or something. there's been a change in structure of the markets. so the people that used to make the markets are the banks. banks are driven out of doing that. who has replaced them? really the people on the stage. more than a third of it now is daily liquidity vehicles. so what happens when retail decides to move out of -- so daily liquidity vehicles are buying assets that probably don't have daily liquidity in the event of a shock. so when something bad happens you're going to see an amplification of a trend out. because the people that have to step in and buy are going to have, you know, much higher they're going to set the price of risk in a much more agretsz aaggressive way. there's a lot of capital on the sidelines. we ourselves have $30 billion in unspent capital. so there's definitely people that will ultimately step in. but there will be a volatility within a range. i don't think it's actually bad for the system.

because i think that ultimately probably having people, like the people on the stage setting the price of risk is better in some way than massive government backed taxpayer backed institutions that are cross collateralized. the structure has changed to a much more institutionalized market, which has created opportunities. you know, we saw a lot of these markets are not in. the high yield market, when we had some of the fiscal issues in the u.s., or when oil cracked, you know, you saw the oil market tradeoff. and you buy a little bit of it and they trade back up 10 or 15 points. and so that's the market we live in today. there's just less liquid. the other thing, i think there's just going to be sort of regional balance. there already is a volatile any certain industries and certain

structures. so in natural resources and commodity there's volatility. why? the the dollar is going up. china is slowing down. in retail there's certain volatility. in energy there's volatility. so with the central banks sort of i've got your back policies i don't know that you'll see broad based volty like you saw in the last financial crisis be u you may see rolling structural volatile around different industries different companies, around different markets and different regional areas. i know it's something from the bank's perspective. and then from the triggers for volatility. but just how bad, kerry is this mismatch in the markets today?

post 2008 we see them reduce by about 70%, i think, is the current figure out there. that's a big decline that has created mismatched liquidity. we are seeing the industrial squealing. those of you who have not read this morning and i hope you all have may not have seen we have a piece this morning about how bankers are appealing for changes in the trace reporting system, because of concern about the lack of liquidity. is this going to be the next spark or the spark for the next crisis, do you think? >> i do think so. i share the concern that's been expressed by many of the panelists. though i don't think it's probably 2015 story, because i think ultimately it's going to take rates rising, and even if the fed does raise rates later this year, it's likely the front end that moves and probably not the ten-year or the longer end.

but on the issue of regulation, it's probably the chart more clients will throw in front of me. you'll see the precrisis go from $250 billion to roughly 40 or $50 billion depending on when you look at that. >> i think you have a chart. >> no. >> that's suspense. we have more charts coming later, but not yet. >> that's just dealer balance sheets. and you know, the reality is some of that is overstated. if you think about it. you know, you took out lehman, bank of america and merrill. if you took capacity out of the market. there's a lot of prop activity not there for the benefits of the clients that bulk up the number.

and part of that is not top down. it's just more costly. it either means the offers have to widen out to compensate the market maker for using the balance sheet. so there's clearly been some element of regulation. but some of it is structural. it changes. the side has grown much more than the cell side. we could double the the balance sheet. you would still have this problem. you think about the crisis, where are you funding the short-term assets with long-term abilities in you can look at the vehicles really funding themselves in the commercial payment market. when that market seized up they couldn't control their liabilities. that's what everyone is looking for. what's the the catalyst? what's the one grain of sand that causes the whole system to collapse and everyone to run and

if you think about what really drives that as a market maker because you have this imbalance very quickly, if high yield, if you think about last summer it's at 5%. it looks like sellers. very quickly the market moves to 6%, 7%. to try to create equilibriums so the sellers become holders or buyers. so then what happens is the buyers come in and say what can you offer? really not a lot because there's not an inventory around. new issue shuts down because borrowers were thinking they could borrow at 5. today it's at 7. it takes a lot to recalibrate. so what happens it immediately snaps back and maybe it ends up at 5.5. in a market you would watch things tick from 5 to 5.5. today and that's probably where all of us agree, is when it goes down, you have to buy what you can. because when you look and see

what actually traded not a lot traded when it goes down from five to seven not a lot trades when it goes from seven to five and a half. and that's one of the the challenges we're all dealing with. and i think the markets are very, very prone to that type of volatility in the future. >> everyone agreed it was caused by too much debt and a mismatch in the duration as a liability mismatch in the parts of many vehicles. so what happens now? we have a market with even more debt out there and even more potential mismatches in terms of liquidity mismatches. but anna would you agree? we've all heard the banks talk about the problems with the the markets and yet, there's an argument to be made that markets are responding with entrepreneurial deals to find other ways to plug that gap. and we don't have to have a world dominated by bankers.

and how the central bankers are looking at the way forward for them. so not only are the banks inventories coming down but the way they behave in terms of offering liquidities change. number one, there's a juniorization of the desks. in other words they try to -- because of more pressure on terms of cutting costs and making each business more effective, they're clearly cutting and using much more junior people on the the trading desks. second thing is dodd-frank is really have no idea how much they're really allowed to use. if a market maker has the specific amount of risk, he's concerned if he prepositions for a trade or trades after from an account, he may say he was doing proprietor trading and therefore

get in trouble have his money pulled back, et cetera. market makers are not behaving at all. and thirdly, that's exacerbated that times of stress. and then the next thing to look at is the idea was to move products to central gdp. counter partner clearing. and that's been very very sloes. now there's been a lot of pushbacks about the specific risk of that clearinghouse if p too much product goes there. so that's another thing aching a long time to get to. we've done hardly anything on there. add that together with the october 15th and the snb have changed the risk. that banks are willing to offer. because after the snb shock, which was a so-called liquid product, they can't model the way they used to.

so this is forcing more and more investors to use stan ardized products to enl their portfolios. by everybody are being used even more and increasing the levels. you go outside moves in the so-called liquid markets. we're moving towards a structure where they are not going to go backwards. they're not going to let the bankings take more product. we're going to a structure that will take some time. less market making by the banks. and electronic exchanges and not saying it's bad. but it's inherently very

different. we don't know if the large moves will follow through to something different. >> i was going to say the institutions that caused the last financial crisis were the banks. they were the largest things out there. and i totally agree. we're all talking a lot about the fact that they've been somewhat pushed out of the market, but i think they're much less leveraged. they have a lot more equity. they're getting out of businesses. so i think ultimately the real question is systematically, i don't think it's necessarily a bad thing for the system. i think there will be volatility within a range. but just the amount of capital sitting on the sideline. we've all been waiting for years now. when it happens, when there's brief bouts of volatility you can't buy anything.

the minute you step in and buy something, it goes right back up. it's like choosing your poison. if you makes them where they're difficult to manage, they may be willing to step in a bit, but you have maybe created a larger systematic issue. i think we're kind of in a better place. >> and i was talking with a group of central bankers recently who said to me, well, back in 2008, they had hoped na endowment and other asset managements would be liquidity providers in the the crisis. and that hope turned out to be completely wrong. so maybe they will step in and be the last resort. alex, are you concerned about what happened? are you willing to be a big liquidity provider in a crisis? >> well, i think you reference a point that is really important,

which is that hope is an important point. central bankers have stepped into the void in the past and this and that. but i can't -- allen made reference to the swiss national bank. when they put the peg on in switzerland e and i think i somehow learned they had no idea what their exit plan was. they knew they wanted to put the peg on but they didn't know how to get off of it. it gets worse when they're not driving the story, so to speak. so to me that's the point we're at now. basically the central bankers have done the vast majority of what they can do across the board. so we're shifting to the fiscal side. more messy at the time with a lot of elections coming up in both europe and downstream in the united states. and you get into the known/unknown donald rumsfeld

thing. the elections coming up are the known/unknowns. greece is the most un/unknown there is. with the uk or the hung parliament lead to instability in that regard? possibility. but what's happening is the unknowns can derail the story. there will be one of them in scale. and then you get to josh's point which is fine. how do you position yourself against that? >> i would just add that i would like to echo a point that josh made, which was that well, first of all crises come generally from the credit world. unless you have a hassive amounts of leveraging, which is situation hasn't been for many years. the worst from from overshooting the credit. and we clearly had pressure through systematic easing globally that caused buildup. but the constitution nalinstitutional

