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Katrina Aftermath Prompts Senate to Look Again at CAFE, Oil Production and Refining

The Senate Energy & Natural Resources Committee (author of the Senate version of the energy bill) accelerated the timing of a hearing that had been scheduled earlier to explore rising gas prices in the wake of the destruction wrought by Hurricane Katrina.

Hurricane Katrina exposed the harsh reality that we have been skating on thin ice when it comes to the concentration of energy infrastructure and production on the Gulf Coast.

On July 29th, 74 Senators came together to endorse the Energy Policy Act of 2005 because they knew that we need a road map for the energy future of our country. I am very proud of the Energy Policy Act of 2005. A number of good and important policy goals were achieved there, but some of the harder choices were not part of that bill...

The things that were not politically possible two months ago are still before us and require an answer. We can either ignore them or we can act. I say we act.

Political obstacles cannot stop us from addressing the hard issues that will secure our energy infrastructure... Some goals we should address in the immediate future are:

  • Encouraging citizens to conserve

  • Increasing CAFE standards

  • Developing more domestic supplies like the Outer Continental Shelf

  • Increasing Refinery Capacity

  • Eliminating the Proliferation of Boutique Fuels

—Sen. Pete Domenici (R-NM), Chairman, Senate Energy & Natural Resources Committee

Among those testifying before the full committee today were Guy Caruso, Administrator of the EIA; Dr. James Overdahl, Chief Economist, US Commodity Futures Trading Commission; and John Dowd of Sanford C. Bernstein, who provided some of the most direct comments targeted at consumption, efficiency and supply.

I believe that, unless we address some of these underlying dynamics now, we will be back in a few months or a few years, re-examining the same issues we are discussing today.

[...] The primary reason that we find ourselves with such limited spare capacity is because the record investment by the energy industry aimed at expanding oil production has not resulted in the expected supply response. Conventional wisdom holds that more investment will lead to more supply. In the case of global oil production, the validity of conventional wisdom does not appear to be certain.

[...] In the case of the refining industry, conventional wisdom regarding the effectiveness of additional investment does appear to be correct. We can and should build more refining capacity. Nonetheless, the industry today finds itself operating at a very high level of utilization due to the robust economic growth over the past decade, the slowdown in efficiency improvements in the auto fleet, more stringent environmental requirements, and the deteriorating quality of crude available to the industry.

[...] This is not only a US predicament. Gasoline prices this year have risen equally in Europe and the Far East... To date, this increase in demand from China has been entirely offset by accelerated production from the Former Soviet Union (FSU). What is alarming is that while Chinese demand continues to expand, Russian production stopped growing last September.

[...] So even as we cope with today’s realities we must begin to think—and act—beyond the short run. In doing so it’s important to recognize that U.S. consumers and policymakers have far more control over long-term demand than they do over long-term supply. The demand side of the equation is where we have the most leverage and where we must focus our effort and resources. [emphasis added]

[...]The President has called for releasing some oil from the Strategic Reserve and for voluntary conservation efforts, while other countries have indicated that they too will tap emergency reserves. The relaxation of environmental constraints in the refining industry should be a small positive for supply. I would recommend a stronger call for conservation. If, as a country, we were to obey speed limits for the next two months, we would probably conserve more fuel than will be lost by the refinery outages. Reducing speeds from 70 mph to 60 mph, for example, improves fuel efficiency by 15 percent. If Americans want to know what they can do to limit gasoline price inflation, the answer is simple: slow down. I don’t think this is generally known, or believed, by the U.S. public, and it should be. That may be all we can do in the weeks and months ahead.

[...]Gradually improving vehicle fuel economy through a combination of higher standards, manufacturer and consumer incentives, and other initiatives would essentially “buy us time” to develop the more advanced vehicle technologies and alternative fuels that will someday allow for a more decisive shift away from our current petroleum dependence. Even in the short run, moreover, the benefits of any efficiency improvements introduced in the U.S. vehicle market would likely be amplified as a result of their diffusion to markets in other countries, most of which have as keen an interest as we do in slowing demand growth and blunting their exposure to future oil shocks.

[...]We can’t stop international oil markets from adding a sizable risk premium to oil prices as long as worldwide spare production capacity remains dangerously low. What we can do is limit our future dependence on oil and our exposure to these risks through thoughtful, long-term policies aimed at promoting a greater supply and diversity of fuel options while at the same time significantly improving the efficiency of our nation’s vehicle fleet... We should try to control what we can control. And we should start doing that now.

Coming out of Katrina, then, the stage is set for more pressure on fuel efficiency standards, and for a shorter-term push for advances in hybrids and plug-in hybrids than is currently contemplated by the research agendas.

The stage is also set, however, for potential relaxations in clean fuel regulations (as well as the expected concentration on increasing production).



What about CAFE standards for 18-wheelers.

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