray for a very warm winter.”  Praying for a warm winter is not an energy policy.

	The concern over natural gas prices is so great that today, several of our nation’s governors are meeting for a summit in Columbus, Ohio, to discuss the “natural gas crisis.”   Their goal is to get an understanding of what is driving prices up and what to do.   

	And it’s not just gasoline, natural gas and heating oil prices that are affected by the current energy predicament.  Over the past 12 months, costs paid by consumers for all forms of energy have increased by 13 percent. 

	High energy costs ripple through the economy.   They drive up inflation.  Then deflation.  The Consumer Price Index has risen 3.4 percent in the last year, with energy price increases responsible for nearly one-quarter of this rise.   

	It also saps the strength of our economy.  Energy fuels economic growth. “Oil shocks” send a shock through the economy, increasing prices for everything that uses energy.  It’s a draining force.  When consumers are forced to spend more on energy, they spend less on other items.   Money that would be spent on new cars or other consumer goods, is instead placed in the coffers of the nations who produce the almost 60 percent of imported crude oil used in this country.

	Higher energy prices increase the cost of doing business, of moving goods, of manufacturing and of farming.  GDC, Inc., a Woodbridge, Virginia, trash hauling company, saw its diesel costs increase more than 44 percent from August of last year – an extra $70,000 per month for this family owned business.

	An analysis by the Heritage Foundation has found that high oil prices will cost the average American family of four more than $1300, decrease consumer spending by nearly $80 million and cost our economy almost 500,000 jobs over the next two years.

	We are seeing the beginning of the consequences of higher fuel costs in Europe.  Protests virtually shut down Great Britain, at one point more than 90 percent of their petrol stations were dry.  These protests blocked transportation and caused disruption in medical services, postal delivery, education and food supply.  For the first time since the years after World War II, Great Britain had to ration food as supermarkets introduced a policy of one loaf of bread per customer.  The British Chambers of Commerce estimated that the protests cost Britain’s economy $351 million per day.  These protests erupted throughout Europe, shutting down traffic and wreaking havoc in France, Belgium, the Netherlands, Germany, Ireland, Spain, Poland and elsewhere.

	High energy prices will dramatically affect the U.S., Europe, Japan and other industrialized nations.  But these economies are better prepared to cushion the heavy blow than the recovering economies in Asia, developing countries and emerging market economies.   These nations, including South Korea and Taiwan, still depend on such heavy industries as steel production for their economic growth.  Studies have shown that if oil prices do not fall quickly, these economies could lose at least 2 percent of their gross national product this year.

	One of Europe’s central bankers has predicted that the current spike in oil prices could cut a full percentage point off of the GDP growth expected around the world during the next 12 months.   The President of the World Bank, James Wolfensohn, echoed these fears in an interview in the International Herald Tribune.  He predicted a $10 shift in oil prices could decrease global economic growth by at least one-half of a percentage point.

Related Budget/Domestic Issues – U.S. and other Nations
	In the United States, a slowdown in economic growth due to higher energy prices will have a negative impact on our federal budget.  The assumptions for projected federal budget surpluses over the next 10 years do not take into account what would happen if high energy prices or energy shortages stalled our economy.  

	Where then would be our proposals to finance new prescription drug plans for Medicare recipients, provide more funding for education, grapple with the restructuring of our entitlement programs, and much-needed funds to improve our nation’s military?  The money needed to fund these areas of the federal budget and pay down our national debt would have gone up in smoke – literally.

	Other countries would be affected in the same way.  High energy prices affect nations the same way they affect individual households – the more money spent on energy, the less there is available for other priorities.

	But this has broader implications than budgetary issues.  Increasing energy prices will affect efforts to improve the environment.  In recent years we have made great strides in working with developing nations to help them use responsible measures to grow their economies.  But they will do what they need to do to survive.  If their national self interests are at stake, they will clear cut forests to grow food.  They will draw natural resources from wherever they can get them.  They will abandon efforts to upgrade to cleaner technologies and stay with their dirty smokestacks and other energy producing methods that damage the environment.