framework is so different now. maybe they achieved what they were trying to achieve. inside of all the mismatches located in the banks, instead you have a banking system that's quite functional. many like the people represented on this stage who basically run either very unleveraged or lightly leveraged institutions that don't have daily liquidity, that are able to provide capital to the market at the moment when the mismatched institutions, such as, you know, we all get worried when we see effs buying bank debt that trades t-plus 30 if you're lucky enough to have someone beating up the lawyer on the other side. and they're lucky enough to have the money. that's a mismatch. but there are so many institutions that don't have the mismatch, that have longer duration capital, that aren't terribly leveraged, and there's plenty of people who i think learned in '08, that providing capital to those types of institutions host a crisis rgs represented by a downdraft in if

crisis is a good thing to do and profitable to do that maybe less worried about the systematic risks of the overshoots. i do think it's critical to have an overshoot. >> josh, do you feel functional? >> yes. it's important as you get older. to 2008, the government did -- the government was the last sort of firewall. and the fed and the u.s. government gampb teed $20 trillion of liabilities. i think it's the same thing. i believe if you were to have a 2008 style crisis that would have to happen again but once that happened the people that would be pricing risk would price it with their own money, with their client's money in a much more analytical systematic way than in a balance sheet. e don't think ultimately the people that would have to step in and change, and i don't think

they're asset managers at this point and not banks. >> there's one issue that is the rise of kpastive sfrumts, which make a lot of sense given the rise in tide in environment. they're a bet of a blend instrument. often the people who hold the instruments are not quite clear of what they actually hold. so last fall when you saw the high yield etf selloff it was because they had a lot of exposure to energy. if you ask a lot of asset allocate allocate allocaters, they were a bit more surprised than they should have been. chinese exposure has been a good investment. but china is slowing. it shouldn't be such a rising kind of dynamic as an instrument. and there will be a period where market catches up with the the the economics and it may be the asset management itself as it goes through its own evolution, also influenced by monetary policy is going to produce

instability. >> a bit like 2007 or 2008 when a lot of mainstream investors realized what was sitting inside was not quite what they expected. >> exactly. >> and had nasty shocks. at this point it's quite a good moment. as the lone banker on the panel, you should get a word on this before we move onto some of the political risks. is there anything you would like to add on the issue whether they are going to save the system next time? >> i think one of the challenges is the changing market structure. and i think broadly defining asset managers, you know is probably not right. which are the managers with short-term liquidity, and which

are the long-term liquidity, and those are the ones the latter group, that can step in and i agree with alex, it's not the knowns and unknowns. it's something we don't anticipate that causes the flows to move. and unfortunately with the change in market structure i think the market is total rate of return money. so when prices are going down, they're going to tend to sell. it's not like insurance and pension or yield driven. and if you go back 20 or 30 years there was more of that type of buyer. so who of the asset managers will step in it has to be those with longer term liquidity so if they buy something and it's down five points they don't get forced out of the trade. >> but josh makes an important important point. we made a lot of money waiting and waiting and waiting and stepping in. so the markets didn't clear. and the people that ultimately

cleared the markets they cleared them at much lower levels than fundamental level. and that was highly lucrative and very profitable for many of us. everyone saw that and everyone is waiting for that. a lot of people are saying when is the next '08? i think you're going to have to be much smarter about how you play industries and regions. we see it today in the stress landscape where josh and i play. the level of returns today are just not what they were. there's many more institutional players. they sit there and wait for pullback energy. which we should get into at some point. you know the vocal drum beat of hey, this is the greatest thing since sliced bread.

so i don't believe that we're going to have the opportunity that we all had you know, in '08. and the flip side is i think the system won't break down as much as it did in '08. >> well, it's a good thing if you're a regulator. >> and our constitutional clients. >> let's look at the the triggers that could spark this volatility. and i'm going to check that you in the audience are still awake after this discussion about market structure. and ask you all a couple of questions. quick show of hands for those of you who are still awake. first of all, i'm going to ask you when you think the next u.s. rate rise will be? will it be june, this autumn, or

not at all this year? all of you who think a u.s. rate rise in june hands up? janet yellen has done her work. those of you who wrpt looking around can see that's apparently nobody. or else you are truly either asleep or very very shy. all of you think who think there's going to be a rate rise in the autumn. >> and those of you who think there will not be a rate rise at all this year. wow, that's a lot more bearish than i would have expected. do you think a rate rise is coming, and will it be a spark for a potential round of volatility? you're saying u.s. rate rise? >> yes. >> i think they're really thinking about it and gritting their teeth, and i think it's unclear. i think they really want to get off of zero rates because you

know, they see the unemployment numbers going down. and they know that eventually the u.s. economy is going to get inflationary. so they don't want to overshoot. which is a pretty significant risk. having said that the data more recently has been negative. and i don't think that -- i think this movement in the dollar has surprised people in terms of the effect on the economy. the conventional wisdom is small movements in the dollar that don't really matter that much. and that conventional wisdom is being challenged right now. and earnings have been pretty poor. and i think you have this on the one hand. on the other hand story for them. i think they're naturally dovish. they naturally want to be cautious about derailing what

they see as somewhat slow u.s. recovery. so my guess is they're not going to act in june. then closer to your end, they're going to be worried about christmas. so my guess is ultimately it's a january -- i think they're going to want to do this early next year. but it's very much condition dependent. if we started having 300,000 job ads every month between now and december they might move. but i think it's not going to happen. >> would you agree? half the people in the room think it's not going to happen this year? >> yeah, i guess i would slightly differ with josh in i do agree the fed is naturally dovish.

and i was struck by 2% in the last 40 years as the s&p been higher now. and there are all these downstream implications, you know, which we touched on. so my guess is they will make a move in the fall, but it will be smaller than expected. which is to me janet yellen alluding to and her redesires to get off the level they're off now. >> any of you think it could happen in june? >> i'm more later. i think the point raised there is one people don't talk about. regulators are trying to use macro potential policy to allow them to keep rates lower for longer. for the first time in ten years okay, i want 20% unlevied

return. then it was 15. and then what do they do for the first time you have investors say ing saying let me buy something that yields eight to get the double return that i need for my clients because in a world of prolonged low rates, you know, have a pension endowments or insurance companies generate the types of returns? so you are starting to see, we all know that one turn of leverage turns into two turns of leverage. why is money flowing out duration? you know. there was an issue a couple weeks ago in europe mexico. they issued 100-year bonds in euro. you have to ask yourself is there that much natural duration risk for 100-year mexico bonds

and it rallied six or seven points on the break. it's trading below 4%. at some point it's not crazy to think that could trade at 6%. that's a $66.75 price. if you trade it at 8%. it's still not a crazy number price. it's one thing if you have the liability. if not, if you're buying because you need yield, what's the only thing you can do if you think it's going to go down like that is to sell it. so you can understand why investors are moving like that because they're getting squeezed. it sets you up for volatile and investors are going in places because the prolonged period of very low rates. it's hard to make business models work with zero rates. >> that raises a very interesting question. which is we were chatting recently to some of janet

yellen's former colleagues who pointed out the issue isn't when the rate rise occurs, it's how fast rates go up. they said maybe we should try to visualize janet yellen in a swimming pool which is strange image. but imagine her holding the water under your chin. she's saying not yet, not yet, not yet, and just when you start to relax, she lets go of the beach ball and it shoots up out of the water and hits you hard in the face. the point being, if you can imagine that vision of janet yellen with her beach ball underwater, that some times things can float to the the surface very very fast by way of reaction. does that worry you allen? but the vision of the rates suddenly shooting up much faster? >> i think two things. there's a big difference, as

they want to get off the zero. a lot of them have a problem with being rates of zero. that's not a hike in their mind. and they will make it clear. i don't think at all they will allow the market to think they're going to be hiking very quickly or in any way to allow other asset prices to sell off dramatically. after seven or eight years of the rates the last thing they want is a small hike of 25 or 50 basis points to cause an armageddon. so i don't think there's a chance of the beach ball going too high initially. maybe later we'll have to see how do the rates go with europe and japan still in easy mode. how does that affect the dollar? how does that affect corporate america? maybe that will affect the rates and the pace and the the amount they hike at.

