focus on those forces of supply and demand to offset the risks that we'll be seeing in the months ahead. >> thank you very much. mr. verrastro. >> thank you, chairman bingaman, senator murkowski, members of the committee. i too thank you for the opportunity to appear today. the rapid rise in gas prices has become a staple on the evening news as you're all too well aware. it's painful for the american consumers and a threat to the economic recovery. so i commend the committee for holding this hearing at this time. given the expertise of this panel i won't repeat what dan and howard have said because i agree with the forecasts and what has occurred. i will highlight a few points and i've brought some slides to my testimony, and if you refer to those especially the first three and the last one i think we can walk through this pretty quickly. the first slide actually shows crude oil prices and we did it in terms of -- wti is no longer

a world class marker. after last year's arab spring crude oil prices settled into a narrow band and you can see that from july through december. and this was largely as a consequence of what we feel were counter balancing signals of fears of weaker economic growth in the euro crisis on the one hand, and perceived stress on the supply side on the other. at the beginning of the year this began to change. between january 1 and march 9 as dan and howard said prices rode $20 a barrel. for the past two weeks prices have been bouncing around in a new higher band and yesterday closed bat $124. the price this morning at 8:00 was $125.04. economic improvement in the u.s. and elsewhere well as weather events contribute. the concerns about supply stability were als apparent. and iranian threats to close the strait of hormuz drove much of that increase. when you look at figure 2, and i

know this has been an issue that senator franken has looked at, given the up side commodity investments have increased. not unlike what occurred in 2008 and 2007. the bottom line with the near term the current psychology of the market is supportive of keeping prices at a higher level. i think the psychology is important. you look at prices the old fundamentals supply, demand and inventory. now we're looking at current prices, future prices, weather, crude oil quality and this idea of breaking market momentum is really important when you see ups and downs in the market. forecasted as we move through the year. and the potential for real disruption trets on going supply disruptions in south sudan, russia, yemen, canada, china, syria, the north sea and nigeria and potential dislocations as well in places like brazil and

iraq. these will all continue to push upward pressure even as we see increases coming out of the sa united states. in addition in the aftermath of fukushima, japan's inability to start their nuclear reactors, this resulted in increased demand for oil as for lng. and even without the closure of the strait of hormuz, the projected removal of several hundred thousand barrel day of iranian production as a coput added stress on the marke as we move further into the spring. in such a market even good news like saudi arabia's offer last week to increase production has been tempered by the notion additional output will deplete the world's available spare capacity. and that would leave price near term increases in libya and the use of strategic stocks as the only ep weapon available to on s further upward movements.

this is not a comporting thought. refineries on the east coast of the united states and what contribution that made. the trainer refinery, and maybe philadelphia, as raw material feed stock is the largest component of gasoline prices the increase in crude prices as dan and howard said is necessarily reflected in the price we pay at the pump. but concerns about deliverability give at any refinery closures on the east coast and elsewhere were also factors. given time, i believe that product imports from europe, the middle east and asia, our shipments from the gulf will but prices given transportation costs are likely higher until we find lower cost logistical alternatives and they become readily available. shipments from the gulf which is pad 3 are an option but deliverability will be influenced by the availability of jones act vessels or possibly

waiver from the jones act. docking and storage facilities and regional and local pipe line capacity. the good news and this is figure 3, is that absent a massive global disruption or market tightening beyond what we foresee today f shift any guide, so this is just history, always easier to predict history than the future, u.s. gasoline prices generally decline or tend to decline after july. unfortunately for consumers and i think we're all at the same mind here, there is little that can be done in the near term in a free market system price is always the final allocator of scarce resources, members of this committee has already offered a number of measures to help mitigate these impacts and i'm happy to discuss any and all of these. while i don't have time to elaborate on the oil price myth section of my testimony, i hope you will find these points both informative and entertaining and i welcome any questions or comments on those as we go forward. final points. the remainder of my charts

really relate to the changing energy landscape. which dan has so artfully described, and raises the question of whether and how we want to use our vast unconventional resources, along with an array of new technologies, efficiencies and renewables to build a new energy future. dr. don paul, a colleague of ours has charactered this as the great dilemma an issue this committee will be dealing with in the next several months as well as the next several years. for the last 40 years u.s. energy policy has been predicated on the dual notions of growing demand and resource scarcity, especially in relation to oil and natural gas. we are now potentially looking at demand reduction and resource abundance and the landscape is being transformed even as we sit here today. higher prices and technology, applications at scale, are driving an unconventional resource revolution and thises that potential for creating a new energy reality in which the

