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CNN Larry King Live

Encore Presentation: A Discussion on Oil Prices

Aired May 21, 2006 - 21:00   ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.

LARRY KING, CNN HOST: Tonight, why are gas prices skyrocketing? How high will they go? We'll ask Robert Redford, the legendary actor and filmmaker, also an environmental activist who's advocated alternative energy for decades.
Plus, a primetime exclusive, David O'Reilly, Chairman and CEO of energy giant Chevron, who enjoyed huge first quarter profits. He'll tell us how the price at the pump is set.

And then some heated debate over gas prices and America's energy future with Sir Richard Branson, and more.

They're all next on LARRY KING LIVE.

We begin in Napa, California with Robert Redford, the Academy Award winning filmmaker, director, producer, and actor, environmental activist, and conservationist.

By the way, David O'Reilly, who will follow Mr. Redford tonight, Robert Redford's father worked with Mr. O'Reilly at Chevron for a lot of years. And you were also in the oil business, right Bob?

ROBERT REDFORD, ACTOR: Yes, not illustriously but I was in it.

KING: All right, tell me first your read on all of this. What's the concept of the kick the oil habit to you?

REDFORD: Well, the concept of kick the oil habit campaign is primarily to let the American people know that there are solutions, other than ones that have been given and the fact that it involves citizen action that's a big deal for me because I think there's been too much over the last while, too many policies that affect our future and our security, particularly our environment had been done in secret and it's been without the participation of the American people.

And, I'm against that and I think it's time that they had a voice and I think that there's so much doom and so much gloom out there today and particularly around the issue of energy.

I think it's important to see the true story being told about how we got there, why we've had a lack of political leadership on the issue and what the solutions are and how the American people by looking at this campaign can get involved and push, pressure their elected officials who have -- I mean, look, there's been a big elephant in the room for a long time that the elected officials haven't wanted to acknowledge, excuse the pun on that, that they haven't wanted to acknowledge. And now it's time to look at it but without spin, without obfuscation, without doing things in secret. Let the story be told and let the American people know how they can play a role in what's going to be big in their future.

KING: Since we need gas and oil what's your answer?

REDFORD: Well, the question is how much do you need and do you need it and how do you need it and what is the cost of it? Look, first of all it's a non-renewable energy source and there are renewable energy sources and the planet has already been trashed enough, particularly with the policies of this administration. Excuse me but it's a fact.

And, we don't have much longer to go continuing on that path. And there are solutions that do not have to involve oil and gas. I mean you can have it but not to the degree you had it.

And also we've had no energy policy. We've had no leadership on the issue of energy. If there's been energy policy at all, it was one designed in secret by our vice president and it was done with oil and energy companies.

So, it's non-renewable. It's not cheap. And it's not particularly safe because our national security is involved because we're depending on oil from unstable countries.

So, the solutions are here and they're here right now and I think you'll find one in this new energy bill that's being put forward right now called E-85, and that's ethanol. And ethanol is -- I'm for it because simply it's out of corn and there are other agricultural products that could be used to do the same thing.

It's cheaper. It's cleaner. It's renewable. And you know what it's American because we grow it. We make it. We're not depending on other countries who are unstable to have to beg and borrow for it.

KING: Other countries, I think Brazil uses ethanol in a major way right?

REDFORD: Look, yes, there are examples all over the place. They're just not here in our own country because of our current leadership. Well, look, for decades we've not had an energy policy and we had the problem for decades.

And I think that if you connect the dots as to the influence the oil and gas companies have had on politics and our political leaders you'll see how the problem came. The question is how did we get here, what can be done about it?

And, as far as I'm concerned the solutions do not have to involve dependence on oil because the solutions are here in front of us. They're here. They're now. They're renewable. They're safe. They're clean. They're economically viable. And also it affects our national security.

KING: Do you think -- are you optimistic? Do you think it's going to happen the way you want it to happen?

REDFORD: Well, I guess, yes, I'm optimistic. I guess you should say I dream on occasion so it will never probably happen the way I would like to have it happen but I think it can happen. I think it should happen.

And I think, you know, I think it will happen because I think finally the American people have been kept out of it for so long with spin and all these policies being designed in secret that now the truth is beginning to come out about the consequences of doing that and how the American people have been ignored and pushed aside and disenfranchised.

And now they're beginning to raise a collective voice with this campaign the Center for American Progress is kicking off is going to help them get information that's going to allow them to have a voice in the process about something that's very, very important for their health and well being and their children, mine, yours, all of us.

KING: We're going to show you a part of this campaign has a series of ads, the kick the oil habit campaign.

REDFORD: Good.