>> what about you? are you concerned on the beach ball going fast? do you think they can get it rising up slowly? >> i do find it disturbing on all sorts of levels. but apart from that, i guess it was interesting to see the result of your poll. because the fed managed to convince everybody they're never raising rates. if you took the poll last year you would have thought it was earlier. i think it will surprise everybody. they have raised rates on a relative basis because of the rates we're seeing elsewhere globally. in some sense you can say they're already quite high relative to other places where you can deploy capital. i think it's very difficult for us to figure out a way to make

money predicting rates. and i think the exact timing and the speed at which they increase it are equally difficult to prikt to predict and i this the world is littered with brilliant economists who got it wrong so many times in the past. so the thought is thousand do you avoid,:+ the credit bubbles taking place in the system? and there are credit bubbles in the the system. it's no comparison to even 2007. there are literally no bank deals today practically at all that have significant protection for lenders. on the other hand you don't have massively leveraged institutionses holding the securities. maybe lst less danger. i tend to think the fed will not want to do something too drastic, too quick too severe. although i heard people on the other side.

but i know going out in today's environment seems awfully risky to do today given where high yield is. so we've been avoiding it. well, let's try another poll. will we have a greek default in the next six months, and secondly, will we have --. so those of you who think greece will default in the next six months, put your hands up. and those who don't. so 50/50 on default. who expects that greece will stay part of the eurozone? wow, so not only have janet yellen convinced many of you, but it looks like angela merkel has convinced most of you.

not only the power of persuasive strong women. only a very small minority are expecting to see it. maybe i should ask allen. is that too complaisant? >> i think it is a bit. what's going on is clearly preoccupying her. and it's something she doesn't want while that's going on. so i think the two together is a bit painful. if we see ukraine and russia calming down that could change yields. what does it mean one year down the road? i don't know if there was a default how the market reacts. but it's saying the euro has gone from a currency to a fixed exchange rate system. they're completely different. and once you understand that if

you are a holder of deposits in one of the southern european countries, do you really want to thoeld your money? maybe takes you a while to work out that you can leave as well one year down the road. the argument against that is they will be very good and behave well and everyone is behaved well. and, there's no chance of an insurance scheme across europe, that's not going to happen. and unless we go to fiscal union i don't see that happening. you're the eling every country you're fine. you don't have to do anything any longer. what haps if they do well? okay, we saved you all so now you're okay.

so the real answer is that's extremely dangerous in the immediate term. that's more than the two-week event. >> so angela merkel stays the course as long as she's dealing with ukraine. once that gets resolved, if it gets resolved, then maybe things get tougher. >> possibly. yeah. >> of course, you're crane is a huge issue. my colleague has written a wonderful piece in this morning's ft arguing that actually the bigger from today is not -- it's ukraine in terms of potential geo political risks. >> i don't think there will be a greek exit either. but we're in this predictable period between the articles of confederation in the united states and the constitution, and you don't kick out west virginia once it's in and expect the u.s. to stay together, right?

i really don't see it happening. largely the gains are clear. even with the finance minister pulled out this morning of the key negotiation plan. >> i'm curious, josh when you look at the chatter about greek default, do you smell opportunity? is this a moment to go out and buy a cheap greek island or --? >> no. it's a good place to visit. i don't think it's really significant in the scheme of either you're europe or the global financial system. a lot of greek debt which has sorlt of transferred into the central bank arms that will allow it to be dealt with without system attic issues. if greece were to default. so i think -- i think it's much more of a longer term issue. i don't see it as being a big

you know the net issue of fixed income now is zero. the rates are negative. they have basically said the easing that's going on there is you know as large as it was in the u.s. relative as large as all that exists in the the u.s. so what you're seeing in europe is what you saw in the u.s. and that's stimulating the stock market. that's making consumers feel better. and it's starting to drive asset pricing up as people move out of traditional fixed income and ultimately the stock market and real estate. so i think you'll see a rebound in europe a bit. i think you're already seeing it. and when you look at what happened in the u.s., it makes

sense. it's sort of following the u.s. model probably seven years afterwards. and i think they're heading in the the other direction. >> i would agree and sort of disagree a little bit. >> i generally agree with his analysis of what's likely. >> financially i would say greece has relatively a small issue but politically it's a big issue. and politically the consequences are all sorts of unanticipated consequences that could take place well beyond the economic consequences. i think the economic consequences, in some respects, are the least important ones. we know there would be unanticipated parts of it. the unintended consequences could be significant. we don't know what type of greece if, god forbid, it does

exit. and when you have an unstable world and people are shuffling around as we're seeing in ukraine and potentially in other parts of the world, then you can have very large significant global events take place that are completely unexpected. no one expected world war i to take place. no one expected world war ii to take place. that's why i think while financially greece is a bit of a rounding error, i think politically it's not at all. >> maybe if geo political con today general tagen. i must say i was very struck. those of year that know once a year the world economic forum surveys the elite and asks them what they're worried about over the next year, last year for the first time ever, income inequality jumped to the top of the list. this year income inequality was topped by something else, which was interstate conflict. ie, war. which to my mind is an astonishing finding. alex, i can see you're --

>> i'm just worrying, nodding going ugh. yeah, it's a very asymmetric global instabilities right now. that means you can't predict it and it's back to your world war i analogy. right? what was unpredictable about that was the trigger point. >> at the time everyone thought congress was too connected for war. then there was a super saturation moment. what could that be today in it could be a lot of things. >> i guess i would sort of push back a little bit on greece. look i do think greece exiting the euro and have instability in the country is certainly not good for the world or good for europe. but when you think about militarization of the soviet union around ukraine and around some of the other nations and when you think about what's going on in the middle east,

like were israel to attack iran were there to be were some of the oil facilities to get impacted although i think that's unlikely if you think about china being more aggressive, which china has improved the navy and air force and the military significantly. and you have new leadership in china. it's really hard to predict. i feel like those are much bigger. if you want to talk about political risks those are much more significant to the world economy than, say, it would be. >> many of the issues are being discussed. do find it fascinating as someone who trained in the the policy. the degree to which they are suddenly waking up and realtzing the numbers are not always the answer as to why there's a political and social fabric

really driving things right now. lu let's have a look at the other risks. i would like to ask the aud yns to do a show of hands, and let's talk about oil. as you say josh, that's a key issue shaping the global economy and intricately tied into the the geo political risks. three questions, or three choices. how many of you think the oil price will be roughly where it is in six months time? how many of you think it will be let's say $10 $20 higher, let's be more extreme, in six months time. and how much of you think it could be $10 lower? so people who think that the oil price will be roughly where it is in six months time? okay. those of you who think it could be significantly higher say $20 higher. and those of you who think it will be even lower? okay. so those of you who can't see the majority of you think

roughly the same level. a significant minority think it will be lower, and very few of you expect it to be significantly higher. >> well you're getting at the secular stagnation point. right? are we in the the ben bernanke part? >> we have a global economy where demand is weak and they don't need much oil. not so much oil relative to stockpiles. josh, do you have any points of what they ma mean for you? >> yeah, we spent a lot of time trying to get ahead. o so predicting oil in the short run is really, really difficult. i would in long run the laws should govern. so in the short run we have 95 million barrel per day market that's two to three million barrels oversupplied. and the storage is filling up a bit. it's recently come off.

and that's why you're seeing the price of goil go up a little bit. but really if you think about that, 2 million barrels. 2% access supply has caused oil to go to 150. so in commodity markets, what shows you is little excess supply and demand swings it wildly. what's happened is that the the higher prices created an entry into the market, which was north america. and so the u.s. shell was adding a million barrels a day, you know, every year. and the people that were taking supply out of the market that made the market oversupplied, and for a number of years opec, which was saudi arabia dealt with that by just taking supply off. and you know, they are the low-cost producer.