united states once again becomes a global leader in oil and gas production, coupled with efficiency as you mentioned senator murkowski, improvements in alternative, supplements, this revolution can substantially lesson oil imports, achieving a significant reduction in our balance of payments and also simultaneously create an engine for growth, a platform for technology and innovation. new job creation, new tax and royalty revenues and the revitalization of domestic industries. that development must be managed prudely and responsibly. in line with balancing our environmental, economic and foreign policy goals. and the policy model which is on my last slide is what we would advance in terms of discussing and balancing those trade-offs. it's act developed for the 2007 nbc study and it basically says the deficiency is the sweet spot but in any given point in time if you look at it as a dial,

economic concerns or foreign policy concerns or environmental concerns can subordinate your energy policy and the trick is to make sure that you balance if we are able to do this, the successful development of these resources will give us i believe breathing space to develop and dispatch the next generation of cleaner burning or lower carbon fuels that currently do not exist at scale. that the writing as senator bing amam said production at it's highest level since 2003. oil imports comprise less than 45% of total consumption, and refined product exports are averaging almost 3 million barrels a day. and this gives domestic refining sector an enormous value add. as development continues its scale new issues will undoubtedly arise including the build out of new supporting structure, the role of exports, the timing of development initiatives and including senator murkowski in alaska with

respect to tasks we need to get on t right mix of federal and state regulation andeali when i mapping out the decades coming. with the ability to access these new s may be on the verge of an american energy renaissance. while the indications are positive with respect to resource abundance we are in the is narrative. i'd say chapter 1, page 10. we will collectively, industry and government, need to make the right choices, operationally in terms of safer smarter and cleaner as well as with respect to investments, policy and regulation that will enable this potential to become a reality. opportunity to elaborate on these issues and look forward to answering your questions. >> thank you very much. dr. horsnell. >> thank you. chairman bingaman, ranking i, 'm very grateful for the opportunity to

appear before you today. my written testimony details six salient points about the curren markets. i'd like to use my time to briefly raise all six of those. concern some specifics of the u.s. gasoline market as other panelists noted prices have risen faster than other product prices, and crude oil prices. and that's clearly does appear to be a fairly strong effect from the closures and potential further closures of catynd the caribbean ad and other refining closures in europe. those concerns appear to be market w transition from domestic supply of gasoline in the northeast market through to imported supplies. i think the points we would like to make is that there is no global deficit of gasoline.

there's a lot of additional refinery capacity that's coming on primarily in china and india and at the global level even with a large amount some 2 million barrels a day of u.s. and european refining capacity likely to come off stream between last year and this year, there is no shortage. the problems then are very much these dli transitional issues and very much where the market is now at a rather delicate stage as the peak of the driving season starts to come forward. the rises in u.s. gasoline prices are down to some of these deliverability concerns and it's clearly an issue colleagues at the eia are closely. turning more to the oil market, the point making, it is remarkably limited at the moment, we estimate around about 1.7 million of su

capacity that can be market fairly timely, within 30 days and be kept on stream for 90 days, if you allow more time, then more capacity can come on. but on that strict definition it appears less than 2% of the market. more worryingly with that low level of spare, the market does appear to be balanced. as mentioned in the financial t appear to be balanced. why that's of some concern is we're coming off a period of two years where demand has tended to run a bitsupply, global inventories implied inventories have fallen for eight straight quarters which is unprecedented. so to get prices up to this level and to have spare capacity down to that level and only have a reasonays a matter of concern. i think our further concern is that there comes a cusp where

the market will start to worry more about the loss of further spare capacity than they will be relieved by seeing extra supplyt point at this relatively thin le the dominant point because it is literally in all of the above item and that it picks up all of the variations in supply and demand. just to go through those,eature very strong change which previous panelists referred to in opec oil supply, a surge in production from north america, 550,000 additional from north america as a whole last year, we expect another half a million from north america this year, which 80% will come from the u.s. and again, to senator murkowski's point what things would have been like without it, i think further reflection of that is what's happening in the rest of non-opec areas, non-opec production outside north america fell last year by some 580,000