KING: It includes a video message. It's an advocacy ad of course. Let's watch.

(VIDEO CLIP OF AD BY CENTER FOR AMERICAN PROGRESS CAMPAIGN)

KING: Were you encouraged, Robert Redford, by the president using the term addicted to oil in the State of the Union?

REDFORD: Was I encouraged?

KING: Yes, I mean that the president is saying something he had not said.

REDFORD: No, I'm afraid not. Oh, that part, yes, if you take it out of context and just use that phrase and that sentence that's encouraging. But you always have to look behind what either the photo op is or the statement is because I have to -- I think you -- you can't look at this issue and not see how this administration and this leadership has been part of the problem.

So, yes, it's nice that it was acknowledged. The question is what are they going to do about it? They better do something other than what they've been doing, which is depending on the oil and gas companies to design an energy policy that cannot possibly work for us in the future.

KING: And how do people get involved in your campaign?

REDFORD: Well, the way they'll get involved, which I like a lot is that this will be able to be put out before the public. I mean, look, if we can send a guy to the moon and we can invent the Internet, we can certainly do something about renewable energy and develop technology to put it in place without depending on foreign countries for oil.

But, the thing that's going to happen, Larry, is that this campaign is going to get before the public. First of all they're going to see facts, the hard, true facts rather than the facts that are spun.

And they're going to see -- the most exciting thing for me is that finally the American people are going to be able to see solutions that they can have a role in and playing a part in that's going to affect our economics so we have gas prices that are through the roof. We have energy companies that are raking in gigantic profits.

And they're going to see ways to avoid having to be trapped by that because these solutions are ready. They're here. They're now. They're homegrown. They can make America proud instead of being dependent on countries that we have no idea which way they're going to bounce, as we can see. So this campaign is going to let the people know that.

KING: Thanks Robert.

REDFORD: And I'm supporting it, yes.

KING: You sure are, Robert Redford speaking on behalf of the campaign he's helped kick off, the kick the oil habit.

By the way, we invited Energy Secretary Samuel Bodman to take part in tonight's program. He declined. We also asked the CEO's of Exxon, Mobil, Conoco, Phillips, BP, and Shell to participate in a roundtable discussion. They declined.

We're going to meet David O'Reilly, the Chairman and CEO of Chevron, who did not decline. He is with us right here and we'll be back with him.

As we go to break, we're going to show you gas stations around the United States, some of the prices. We'll show you high prices. We'll show you low prices. As we go to break that's Santa Barbara, California.

(COMMERCIAL BREAK)

KING: We're back. There's a repeat shot of the gas station in Santa Barbara, California. According to the auto club, I guess, they say is the highest price, which I thought we said already, in the United States.

We now welcome David O'Reilly, Chairman and CEO of Chevron. Chevron is the second largest integrated energy company in the United States. What's your overall reaction to what Robert Redford had to say?

DAVID O'REILLY, CHEVRON CHAIRMAN AND CEO: Well, there's a lot that I would agree with and a lot that I would disagree with in what he said. I do think that one of the things that I've been advocating for some time is getting people involved in the energy supply issue because it is a significant issue for our country and I'm very pleased that anyone would take an interest in this because I think it's something that's important for our future.

You know we are part of a global economy. Global demand is going up. We're competing for supplies. We import two-thirds of our oil today and that's been growing. We used to produce a lot of our own oil and that's been in decline. So, engaging people in solutions I think is the right thing to do. And, of course, the question then becomes what are the solutions?

KING: And what did you disagree with?

O'REILLY: Well, I think one single solution isn't the answer here. We've got to look at multiple solutions. It's all very well to talk about ethanol 85 and that's something we should pursue.

In fact, we're testing that in California along with the state and with a company called Pacific Ethanol because California limits the amount of ethanol we can use in our gasoline because they're concerned about air emissions because it is more volatile. So, we're going to test it and see if it works. If it works, then that's a good thing.

KING: When we see a price $3.80 a gallon, how much of that do you make? How much of the $3.80?

O'REILLY: In the last year, couple of years in fact, our average profitability per gallon has been five cents a gallon. You've got to remember there's a lot in that. There's crude oil price which makes up the majority of the cost. Taxes in California in particular are very, very high.

KING: Have they gone up?

O'REILLY: Yes, because in California as the price goes up the sales tax goes up, so we have federal, state tax, state excise tax, as well as sales tax.

KING: All right, then how do you explain a first quarter profit, David, soaring 49 percent to $4 billion on a nickel?

O'REILLY: On a nickel a gallon and our refining and marketing business. Remember we only made a third of our profits in the United States. We operate in 180 countries around the world. We have enormous capital investment.