National Security / Global Stability
	The price of oil also has broad national security implications for the United States because we are so reliant on foreign sources for our supply of crude oil.

	During 1973, at the peak of the energy crisis, we relied on foreign sources of oil for 35 percent of our domestic supply.  Since that time, we have become more, not less, dependent on foreign oil.  Today, we import 56 percent of the oil used in the United States.   The Department of Energy estimates that we will be at least 64 percent reliant on foreign oil by 2020.

	The response to the current high oil prices by the Clinton Administration has been to try and cajole oil exporting nations to increase production in an effort to lower prices.  U.S. Secretary of Energy Bill Richardson has said regarding the pressure on OPEC nations, “Our quiet diplomacy is working.”  What diplomacy?    Crude oil is at record high prices.  We import more oil than we did during the energy crisis in the 1970s, spending more than $300 million a day.  Petroleum accounts for one-third of the U.S. total trade deficit.  Who are we kidding?

	This has bigger implications than high gas prices.  In February 1995, President Clinton issued the following statement: “...the nation’s growing reliance on imports of crude oil and refined petroleum products threatens the nation’s security because they increase U.S. vulnerability to oil supply interruptions...I concur with the Department’s recommendation that the Administration continue its present efforts to improve U.S. energy security.”  Yet, through their policies, the Administration has discouraged, and in many cases blocked, American oil and gas producers from increasing domestic production.  Since that time, we’ve increased our use of oil – and turned more and more to foreign countries to supply it.  We import 1.5 million barrels of oil more per day than we did in 1995, an increase of nearly 22 percent in five years.  Therefore, it shouldn’t be surprising that President Clinton issued a nearly identical ruling on March 24th of this year, stating again that oil imports threaten U.S. national security.

	High energy prices also impact the security of other nations and threaten global stability.  Energy fuels the productive capacity of national economies.  The adverse effect of high energy prices can cause instability in emerging democracies and market economies, which can quickly erupt into regional turmoil, conflict and war.  Devastating all prospects for growth, prosperity, and for eliminating hunger and poverty.
	
Geopolitical Consequences / Increased Leverage for Oil Producing Nations
	The contributing factors to the current high oil prices demonstrate the geopolitical consequences of energy, and the leverage granted to oil exporting nations.  

	Prices have increased for oil and natural gas because supply has not kept pace with demand.   From 1994 to 1999, global oil consumption grew by 9.8 percent, while production rose only 7.4 percent.

	Do we have a supply problem?  Growing reports indicate that we do.  When demand stretches supply to the breaking point, the result is rationing.

	When the price of oil fell dramatically a few years ago, drilling companies cut back on their exploration of both oil and natural gas.   They reduced their spending.  There was a drastic decline in global drilling during 1998, 1999 and early 2000.  Astonishingly, there are only about 40 percent as many drilling rigs working today than there were in the early 1980s.    Even OPEC nations have to constantly drill to offset depletion.   Low levels of drilling reflect a capital shortage, and the result is that production is falling in the U.S., stable to falling in the North Sea, falling in most of Latin America, and not growing much anywhere else despite high oil prices and strong demand.   Capital not invested in energy production a few years ago is now reflected in lower supplies and product.  

	During this time, global demand for oil has increased, fueled by a strong U.S. economy, economic growth in Europe and a stronger than expected economic recovery in Asia.  The economic growth of developing nations is an energy intensive exercise.  China and India show oil demand growing at nearly eight percent per year on a sustained basis.

	This increased demand coupled with low supplies has pushed oil reserves near their limits.  Inventories are at low levels in most industrialized nations.  It will take many years to correct the imbalance between supply and demand.
  
	In addition to current inventories, the oil industry has another cushion to use to meet increased demand.  This is “spare capacity” or unused wells that can be called on to produce additional supplies when necessary. Turning on these spigots can help correct the imbalance between supply and demand.  However, except for the days of the Gulf War, the world’s spare capacity is at its lowest point since the days leading up to the 1973 energy crisis – less than 3 million barrels per day.  Therefore, the world oil market is very tight and very vulnerable to supply disruptions and price fluctuations.  A further tightening of the market could lead to the kind of energy rationing we saw in the 1970s.