and they are the market maker within opec. and so they lowered their production from 12 to 10 12 to 9. one day they woke up and said wait a minute. this doesn't make sense for us. we're the low-cost producer. and if we allow this to continue, we'll have a market 5 million oversupplied. so think changed their strategy and said we're not going to lose more market share, which i think was economically rational for them. and so i think really ultimately what's that has done is blunted the growth of the shale. so if you think about the laws of economics you know the shale will still grow thissee, but 300 or 400 barrels. it will flatten out or decline a little. so if you think of no other geo political issues, no other geo political things going on like iran going back. iran used to produce three or

four billion more than today. that could also create a glut. if you ignore -- or if syria were to noinged off or iraq that would go the other way. if you ignore all that, it will take one or two years nor the the price of oil to climb back. it probably won't climb back to where it was. but it will climb back to $70. because you've had, you know the service sector get hit. and so the cost of production has gone down. the problem is what is saudi arabia going to do? are they going to want to teach the shale more of a lis son? what's going to happen in iran? what's going to happen in iraq? and so you have something that is very very difficult to predict, and so i think what you have to do to make money in oil is take the perspective that you know, you have to take a much longer-term perspective and

sort of eventually go back to the cost curve. like where is the most of the oil economic and most of the the oil economic today in the 65 to $70 range. and so ultimately if you sort of use that as your beacon long run, you'll probably be right eventually, but short run predictions on the price of oil you are really predicting so many factors that it's hard to be right, so i would kind of avoid it. >> back to josh's point. the future is entirely unnoble. >> the future is noble on one very important dimension, which is demographics. that's one of the only things we can predict. we are 7 plus billion going to $10 billion. and we know where most of the growth is. so some over the longer term are predictable. >> right. >> one of my oil friends said the best cure for high oil prices is high oil prices. and it's absolutely true. look, it's a commodity market with a few chunky players and

chunky markets like the shale market. i think the key as an investor when you look at is this is any time you look a security in the energy business, you have to compare it across the full range of making the same bet. so if you decide you want to buy distressed debt in a company very adversely affected by the current price deck, you have to compare, and say what would make that a successful investment in terms of the the outlook for oil, and then compare that to buying oil futures and compare it to the full range of other securities because these markets don't communicate with each other as they should. most can only buy equityiesequities. it can only buy this or that. so you get disparities between buying a distressed bond and buying an equity sometimes.

don't reflect the same future outcome probabilities as you might find in the oil curve itself. >> but an important point. the markets has sort of said we're going to ignore this and what they have done is, you know, not withstanding all the quote grapevine opportunities that are going to occur, and going back to the original discussion about zero rates there's so much liquidity sloshing around that many of these companies that are now losing money and significantly cashing in on the negative have done equity and data offerings. the markets haven't missed a beat and the offerings imply the price of oil is going right back to where it was. and so the markets have said this is a temporary blip. we're going to ignore this, and it's made it hard to make economically interesting and i think it will eventually happen. but just an interesting comment on, you know kind of some of the effects of quantitative easing and sort of people ignoring the price of risk.

people ignoring the volatility. >> right, right. >> yes i think the main effect is how it affects if we have oil at this price or slightly higher, say six or nine months from now how is that now, how is that going to affect the japanese banks who react to the inflation? you can argue that the japanese extra qe in october was because of oil coming down and i'm sure that the low price of oil helped the europeans do their qe. now, let's say going six, nine months from now, inflation in both of those places would be much, much higher. how is the market going to react to the idea that they won't be doing any more qe and at that point we have no one doing the qe. how is the reaction of the bond markets from there? >> short the german bond then? >> not today but closer towards -- if we see that level i don't see how they are going to have bond yields at this level when they understand that qe is coming to an effect globally.

that could have an effect on markets which have a shock. they might not be at the right level. >> my last question, really, is given what you've heard about these potential rising volatility, even though we've had pockets with the oil prices given the rise in volatility the regulated structure and a world where it's been -- everyone has been reaching for risk, can you tell the audience, you know what is your top favorite one trade that you would put on at the moment to cope with this world? what advice would you give to people in the audience? or tell us one thing you wouldn't -- >> i think it's an enormously challenging investment environment. i would -- i think the most interesting part of the market is yield.

so where the banks are pulling back in sort of the 8 to 10% fixed income space off the run credit. again, now we're sort of talking above. but you're in a world where everything is overvalued. if it has a cusive number quoted on bloomberg and rated in the fixed income world. so you have to get out of that world. you have to buy issuers that may not be rated. you have to do things like shipping loans and nonperforming loans and other things that the money hitting the market can't really be a soesh and the banks are pulling bark. there's an interesting opportunity in off-the-run credit you know, in the sort of cross-over space. i think it's a very complicated world right now. >> right. gary, what do you think about

that? >> i think a couple of ideas. i think, one, with the theme of -- i think at the end of the day liquidity is going to run out. despite all of the knowns/unknowns, when you're sitting at the end of the year, i think economic growth is okay. it's supported for risk assets and, you know, these more structured products will continue to well, low liabilities are one example in a world where you have so much government collateral trading at negative rates aaa ceos that may not be that excited but you're getting for the right investor looking for a safe that is less liquid but well-structured, it's been battle tested. again, it has a stigma but that's why it's an attractive u.s. asset.

we're starting to see some of those flows whether it's european government bonds, we're seeing flows into european credit but look at that versus u.s. credit. again, institutions tend to move more slowly and not all of them have that mandate. but the pickup in yield and the currency benefit of that trade you're going to see fund knows in that direction. >> do you see volatility as an opportunity? >> absolutely. i think the main events at the moment for us the negative rates has not been written enough about what is going on with the negative rates in europe and the effect on the portfolios. many investors can't afford to all want to hold any bonds with negative rates. the idea that you're paying governments to hold your bond for their debt is just crazy. i don't know how long that is going to take but it's a big theme still. i think that will have an effect on currencies for a while until we get out of that zone.

that's the first -- >> you think the european investor also rebel against paying governments? >> i think all investors who hold european bonds or negative yielding assets will over time sell them out. the idea that you're giving governments, which i should mention in countries with longer dated pension issues or demographic issues is not going to last. so we'll have to see how long that takes, especially if oil goes up or stays where it is. i think that's a big theme that has not played through yet. second thing is in the period until -- the next period of time, i go with alex regarding risk assets are still chasing japanese stocks. those are the two things that i would say. >> say that again japanese -- >> japanese stocks. >> good buy. >> good buy.

>> well it's going to be interesting to see what happens to washington in the visit this week. >> i think it will go through at some point and i'm confident it will go through at some point. >> that will be a surprise on the good side if it happens. josh and alex what do you make of this? what's the best way to play an uncertain volatile world? >> the flip side of having extraordinarily high equity multiples and stock prices as well as extraordinarily low cost of debt is that you get a record number of corporate transactions taking place mergers recapitalizations, et cetera. and this causes not only event-oriented uncorrelated equity price changes -- by the way, the overlay on that is we have a regulatory structure where it's awfully hard to predict the outcomes. we saw what happened to the time

warner deal and what happened to shire last year. when you get one of these negative surprise to the markets, what is interesting is you not only get merger transactions but recap transactions because smart people like josh think they can borrow at zero cost and pay a dividend to their shareholders. this causes credit quality to ping-pong all over the place. you have bonds that all of a sudden go from investment grade to noninvestment grade. so time warner fearful charter acquisition, bond holders all sell. comcast comes back in and now we're back and charter is going to buy it and charters are going back south. so you get -- and you get markets discontinue wous and don't communicate with each other. i think there are many of these event-oriented somewhat short duration plays that have very attractive risk rewards because of the volume of these transactions and the amount of somewhat unpredictable

regulatory oversight. i would also agree with josh's comment about nontraditional lending in places where banks are not treading. there's been a very significant pickup that we've seen of loans in the 12 14% area that are slightly less liquid and the balance can withstand that. >> alex? >> okay. i'll go with europe. and in two parts. over the next 6 to 9 months i think the european equities, cyclicals, are a good place to be positioned because you have the three dynamics that we alluded to with the qe support and you also have negative yields driving people further on the risk further. it's a tailwind in terms of a technical shift and more demand. related to that, i think it's coming up time to be short some of the sovereign debt in europe, particularly the german bonds are the biggest bubble in existence. >> the german bonds being the biggest bubble, that will be