Our return on sales are about seven percent, which is the median for all industry. We're not as profitable as banks or pharmaceuticals and we are an enormous business. We reinvest everything we earn.

For example, over the last four years we've reinvested in the business all of our earnings. This year we're investing $40 million a day in growing out business to supply the energy needs of the world.

KING: Will you admit that it reads or sounds obscene? O'REILLY: It's a big number but this is an enormous business. The scale of this business is tremendous. For example, the latest project that we're developing in the Gulf of Mexico that's a project in the deep water. It's in 4,000 or 5,000 feet of water. It's $3.5 billion just for that platform to produce 125,000 barrels a day of oil to supply the American people. So, the scale is very, very big.

KING: Were you concerned when the president said we're addicted?

O'REILLY: I was. I don't think that's the term, you know. I had a colleague of mine we're addicted to prosperity in this country. I think we're addicted to a good quality of life and energy is a very important of our lives, whether it's transportation, whether it's heating, it's the fuel that drives our economy and we are getting more efficient in how we use it as a country. That's a good thing but energy is a part of our life.

KING: Do you like hybrid cars?

O'REILLY: I do. In fact, I think, you know, it's a sign that the market -- the American people are smart. They follow -- they do what I think are intelligent things and you can see the demise of the Hummer, H-1, was reported in the press this week. And the supply of hybrids from Toyota apparently there's a backlog, a waiting list for those cars. So, the people speak with their dollars.

KING: Mr. Redford mentioned a few times hidden things, secret energy meetings. Why should anything be secret?

O'REILLY: Yes, but first of all let me tell you about our position. We haven't involved ourselves in secret meetings. I've said that to the Energy Committee in Congress.

Our position on energy supply is in public. We sent a letter to the president. We copied every member of Congress that was relevant, all the committee heads, both sides of the aisle, all the department heads.

So what we do, we believe in an open book. And one of the reasons we're running our ad campaign, which incidentally reminds me a little bit of kick the oil habit and some of the same facts in it is because we want people to engage in this and understand the issue so that we can do something constructive about it.

KING: Why did the prices suddenly skyrocket?

OREILLY: A couple of reasons. First of all they've been going up as supply and demand had started to narrow. We had a period of time after the '80s when there was an enormous overhang of capacity globally.

Over the last five, six years in particular with the global economic growth we've had, demand has grown and supply is now barely keeping up with demand on a global basis. So, crude oil prices have gone up dramatically around the world and affected everybody and that's the major factor. KING: Do you see it going down?

O'REILLY: I'm afraid -- I'm concerned. I think first of all we're not going back down to $1 a barrel -- I mean $1 a gallon gasoline or $20 a barrel oil. I hope it will moderate a little bit.

But let me tell you what my concern is. My concern is we're coming into the hurricane season again and we're still not recovered from the last one. We still have 60,000 barrels a day of oil shut in, in the Gulf of Mexico because we still haven't finished all the repairs.

Our people there are working very hard to get it back online but we're vulnerable. Many of them are living in trailers. They've been dislocated from their houses. They're working 24/7 in temporary housing (INAUDIBLE).

KING: What if a major one hits?

O'REILLY: I think it would be a bad thing so I'm hoping it won't.

KING: We'll take a break, be back with more with David O'Reilly and then our panel. We're showing you various gas stations around the United States with various prices.

We'll be right back.

(COMMERCIAL BREAK)

KING: Now that gas station you're seeing is in Cheyenne, Wyoming and AAA says that's the lowest in the country at $2.69 unleaded self- serve.

Our guest is David O'Reilly, Chairman and CEO of Chevron. Let's show a sample of Chevron's TV and radio campaign called "Will you Join us"? Watch.

(BEGIN VIDEO CLIP)

ANNOUNCER: As a source of energy, wind power alone can't do it all because just to power a city like Paris would take 20,000 turbines. We believe that meeting all our energy needs will take innovation, conservation and collaboration. Will you join us?

(END VIDEO CLIP)

KING: Pretty good. When a price changes like every day who calls that in? Who tells the gas station make it $2.74?

O'REILLY: Well, in our case, we have 9,500 stations around the United States, mostly in the western and the south states and all but 400 of them are operated by independent business people who are, you know, good hardworking people, and they set the price locally by -- day-by- day. They look at what it takes to satisfy the demand and if...

KING: For that day?

O'REILLY: For that day and prices literally do change in our business day by day.

KING: What about the stations you own? O'REILLY: Same, we're...

KING: Do you make a call?