barrels a day, so perhaps surprisingly non-opec production ming lly fell in 2011 simply from production losses particular i other areas. so again, without that contribution from the change in north american fall in non-opec supply would have been quite serious last year. the current market circumstances, this is our fourth salient point, there is currently a rather high rate of supply losses particularly in non-opec areas. unusually high rate. just to detail some of them, the situation in sudan and south sudan has taken 400,000 barrel as day off and look for an extended period given some of the deterioration in relationships and the border incident. yemen, syria, there have been some accidents in canada, juek some

the north sea have taken off another portion. in total as of today, we'd million barrels a day of non-opec production is out unexpectedly. that's more than we would expect, part of the reason why the market is still balanced despite the very high rate of opec production that we're seeing at the moment. so, again, it's very hard to factor in by definition as unexpected factors but i think they are significant feature of the current market. the fifth point is just on demand, demand growth is continuing. it's modest at a global level, very heavily concentrated. if you take brazil, india, china, saudi arabia, those four countries alone just as they have over the past five years, constitute virtually all of the net global demand growth outside those four demand has been

falling for a long period. some specific features for tension to fukushima, on japanese demand, now expected to be falling as it has done but very strong japanese demand last year, primarily for lng but also for oil and for this year we think some of that increase is the nuclear plants continue to stay down is going to be toward oil. as of now with the 54 japanese nuclear unit there is is only one currently operating and even that one is very likely to come off stream for maintenance during may. again, that's a factor which has tightened up on the demand sid., final current feature, again i don't want to repeat what previous panelists have said, there is an unusually high degree of geopolitical risk this time.

this again goes back to spare capacity. we worry about geopolitical risk when spare capacity low. in the world three years ago and a lot of global spare capacity then the number of potential political issues that might impact on the oil market would be rather limited and the response to them relatively muted. as spare gets less the number of things that can affect prices increases and sensitivity increases. so to mention other ones, there are concerns about nigeria in the wake of the situation politically there over the course of the last few months. there are also some geopolitical concerns about sustainability of iraqi production, and in particular the continuing disputes between the regions over the oil law and getting the full potential of iraqi production to go forward. so it's not just iran.

there are a series of other g geopolitical issues which i think play across the market radar occasionally. i'll stop there in describing the six but i look forward to answering questions you have. thank you. >> thank you, and thank all of you for your excellent testimony. let me start with five minutes of question. let me ask on the issue of the refining capacity and the decision that companies have made to close some of their refining capacity and the effect that might be having on the price of gasoline. particularly in the east. the east coast. maybe you, any of you, i don't know if dr. greensfekt you have more insight you can give us as to what is causing them to shut down this refining capacity and

if there is any clear indication as to how much of the price increase we're seeing results from that. >> thank you, mr. chairman. as you know, the eia put out a couple of reports, pretty detailed reports, on northeast refining and it's an evolving situation. we're not privy to company decisions to close or sell refineries and they are made within the strategic plans of each company. but it's very likely that the reason refiners are closing particular refineries on the east coast is that they are not making money, not profitable operations. east coast refiners operate in a pretty competitive environment. they have higher crude acquisition costs than companies in other parts of the united states because they are bringing in water-born light crudes from africa which are some of the most expensive crude oil. the refiners in the mid getting

crude oil, refinalers on the gulf can process lower quality crude oil because they have different refiningcapabilities. at the same time, europe has sort of an excess supply of gasoline available for export which tends to keep prices on the east coast relatively moderate. we're really not seeing high prices on the east coast relative to other parts of the country at this time. in fact, in philadelphia where the refineries are closing, you know, we've been looking at prices and chicago area has very high prices now. it's not the east coast that has very high prices relative to other areas at this time. there are concerns, i agree with paul horsnell, about the it's more about logistics than the supply of gasoline. looking forward there are some concerns particularly related if the one major so no corefinery

operating in the area called sunocoph to shut down there might be some areas in the northeast that could potentially be subject to low supply. let me just leave it there because others may want to speak. >> dr. yergin. >> two point as to that. what howard says one of the refining companies has publicly said they have been losing a million dollars a day and you can't go on very long losing a million dollars a day i think we need to look at what's happened to overall u.s. energy demand. u.s. demand for oil is down 2 million barrels a day since 2007. that's a 10% drop. in fact, our demand levels now are back to what they were in 1997. so, that is part of the context in whichs howard and frank talked about is