another source of volatility quite dramatically. thank you, guys. it's been a fascinating discussion. i have three or four key takeaways. you are bracing for dislocation in the next year or two but, interestingly, not overall dislocation. you're seeing much more of a fragmented pattern perhaps more fragmented than in 2008 when we had incredibly high correlations. and thirdly i think that your comment on the regulation structure suggests to me that it's not quite black and white as some of the reports suggest. yes, there are very big liquidity mismatches but the question is whether some of the money sitting on the sidelines will come in next time around and whether new players will come around. the biggest point of all that comes out of the conversation to me, at least, is not just the world of financial contagion that worries but but a

geopolitical contagion and that, of course is one of the most unpredictable threats and the most alarming. so thank you all very much for a great conversation. best of luck. [ applause ] coming up tonight on c-span 3, energy secretary ernest moniz testifies. then the supreme court oral argument in elonis versus u.s., a case related to online threats. after that general john allen, the special envoy in charge of encountering isis delivers the commencement college in monmouth illinois. and then mayor nutter speaks at

philadelphia university. energy secretary ernest moniz testified before the house energy and commerce subcommittee on tuesday about the administration's quadrennial energy review. the qer provides policy recommendations for modernizing u.s. energy infrastructure. this is 2 1/2 hours. i'd like to call the hearing to order this morning and the title today is the hearing on the quadrennial energy review and related session drafts including title 3 energy diplomacy. we'll have two panel of witnesses this morning.

on the first panel we have secretary of energy mr. moniz who is no stranger to this committee. so we appreciate him being with us. we look forward to his testimony and other issues. at this time i'd like to recognize myself for five minutes for an opening statement. everyone is very much aware that this subcommittee and the congress has been working on a bipartisan energy bill for several months now. many people are even asking not surprisingly, is there enough common ground between our efforts and the obama administration to enact meaningful energy legislation. and i do believe that this question was answered with a clear "yes" when the department of energy's first installment of its quadrennial energy review was released last april.

this detailed study focuses on the infrastructure implications of america's new energy boom and many of its recommendations overlap with provisions of our draft energy bill. and so we are excited and mr. moniz is here today so that we can explore the prospective of the department of energy as the country makes dramatic changes in its energy distribution transmission system. we have a lot of infrastructure needs. we're focusing on the diplomatic diplomacy aspects of energy which is becoming more and more important to our friends in the european union who find themselves reliant on natural gas coming from russia and so we have many opportunities in the

united states to come forward with a good energy policy and i think democrats and republicans agree that they need to be addressed and one of the biggest is infrastructure needs in trying to approve the permitting process, for an example. so i look forward to the testimony of all of our witnesses today and we have a real opportunity here and we don't want to drop this ball. we're getting close to the end of drafting this legislation, coming up with a final product and we look forward to moving it in a meaningful way. at this time i'd like to recognize the gentleman from california, mr. rush, for his opening statement. >> thank you mr. chairman for holding this important meeting on the qer as well as on a variety of other issues covered.

mr. chairman let me first begin by welcoming secretary of energy mr. moniz here to the subcommittee. welcome, mr. secretary. let me commend you for the outstanding work. you have been involved in a myriad of different issues, all important to the american people. mr. chairman mr. secretary you might not accept this and you might not -- you might think that this is not something that you seek but, in my mind and in the mind of a number of my constituents, you are, indeed, a superstar secretary. i am real proud of your work on behalf of our nation. mr. secretary from your literature and historic nuclear

talks with iran and the minorities on energy initiative to overseeing the development of the comprehensive qer are among your more important accomplishments and i have no doubt you would go down as one of the secretaries of modern time. you see, i'm a fan mr. secretary. and to replace the current requirement for energy plan with quadrennial energy review. it is my hope that this bill, like the senate counterpart that was recently introduced by secretary coons of delaware and senator alexander of tennessee

will attract bipartisan support. in fact, mr. secretary, i have held off on introducing the bill as of yet so that my office can continue to hold talks with the majority side in order to find language that both sides can agree on. and, mr. chairman i will continue to reach across the aisle for support on this nonpartisan issue of quantifying a quadrennial energy review and i hope that we can find common ground. mr. chairman the qer addresses many areas that also are covered in the discussion draft of the comprehensive energy bill we have all been working on. issues such as increasing the resilience reliability and safety on the grid and.

[ indiscernible ] regarding modernizing the grid and enhancing the employment and workforce training. however, mr. chairman, there is still much work to be done in bridging the gap in areas where there are some disagreements, such as inciting and addressing the transmission of storage and distribution infrastructure. specifically in a discussion draft before today i have some concern regarding the approval process described in section 3104. in this section, the burden has shifted away from private companies and onto agency

officials to issue so-called crossing unless the official finds a project and, i quote is not in the public interest of the united states. another concern that i have, mr. chairman, is in section 3102 which sets up an interagency task force to evaluate north american energy flows. however, is missing is representatives from the council on environmental quality, the environmental protection agency as well as the departments of interior or transportation among others, who may weigh in on environmental issues. mr. chairman as we move forward with the goal of putting forth a truly bipartisan energy bill, it is my hope that a majority side will work with us as to find

common ground on most of these issues and put precedence in doing the right thing above doing it quickly. mr. chairman, i thank you and i yield back the balance of my time. >> thank you, mr. rush for that opening statement. at this time i'd like to recognize the chairman of the full committee, mr. upton for five minutes. >> thank you, mr. chairman. i want to say in response to mr. rush's comments, i look forward to working with him and mr. pallone and all of our members on both sides of the aisle to do this right. i appreciate those kind words. we're delighted to welcome back secretary moniz to discuss the first stallment of the quadrennial energy review that focused on energy transport and infrastructure, something we need to do. our laws and regulations need to change with it. long-standing concerns about the declining domestic energy output

have been erased by a rapidly rising oil and natural gas production. 2013 alone, according to the qer, the u.s. added 1.2 million barrels per day a record increase by one country in one year. domestic production and natural gas from related liquids has experienced equally dramatic increases. this became the number one energy producing nation. it's time that we start acting like it. unfortunately, rising energy production requires more energy infrastructure. what i have called the architecture of abundance. both the energy legislation and the qer included number of ideas for upgrading and expanding the nation's energy infrastructure. and in light of the recent pipeline spill in california, i would add that both aim to ensure that this new infrastructure is built with state-of-the-art technologies that reduce the environmental

and safety risk. energy abundance can be more than just an economic success story. it indeed can be a foreign policy success story as well. and that's why recently released discussion draft of our energy diplomacy title is so important. the discussion draft builds on the extensive work built by this subcommittee. at numerous hearings over the last couple of years we heard from our allies around the globe who said they would rather get their natural gas from us than the likes of russia or iran. that message was underscored last month when i led a high-level delegation to ukraine and came away with a profound understanding of how these partners can be. leaders are coming together to promote a unified energy market because of the potential for security, affordability and innovation. in ukraine, where the commitment

to freedom and democracy is hard fought each and every day, their energy aspirations are fundamental to their dreams for a peaceful future. while our discussion draft encourages north american energy cooperation and cross-border infrastructure, opportunities for energy diplomacy, extends well beyond our own continent. for example, there is broad recognition that the exports will benefit the u.s. economy, our consumers and, yes our allies. while the same could be said for oil exports, a statutory ban has prevented us from pursing these benefits for the past four decades and it's time that congress considers revising the ban on crude oil exports. as with natural gas, america now has enough oil production to make increased exports feasible. especially the crude that the qer notes have experienced the most rapid supply increases. economic and foreign policy experts across the political

spectrum believe that it would be a net jobs creator at home and influence abroad and at the same time, reports from the gao, cbo and energy information administration all point to reductions in the price of gas as a result of increased oil exports. in other words, oil exports can be a win for the american people and a win for our allies. the energy sector has been the nation's most significant job creator in recent years. but with the drop in oil prices as many as 100,000 energy positions have been lost. the case for creating more jobs by expanding the market for american oil is a key reason why oil exports should be on this committee's agenda this year. and while we're not currently considering any such provisions in this pending legislation, i do look forward to working with my good friend mr. barton and others, on both sides of the aisle to ensure that we get the policy right.