O'REILLY: They -- well, our pricing people make the call just like any -- like anybody would in a market where the prices fluctuate day by day and the costs fluctuate day by day.

KING: Why is gas $2.99 and nine-tenths?

O'REILLY: That's a good question. It's like shoes, you know, 99.99 or whatever it is. It's been a convention that just...

KING: (INAUDIBLE).

O'REILLY: Because it's a big, tall sign with -- any -- I saw the joke the other day that any price on a big, tall sign in big numbers looks high, so I guess you want to make it just a little bit less.

KING: Senator Durbin, who will be on with us at the bottom of the hour, he wants a windfall tax.

O'REILLY: Yes.

KING: How do you react?

O'REILLY: Well, I think it's a very bad idea. First of all, let me tell you the taxes we pay. Our taxes in the first quarter were 48 percent of what we earned, 48 percent tax rate. We pay state income tax as well as federal income tax and so forth.

So, we pay a very high tax rate. We're investing all we earn. We raise the taxes at a time when we need to increase investment and supply. That's the wrong answer. We need the money to invest, to grow our business, and taking money away from the opportunity to invest when we already pay enough taxes seems to me the wrong answer.

KING: But the public when it sees, I forget what oil company some cheese, CEO retires and gets $400 million that looks bad. It looks bad.

O'REILLY: Yes, but I -- well it certainly can raise -- I can understand why it would raise questions. You know the public sees these high prices and I empathize with them because we've certainly seen an increase in gasoline prices in the last few years.

As I mentioned, it's primarily due to this issue with high crude oil prices which is a global issue. But I can understand why people would be concerned but there are remedies for that. Companies have independent boards. They have shareholders and the shareholders can vote.

KING: What's your biggest concern?

O'REILLY: Well, my biggest concern, well first of all I mentioned the hurricane season and near term that's my biggest concern because we're so close to it right now and the system is fragile and the people have been working 24/7 to get everything back and they're living in temporary house, many of them still displaced. I admire what they're doing to supply oil to the American people.

My other concern is we let this opportunity go. I mean I agree that this is the time for a debate on energy supply and there is room for us to look at alternatives. Certainly we should be pursuing ethanol but it's not the only answer.

In a country where we're producing oil and gas in declining amounts and importing more, why not open up some of the areas of this country that are closed today to oil and gas exploration? We're very limited to where we look today.

And it seems to me that everyone's got their own little answer to this question but we ought to be looking at the thing holistically. We ought to be looking at the supply side. We ought to be looking at alternatives. We ought to be looking at hopefully getting the message out that we need to value energy and conserve energy and be more prudent as to how we use it.

And, I'd hate to see this opportunity go by because I agree with one thing that Bob Redford said. We really haven't had an integrated energy policy in this country and now is the time to do it.

KING: Do you buy oil from Iraq?

O'REILLY: We do. We do. Iraq is selling oil today in a market. It's in declining amounts unfortunately because of the disruptions there but they're good people. They're working hard under very difficult conditions.

KING: Libya?

O'REILLY: No, we do not buy oil from Libya. That mostly goes to Europe.

KING: It's finite though isn't it?

O'REILLY: It is finite but...

KING: Are we going to run out?

O'REILLY: Not -- I don't think anytime soon because technology has allowed us to go into more difficult areas. We're now in the deep water. We're in the arctic areas. There are lots of -- there's lots of the country that has not been -- the world that has not been explored so we can go further.

KING: Are you optimistic? I asked Robert Redford and he said he is. You are too? O'REILLY: I am optimistic but I want us to take this chance to really have an energy policy that looks at it in an integrated manner and not just everybody's pet project.

KING: Will you and others in your group sit down with the Redford's?

O'REILLY: I'd be happy to sit down with him. I mean I remember his dad well. I'd be happy to sit down with him and talk through these issues because I think there are -- I mean we share a lot of common concerns here.

Now I have grandchildren. I want them to grow up in a country that has a good environment and has plentiful energy supply so that we can support a good quality of life.

KING: Do you want to stay a while with the panel?

O'REILLY: I'd love to.

KING: OK, you will.

O'REILLY: Thank you.

KING: David O'Reilly will remain. The panel will be organized.

Don't go away.

(BEGIN VIDEOTAPE)

UNIDENTIFIED FEMALE (voice-over): Gasoline prices has surged nearly 30 percent over the past year to almost $2 a gallon nationwide.

UNIDENTIFIED MALE: The national average will be $2.25 which will be 20 cents over what it was last year.

UNIDENTIFIED MALE: And that tab is almost certain to move higher over the next month.

UNIDENTIFIED FEMALE: The price is sitting right about $3 a gallon. Every penny counts.