	The situation is even worse in the natural gas market, especially for North America.  Oil and gas exploration go together.  When oil exploration and drilling are reduced, the same holds true for natural gas.  We have very low stored supplies of natural gas, which is not a good position to be in heading into the winter.

	But correcting imbalances of supply and demand in oil markets is very different from traditional economic models.  Oil doesn’t move on a free market.  The demand is given – individuals and nations do not have a choice about whether they need energy, and oil is the greatest sources of global energy. Its production is concentrated in the hands of a few, who have the ability to control the flow of oil into the market and thereby, the price of this commodity.  This makes oil a political commodity.   

	As Jim Hoagland of the Washington Post stated:   “It grants the power to tax – to decide where to impose the burden of paying a society’s bills – to those strong enough to claim it......The periodic price and supply disasters that surround oil are all manmade.  The shortages and panics are not the result of unpredictable forces of nature or freely functioning markets.  They are the product of greed and miscalculation.”

	Our reliance on foreign oil leaves the U.S. vulnerable to the whims of foreign oil cartels.  Should something happen to threaten this supply, we cannot turn on the spigots in the U.S. overnight. 

	A tight oil market gives additional leverage to individual oil exporting nations.  Half of the world’s spare production capacity right now is in Saudi Arabia.  Iraq is the fastest growing source of U.S. oil imports.  What if Saddam Hussein were to decide to bully the world market by turning off his tap, which currently pumps 2.3 million barrels a day onto the global market.   On Monday, he warned that OPEC nations were bowing to pressure from “superpowers” in agreeing to increase production in an attempt to lower prices.  “The superpowers will fasten their grip on oil producing countries,” he said as he renewed claims that Kuwait is stealing Iraq’s oil.  This is a very dangerous development.

	Our allies would be even more vulnerable to threats from oil producing nations, because Europe and Japan are even more dependent than the U.S. on foreign oil.  America and its allies must never allow themselves to become political hostages of energy supplier nations.  Look at the current situation with Saddam Hussein and his two and a half million barrels of oil that Iraq is producing daily...of which 750,000 barrels are coming to the U.S.  This could lead to international blackmail and dangerous, unpredictable world instability.

Impacts of the Clinton /Gore Administration
	How did the United States get ourselves in this precarious position?   We bumbled into it because we weren’t paying attention.  The Clinton/Gore Administration has drifted through the last eight years without an energy policy, content to sit back and enjoy a good economy, and take credit for that economy, but unwilling to prepare our nation for the challenges ahead and make the hard choices necessary for energy independence. 

	The lack of a federal energy policy for the last eight years has worked to decrease U.S. oil production, making American consumers more vulnerable to the volatility of prices set by oil cartels such as OPEC.  The wild swing in prices over the last two years has hurt U.S. oil and gas producers and shut down many drilling wells because of instability in the markets, loss of investment capital, loss of qualified employees and elimination of the petroleum infrastructure.   

	The lack of an overall policy has made U.S. producers more susceptible to the manipulation of prices by cartels like OPEC.  In testimony before the Senate Foreign Relations Committee in March, Denise Bode, an Oklahoma Corporation Commissioner, discussed the impact of OPEC’s manipulation of the oil markets: “Whatever OPEC’s motivation, the impact on American petroleum production is that each time this happens, they make the domestic oil and gas production industry a little less predictable, driving away capital, qualified oil field employees and scrapping petroleum infrastructure...Each time one of these price shocks occurs, a larger portion of the domestic industry is lost.”  

	The policies of the Clinton/Gore Administration have actually served to discourage and at some points completely shut off domestic oil and natural gas production.   While oil consumption in the United States has risen by 14 percent since 1992, U.S. crude oil production has declined by 17 percent.  The number of American jobs in exploring and producing oil and gas has declined by 27 percent since 1990.   The number of working oil rigs has declined by 77 percent. 