i yield back the balance of my team. >> gentleman yields back. this time, recognize the gentleman from new jersey mr. pallone, for five minutes. >> thank you, chairman whitfield and ranking member rush. let me start by welcoming secretary moniz on back to the committee and the first installment of the quadrennial energy review. it's a truly comprehensive look at our nation's infrastructure and its recommendations will help us chart a path forward in the rapidly changing energy sector. this installment relates to the transportation and storage distribution of energy. these ts and d connections between suppliers and users can impact our energy rely yeah built and security and affect our ability to meet environmental and economic goals. ts and d infrastructure is vul ner ner rabl to cyberattacks and it's important to know how to

mitigate their impacts. at the same time this modernization could reach other environmental goals while enhancing safety security and re reliability. we need to ensure a smarter more resilient and environmentally sound energy system for the future and i look forward to, working with you, mr. secretary to translate these important ideas into legislation and law. i wish i could be as upbeat in discussing the energy diplomacy discussion draft. rather than building on the strong relationships with our north american neighbors, the na majority has chosen to resurrect proposals have tha have already drawn democratic concerns and presidential veto threats. for example, the bill would eliminate the current presidential permitting process for liquid and gas pipelines and electric transmission lines that cross the u.s. border with mexico and canada and replaces the process with one that

effectively rubber stamps permit applications and eliminates any meaningful environmental review. now it would only take effect after president obama leaves office specifically excludes the keystone pipeline. it still appears to allow transcanada to avail itself of the new process by reapplying with the revised route. the provision limits federal approval and environmental review to the small segment of a project that physically crosses the national border and creates a presumption that these projects are in the public interest shifting the burden of proof to opponents to project opponents. this all but guarantees permit approval and eliminates the opportunity for protective permit conditions. the draft bill also recycles lng export language designed to address nonexistent delays at the department of energy. in fact doe recently testified and i quote, that right now

there are zero applicants sitting in front of us for a decision. the last application that came out, we turned that around in one day. nonetheless, the bill would make changes to an otherwise successful process. and finally, another provision would create a task force burdening federal energy regulatory actions with additional red tape and environmental considerations. in fact, it speaks volumes that the agency is task with natural resource and environmental management like epa owe doi are excluded from the task force. i hope this committee can work towards consensus legislation instead of resurrecting problematic issues of the past. but thank you, mr. chairman. i yield back. >> gentleman yields back. that concludes the opening statements for today and mr. secretary, thank you for joining us. we do look forward to your insights on these important issues and i'd like to recognize you for five minutes for your opening statement. >> thank you chairman upton and

whitfield and ranking members pallone and rush. >> i'm not sure the microphone is on. >> yep. okay. >> start again. >> okay. well again, chairman upton and whitfield and ranking members pallone and rush distinguished members of this subcommittee, thank you for the opportunity to be with you again today. i really appreciate the leadership that this committee has shown in working towards comprehensive and bipartisan energy legislation that includes many of the topics in the qer first installment. i look forward to working with you to move these ideas forward and really appreciate in the opening remarks the statements about common ground and the opportunities we have to work together. as was already stated the u.s. has reaped enormous benefits from our energy revolution which i point out includes carbon

production and renewables deployment to energy productivity gains. this has produced changes that are challenging our energy infrastructure and to be direct, we need to modernize and transform our energy sectors and shared commodity infrastructures. this will require major new investments and we have to get it right. acknowledge that while the choices we make and the decisions we take today and in the near future are critical, we also have to acknowledge that the choices and decisions that we fail to take in a timely way are very important for generating our infrastructure for the 21st century. to help guide these investment choices, the qer provides recommendations based on the 15th month multiagency process that included 14 public meetings across the country and consultations with canada and mexico the. qer focuses on ts and d, including the network of

railroads and other facilities that formed the backbone of our energy system. i asked the chairman's permission to submit the summary version of the qer into the record. the full qer is available online and you have my written testimony. so let me just take the opportunity to highlight five crucial tasks that we need to take. first, the infrastructure investments and energy security in a broader sense than the oil centric focus of the last several decades. an example is found in the definition of energy security that the u.s. and our g-7 allies developed after the russian aggression in ukraine that includes seven critical elements in a modern view of energy infrastructure. supply diversification, for sure, but also transparent markets, greenhouse gas emission reduction, infrastructure modernization and energy response. this doesn't mean that oil disruption is not a concern.

indeed modernizing the sproe, as well as the authorities for the use is a major area of focus. through its analysis of resilience and modernization, the qer goes beyond the single focus of security policy leaving, for example recommendations for fuel disruptions as we have seen across the country. more coordinated state planning is also essential and, most notably, we feel that state planning grants to help states update and expand their emergency preparedness and security exercises to enhance reliability, to accommodate several changing factors are all critical. other ways to improve energy security include programs to make our energy infrastructures more resilient to range of hazards and vulnerabilities. these are addressed in part for

the qe's recommendation of a predisaster hardening grant program, transformer reserves and systematic program to ensure unaging natural gas distribution pipes. second qer and its recommendations underscore the indispensable role of states. these really are test beds. we need to advance studies such as a new framework for evaluating energy services to help things like rate structure development. third, the qer analysis showcases the importance of complexity of how our energy revolution challenges our shared transport infrastructures. frankly, when we started the qer, we did not anticipate that we would end up with this as a major area of focus. however, the dramatic oil production increases in unconventional locations coupled with things like the rsf and impending exports of natural gas have placed strains on those

transport infrastructures, rails, bars, locks, port facilities and the like. the qer includes recommendations focused on innovative funding mechanisms for these infrastructures and, for example, recommends a program for port connectors being stressed by new energy supplies. fourth, the qer recommends coordinated efforts for skills training and recruitment of workers to build and staff our modernized energy infrastructure system and support jobs for working families a national job driven skills system with standards that include a special emphasis on training for veterans on minorities in energy is critical to our energy future. i might note that yesterday, 85 minority interns started working at d.u.e. for the summer. i will look at how we can capture the energy sector opportunities that we have for new jobs. and finally, we need to acknowledge the critical federal

role in incentivizing our investments. while the bulk of the qer recommendations fall under this committee's jurisdiction the cross has other equities and infrastructure especially in shared infrastructure and north american energy integration. i would just note in closing that the administration's most recent budget request includes a down payment for funding qer at $500 million and sequestration has placed artificial caps on spending and the corps of engineers and others, frankly placed these critical problems in competition with very restricted budget allocations. for example, the house meet our needs for energy infrastructure. in closing, the department of energy and all the agencies that developed this report and it is recommendations see great potential for benefit and we look forward to working with

this committee again to find a bipartisan ways of advancing our ts and d infrastructure. i would be pleased to answer questions. >> thank you secretary moniz. and at this time i'll recognize myself for five minutes of statements and questions. we all recognize that the clean energy plan has been at the very center of president obama's initiatives and i think everyone recognizes that the tension between the obama administration and republicans in the house and senate as well as elsewhere has been -- many of us feel that the president is moving so quickly through regulations without adequate communication with the legislative body. and while we all recognize the need for an all-of-the-above

policy, we look at europe and see how some policies over there and which countries like germany made decisions to eliminate nuclear energy has created extremely high retail prices and, as a result, europe has some real economic problems. so what we want to be sure about in america, we made this mad rush for change and we do so in a way that we can protect the reliability, the affordability so that america can continue to be competitive in the global marketplace. mr. mckinley, who left, was just saying that in west virginia they've lost 45% of their coal jobs. this economic impact affects all of us and that's why we're trying to move this energy bill

and that's why this quadrennial bill is so important, to look at all aspects of everything. because everyone knows that we're fortunate we have an abundant energy supply and natural gas and oil as well but we have infrastructure needs and it takes years and so as we're shutting down coal plants through regulatory orders we don't always have the capability to get the energy product to where it needs to go. and so that's what this is all about. so one of the things i need to ask you the first installment was a colossal undertaking with 22 agencies involved and more than a year of work. and if this is the first installment of the qer, will there be a new installment each year for the next three years

and then the process will begin all over again? is that what your understanding is? >> no. i apologize. so this first installment it frankly took a few more months than we had hoped. we're now in the process of working across the government to settle on the next installment we would like to get something into your hands early next year again and then again at the end of 2016. >> now -- >> and clearly this will be now expanding into the supply and demand ends of the energy sector. >> yeah. and my time is already running out here. i want to focus on one issue because -- maybe because i was in the railroad industry, but