UNIDENTIFIED MALE: It's unfair that we're paying this much and the gas companies are making the highest profits in the history of the world for any company ever. That's just unfair.

(COMMERCIAL BREAK)

KING: Subject tonight is energy. Staying with us is David O'Reilly, chairman and CEO of Chevron. Joining us in Washington Senator Kay Bailey Hutchison, Republican of Texas, member of the Commerce, Science and Transportation Committees, Senator Dick Durbin, also in Washington, Democrat of Illinois, he is the minority whip.

Earlier today Senate Democrats unveiled an energy legislation package they say will put America on the road to energy independence by 2020.

In Washington is Dan Yergin, chairman of the Cambridge Research Associates. He earned a Pulitzer Prize for his best selling book, "The Prize: The Epic Quest for Oil, Money and Power." He testified yesterday before the House Government Reform Committee. And in Necker Island in the Caribbean is Sir Richard Branson, our old friend, the founder and chairman of the Virgin Group. His companies are investing in alternative fuel sources.

Let's start with Senator Hutchison, what do you make of what you heard so far? How do you feel about energy crisis now?

SEN. KAY BAILEY HUTCHISON (R), TEXAS COMMERCE,SCIENCE & TRANSPORTATION CMTE.: Well, I think, Larry, we have to diversify our energy sources. I think that's what we are trying to do, but it takes time. I think the E-85, the ethanol is certainly promising, but you can't transport it in pipelines, so we have to figure a way to get it out. We don't have the refinery capacity to make it as readily available, but we're working on it.

I think we have got to drill more in our own country for our own resources, as well, so we're not dependent on foreign sources for our energy needs. And we need to conserve and have renewable energy, and I think that's what all of us are trying to work to do.

KING: Senator Durbin, have you heard what David O'Reilly has had to say?

SEN. DICK DURBIN (D), ILLINOIS, SENATE MAJORITY WHIP: First, let me commend him for appearing public. Most of the CEOS of the oil companies won't do it. And Mr. O'Reilly I respect you for coming forward this evening and explaining your point of view.

America does not have an energy policy. We signed an energy bill. The president did last August, and now we're debating about an energy policy. It is because frankly, we weren't prepared. We weren't prepared to make sure that we had enough energy to fuel our economy and an energy policy that was consistent with preserving our environment.

It's about time we had direction in this country. And I think that's what the Democrats were saying today. We came forward with a plan to reduce our dependence on foreign oil by 40 percent over the next 20 years. We think that is a sensible starting place.

KING: Would you support that, David O'Reilly?

O'REILLY: I think it's very difficult to achieve that. I think we can make ourselves more secure by developing more of our own resources and paying attention to how we use energy here. But remember...

KING: But it wouldn't be a bad thing, would it?

O'REILLY: The direction is a good direction. But I don't think it's achievable, frankly, in that time frame.

KING: David Yergin, what's your read on all of this?

DAVID YERGIN, CHAIRMAN, CAMBRIDGE ENERGY RESEARCH ASSOCIATES: Well, I think as I have listened to it, I'm both optimistic and I'm worried. I am optimistic because we see technology working, and in due course, markets will work. There is more technology bubbling all along the energy spectrum. And I think we have heard a convergence of views.

But I am worried because we're not an island when it comes to energy. We are part of a global marketplace, and there are some big things out there to worry about, in addition to what Mr. O'Reilly said about hurricanes regarding hurricanes, it is what is happening in Nigeria, the potential threat from Iran. And we already have a disruption. So I prefer to think rather than energy independence, which we are going in the opposite direction, think about energy security. What do we do to protect our country?

KING: Are you optimistic?

YERGIN: Are you asking me?

KING: Yes.

YERGIN: Well, I'm optimistic because I can see that so many opportunities are here. And that in the past we've seen a quicker response, but I think there's some really near term risks that are staring us in the face.

KING: Sir Branson, first of all, what has this done, this terrible energy crisis -- what has this done to fuel in the airlines?

SIR RICHARD BRANSON, VIRGIN GROUP CHMN., HIS COMPANIES INVESTING IN ALTERNATIVE FUELS: Well, we're in the airline business and we are in train business, and fuel prices have gone up dramatically. A small company like Virgin is paying something like half a billion dollars more for its fuel. The positive side of that is that it's awakening us to do something about it.

The beautiful globe is being destroyed by global warming. And every year, the world is heating up. The amount of CO2 that is being put in the world is increasing every year. And we've got to do something about it, otherwise, you know, we won't be able to carry on having these discussions in 100 years time.