	The Clinton/Gore Administration has also failed to encourage viable energy alternatives.  They pursue policies promoted by environmentalists with no comprehension or acknowledgment of the consequences these policies have for real Americans, our nation and our future.

	A policy that is narrowly focused on certain fuels to the exclusion of others, such as by promoting switching from coal to natural gas for electricity generation, is a recipe for disaster.  Historically, the federal government has caused enormous economic waste when it tries to pick “winners and losers” in the energy marketplace.  It has also caused waste when its energy policies are not coordinated with other policy objectives or considered in the context of economic growth. 

	The Clinton/Gore Administration has blocked exploration in the Alaska National Wildlife Refuge (ANWR), which could contain 16 billion barrels of domestic crude oil.  In 1995, President Clinton vetoed legislation to allow exploration in ANWR.

	In 1998, President Clinton closed most of the federal outer-continental shelf (OCS) to any exploration until the year 2012. Vice President Gore has vowed to prohibit any future exploration for oil and natural gas on the OCS. 

	Increased government regulations have affected investment in the oil industry.  Thirty-six oil refineries have been closed in past eight years, and no new major oil refinery has been built in the last 25 years.  This is in part due to the requirements of the Clean Air Act that make it difficult to build or upgrade refineries.  EPA regulation has placed more and more burdens on the fewer and fewer oil refineries by forcing them to produce reformulated gasoline for different markets.

	Use of hydroelectric power has been sharply declining due to the onerous regulatory burdens place on the industry.  This Administration does not consider water to be a renewable resource, and has even advocated taking down valuable hyrdoelectric dams in the Pacific Northwest. 				

	Nuclear energy has not been promoted as a clean energy alternative by this administration.  No new plants are scheduled to begin operating.  This Administration has steadfastly opposed, and recently vetoed, legislation that would ensure timely construction of a desperately needed federal storage facility for spent nuclear fuel.  In addition, virtually all nuclear operating licenses are up for renewal by 2015, yet the Nuclear Regulatory Commission has indicated it expects no more than 85 of the 103 units will file renewals.

	Environmental Protection Agency (EPA) Administrator Carol Browner is trying to shut down coal-fired electric generating plants in the Midwest – a region which depends on these plants for 88 percent of its electricity.

	Furthermore, the Clinton Administration, while professing a desire to increase natural gas as a source of energy is working against efforts to increase the availability of domestic natural gas. 

	The National Petroleum Council (NPC) has identified a critical barrier to increasing supplies of natural gas – access to over 200 trillion cubic feet of natural gas reserves is either off limits or is being severely restricted on multiple-use federal lands and the OCS.   This administration says: Use natural gas, just don’t drill for it in any new locations and don’t build any new gas transmission pipelines.

	In 1997, this Administration – at the insistence of Vice President Gore and over the clear objections of the U.S. Senate – agreed to the Kyoto Protocol.  This treaty would require the United States to reduce its manmade greenhouse gas emissions, primarily carbon dioxide, to seven percent below 1990 emission levels.  This is impossible without causing severe damage to the U.S. economy.

	And for what?  The Kyoto Protocol has no hope of achieving its stated goal.  How can it reduce global greenhouse gas emissions when it excludes more than 130 nations?  Nations such as China, India, Mexico, South Korea – all of whom are already among the world’s largest producers of manmade greenhouse gases. 

	If we think energy prices are high now – this is nothing compared to what the Kyoto Protocol would bring.  The Administration’s own Energy Information Agency has estimated that implementing the Kyoto Protocol would give us an increase in gasoline prices of over 70 cents per gallon.  But unlike current price fluctuations, the Kyoto fuel price increases would be permanent and would continue to grow.

	The Administration’s budget clearly demonstrates where its energy priorities lie.  This year’s Department of Energy budget has $1.2 billion for climate change activities.  It has only $92 million for oil and gas research and development.