occurring. >> yes. was , go ahead. i director of crude gest independent in the united states. i think howard and dan have summarized it correctly. the refining business has always been difficult. we're 18 situation we have declining product demand. if you're an east coast refinery your acquisition costs are higher but you're pressured on the back end because there is a lot of competition. especially in the last two years, while a lot of the east coast refineries were depending on libya crude, when libya went down they were looking for substitutes and the crude quality substitutes were algerian, nigerian and goalen, the same that a lot of europeans were looking for sose dan is right that they are losing a million dollar as day which is difficult to do. there is one offsetting factor. i have known the case of sunoco,

they intend to keep a facility, they intend to continue to supply customers so it won't be all of their customers i suspect contract customers will probably contin td they will work out arrangements. their spot customers might be in a different situation. then the logistics and as paul talked about the deliverability system is really important. philadelphia has historically been a crude oil port. if therere to bring in product you have to change out the tanks, change out the pipes and the pumps and the storage facilities to move product. new york is typically a refining center or a product import center but to get those supplies down to western pennsylvania, ohio, probably in means truckin. so this will all work out in time but it's just over the summer driving season might be a little difficult. >> did you have anything more to add on briefly. it's an issue really for

europe and those who disadvantaged either by position or by the nature of their inputs or the nature of their refinery equipment are all under pressure. so it's not just an east coast specific factorment i'd also say the problems, potential problems they share, i will stress these are transitional, to do with moving from a domestically supplied market through to relines on imports. >> senator murkowski. >> gentlemen, thankmorng. very important, very interesting. i want to explore a little bit more on this issue of where we are with spare capacity. i think it was you, dr. horsnell, you used the term remarkably limited when we talk about the global spare i think in previous statements you've used the terminology ridiculously thin, so any way you cut it there's not enough

that is out there. and it seems to meh talking about the geopolitic, what's happening in iran, yemen, what we're seeing with the increased demand in developing countries, all of these things that we have no control over this issue of spare capacity is really a key one when we're talking about the impact on prices and the vulnerability we have from an energy perspective and certainly from a security perspective. so let me ask the question, and it goes back to where i was going in my opening comments. we were talking about increased domestic production here. if we were to bring on 2.5 million barrels a day here and opec then responded by holding back that same amount, as the u.s. sources come on line, opec is going to hold back, would that not amount to greater spare

capacity within the system and potentially a cheaper price of oil? i throw that out to any of you. go ahead, mr. verrastro. >> all things being equalatso i were s that extra production, to hold more spare capacity that's the cushion. but if demand starts rising as a result of lower prices expansion that we're seeing it's good to stay ahead so i would welcome any and all production. it doesn't necessarily into lower prices. >> senator, i think your focus on spare capacity goes to the heart of the matter. before the book the prizeit i s amount of time reading the senate hearings. >> sorry about that. >> they were extremely

interesting and lively. very lively. but spare capacitas kind of the nub that things came down to. if you look back on when prices went up in the last decade, 2005, it was a spare the market was as tight as it was on the evef crisis. when you adjust for the fact tells you it's a tight market. i noticed paul's number was even a little tighter than ours. it's a market without a lot of ery tight spare you have that capacity so along with inventories one of the real things that we need to focus on. >> let me ask in another way then and perhaps dr. horsnell or dr. gruenspecht you can weigh in. if the saudi dues what some have asked here to put an additional 2.5 million barrels a day out on

the market, doesn't that then remove some of the world's spare capacity, and could that not act to create a higher risk premium and impact the price of oil because you're now in a position where yeah, they have done what we asked. theoretically trying to help out here but by doing so you eliminate or certainly reduce that spare capacity so you don't have that safety net and could that not have consequence in terms of a price increase. dr. horsnell. >> i think that's a very good point. i think we're very close to that of bringing on more supply could very much be overwhelmedpply >> if saudi arabia did increase dramatically from this point. there's more supply, that should be a depressing effect on prices

but then spare capacity, this they brought on 2.5, there would be nothing left at all. and i think that would very much unnerve the markets, so we're on that cusp where further increases may not bring prices down too much further. to illustrate, in terms of how much can be brought on timely, the 2.5 million according to mr. my eemy's statements would take 90 days to bring on stream. what could be brought on in 30 days is probably 1.7, million barrels a day. but bringing all that on would leave a system with no spare --acity and as dr. yergin has >> my time has expired but i want to make sure i understand this. when we're talking about spare capacity it's not only have out there as reserve if you will or additional supply, it's your ability