So from Virgin's point of view, all of our spare money is being put into building ethanol plants, wind farms, looking at solar heating and just trying to do everything we can to create an alternative energy source. And it's also good business sense.

KING: David O'Reilly, shouldn't the responsible citizen support everything he just said?

O'REILLY: Well, I think the encouraging thing is -- Richard Branson has made the case for energy efficiency, which I heartily support. We have a billion and a half people on earth that don't have electricity today. They aspire for a quality of life that will allow them to have energy in their lives. Therefore, if we don't conserve it, we are going to really head into a big global problem. So I think conserving, being energy efficient is a very important way to go, and we're going to need it if we're going to supply needs of the world. KING: Can't all of your collective heads, Senator Hutchison, get together a massive energy conclave, maybe, with all sides of this issue sitting down and digging into it?

HUTCHISON: Larry, absolutely. And I think the discussions that we're having are so much more productive than anything I've heard in the 12 years that I have been in the Senate. We have been attempting time after time after time to drill more in our country, to conserve more, to have alternative sources.

One thing that David O'Reilly hasn't mentioned, but I think is just wonderful is that his company is investing in a bio-energy plant in my home state in Galveston, Texas. And it is going to use soy beans as the fuel. That is what we're looking in that future.

I think we're going to see more ethanol when we have the refinery capacity, but we're having to adjust to all of that. Do you know that in my home state of Texas, almost 10 percent of the energy is produced by wind? And that is a phenomenon that we never thought would have happened before.

KING: Senator Durbin, do you think as a society we're prepared to look at all of this?

DURBIN: I think we are. I think it's been a wakeup call with these prices at the gasoline stations, and I think we're ready to take a fresh look. But we can't drill our way out of this problem. All of the reserves under our control in the United States are worth about 3 percent of the world's supply, and we consume 25 percent of the world's energy.

We can't drill our way out of it. And I want to go back to a point that Robert Redford and Sir Branson made, and that is that we have to talk about energy in the context of our environment. When Mr. O'Reilly warns us the hurricane season is coming, he knows as well as others, the hurricanes are getting worse.

It is no accident, it's global warning. We have to find a way to reduce the expenditure of CO2 into the atmosphere that is creating terrible climate changes. We owe it to our kids, and that means putting this energy policy debate in the context of sensible environmental policy.

KING: We are going to take a break, and when we come back we'll include some of your phone calls on this very important discussion tonight on LARRY KING LIVE. Don't go away.

(COMMERCIAL BREAK)

KING: We're going to go to some of your phone calls for this outstanding and diversified panel. And we'll start with Sacramento, hello.

CALLER: Yes, hello. I'd like to know please why the second the price of barrel of oil goes up in the world community, why does it go up at the gas station? I know we have tremendous reserves in this country, the oil companies have reserves as do the gas stations.

KING: All right, fair question, David.

O'REILLY: Well it's like any other commodity. It does go up to reflect the concern.

KING: If you have reserves, why does it have to go up?

O'REILLY: Well we don't have reserves. I mean, I think there's a misconception. There's a rapid turnover. I mean, this is just in time delivery. So there's a very turnover to the pump. Also, gasoline goes up because of the local market conditions. It can go up when crude oil prices go down if there's a shortage in one area of the country. Other people think we have just three grades of gasoline, regular, mid and premium.

We actually have 18 different formulations. The gasoline in Las Vegas is different than Phoenix. The gasoline in Memphis is different than Atlanta. So if there's a shortage in one area, you can't just divert the gas supply to fill that shortage on short notice anymore. This is something that the American people need to raise with their Congress because it's Congress that's dictated this.

KING: Dan Yergin, what about the international question here, the demand of countries like China, Russia, what do they play in this?

YERGIN: Well what we saw a couple of years ago, 2004, we have a demand shock. Chinese oil demand by an enormous number, 16 percent. It's really the success of the global economy, the prosperity. They're getting richer and that gave us a big shock and it started the price on its way up. Last year actually Chinese demand cooled off, grew only by two percent and now what we've had is this sort of slow motion supply shock. So those things are all coming together, creating this very tight market. And when you have a tight market, it's vulnerable to crisis.

KING: Sir Branson, what are you doing with regard to your methods of delivery of energy?

BRANSON: Well I think ethanol has got a limited amount of supply. By the time you say build another 200 or 300 ethanol plants in America, you're going to be starting to eat into the food supply and therefore people are not going to want to use food for ethanol.

What we need is something called cellulose ethanol, which is basically enzymes which will break down the waste products in the fields that currently gets burnt off. And there's enough waste product in the world to replace our energy needs completely.