railroads provide a vital transportation network for all sorts of commodities in america. and historically railroads have generated lots of income from moving coal. and the coal shipments have dropped dramatically, even though our coal exports are up despite problems of trying to open up coal export facilities in washington state. but many people are genuinely concerned about the viability of the railroad industry with this extreme reduction in coal transportation. was that discussed in the quadrennial review process, from your personal knowledge? was there any discussion about that at all? >> yes mr. chairman. of course, the department of transportation would have prime responsibility in that area. but there were discussions because we did see, in some cases, especially in the upper midwest, some coal shortages for

a while. it was not because the trains weren't operating. they were just carrying other commodities, which, my understanding, may have had a higher margin for them. so one of the initiatives that we have taken and the doe eia is working with the surface transportation board at d.o.t. is to first of all get more data and understanding of how commodities, including energy commodities, are moving on the railroads because it is coal. it's obviously oil. and it's an ethanol competing in a certain sense with a whole variety of other commodities. but i think more data and data transparency will be very important for federal and state planning. >> because we do have to have a strong financial railroad sector just because of the impact it has on our entire economy. my time's expired. at this time, i'd like to recognize mr. rush for five minutes. >> thank you mr. chairman.

mr. secretary, as i asserted in my opening statement i believe you will go down as one of the most consequential energy secretaries of our time and i want to commend you on your fine work and the initiatives that you have established during your tenure. and as you know mr. secretary one of the attempts to change the culture and the practices of institutions and they have been doing ways for a long time and inevitably there would be resistance and apprehension when those entities are asked to change. and if it is with this in mind to discuss with me the initiatives that you and i have discussed before in the past

specifically, i would like to discuss with you the issue inclusiveness and outreach of the publicly funded national labs including but not limited to argon and berming in my state. and my office would be in touch with you to schedule a meeting for sometime in the very near future between you and i. it is my opinion mr. secretary that argon and berming specifically are fumbling on the issues of inclusiveness and outreach. it seems to me that they are trying to run out the car on you and i. they are not seriously taking our requests and our initiatives to heart. mr. secretary on another issue,

i'd like to get your thoughts and feedback on the qer legislation that was introduced in the senate. and i -- as i said before, i will be offering a companion bill in the house soon. as you know, mr. secretary, this bill would simply amend the d.o.e. organizational act to replace the current requirement for a biannual energy plan for a quadrennial energy review. can you give the subcommittee some feedback on this bill from your understanding would d.o.e. take the lead in drafting a qer and is there a need for a legislation such as what i previously discussed?

>> thank you mr. rush. by the way, on the consequential issues i hope there are positive consequences and at this point i'd say that our energy policy and systems analysis office did a heroic job in marshalling this huge qer forward. on your first question and culture, et cetera i might add that there's a wonderful expression by peter drucker, the famous management consult stantant, we can change rules but it's hard to change culture. but i think we are certainly making advances, certainly on the issue of minorities and energy and if you know otherwise, i'd like to discuss it with you. i do see enthusiasm going forward. argan, for example, one of their initiatives is in terms of making sure that minority businesses are quite aware of the opportunities for procurement. we also have a leader in our

place-based initiatives. a good example is working with southwest louisiana with the enormous construction going on driven by natural gas for training minorities to get some of those jobs. in terms of research collaborations, another example would be our jefferson lab working closely with hampton university. i mentioned the interns already. we're going to keep pushing on all of these fronts and i want to work with you on that and if you find problems let me know because i will be sure to -- >> i certainly will, mr. secretary. >> okay. thank you. >> secondly on the qer and the possibility of legislation let me say that i certainly share the driver of this which is that i think -- and by the way, the initial reaction to the qer including in this hearing, i think it suggests that institutionalizing this could really be very important for continuing a bipartisan

administration congress discussion. so i'm happy to work with both chambers in terms of how that might go forward. i would say that the department of energy in this first installment clearly did provide kind of the analytical horsepower for it. but i do want to note that the executive office of the president also played a crucial role in being able to convene 22 agencies to come together to work on it. so, anyway, we'd be happy to discuss that further. >> okay. my time has expired. this time right now is the gentleman from michigan, mr. upton, for five minutes. >> thank you again, mr. chairman. mr. secretary, in my opening i spoke about the willingness to work with you and your committee on qer recommendations and we look forward to that. receiving technical assistance on some of the other sections of the bill as well. one of the areas that i wanted to zero in on is sprow.

as i noticed in your response to the committee yesterday, it was established in 1975 and it's the largest government petroleum reserve in the world. it's been used successfully on multiple occasions to respond to different types of energy supply disruptions. but it is now 2015 and global and domestic oil markets have changed significantly. we would all recognize that and sproe needs to be modernized. the committee recently voted to draw down a limited amount of sproll oil to pay for our 21st century cure package beginning in 2018. as you conduct the ongoing study to recognize the new study going forward, would you support an additional change that would allow the president to draw down in self-surplus crude oil in order to use the funds to pay

for operations in maintenance in line with the d.o.e. budget request and modernization plans? in other words using what we call mandatory savings had for needed improvements that have to take place in the number of years? and i would imagine that would be a pretty small drawdown. >> mr. chairman first of all as you know i have considerable concern about using the sproule for anything other than energy security and resilience issues for which it is intended. now, the issue of, first of all, of what is or might be called surplus is really part of the study going on because we understand there are certain iae requirements but that might not be the metric for us to use.

that's the first thing. secondly, we did identify, of course, in the sproule -- in the qer, excuse me -- needs right now for modernizing the sproule for -- well, there is issues of maintenance. there are issues of modernization and, in particular issues of addressing distribution systems for getting sproule oil onto water in particular, in an emergency. clearly, what you've proposed is if one were to do that, it would be being used i would argue, for the energy security intent of the petroleum reserve. >> so, as you know the qer recommends more flexibility and anticipatory authority to initiate a sproule drawdown.

>> the motivation for recommending anticipatory authority is not motivated by a desire to use the sproule to manipulate the oil prices. the current anticipatory authorities are highly restrictive, up to 30 million barrels and only if that keeps you above 500 million barrels. so there are issues there and we feel that, should a larger drawdown be required or if the sproule were at 500 million barrels, one shouldn't have to wait to see the consequences on consumers of a spike in global oil prices before one can act. so i think that's the spirit as opposed to manipulating oil prices. >> the qer discusses the last

time spoure had a release in reaction to libya was in 2011. seems like yesterday but it was in 2011. since then the supply has greatly changed, for sure, as demonstrated in the test sale this last year. if there is an interruption somewhere in the world that doesn't impact the supply to u.s. refiners would it make any sense at all to export sproule crude? >> once again, i would say that that should be part of the study -- studies really that are going on. but i might say that it's hard to see how a major global disruption would avoid impacting our imports. because again, we still import 7 billion barrels a day. only because with a major disruption, even if that --

let's say country -- is not directly importing to us right now, there would probably be a redistribution of the market that would impact our imports. nevertheless hypothetically if that were the case i think there would still be an issue of putting sproule out would have the effect of backing out imports that would ee kwil great in the market. >> my time is up. >> gentleman from new jersey mr. pallone, for five minutes. >> thank you mr. chairman. secretary, climate change as you know is real and we're already feeling its effects across the country, the damaging impacts range from heatwaves and droughts to increased wildfires and everyone is affected. i'm concerned about impacts of extreme weather events and sea level rise under already problems that we have with our

energy infrastructure. so my question is, the qer outlines a number of findings in this area. how is your energy transmission and storage and distribution vulnerable to the impacts of climate change? >> thank you mr. pallone -- chairman pallone. first of all, as the data in the qer show we have been seeing increasing impacts probably impacting the economy on in the last decade and with the rising sea level, the effects of storms, major tropical storms for example, are amplified. so we feel it is very important now to address the hardening of these infrastructures, not only coastal but coastal is one major issue. that's why we recommend a joint set of initiatives. one is to provide energy