	An energy policy that emphasizes only some energy sources and priorities -- without regard for their negative impacts on energy markets -- threatens the sustainability of the national economy and the welfare of the American people.  When such a policy also undermines the development of domestic oil, gas, nuclear, coal and hydroelectric power, then these “supply-side” disincentives add up to what is essentially a policy of “planned energy dependence” by the United States on foreign sources.
Need to Develop a Strong Energy Policy and a Diversified Energy Base
	What can we do to address this problem?  Both the next President and Congress must pursue a comprehensive energy policy that decreases our reliance on foreign oil by increasing the safe and environmentally sound production of our domestic oil and gas resources, and by developing a more diversified supply of energy sources.

	The answer is not to tap into the strategic reserve.  These 570 million barrels were set aside to deal with severe disruptions in oil supply caused by war or other national emergencies.  The strategic reserve was not created to make up eight years of inattention from the Clinton/Gore Administration or to make up for the detrimental impact their policies have had on domestic production.
	
	In addition to augmenting domestic oil production, the United States must explore other future energy options that will reduce our foreign oil dependency.  

	The United States must seek to further diversify its energy resource portfolio.  We should all learn the lessons of history and recognize that we should not be focusing our energy needs in one area, but must have a diversity of sources to meet them.  

	New technologies involving renewable bio‑fuels and bio‑mass fuels such as ethanol will help change America’s dependence on fossil fuels and improve the quality of our air.  And, ethanol has proven to be a lower cost alternative to pure gasoline. 	

	In addition to ethanol, the further development of biofuels like biodiesel have great potential to lessen America’s dependence on fossil fuels.  Solar, wind, and geothermal energy also have an important role to play as future energy options and they should be incentivized and expanded.  

	We have made tremendous strides in our coal industry with low sulfur coal and clean coal technology.  This is an abundant source of energy for the United States, one we can tap into immediately.  Greater use of coal can help the U.S. lower our dependency on foreign oil and buy us time as we continue to develop renewable sources of energy. 

	Another vital energy source, nuclear energy, is one of the cleanest sources of energy.  We must give a serious look at expanding this source of energy.

	Hydropower is another energy source that possesses unparalleled efficiency. 

	For the United States to protect itself from the whims of international oil cartels like OPEC, we must harness as many of our renewable energy resources as possible.  
Legislation Currently in the Senate
	I support legislation recently introduced in the Senate that will reduce America’s dependency on foreign oil to below 50% in ten years.  The National Energy Security Act of 2000 would reach this goal by opening up the northern coastal plain of Alaska for oil and gas exploration, by providing tax incentives for oil and natural gas produced from marginal wells and by expanding tax credits for renewable energy sources such as wind, biomass, and solar power.  

	The National Energy Security Act also recognizes the important role that nuclear energy and hydropower play in meeting America’s energy needs by reducing the time it takes to re‑license hydroelectric and nuclear power plants.  

	If this bill passes, the United States would be a renewed producer of energy and better able to supply more of the energy it consumes, and would be less vulnerable to the dangers of dependency. 

Conclusion
	The next President of the United States must make energy production a top priority ‑ that means developing a coherent, realistic and smart energy policy for America's future. 
	As David Ignatius said in his column in Sunday’s Washington Post:  “Oil is dangerous stuff.  It destroys presidents and prime ministers.  Although the United States so far has avoided the panic that is sweeping Europe, this crisis is drifting toward America like a fall hurricane, just visible now on the radar far across the Atlantic.”

	If that storm comes, it’s one we could have prevented.  This Administration has been asleep in the lighthouse.  The next President and Congress must immediately address America’s need for a strong, defined national energy policy.  It underpins our national independence.  Energy independence underpins our national security, our economy, our standard of living, trade and our role in the world.  

	Our nation’s future is directly connected to energy capacity.  If we fail this great challenge our children and history will judge us harshly, and we will leave the world more dangerous than we found it.  That is not our heritage.  That is not our destiny.  But it will require bold, forceful and intelligent leadership.  That is our heritage – that is our destiny.

	Thank you.