The great thing about cellulose ethanol is that it's 100 percent environmental friendly. But what cellulose ethanol needs is government support, because at the moment it's more expensive to produce and it needs a lot of investment by government in getting the enzymes right so that it can be produced. If it can be produced, I think that is the exciting future and hopefully in the next handful of years, there will be big break throughs with the enzymes. O'REILLY: Larry, if I could jump in, it is true, cellulose ethanol is almost like the holy grail. If it works, it changes the game. So I'd say if you can crack the cellulosic code, that will be an even bigger deal than "The Da Vinci Code."

KING: Senator Hutchison, when President Bush at the State of the Union said we are addicted to oil, did you jump up and applaud?

HUTCHISON: Oh, yes. It's true. We are consumers. I do think America has remained mostly static, however, and the other industrialized countries that are growing have caused this real demand that we have not been able to supply. And it is China and India that have been the largest growers.

And so while we are consumers and we are probably the most in the world per capita, nevertheless, I think we're also smart enough to realize that we have to diversify. We do, we want to, and I think we're going in that direction. We are in Congress giving tax credits for solar, wind, bio energy. We subsidize ethanol. We've given incentives for new refineries to be built, especially for ethanol.

So I think a lot is going on but it has to get in the pipeline and get through it. And of course, ethanol doesn't go in the pipeline, but it has to have the time to come to the marketplace.

KING: Dick Durbin, you want tougher fuel efficiency standards for cars, something not included in the Democratic Party legislation today. Why not?

DURBIN: Well it should be included. I think it's an important part of our future. Tom Friedman of "The New York Times" said if you were concerned about Red China, you should be more concerned about Green China.

Do you know that the Chinese now have tough fuel economy standards and the United States does not? They are an energy dependent country, they see the future, 60 percent of all the oil we import goes into our cars and trucks.

And yet we find year after year, the average fuel economy going down in America because our manufacturers are not building those hybrids and fuel efficient cars as they should. And American consumers now are hungry for them. And I think we need to have a policy and a program that reduces our dependence on foreign oil with CAFE standards.

KING: Would you favor that, David?

O'REILLY: Well I think if American consumers are hungry for them, they'd be buying them, and I think they are. So I think the senator's question is being answered.

KING: Would you favor legislation?

O'REILLY: I'm a kind of free market person in general. I don't think legislation is needed in this case. Let me just give you an example. It would take many years for that to occur. If everyone changed their behavior so they drove in a manner that allowed their car to go one mile per gallon less, we'd save 100 million barrels a day of oil. But I see people driving around the freeways at 80-miles- an-hour. We need an energy-conscious public and I think we're going to get one.

DURBIN: If I could respond just, Larry. It's tough to argue the free market when you're dealing with an alogopoly. His company has been swallowing up other oil companies to the point where we have five major oil companies whose prices march in lock-step. So if you're talking about moving this system, what he's suggesting is if the price of the pump reaches an outrageous level, then the consumers will demand more fuel efficient cars. Wouldn't it be a lot better for the economy for us to have those standards without that pain?

KING: I've got to get a break and we'll come back with more. Don't go away.

(BEGIN VIDEO CLIP)

GEORGE W. BUSH, PRESIDENT OF THE UNITED STATES: Keeping America competitive requires affordable energy. And here we have a serious problem. America is addicted to oil, which is often imported from unstable parts of the world. The best way to break this addiction is through technology. Since 2001 we have spent nearly $10 billion to develop cleaner, cheaper and more reliable alternative energy sources and we're on the threshold of incredible advances.

(END VIDEO CLIP)

(COMMERCIAL BREAK)

KING: Take another call. Portland, Oregon, hello.

CALLER: Portland, Oregon, yes.

KING: Go ahead.

CALLER: Oh yes. I have to get back to this 49 percent profits. I understand the stockholders are getting huge profits, and Mr. O'Reilly certainly is. But I want to know if in downtown Portland, where I buy my gas, is that individual station owner getting also a 49 percent profit?

KING: David?

O'REILLY: Well, I think Larry was referring to our profits being up 49 percent. And remember, I mentioned that we make about five cents a gallon on our sales. I think it depends on how well he's running his business. And he is an independent business person in all likelihood.

KING: What should he make?

O'REILLY: Well, I am going to say he is probably going to make five or 10 cents a gallon himself. And then he makes -- if he has got a convenience store or a repair business, he is going to make money on that as well. These are hard working people. They work hard for that money. It's a 24 hour a day business in many cases, seven days a week, and I think they deserve it.

KING: Cottage Grove, Oregon, hello. Cottage Grove, are you there? I will give you one more shot. Cottage Grove, Oregon.