assurance grants for states to do planning and to provide a basis for the states to then compete for what we recommend as a several billion dollar opportunity for these kinds of activities. i'll give you one example. it happens to be in new jersey. it was not out of the recommendations here but in new jersey there was the case where we cost shared with the state a study on implementation of a very significant microgrid to protect electrified transportation corridors. the state then used that study to compete for sandy recovery money and, in fact, several hundred million dollars to implement that. that's the kind of thing. do these studies get technical assistance and then have the opportunity to move forward with cost sharing major resilience in

projects. >> i appreciate your mentioning our new jersey grant because you know, obviously we did have a lot of vulnerabilities during superstorm sandy. we saw a breakdown of infrastructure and services in terms of water supply. in terms of the grant program that is going to promote innovative solutions for resilience and reliability and security, just give me a little more information about how that program would work. i know you mentioned the new jersey program but what other kinds of projects would be eligible for those grants? >> well, it could be again any kind of project that hardens infrastructure. the electric grid is -- has clearly shown vulnerability to storms. so it could be things that, like i mentioned with microgrids it could be the use of advanced technologies. i could mention some things like

synchro phasers to prevent a blackout for example. one of the recommendations that we have in there is to expand analyses of what -- the different kinds of regional product reserves might do. now, this is a case where, again, in the northeast in new jersey, we've already moved there. but there are issues in california, there are issues in the southeast. there could be issues in the upper midwest and so we recommend that and there could be opportunities there for new resiliency projects. >> all right. thanks a lot. i do want to applaud you for your efforts to strengthen you know, these vulnerable and critical energy infrastructures especially in the face of global climate change. so thanks again. thank you, mr. chairman.

>> at this time -- >> if i might just add, this is an example of the importance of the broader view of energy security, including resilience of our infrastructure. >> exactly. thank you. >> thank you. >> at this time recognize the gentleman from texas, mr. martin, for five minutes. >> thank you mr. chairman and mr. secretary welcome back. mr. rush and you seem to have a mutual admiration relationship going on. >> do not get jealous. >> what? >> do not get jealous. >> well i wouldn't go quite so far as superstar but my daughter has a saying that she learned in college when something's really cool, it's money. and i would say -- it's money. when you say it's money, it means that man that's hot and it's cool and it's right on the bean. i would say moniz is money. so not superstar but money.

now, you know what i'm going -- i'm going to i have go you a chance to show just how money you are. what do you think i'm going to ask you right now? >> i don't know but i'm covering my wallet. >> you heard the chairman's opening statement. he talked about oil exports and, as you well know, mr. secretary, back in the '70s we had the opec embargo and this committee and the congress passed legislation most of which has been repealed. we had price controls on the well head natural gas prices price controls on crude oil, we had even retail price controls on gasoline. we limited what natural gas could be used for. that's all been repealed. thing that hasn't been repealed is the ban on crude oil

exports. now, the u.s. is number one in the world in oil productionproduction. over ten million barrels a day. world uses somewhere around 94 95 million barrels a day. would you agree that if we were to let our domestic oil potentially be exported that it would at minimum keep prices from going up on world markets and it is a possibility that world oil prices might go down. would you agree with that? >> i think the key issue, mr. martin is whether or not in a country like ours that still imports 7 million barrels a day, the question would be whether that did or did not stimulate any appreciable additional production. that would be the issue in terms of global price.

internally there wouldn't be an issue on how rents were shared between refiners and producers, but in terms of the economy wide, the real issue is whether there's more production and certainly in today's market it is hard to imagine that happening. in a future market -- >> i am not a harvard economics professor. >> nor am i. >> but i did go to graduate school, you want to talk about sharing of rents our refiners are taking those rents and putting them in their pockets. they're not sharing those with the retail consumers. if we let the producers have the option of putting that oil on the world market the consumer in the united states could potentially benefit from oil prices going down. i think you'll agree with me that retail gas prices are basically set based on the world price for crude. you'll agree with that.

>> absolutely, yes, confirm that. >> so i have a list here of studies where they've looked at what the price, what would has been to the price in the united states in retail for gasoline. and brookings institute, resource for the future, foreign relations, center for global energy policy at columbia university, energy policy research institute, aspen institute, progressive policy institute, icf international heritage foundation american council for capital formation congressional budget office, energy information administration, general accounting office, federal reserve bank have all concluded that if we allowed our oil to be exported there would be no increase in domestic price for gasoline and in most cases it might go down. now those aren't oil company

hacks. those are bipartisan usually i would say objective institutes. are you aware? you have to be aware of some of those studies. >> yes. i think they're all in agreement with the fundamentals that again the issue is whether or not such a move would lead to an increase of production of any appreciable magnitude. if it doesn't, there's essentially no impact on price. >> my time is expired but if you'll send one of your crack aides to the republican study committee taskforce on energy seminar this afternoon, you'll hear four or five experts all say if we allow our oil to be exported, u.s. production will stabilize and probably go up. >> that's the key issue i think

we all agree on the facts. >> the document does recognize legislative actions. would you elaborate on one or two important ones? >> this issue of providing funding, particularly for stays to compete for good projects that provide resiliency of infrastructure. that's an important one. another one is we recommend a fund that would allow for competition for accelerating natural gas distribution structure for environmental and

safety reasons. clearly federal government cannot and should not pay a quarter trillion dollar bill. but what we recommend is acceleration in which the federal government could help absorb any rate increase for low income families. >> one thing is talking about grid resilience. do you think there's a short term potential for that energy storage to be useful and resilience in lowering the cost improving access for renewables and so on? >> we all know california is in the lead as is often the case in terms of storage and clearly except for the places geographically where pumped storage is available we still need to bring down the cost of

storage. but they're coming down. they could be a game changer in terms of large scale variable renewables but also distributed storage at the household or commercial enterprise level to be another game changer, particularly in terms of distributing generation enablement. >> are we close to having technology available? >> well, technology is available, it is the cost. we probably need another factor of two to three reduction in cost to make it widespread available. >> thank you. do you feel the regional grid reliability would be put at risk by the clean power plan? >> we don't see any evidence in our analyses that this couldn't be managed. for example, we did a specific analysis in terms of the natural gas transmission infrastructure

because of the issues raised in terms of dramatically expanding gas use in the power sector and that found that while one would probably have some regional issues to develop that it was not like we needed a massive program because we actually have been building out that infrastructure pretty substantially the last 15 years, and frankly it is over capacity. so we don't see that as, you know, as particularly difficult issue. >> what would be the best way to deal with the regional question then that you just referred to of grid reliability? >> i think it would be in the normal process as the supply distribution is understood in that region, the companies would go through the usual process for interstate gas transmission pipes. >> seems to be a patch work of transmission citing initiatives.

qer highlights need coordination for transmission for many processes. do you believe the rapid response transmission team has been effective and should its role be expanded? >> i believe that it is -- i would say it has gained traction. in my view i'll be honest, i think it is slow getting going but i think now the preapplication standardization has come into play and i think that we do need to in fact, keep up the pace. >> thank you, mr. chairman i yield back. >> gentleman yields back. recognize the gentleman from texas, mr. olson for five minutes. >> thank the chair. welcome secretary moniz. my first question is about the federal power act, under section 202 c d.o.e. you, can order a power plant to stay running during a grid crisis. following your order, the plant

might squeak past the clean air permits, unfairly that plant can't be fined and sued by others for doing so. one regulator says go another says stop. that plant has to decide whether they want to acquiesce in a power shortage maybe rather a blackout, or breaking the permit a few days, maybe a few hours. i have a bipartisan bill with representative doyle and greene to fix this in the energy package we're working on. this is not about coming rough shod over environmental laws, we are talking days or hours in a crisis. the other week ferk and nerk endorsed our bill. your predecessor, secretary chu

told me that he is quote, unquote very supportive of the idea. the bill has passed this committee three times now, the whole house twice. 112th 113th congress. my question is can i count on your support in the 114th congress. will you be very supportive of the bill like your predecessor? >> mr. olson, thank you, you asked me this question before, let me say that the answer is basically yes. i know our d.o.e. staff has worked with both sides on this. and i think we're quite comfortable with it. thank you. >> thank you for that clarification. as you know, my home state of texas has half our southern border over 1200 miles with our neighbor to the south, mexico. and you know how important that relationship with mexico is for our