CALLER: Yes, I'm here. Can you hear me?

KING: Yes, go ahead.

CALLER: Yes, I would like to know since profit is the major motive of the oil companies, how do you, as an oil executive, plan to deal with -- I'm sorry, I can't remember my question.

KING: OK. But I think I know where he was going, if your No. 1 motive is profit, why would you get involved into things that might reduce that profit?

O'REILLY: Well, our No. 1 motive is to be a long-term profitable company and supply energy to our customers. And we feel that while oil and gas is our core business, we also see the opportunity to develop energy in alternative areas. We are the largest renewable major oil company in the world. We have the largest investment in renewables. Most of it is in geo-thermal, which is volcanic steam to generate electricity. But we think that we are an energy company and should be looking at the broad spectrum.

KING: Colstrip, Montana, hello.

CALLER: Hey, how's it going?

KING: Hi.

CALLER: Is this LARRY KING LIVE?

KING: Yes, what's the question? Hello. OK, I think he was just shocked to get on.

All right. Senator Hutchison, would you agree with what David O'Reilly just said?

HUTCHISON: That an energy company should be looking at diversifying? Absolutely. They are citizens of the world. They have children. They want their children to grow up in a good environment, and I applaud them for investing in bio-diversity as well as well as other forms of energy.

The technology is going to take over this issue. Americans are ingenious. We will find the ways to have alternative sources of energy to keep our economy strong, and we just have had a little lag time. And I think we're on it now. And it is going to be in five years a whole different debate.

KING: David Yergin, what do you think of what the big companies are doing? YERGIN: Well, I think that they're primarily in the oil and gas business, and that is what their shareholders and the pension funds have been telling them. But you see them certainly diversifying into other resources.

I'm really struck, Larry, just listening to the show this evening, and we have seen it over the last few months, how ethanol has been really embraced across the political spectrum. I think Sir Richard made an important point, it's about 2 percent of our gasoline now, and it could get up to 10 to 20 percent. And then without breakthroughs, you run into the limits.

But it is an important form of diversification. If we get up to those numbers, it is as though we have added a new Algeria or new Indonesia to the world oil supply. That's the kind of scale we're looking at.

KING: We'll take a break. When we come back, we'll get some thoughts from Senator Durbin and Sir Branson. And it wind it up with a comment from everybody. Don't go away.

(COMMERCIAL BREAK)

KING: Sir Richard, are we on the right road?

BRANSON: We're beginning to be, but we're already I suspect too late for about 20 to 30 percent of the species on the amount of CO2 that's up there. And we can't do anything about. We've left it too late for something like 20 or 30 percent of the species. We have got to tackle head on issues like gas stations. They are the most damaging thing on earth, and China and India and America and Britain are building many more. They shouldn't be allowed to build them.

I think the global community has just got to rally around to prioritize and make sure, you know, that we get on top of the CO2 emission situation fast in order to save the 17 or 18 percent of species that are still there and have a chance to be saved.

KING: Senator Durbin, are we on the right road?

DURBIN: I think we're finally waking up to the reality that we just can't live with the possibility that gasoline prices will go down again. They may not. And if they don't, they are going to change our way of life and our economy.

What I liked about the discussion tonight, Larry, is we talked about energy and its important part it plays in our economy. But we spent a lot of time talking about the environment. I just left the premier of Al Gore's new documentary, "An Inconvenient Truth," about global warming. And I hope you get a chance to see it because if you do you realize we have to talk about both at the same time, energy for the economy and making sure we do something about global warming.

KING: Dan Yergin, are we on the right road?

YERGIN: I think we're on a much better road than we were a couple of years ago. I think people are really focused on this. I think there is a lot of actually consensus despite all of the political divisions on where to go. And so I think that we need time.

The thing that I worry about is that somewhere in here the confrontation over Iran's nuclear program may intersect with the oil market, and Iran is the second largest exporter in OPEC.

KING: Does that worry you too, David?

O'REILLY: Well of course, of course.

KING: He's got a good point.

O'REILLY: You do worry about the geopolitical situation, but on the positive side I think this discussion we have had points I think to the need to look at the whole spectrum. And I hope we don't get kind of special interested out of this. We should be looking at this holistically.

KING: We thank you all very, very much. And remind you by the way, Robert Redford's organization for more information is kicktheoilhabit.org. And we thank Senators Kay Bailey Hutchison and Dick Durbin, Dan Yergin, the Pulitzer Prize winner, Sir Richard Branson, the founder and chairman of the Virgin group, and David O'Reilly who remained with us for most of the show, the chairman and CEO of Chevron.

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